Lachmi Singh [*]
February 2006
1. INTRODUCTION AND INTERPRETATION
There has been countless scholarly material published on the United Nations Convention on Contracts for the International Sale of Goods,[1] with both advocates and opponents of the Convention fiercely debating the merits and shortcomings of the treaty as a means of furthering international sales transactions. Some argue that the CISG is not suited to the realm of these often complex transactions, proposing instead the use of domestic laws that would benefit buyers and sellers, because these laws are more certain and have had many years to develop as compared to the Convention.
This thesis seeks to examine these claims using the specific area of the buyer's right to declare the contract avoided as envisaged in Article 49 CISG and the difficulties of interpreting the ambiguous criteria laid out in this provision. I believe this provision to be key to the Convention's success, the reason for this being business people require certainty and predictability in their transactions when seeking to avoid the contract. Upon examining this provision and the case law generated under it, we will be able to discern the rationale behind the decision making, specifically how have the judges interpreted its wording and what burden needs to be proven to declare the contract avoided. These findings will have a significant impact on how the CISG is viewed particularly by different sectors of the (product) market. Trietel for example argues that the CISG is not capable of dealing with standard types of international sales specifically FOB [2] and CIF [3] contracts.[4] This writer advances the proposition that the Convention cannot be deemed to be inappropriate or inadequate in certain areas without any analysis of the existing case law. For example, the commodities sector will have different technical standards of when it will be appropriate or advantageous to avoid the contract. This will differ from the manufacturing sector or the specially designed product sector. In examining the relevant case law, we will look at how the CISG has coped with these different areas to determine if indeed it is a flexible instrument as proclaimed by its advocates. In carrying out the analysis, this thesis will at relevant points draw comparisons with other bodies of law and examine the jurisprudence of both civil and common law countries to determine how, if at all, this has influenced the decision making process.
Prior to commencing an in-depth examination of the CISG, it is first necessary to review its history, scope, as well as its purpose, albeit briefly. Only upon doing this, can we fully appreciate its significance and potential impact on international commercial law. This chapter will then examine the importance of Article 7 and the provisions which assist in interpreting the Convention, as well as the various mechanisms available to decision makers to fill in any gaps that exist in the Convention.
1.1 Historical Background
In the late twentieth century, the need for a harmonised instrument of international sales law was expressed. This emerged because of the effects of increased trading amongst Nation States.[5] Such a harmonising measure was thought to increase international trade, promote fairness, and reduce the negotiation cost of transactions.[6]
In 1929, Ernst Rabel working with the International Institute for the Unification of Private Law (UNIDROIT), sought to establish a uniform law governing transactions of sale.[7] This resulted in two Hague Conventions in 1964: Uniform Law for the International Sale of Goods (ULIS), and Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF).[8] These Conventions came into force in 1972, but they had limited success as uniform law, because they were generally considered too wide-ranging in scope. Thus, they were only ratified by nine countries predominately European nations.[9]
The failure of these Conventions led to the recognition that more effort was needed to create a uniform sales law that could be applied to all States regardless of their legal, social, or economic backgrounds. In 1966, the General Assembly of the United Nations established the United Nations Commission on International Trade Law (UNCITRAL). This working group sought to review ULIS and ULF in order to create a new Convention, and the result of their efforts were completed in 1978.[10] At the United Nations Diplomatic Conference which adopted the CISG, 62 States took part: 22 European and other developed Western countries, 11 socialist, 11 South-American, 7 African and 11 Asian countries; in other words, approximately, 22 Western, 11 socialist and 29 third world countries.[11] The CISG was signed in Vienna in 1980, and came into force in 1988 upon gaining the required number of ratifications.[12] The participating nations approved six official CISG texts: Arabic, English, French, Spanish, Chinese and Russian.[13]
As of 15 January 2006, the United Nations reports that 67 States have adopted the CISG.[14] This number includes all of the European Union countries (except the United Kingdom, Ireland, and Portugal), all NAFTA countries, most of Eastern Europe, some of South America, China, and Australia. To put this in perspective, worldwide two-thirds of all international sales transactions are conducted between parties in a Contracting Member State.[15]
1.2 Scope of the Convention
The Convention, once ratified by a Contracting State, will result in the CISG taking precedence over domestic law and choice of law rules in regards to sale of goods.[16] The CISG has 101 articles and is divided into four principal parts. Part I deals with the Convention's scope and contains general provisions applicable to the rest of the Convention. Part II is concerned with rules for the formation of contracts of sale, and Part III with the rules governing the seller's and buyer's substantive obligations. Part IV contains the final provisions on adherence to and ratification of the Convention by Contracting States including the reservations that may be made at one of several stages to the Convention's applicability to a Contracting State.[17]
According to Article 1(1)(a), the Convention applies to contracts of sale of goods between parties whose places of business are in different States. The CISG will also apply where when the rules of private international law lead to the application of the law of a Contracting State.[18]
It is important to note that the CISG is a body of laws for business not consumer transactions. In addition to this, certain types of contracts are specifically excluded under the Convention.[19] Questions involving the validity of the contract are also outside the Convention, as is the effect which the contract may have on property in the goods sold,[20] and any liability of the seller for defective goods causing death or personal injury to any person.[21] One of the notable features of the Convention is that it allows contracting parties the ability to derogate from[22] or exclude its provisions altogether.[23]
1.3 Purpose of the Convention
After examining the history and scope of the Convention, one might ask, "Why the need for the Convention? Before the enactment of the Convention, parties would concede to a foreign country's law to govern their agreement. This, however, was not always feasible. For example, the difficulties of reaching agreement with foreign parties on choice of law issues, or the problems of proof of foreign law in domestic and foreign courts.[24] It has been argued that the Convention offers parties a useful compromise in that it may decrease the time and legal costs otherwise involved in research of foreign laws, and it will have a degree of familiarity to both parties, thus putting each on equal footing with the other with no unfair advantage to either party.[25]
These claims are potentially contentious as it is questionable whether the CISG has fulfilled the purpose of making international sales transactions more certain, efficient, and less costly. This thesis will examine the validity of these claims when analysis of the case law is carried out.
1.4 Interpretation of the Convention
The only manner which this writer views as appropriate to judge the success of the CISG is through the lens of judicial interpretation. The reason for this is that it is only in the determination of crucial issues can one determine whether the provisions of the CISG are being correctly applied, and are suitable to the complex environment of international sales of goods contracts. In order to understand why interpretation is key we have to reflect on the very nature of the CISG. As a result of negotiation amongst countries of differing legal, social, and economic systems, many of the provisions in the Convention were a product of compromise. Ziegel states, "Where an acceptable compromise could not be reached the drafters unhappily had to seek refuge in vague or obfuscatory language."[26] Thus, it is necessary to view the Convention not as a body of law on to itself, providing an explicit solution to every problem that may arise, but rather as a framework of laws which are capable of generating solutions through its underlying principles which continue to evolve. To better illustrate this we have to examine Article 7 of the Convention which states:
"(2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law."
Phanesh Koneru states, "Article 7 is arguably the single most important provision in ensuring the future success of the CISG."[27] To support this, Felemegas contends that, "The area where the battle for international unification will be fought and won, or lost, is the interpretation of the CISG's provisions. Only if the CISG is interpreted in a consistent manner in all legal systems that have adopted it, will the effort put into its drafting be worth anything."[28]
The origins of Article 7 are founded in the Convention's predecessor ULIS, specifically Articles 2 [29] and 17.[30] Many rounds of negotiations and numerous compromises brought about the changes to the text of these articles, and resulted in the present Article 7. For example, some argued that guidance for interpretation of the uniform law was noticeably inadequate, the ULIS articles did not state the general principles on which it was based and those principles may very well never be found. To suggest that these questions could be solved and these terms be construed without recourse to national law was both unrealistic and impractical.[31] Interpretation is the process by which judges and arbitrators in applying the Convention to a particular case, ascertain the meaning and the legal effects to be given to its individual articles. Article 7(1) instructs regard is to be had to:
a) its international character;
b) to the need to promote uniformity in its application
c) the observance of good faith in international trade.
The solution to filling in any gaps which may be evident in the Convention was provided for in Article 7(2), which creates a hierarchical system for judges and arbitrators to adhere to. In order to resolve gaps in the Convention, one had to first look to its internal principles and only when this method was exhausted could external principles be brought in as a last resort.[32]
These provisions laid out in Article 7 undoubtedly give the reader much to contemplate, for although this article is one designed to clarify and interpret other parts of the Convention, which are vague and ambiguous, it is paradoxical that it is itself unclear in its direction and wording. As a result of this, Article 7 has been the subject of numerous commentaries, as scholars and practitioners attempt to decipher the meaning behind its provisions. It is necessary if we are to fully understand the significance of this provision to examine some of these writings to give a greater perspective on the nature of the Convention and to clarify its ambiguous wording.
(a) International Character
It is fair to say that given the language set out in Article 7(1) regarding the way interpretation should be carried out, judges should as far as possible abstain from resorting to a domestic definition of a provision or term which could be in conflict with the CISG.[33] Instead, decision makers should strive to keep in mind the very purpose of why the Convention came into existence, thus any deviation from its 'international character' would undermine its legitimacy. Van Alstine puts forth the idea of dynamic treaty interpretation, thus recognising that the judiciary have an active role in interpreting the treaty. To be precise, they have to ascertain and give real meaning to the principles of the Convention to aid in the advancement of the law.[34] Furthermore, he argues that the essential reference to international uniformity means that judges have to co-operate with courts in other Contracting States in creating an international common law around the framework of the Convention.[35]
(b) Uniformity
The Convention stresses the need to promote uniformity when interpreting its provisions. The reasoning behind this instruction is evident; it is only with uniformity of decisions one can determine if the Convention has been a successful instrument In addition, uniformity of decisions helps to further certainty in transactions. Gebauer argues that autonomous interpretation may not result in uniformity, courts will decide cases differently and have different autonomous interpretations even when looking at the same legislative history, underlying aims, and analogy with other rules of a particular provision.[36]
It is the opinion of this writer that the reason why uniformity is likely to be elusive is that the Convention has no designated court or tribunal equipped with the task of interpreting its provisions; instead that task is left to national courts and national judges who are not isolated entities, they are influenced by their own cultural, legal, and political traditions.[37] To deter the ever present threat of the 'homeward trend,' the courts need to not only exhaust all the mechanisms provided for within the Convention, but also to refer to decisions on the CISG handed down by courts and tribunals in other countries; a task which most are reluctant to carry out.[38] Article 7(1) implicitly requires that courts consider the decisions of other Contracting States. Gebauer states, "These rules not only allow but require consideration of foreign case law, thus promoting uniform application of the Convention and thereby serving legal predictability and security."[39] However, Bonell and Liguori note that, "Very rarely do decisions take in to account the solutions adopted on the same point by courts in other countries."[40] As there is no international court to confer authority on differing decisions of national courts, foreign precedents will depend on the quality of decisions; precedents have to show the courts' reasoning and analysis of the rational for the decision.[41]
(c) Good Faith
The concept of 'Good Faith' in the Convention is one illustration of the tension amongst countries of varying social, legal, and economic backgrounds; the way in which it is referred to in the Convention is a reflection of this tension.[42] The extent to which commercial law should emulate and uphold standards of morality is a subject of much debate.[43] The unification of morality with the law has been approached in opposing ways by Civil and Common law systems.[44] For example, this concept is addressed under § 242 [45] of the German Civil Code, which stipulates that the conduct of parties in a contractual relationship is to be governed by the requirements of good faith. English common law states the opposite, for example, in 1988 the English Court of Appeal stated that, "In the case of commercial contracts, broad concepts of honesty and fair dealing, however laudable, are a somewhat uncertain guide when determining the existence or otherwise of an obligation which may arise even in the absence of any dishonest or unfair intent."[46]
Given these two extremes in ideology regarding the role of good faith, Professor Farnsworth described Article 7(1) as a, "statesmanlike compromise."[47] The compromise that was finally achieved is somewhat mystifying to this writer. The Common law contingent appears to have 'won' in the fact that good faith was not imposed as a legal obligation on contracting parties, instead it was shifted to the interpretation of the Convention, thus according to Eörsi, "giving it an honourable burial."[48] However, can we really believe that judges and arbitrators in interpreting the Convention would not take into consideration the conduct of the parties? As Koneru states, "Good faith cannot exist in a vacuum and does not remain in practice as a rule unless the actors are required to participate."[49] Schlechtriem, attempts to put this quandary to rest by advancing the idea that good faith in the CISG should amount to a general principle, based upon internationally accepted principles, such as carrying out performance in an honourable manner.[50] Bridge, however, is firmly opposed to the idea of a general rule of good faith. He argues that it does not take into account the diversity of commercial contracting, and will undermine the CISG by opening the door to further ambiguity and less certainty.[51]
This paper does not intend to advance the argument of the benefits or the detriments of the good faith requirement in Article 7(1), instead we will proceed on the premise that good faith is indeed a basis on which the CISG rests, and interpretation requires that it be taken into account. It will, however, be interesting to examine the extent to which differing legal systems use good faith in their decision making process, since this will help reveal how likely it is that national courts will succeed in developing a uniform approach. This will be addressed in a later chapter when the case law is examined.
(d) General Principles
Civil law countries advocated the use of general principles upon which the Convention is based, or using analogy as the method of gap filling in Article 7, in other words a "true code" methodology.[52] Common law countries doubted that principles could be found in the Convention itself that would be clear and certain enough to address every problem that may arise, hence they advocated the use of domestic law to gap fill if the CISG did not expressly refer to an issue.[53] With regard to the exercise of gap filling, when matters are not 'expressly settled' by the Convention, Article 7(2) instructs decision makers to look to the general principles on which it is based, or if those principles do not exist, then it is permissible to resort to the rules of private international law. Once again, the ambiguities evident in the Convention rear their head, and one is left to ponder what exactly are these general principles, and how does one go about ascertaining them. If we recall one of the criticisms of ULIS Article 17 mentioned above, negotiating States disapproved of the lack of any general principles listed in that treaty to serve as a useful guideline; however the CISG offers no improvement on that matter. The Convention itself, neither in its provisions nor in the Secretariat Commentary, [54] states what these general principles are but the academic literature assists in this matter.
Hillman identifies what he considers to be the four basic policies underlying the CISG: Freedom of Contract, promotion of co-operation and reasonableness to preserve the contract, facilitation of exchange even in the event that something goes wrong, and to provide compensation for the aggrieved party.[55] Many legal scholars support this, and advance the idea that given these underlying policies there should always be an answer within the Convention itself to fill any gaps that may arise, thus making the resort to domestic law almost non-existent. To avoid the problem of interpretation with a view towards domestic law, judges should instead use all the internal mechanisms available to them: the text, statutory purpose, public policy, and legislative history.[56] A specific article in the CISG cannot really be regarded as a general principle, for they are merely rules. General principles support these rules; therefore, a general principle should be part of the foundation of the Convention. Felemegas argues that we can extract general principles by analysing the contents of specific provisions of the CISG in practice.[57] For example, the principle of reasonableness can be seen in avoidance provisions, the standard of the reasonable person in those circumstances, or in the provisions to take reasonable steps to mitigate damages or preserve the contract.[58]
We will now examine some of the mechanisms available to decision makers to identify the general principles of the Convention.
(i) Legislative History
The idea of looking to the legislative history of a provision to find an answer as illustrated above can be frustrating and ambiguous, because of the many contentious issues under the Convention which led to vague compromises.[59] Easterbrook rejects the idea of looking at the legislative history of a provision. He states, "Intent is elusive for a natural person fictive for a collective body."[60] He points out that the legislative process can be influenced by different interests and motivations often leaving ambiguous, conflicting statements in the drafting records.[61] I would argue that although this contention may be well founded, nevertheless examining the draft commentary of the provision in question could prove fruitful; for although it may not provide a clear cut answer, it could help to guide the decision maker as to what the concerns and overall intent of the negotiating parties were. Thus, the legislative history of a provision should not be the only mechanism one consults when trying to fill in a gap in the Convention but it may certainly be the first step in trying to do so.
(ii) Analogy
Enderlin and Maskow contend that, "Gap filling can be done by applying such interpretative methods as extensive interpretation and analogy. The admissibility of analogy is directly addressed in the wording contained in the CISG because it is aimed at obtaining from several comparable rules, one rule for a not expressly covered fact or a general rule under which the fact can be subsumed"[62]
Analogy is described as the discovery of a specific provision dealing with issues similar to the one present in the gap; there must be a link between the gap and the analogous situation. This requires a detailed examination of the provision in question because the rule in the provision may be restricted to a particular situation thus making the analogy contrary to the drafter's intention.[63]
Brandner looks at the admissibility of analogy under the CISG since it is not mentioned as a means of gap filling in Article 7. He argues that since autonomous interpretation is required and the words in the CISG should not be assumed to mean the same that they do in domestic law, the use of comparative law should be a last resort.[64] He contends that German and other Civil law countries favour analogy, whereas English courts would not be willing to go further than the wording of the treaty to deduce objective teleological criteria as German courts would.[65] Bonell believes analogy to be included in the recourse to general principles, even though the legislative history on Article 7 is inconclusive on the issue.[66]
This paper will proceed on the premise that analogy is permitted as a means of ascertaining general principles under the Convention; however it has to be apparent that there is a clear and unmistakable link between the problem in question and the analogy being used, otherwise the legitimacy of the Convention may be compromised.
(iii) UNIDROIT Principles
Outlined above were a few of the internal mechanisms available to decision makers to ascertain general principles within the Convention, now we will examine one of the external methods of gap filling without the recourse to domestic law.
The International Institute for the Unification of Private Law (UNIDROIT) is an independent intergovernmental organisation, whose purpose is to study needs and methods for modernising, harmonising and co-ordinating private and in particular commercial law between States and groups of States.[67] The UNIDROIT Principles were drafted and discussed by legal scholars from different nations, whose opinions did not bear the official representation of any one country.[68] This approach precluded the need to adopt diplomatic solutions in the formulation of rules, and the consequent need to conceal important issues with a compromise formula. Thus, the unequal bargaining conditions that may exist in international treaties between parties with different levels of education and technical skills, were not present in the UNIDROIT Principles.[69]
Although one may rightly argue that recourse to the Principles as a means of gap filling can be equally as dangerous to the goal of uniformity as resort to domestic laws, there is, however, a subtle difference between the two. Ziegel examines when is it legitimate to use the Principles to interpret the CISG: first he advises that courts should look at the drafters' intent, if this is not helpful in the circumstance then look to the underlying purpose of the provision.[70] Once this is exhausted, then one can resort to the UNIDROIT Principles. One cannot use the Principles to interpret the Convention simply because they are more detailed or desirable.[71]
I would argue that using the UNIDROIT Principles, as a means of gap filling is legitimate, provided the internal mechanisms are exhausted; and indeed it is more advantageous to use the Principles instead of domestic law if the international character, uniformity, and good faith of the Convention are to be protected. The reasons for are that the gap filling role of the UNIDROIT Principles can supplement those international uniform law instruments with a set of rules that the decision maker is unable to find, expressly or impliedly, in those instruments. The aim is to prevent an easy resort to the domestic law indicated by the conflict of law rule of the forum, thus keeping the settlement of the dispute within its international legal habitat, and ensuring fairness to the parties as they will both have equal access to its provisions.[72]
Most scholars agree that the CISG and the UNIDROIT Principles are complementary instruments both advocating many of the same policies, such as good faith, recognition of party autonomy, freedom of form, the cure of a failure to perform, the survival of a contract against its premature and unilateral termination, fostering mutual cooperation between the contracting parties, and obtaining full compensation of foreseeable damages resulting from a breach of contract.[73]
1.5 Conclusion
After careful examination of the history, scope, and purpose of this Convention, in addition to its interpretative provisions, we now have a better understanding of the issues and controversies surrounding the Convention. The next part of this paper will narrow the focus on one particular part of the Convention, examine its ambiguous meanings, and attempt to engage the issues surrounding its provisions to determine if the CISG has indeed been successful in facilitating the complex environment of international sales.
2. ARTICLE 49: THE BUYER'S RIGHT TO AVOID THE CONTRACT
Many have hailed the Convention as a success, as it has received the one of the largest number of ratifications of any international treaty. However, there is a contention that not all contracting parties are keen to accept uniform substantive law, consequently they will expressly opt out of the CISG, choosing instead to apply domestic laws which are more conducive to their commercial needs and provide some measure of predictability.[74]
This chapter seeks to examine one of the most controversial issues within the Convention, and indeed it is one that has important implications for the area of international sale of goods. When one thinks of an international commercial contract, several important issues immediately come to mind, for example what are the rights and obligations of the seller and buyer, and if these obligations are breached or rights impeded, what are the options available to the non-breaching party? The purpose of this chapter is to examine the provision under the Convention, that deals with the buyer's right to declare the contract avoided. In doing so we must examine the burden involved of proving that the breach is sufficiently serious and the criteria employed by the Convention to establish this severity. As mentioned previously, I think this provision has vast implications in determining whether the CISG can be deemed as useful in certain market sectors. For example, the commodities sector will have different needs to take into consideration such as rapid fluctuation in market values compared to the manufactured product sector or the specially designed product sector which are more fixed in nature. To illustrate this concept, the remedies appropriate for the sale of complex, custom-made machinery are unlikely to appropriate for the sale of commodities. As Hellner states, "The avoidance of [a contract for complex machinery] will hurt the seller very badly and often will not be very advantageous to the buyer either, who may then have to wait a long time for the delivery of another machine. For this reason, avoidance is not a suitable remedy except in extreme cases."[75] Thus, the rules and case law decisions relating to the buyers right to avoid the contract will be of utmost importance to those contracts for which the CISG is applicable.
2.1 Buyer's Right of Avoidance
Article 49 of the Convention addresses the buyer's right to declare the contract avoided. It states:
"(1) The buyer may declare the contract avoided:
(a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or
(b) in case of non-delivery, 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.
"(2) However, in cases where 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;
(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 (2) of article 48, or after
the buyer has declared that he will not accept performance."
There are undoubtedly many key features in this provision: In paragraph (1) there are two conditions under which the buyer may declare the contract avoided; paragraph (1)(a) states if the non-performance of any of the seller's obligations amounts to a fundamental breach, and paragraph (1)(b) stipulates that in the case of non-delivery, where the seller fails to deliver within the additional time fixed under Article 47(1).[76] Paragraph (2) identifies some of the conditions under which the buyer loses his right to avoid the contract; these rules allow for the fact that the seller has delivered. This paragraph does not deal with paragraph (1)(b)[77] and only looks at the situations covered by paragraph (1)(a); thus the fact that the goods have come into the buyer's possession, validates the use of higher standards; the principle of good faith dictates that the buyer may not avoid the contract for minor breaches.[78] As soon as the seller has made delivery, if the buyer wants to reject it he must not delay. He must declare the contract avoided within a reasonable time after the goods or the documents representing them have been tendered. A reasonable length of time can be determined by trade standards and particular circumstances of the case.[79]
Although this paper will briefly examine the provisions of Article 49(1)(b) and Article 49(2), the main focus of this chapter is to analyse Article 49(1)(a), the right of the buyer to avoid the contract if the seller fails to perform any of his obligations, thus amounting to a fundamental breach of contract. The notion of what constitutes a fundamental breach under the CISG must be identified, so that the buyer, when faced with a breach of obligations by the seller, can be fully aware of what his rights are.
2.2 Fundamental Breach
The origins of fundamental breach can be found in ULIS Article 10,[80] which was drafted with an aim to prevent avoidance from inconsequential contractual breaches.[81] Although the provisions under this article contained both elements of subjectivity and objectivity, it was criticised as being too hypothetical in that the party in breach would have to possess what Bonell refers to as, 'ex-post-facto' knowledge of the events.[82] As a result of these criticisms, when the committee to re-examine and create a new uniform law was established by UNCITRAL, it was mandated that a more 'material' test was needed.[83]
The Convention attempts to define the concept of fundamental breach under the provisions of Article 25, which states:
Upon reading this, one is confronted by a number of terms that are vague and ambiguous in their meaning, and for which the wording of the Convention offers no further elucidation. This writer is concerned with what Bonell states as, "Parties who do not want to be bothered with esoteric phraseology exclude the CISG altogether or derogate from certain provisions."[84] If indeed parties would rather opt out of the Convention, rather than have to navigate through its vague terminology, its future success is in peril.
To understand fully what is meant by the terms: 'substantially to deprive,' 'entitled to expect,' 'did not foresee,' and 'reasonable person of the same kind in the circumstances,' reference to the interpretive provisions of Article 7 are needed. In order to gain a better understanding of these terms we will examine the legislative history.
(a) Substantial Deprivation
In order for a breach to be 'fundamental,' the breach must cause a 'detriment' that substantially deprives the non-breaching party of its reasonable expectations. The CISG, however, does not define the term 'detriment.'[85] Lorenz contends that, "Detriment fills the function of filtering out certain cases as for example where breach of a fundamental obligation has occurred but not caused injury."[86] For example, taking the case of an antedated bill of lading, although the seller would be committing a fundamental breach of his obligations, if the breach does not cause the buyer any injury, it can be argued that detriment does not occur. It is important to recall that one of the significant principles of the CISG is the preservation of the contract and ensuring both parties receive the fruits of the contract. The Draft Commentary stated that, "The determination whether the injury is substantial must be made in light of the circumstances of each case for example, the monetary value of the contract, the monetary harm caused by the breach, or the extent to which the breach interferes with other activities of the injured party."[87] Schlechtriem suggests that detriment means that the purpose for which the injured party engaged the contract, was thwarted and, as a result, this led to his losing interest in the execution of the contract.[88] Furthermore, when the party whose interests were infringed decides that continuing to be bound to the contract impedes his business activities to such an extent that he can no longer be expected to be bound, avoidance will be the remedy he seeks for no other remedy in the Convention will satisfy the breach caused.[89]
Some legal scholars have argued that the wording of the provision creates ambiguity, not only in sense of the meaning of the terms used but also in the type of words used. For example, the terms 'substantial' and 'fundamental' as characterising a breach of contract is said to be a tautology or reiteration, making it difficult to ascertain when substantial detriment amounts to a fundamental breach.[90] This writer, however, disagrees with the criticism, instead I argue that the two words merely reinforce the severity of what is needed to justify avoidance under the Convention, the principles on which it is based simply will not allow for avoidance for minor breaches of contract.
(b) Expectation
The two concepts of substantial detriment and contractual expectation are fused together, since detriment can be characterised as a fundamental breach if the injured party has no further interest in accepting performance of the contract.[91] Some delegations present at the drafting of the Convention thought the reference to expectations under the contract represented a great improvement, while others claimed it was less flexible and introduced an element of subjectivity. I disagree with this suggestion. In examining the legislative history of this article there is nothing to suggest that it is merely the expectation of the injured party alone that is taken into consideration. Bonell lends credence to this idea when he states that, "the final formulae seems to have been inspired by Lord Diplock, in Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha ... does the occurrence of the event deprive the party ... of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain?"[92] Thus, in order to differentiate between a substantial and insubstantial detriment it is not only the decision maker's opinion of the non-breaching party expectations that matter, instead it is connected to the terms of the contract.[93]
Under the general principle of freedom of contract in the CISG, the parties are open to decide when a breach of a contractual expectation is deemed fundamental. The proposals of the Federal Republic of Germany advocated that the expectations of the aggrieved party have to be apparent from the contract itself. However, it was widely controversial that every non-fulfilment of a contractual obligation could be a fundamental breach, as this would contravene the principle of preservation of the contract.[94] Hence, it is proposed that reference to the contractual terms serve as a restraint on cases of fundamental breach, rather than an expansion, so that not every expectation is protected, just those which in the event they are breached, would cause such detriment as to substantially deprive the aggrieved party of what is expected.[95] Babiak suggests parties expressly stipulate what constitutes a fundamental breach, for example, what are their contractual expectations and what degree of a breach of obligations would substantially deprive a party of these expectations.[96] However, it is this writer's contention that this defeats or at the very least undermines the very purpose of uniform law, specifically the reduction of negotiation costs. In addition to this, it is impossible to foresee and anticipate what can go wrong in any contract thus, there is no guarantee of avoiding litigation by using this method.
Furthermore, it is uncertain whether negotiations, trade usages, or practices established by the parties themselves, and not expressly stated in the contract can also be relevant, to determine the contractual expectation.[97] This issue will be specifically addressed in a later chapter.
(c) Foreseeability
The test of foreseeability as set out in Article 25 is meant to preclude a fundamental breach where the substantial detriment occurs unforeseeably; it is a mechanism which allows the party in breach to evade avoidance of the contract. Since it is improbable that the party in breach will acknowledge they foresaw the detriment in question the 'reasonable person standard' was established.[98] Where substantial detriment is deemed to exist, the party in breach in order to escape avoidance, has to show that he did not foresee the negative result, nor would a reasonable person have foreseen it. Thus, it will be necessary to evaluate this in light of whether business people in the same product market would have foreseen the detriment; the reason for this is that standards of reasonableness will vary amongst the different areas.[99] A reasonable person is considered to be a reasonable merchant of the same socio-economic background, so all of the standards of the trade would have to be met. In addition to the circumstances of the particular case, market conditions both regional and worldwide must be taken under consideration, as well as legislation, political climate, and prior dealings[100] as stated in Article 8(3).[101]
Foreseeability would also have to be determined within the wording of Article 74, which looks at the facts of the case, 'in light of the facts and matters of which he then knew;' the burden of proving unforeseeability rests with the party in breach.[102] The question arises as to the point in time when the detrimental result has to be foreseen; Article 25 does not state whether foreseeability should be decided at the time the contract was formed, or when the breach took place.[103] Lorenz contends that since the contractual terms establishes the rights and responsibilities of the buyer and seller, then the decisive time for when foreseeability is determined should be when the contract is formed. If not, one party could provide the other with further information, thereby changing what was deemed to be a substantial interest and could now give rise to a fundamental breach.[104] Graffi, however, disagrees with this, arguing that if we take the notion of good faith into account, then credence must be given to any information received by the party in breach after the contract was formed.[105]
I agree with the suggestion that the reasonable person should be judged by the characteristics of the reasonable merchant in the same circumstances as the parties involved, as this seems to be the most commercially prudent approach to the situation. The matter of time of foreseeability is not as straightforward. However, the arguments put forth by Lorenz are convincing in that the time of foreseeability should be judged at the time of contractual formation to produce a fair result. Although these opinions are helpful, these issues should be left to be determined by the courts to establish principles in this area.
Professor Ziegel sums up Article 25 with the following, "In my view, the new test is too severe and will make it very difficult in practice for a seller or buyer (but particularly a buyer) to cancel a contract because of defective performance by the other ... I still feel that the definition will lead to undesirable results. However, it should be borne in mind that the parties are free to adopt their own definition and in practice it is very common for seller to limit, or even exclude entirely, the buyer's right to reject defective goods and to cancel the contract."[106]
2.3 Can the UNIDROIT Principles be Used to Supplement Article 25?
Earlier on we discussed the legitimacy of using the UNIDROIT Principles to supplement the various gaps that may present itself in the Convention, eventually concluding that based on the arguments offered, resort to the UNIDROIT Principles should be allowed as long as the two provisions are compatible, and indeed it is preferable to use the Principles as opposed to resort to domestic laws.
In examining the provision under the UNIDROIT Principles corresponding to Article 25 CISG, we can see certain similarities as well as stark differences, thus one must proceed with caution when using the Principles as a supplement in this particular area.
Article 7.3.1 UNIDROIT states:
"(1) A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance.
"(2) In determining whether a failure to perform an obligation amounts to a fundamental non-performance regard shall be had, in particular, to whether
(a) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result;
(b) strict compliance with the obligation which has not been performed is of essence under the contract;
(c) the non-performance is intentional or reckless;
(d) the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party's future performance;
(e) the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated."
Upon reading the provision, it is obvious that it is more detailed, and provides more guidance on determining fundamental non-performance; however we must determine how useful these guidelines are in relation to interpretation of the CISG.
Paragraph (1) is similar to that of the CISG in that in order to justify termination or avoidance, which is the term used in the Convention, there needs to be a fundamental non-performance in relation to an obligation under the contract, so there is no dispute in this matter. Paragraph (2)(a) with reference to substantial deprivation, expectation, and foreseeability as a means of determining fundamental non-performance is also similar to the provisions under the CISG. However the Principles go on to provide a more express guideline than Article 25 CISG as to which factors are relevant in determining fundamental non-performance.
Koch argues that the reference in Article 25 to the expectations of the party under the contract allows resorting to criteria focusing on the nature of the contractual obligation, which is evidenced in Article 7.3.1(2)(b) of the Principles, as well as the reliance on one party's future performance as seen in Article 7.3.1(2)(d) of the Principles in determining fundamental breach.[107]
With regard to Article 7.3.1(2)(c) of the Principles, it should be noted that under the CISG, 'fault' is not generally a condition to a finding of contractual liability, thus intentional or reckless performance should not automatically render a breach to be fundamental under Article 25, however, it may have some significance when we look at the role that good faith plays in the Convention. Although it has been argued that under Article 7, the principle of good faith has been relegated to interpretation, this writer strongly believes that a decision maker cannot separate the nature of the party's behaviour from interpretation of the Convention.
Furthermore, in considering Article 7.3.1(2)(d), whether the breaching party will suffer disproportionate loss if the contract is avoided, there is nothing in the reading of Article 25 to suggest this is a consideration in determining fundamental breach. However, as mentioned above, the principle of good faith may allow for this to be taken into account, as well as the seller's ability to cure the defect, a topic that we will examine in chapter three.
In summary, we can see that it permissible in certain circumstances to use the Principles to supplement Article 25 of the Convention, however, there are certain factors which the Principles take into account when determining a fundamental non-performance, which could undermine the CISG and detract from uniformity and its international character.
2.4 The Relevance of Good Faith in Determining Fundamental Breach
Outlined above were the various tensions surrounding the role of doctrine of good faith under the Convention. It was noted that the Convention is to be interpreted in accordance with the requirement of good faith in international trade. The question arises as to what impact this has on the buyer's right to avoid the contract; it is established that it has to be shown that a failure of the seller's contractual obligations amounts to a fundamental breach. Scholars have argued that courts in employing the doctrine of good faith, place severe restrictions on the buyer's right to avoid the contract, for example, if there can be another remedy available to the buyer, the courts will tend to resort to that remedy rather than avoidance.[108] Koch argues that the principle of good faith prevents a party from exercising his right of avoidance if the breach in question is minor, unless the parties have expressly agreed that it is an essential term and that breach thereof represents a fundamental breach.[109] Another example of the application of the principle of good faith is put forth by Honnold. He contends that if the fundamental breach is curable, and the seller offers to cure either before or after the date of performance, then whether a breach is fundamental should be decided in light of an offer to cure. The reason for this is that the criterion of good faith imposes a duty on the parties to cooperate with each other in remedying defects.[110] We will examine the seller's right to cure in the following chapter.
Although these are just a few examples, the concern arises as to whether the doctrine of good faith can actually distort the effect of certain provisions under the Convention. The Drafters in reaching this compromise of interpretation with regard to good faith, may not have foreseen its effects, and surely would not have intended the Convention to be undermined in any way that may be detrimental to their original intent. The only true measure of the effect of good faith on the buyer's right to avoid the contract, is to examine the case law which we will come onto in a later chapter.
2.5 The Effect of Article 47 in Relation to the Buyer's Right to Avoid the Contract
Article 47 states:
"(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."
Although the main focus of this section is the criteria of fundamental breach in relation to the buyer's right to avoid the contract, for the purposes of being thorough, we must address the other provisions set out in Article 49, in determining whether or not the buyer has the right of avoidance. In paragraph (1)(b) of Article 49 the notion of an "additional time" for performance is provided for where the seller does not deliver the goods within the time stipulated in the contract; in this case the buyer is allowed the right of avoidance if the seller fails to deliver the goods within the additional time fixed. Under the Convention the buyer does not have to fix an additional time, however, given the uncertainty of establishing a fundamental breach it may be in his best interest to do so. It is important to note that whereas under the Convention's predecessor ULIS, the buyer could convert any breach of contract however minor, into a fundamental breach by allowing an additional time for performance, under the Convention, only in cases of non-delivery may the time fixing mechanism be used to make a non-fundamental breach into a fundamental breach.[111] This approach balances both the rights of the buyer and seller. On one hand, the buyer cannot avoid the contract for insignificant breaches, where on a falling market it may be advantageous for him to do so, and on the other hand, because delivery is held to be an essential obligation although it does not start out as a fundamental breach, it has the capacity to do so if the seller continues to fail in delivering the goods.[112]
The origins of this doctrine of additional time for performance stems from the German legal system, where under § 326 of the Brgerliches Gesetzbuch (BGB),[113] the setting of a Nachfrist (grace period)[114] signalled that upon its expiration, performance would be rejected; contrary to the CISG, under the German Civil Code a party has to first fix an additional time, then chose a remedy if not met.[115]
Under the Convention, Nachfrist must be determined by indicating a given date or a period of time; it brings certainty with regard to the buyer's interest in performance of the contract, in addition to a possibility of avoiding the contract.[116] The Nachfrist cannot be too short in length as this would allow the buyer an excuse to avoid the contract when the time expires under Article 49(1)(b). Thus in order to determine an additional period of reasonable length, considerations such as the extent and the cost of the delay have to be taken into account.[117] For example, the length of the contractual period for delivery, the nature of the seller's performance, the type of the goods involved, and what may have caused the problem in delivery.[118] Furthermore, it must be noted that in order to protect the seller who may have embarked on preparing to perform the contract, perhaps already incurring expenses in doing so, the buyer who has sent a Nachfrist notice, cannot during the additional period specified in the notice resort to any other remedies for breach of contract, unless he has received notice from the seller that he will not comply with the notice.[119]
Thus far, we have examined the notion of fixing an additional time for performance as a choice to be exercised by the buyer, either in the case where the nature of the contract in question allows him to do so, for example, the goods are not needed for use right away, or alternatively, where he is uncertain on how to proceed on the basis of whether the breach in question is indeed fundamental and the possible remedies that may be available to him. However, in evaluation of the Convention and the concepts and principles associated with it, one could potentially foresee the courts taking into account whether or not the buyer has allowed for an additional period of time for performance, as one of the criteria for determining if a non-delivery amounts to a fundamental breach. We could argue that the role of good faith and the general principle of preservation of the contract to ensure both parties receive the fruits of their exchange, could potentially affect the buyer's right to avoid the contract if he chooses not to exercise the Nachfrist notice procedure. An illustration of this is found in the case law, where the Oberlandesgericht Dsseldorf held that, "mere non- or late delivery does not constitute a fundamental breach under Article 25 provided that delivery is objectively possible and the seller was willing to deliver ... where delivery was objectively possible, but where it was obvious that the seller for idiosyncratic reasons would not be able to deliver the goods in question, the buyer would be entitled to avoid the contract."[120]
Although most scholars advocate the use of the Nachfrist procedure, declaring it as a, "functional device which is necessary in the Convention's remedial scheme to provide clarity, certainty and predictability for a party facing delay of a primary contractual obligation," [121] in this paper it is put forth that until further examination of the case law dealing with this concept in relation to the buyer's right to avoid, it would be best to use a cautious approach when deciding whether a failure to deliver prima facie constitutes a fundamental breach.
2.6 Circumstances Where the Buyer Loses the Right to Avoid the Contract
Article 49(2), examines the circumstances under which the buyer loses the right to avoid the contract once the seller has delivered. Paragraph (2)(a) deals with the issue of late delivery, the buyer must declare the contract avoided within a reasonable time after he has discovered that delivery has been made; the late delivery must be a fundamental breach of contract, as in the case of a contract in which time is of the essence, or a delivery after the Nachfrist set by the buyer has expired. For any breach other than late delivery paragraph (2)(b) stipulates that avoidance must be carried out within a reasonable time. These breaches can consist of delivery of non-conforming goods under Article 35;[122] in such a case the buyer must not hesitate, or he will lose his right to reject the goods and declare the contract avoided if it is not done in a reasonable time as set out in (i)-(iii).[123] We will not cover here the provisions under sections (ii) or (iii) as section (ii) looks at the Nachfrist procedure which was covered earlier and section (iii) deals with the seller's rights under Article 48 which will be examined in chapter three.
Article 49(2)(b)(i) states that the buyer must declare avoidance within a reasonable time after he knew or ought to have known of the breach. This means the failure by the buyer to examine the goods could result in the loss of the right to avoid the contract, as he may not be aware of defects until its is too late. Korpinen, however, points out a potential problem that could arise for the buyer wishing to avoid the contract. He argues that if the buyer does become aware of the "fundamentality" of the breach at the same time as he learns about the defect that constitutes the breach, for example a breach that worsens as time goes by, the buyer may have already lost his right to avoid the contract at the time he learns that he would have a right to invoke that remedy.[124] Under the provision of Article 39(1), the buyer loses the right to rely on a lack of conformity if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he discovered it or ought to have discovered it. However, this notice does not give rise to a remedy of avoidance; Article 26 address the issue of a notice of avoidance. Korpinen argues that because both Article 39(1) and Article 49(2)(b)(i) state that the buyer must give both the notice of non-conformity and the notice of avoidance within a reasonable time, from when he ought to have known of the breach, it creates the impression that the time limit is one and the same.[125]
The CISG Advisory Council,[126] a group of legal scholars that address controversial unresolved issues relating to the CISG, somewhat clarified this point in their report, stating that the period for examination of the goods under Article 38 and the period for giving notice under Article 39 must be distinguished and kept separate, even when the facts of the case would permit them to be combined into a single period for giving notice. One can draw an analogy from this and extend it to the issue of giving notice for non-conformity and giving notice for avoidance.[127] Furthermore, if we use the mechanisms of Article 7(1), and the notion of good faith, then this approach would arguably be permissible under the Convention.
The CISG Advisory Council also suggests that the reasonable time for giving notice after the buyer discovered or ought to have discovered the lack of conformity will differ depending on the relevant factors. In some cases, notice should be given the same day. In other cases, a longer timeframe may be suitable. No fixed period should be regarded as reasonable in the abstract without taking into consideration the circumstances of the case. These can include the nature of the goods, the nature of the defect, the situation of the parties and relevant trade usages.[128]
It is important to remember that even if the buyer can establish that he declared the avoidance within a reasonable time, the defect in the goods still has to constitute a fundamental breach of contract. We will examine the difficulties this can present in practice when we analyse the decisions of the case law in regard to this particular issue.
2.7 Comparison with Other Legal Systems
As noted in the introductory chapter, those opposed to the CISG as an instrument of furthering international sales transactions claim that it is too uncertain and instead advocate the use of familiar domestic laws to govern contracts. This thesis will draw comparisons from some of the predominant legal systems namely the United States, Germany and the United Kingdom[129] to determine if the CISG is any less suitable to be applied to contracts for the international sale of goods on the issues of fundamental breach and avoidance.
(a) United States Law
The law governing sale of goods in the United States is embodied in Article 2 of the Uniform Commercial Code (UCC). Article 2 does not provide a definition of 'fundamental breach,' instead it uses the term, "substantial impairment of value" to decide if a breach is significant.[130] Pauly argues that this test is decidedly more subjective than that of Article 25 CISG and the UNIDROIT Principles 7.3.1.[131] However we do observe some objective criteria, for example, Section 2-608(1) UCC states: the buyer has the right to revoke the acceptance of the goods in whole or part if he can show that the non-conformity substantially impairs the value to him. Thus, the courts will look at the surrounding circumstances and the purpose for which the goods are bought to decide whether the defect substantially impairs their value. Pauly contends that, "Substantial impairment is similar to the common law standard of material breach."[132] He goes on to explain that the courts have used the Restatement (Second) of Contracts Section 241 as a guideline to resolve if a breach is substantial. It will look at: 1) the extent to which the injured party will be deprived of the benefit he or she reasonably expected; 2) the extent to which the injured party can be adequately compensated for the benefit of which he will be deprived; 3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; 4) the likelihood that the party failing to perform or to offer to perform will cure the failure, taking into account all the circumstances, including any reasonable assurances; and 5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.[133]
Perhaps the most startling difference between the provisions of the CISG and the UCC can be seen in the 'Perfect Tender' rule under the UCC. The rule allows the buyer to reject a tender under a single delivery contract that does not correspond to the contract.[134] This rule, however, is curtailed to a certain extent, for example Section 2-602 UCC, states the buyer must reject the goods within a reasonable time after delivery and to seasonably notify the seller. In addition, Section 2-605 UCC states the buyer must notify the seller of any defect that is discoverable by reasonable inspection, following this, it is left to be determined if the seller would be able to cure the non-conformity within a reasonable time. If the buyer does not follow this procedure, he will be prevented from using the defect as a valid reason to reject the goods.[135]
When comparing these criteria to that of Article 25, we can see some similarities. Firstly, both bodies of law look at the extent of the deprivation and the reasonable expectation of the parties. Secondly, the courts will look at whether the breach can be adequately compensated monetarily. The other criteria such as the ability of the seller to cure the defect although it is not a de facto criterion under the CISG, is of some relevance when determining fundamental breach as we will examine in the next chapter.
Although the perfect tender rule has no counterpart under the Convention, one can argue that this rule is not a right given to the buyer without restrictions. Similar to Article 49(2) CISG, the buyer will lose the right to reject if he does not do so within a reasonable time, under the required notification procedure as set out in Article 39.[136] Pich argues that, "The perfect tender rule under the UCC, doubled with its comprehensive cure provisions, amounts to a 'substantial performance' requirement equivalent to the CISG 'fundamental breach' rule."[137] She advances the proposition that both bodies of law have to be considered in light of their policies specifically: efficiency and fairness. Thus, both the CISG and the UCC compel buyers and sellers to reduce the risk of defective performance and the losses that may arise.
(b) German Law
German sale of goods law is codified within the German Civil Code (Brgerliches Gesetzbuch) (BGB) under the Law of Obligations. Although the Civil Code stood unchanged since 1900, reforms were made in 2002 with the implementation of the Act on the Modernisation of the Law of Obligations which had a significant impact on the system of remedies available to buyers.[138] This system was based on the rules contained in the CISG, namely: the range of legal remedies available, a standardised notion of breach of duty, and a move away from the fault requirement regarding avoidance of the contract.[139] The main provision granting the buyer the right to terminate the contract can be seen in § 323 of the BGB.[140] This provision requires in general, an additional period of time to be set by the obligee (buyer) before the contract can be terminated. This obligation, however, is qualified by § 323(2) and the circumstances outlined which exempt the buyer from having to fix a Nachfrist.
Prior to the enactment of the new system, the remedies available to the buyer depended on the type of breach in question, the four main types being: impossibility, delay, positive breach of contract, and obligee's rights in the event of defects. It was often very complicated to differentiate between the four types, as there was overlap or it was simply too difficult to classify under one of the headings. Under the new system the criterion for remedies of the buyer in case of non- or defective performance is 'breach of duty.' Section 433(1) BGB states, "By a contract of sale the seller of a thing is bound to hand over the thing to the buyer and to transfer to him ownership of the thing. The seller must procure the thing for the buyer in a state that is free from defects as to quality and defects of title." Nölke argues that the new provisions put "... greater pressure on the obligor to perform and higher risk of being liable for damages caused by non-performance."[141] The aggrieved party has to notify the seller of his intention to terminate the contract as set out in § 349 BGB. As noted above, any defect in performance or goods allows the buyer the right to terminate the contract. In addition, if the seller fails to replace the goods or correct the deficiency, the buyer may terminate the contract. However, it is important to note that the statutory obligation on the part of the seller to take measures to repair defects [142] (Nacherfllung) was introduced by the new Act, and the buyer may only refuse repair to the defect if it is unreasonable in light of all the circumstances.[143]
In light of this examination of the provisions above, we can note certain differences between the German concept of termination for breach and that of the CISG. Under the BGB, the buyer may potentially terminate the contract for any breach, however, there are certain restrictions. The buyer is under a prima facie statutory duty to set an additional time for the seller to perform unless he can prove one of the exempting conditions is relevant to the circumstances of the case. Secondly, the right to supplementary performance or cure under the BGB appears to be primarily a buyer's remedy; there is no provision for the seller to demand the right to cure. However, the buyer can only refuse repair if it is unreasonable. It is also important to note that under the German Commercial Code (Handelsgesetzbuch) (HGB), which acts as a supplement to the BGB, governing contracts for commercial goods when at least one of the parties is a merchant, Section 377 imposes the duty on the buyer to inspect the goods upon receipt. He then has to notify the seller of any defect without delay. If the buyer does not inspect the goods and provide such notice of a defect, the goods are deemed accepted. The buyer will then be barred from recovering for that breach, even if the breach was not obvious. The only exception to this rule exists according to HGB Section 377(5) when the seller acts in bad faith or knowingly makes false representations as to the goods. After examining these provisions albeit briefly, this writer ascertains that many of the principles present in the CISG are also evident in German sales law for example, trying to preserve the contract through the means of setting a Nachfrist and the obligation to cure. Both systems although procedurally different strive to uphold fairness to both parties while ensuring core contractual rules remain intact.
(c) English Law
The Sale of Goods Act 1979 is the relevant statutory body of law governing sale of goods in the United Kingdom. The developed case law is often cited as one of the main reasons the United Kingdom has not adopted the Convention. Trietel argues that if CISG rules were applied to international sales contracts currently governed by English law, the effect would be significantly different because the CISG's vague provisions would cause uncertainty.[144]
Whereas the CISG uses the criteria of fundamental breach to give rise to the right to terminate the contract, English law bases the right to terminate the contract using a classification of terms. The contract can be terminated if the term broken is a condition. This can be defined as a term that goes to the root of the contract and to the main purpose of the contract; thus if it is broken, the aggrieved party has the right to bring the contract to an end.[145] The second category of term is a warranty; this term does not go to the root of the contract but is part of the main purpose of the agreement. These terms are less crucial than conditions, and their breach is compensated by damages. The third category of terms are those referred to as innominate, meaning it is neither distinguishable on its face as a condition or warranty but rather what needs to be looked at is whether one party has been deprived substantially of the whole benefit which it was intended he would receive. Although this term developed in the common law in the case of Hong Kong Fir Shipping Co v. Kawasaki Kisen Kaisha[146] it has been transferred into the Sale of Goods Act 1979 Section 15A [147] in a somewhat modified format in regard to the implied terms laid down in the Act, namely, those relating to correspondence of the goods to their description, fitness for purpose, and conformity to sample.[148] Thus, according to this section, if the breach is so 'slight' the buyer loses his right to reject the goods, so here we see an element not dissimilar to that of the CISG. The implementation of Section 15A into the Sale of Goods Act 1979, has demonstrated that a just result is needed to curb the effect that terms deemed to be conditions had on contracts. Mullis states that, "Thus, at least in respect of some breaches, the demands of 'justice' trump the demands of commercial certainty even in English law."[149] However, some have argued that when the issue at hand is that of international sales, one party cannot be permitted to speculate at another party's expense. Thus, justice can only be furthered by precise termination rights. Mullis further argues that the Convention places too much of a burden on the aggrieved party to promptly give notice regarding the lack of conformity that is alleged. In English law, acceptance of the goods (or documents) only causes the buyer to lose his right to reject them; whereas failure to give notice of lack of conformity under the Convention causes the buyer to lose his right to any claim.[150]
From the brief examination above, one see why common lawyers find the provisions of Article 49 especially those relating to fundamental breach difficult to grasp, as it may not achieve the predictability and certainty of English law. However, this writer questions whether concepts such as innominate terms and the provisions of Section 15A of the Sale of Goods Act still preserve this certainty in commercial transactions. Specifically, in the absence of the parties' intention to the contrary, it will be for the courts to decide whether the breach is serious enough to give rise to termination. Arguably, although the criteria applied may not be as strict as that of Article 25, surely the underlying aim of having these mechanisms within English law is to establish a balance between justice and commercial certainty. We will look at CISG case law further on in this chapter to examine what factors judges have taken into consideration to justify avoidance of the contract.
2.8 Examination of the Case Law Regarding Article 49
In examining the relevant case law, one observes that interpretations by the national courts regarding the notion of fundamental breach differ considerably from each other. Mullis contends that for the German courts the remedy of avoidance under the CISG is one of last resort and consequently the threshold for fundamental breach is quite high. There are three factors that the courts take into consideration: first, if the buyer can make some use of the defective goods the breach cannot be fundamental. The second factor is the willingness of the seller to cure defects. Even though some have interpreted the buyer's right to avoid the contract as predominant over the seller's right to cure in Article 48, German courts nevertheless hold that supplying non-conforming goods cannot amount to a fundamental breach if the seller can cure the defect without unreasonable inconvenience. The third factor is how important was the term broken given the circumstances of the particular case.[151]
The CISG Advisory Council advocates the idea of looking to the purpose for which the goods are bought; the decisive factor being whether the goods are totally improper for the use intended by the buyer and the extent that the buyer can make use of the goods without unreasonable expenditure.[152]
One example of a German decision that used BGB provisions to interpret the CISG is evidenced in a case heard by the Oberlandesgericht[153] Dsseldorf involving the sale of fabrics.[154] The German buyer claimed that some of the fabrics delivered by an Italian seller were of the wrong colour and therefore not in conformity with Article 35 CISG. The court held that the buyer was not entitled to declare the contract avoided because of the non-conformity of part of the fabrics. The court found that the buyer did not give sufficient evidence that the non-conforming textiles could no longer be used as contemplated under the contract. In addition, it was held that that the buyer failed to fix an additional period of time of reasonable length for performance by the seller, and consequently, it was held that the buyer could not exercise those rights under Article 49. In this case, the courts applied the Nachfrist procedure incorrectly using the German concept of notice under the German Civil Code whereby the party has to fix an additional time prior to exercising the remedy of avoidance.[155] In contrast under the CISG, the buyer is not under an obligation to fix an additional time to be entitled to avoidance. I find this decision particularly troublesome. If we recall in the first chapter, we examined some of the difficulties posed by having national judges interpret the CISG, the concern being that they could not separate their national viewpoints from that of the CISG. This case illustrates this concern and raises the question of whether the CISG can evolve and develop as an instrument of international sales law if judges cannot interpret its provisions without keeping their national perspectives separate.
In another case decided by the Oberlandesgericht in Frankfurt, an Italian seller and a German buyer were in a dispute over a contract for the sale of shoes.[156] The Italian manufacturer had agreed to produce 130 pairs of shoes according to specifications given by a German buyer, to be used as a basis for further orders. At a trade fair, the manufacturer displayed some shoes produced according to these specifications and bearing a trademark of which the buyer was the licensee. When the manufacturer refused to remove those shoes, the buyer advised the manufacturer that he was terminating the relationship and would not pay for the sample shoes which were no longer of any value to the buyer. The court held that the manufacturer's breach of the duty of preserving exclusivity, although not a primary obligation under the contract, constituted a fundamental breach under Article 25 since it endangered the purpose of the contract to such a degree that, as was foreseeable to the manufacturer, the buyer had no more interest in the contract. It was reasoned by the courts that the basis of trust was destroyed. In this decision, we see the courts looking at the behaviour of the parties involved, and making a decision in the interest of good faith. The breach that was committed was not one which could be remedied, for the damage had already been done to the buyer. In displaying the shoes at the fair, the buyer had lost all of his expectation interest and had been substantially deprived since the shoes had now become worthless to him and had no further interest in pursuing the contract. I would agree with the reasoning of this decision, for it is one of the clearer examples of judges seeking an answer beyond the scope of their national perspectives and using the Convention in the manner it is envisaged that the drafters would have intended. Specifically, using the provisions of the CISG not merely on the face of its wording but delving deeper to examine principles of good faith and reasonableness.
In a case decided by the Bundesgerichtshof[157] involving the sale of cobalt sulphate between a German buyer and a Dutch seller,[158] the seller had sold four different quantities of cobalt sulphate to the buyer. It was agreed that the goods should be of British origin and that the plaintiff should supply certificates of origin and of quality. After receiving the documents, the buyer declared the contracts to be avoided since the cobalt sulphate was made in South Africa and the certificate of origin was wrong. The court held that there were no grounds for avoidance of the contract and thus found for the seller. The reasoning for this was that there was no fundamental breach of contract since the buyer failed to show that the alleged difficulties in exporting the goods due to the then existing embargo against goods produced in South Africa would make resale in Germany or abroad impossible. Thus, the buyer did not establish that he was substantially deprived of what he was entitled to expect under the contract as per Article 25. Furthermore, the court held that the fact that the buyer may have to resell the goods at a lower price is not to be considered in itself an unreasonable difficulty. From examination of the facts of this case, we see that the German courts treat avoidance as a remedy of last resort, and rightly so, given the principles of preservation of the contract under the CISG. However, this decision seems to place an unduly harsh burden on the buyer, for one might argue if the buyer contracted to buy cobalt sulphate of British origin, why should he have to accept another kind? The courts in this case are overriding the parties' overall intentions, however, this was justified by the courts which stated that the parties had not expressly stipulated in the contract which requirements they considered fundamental. This decision demonstrates and lends credence to some of the criticisms of the CISG opponents, for how can a decision like this which is contrary to the parties' intentions inspire any confidence in buyers regardless of the product market?
To contrast these German decisions, we will examine the American case of Rotorex Corp. v. Delchi Carrier, which involved an Italian buyer and a U.S. seller.[159] The contract was for the sale of compressors for air conditioners. After delivery of the first instalment, the buyer discovered the compressors were not in conformity with the sample model contract and sought to reject and declare the contract avoided. The courts held that the seller's breach was to be considered fundamental as per Article 25, because cooling capacity and power consumption are important determinants of the value of air conditioner compressors, therefore the buyer did not actually receive what it was entitled to expect under the contract. The Circuit Court stated: "The District Court held that there appears to be no question that buyer did not substantially receive that which it was entitled to expect and that any reasonable person could foresee that shipping non-conforming goods to a buyer would result in the buyer not receiving that which he expected and was entitled to receive."[160]
In examining this decision, we can see that its rationale differs from that of the German case law, because as Pauly argues, a German court would have looked at whether or not the buyer could have used the compressors in his ordinary course of business and if so, the breach would not have been fundamental to justify avoidance.[161] In contrast, in the American decision there is a startling lack of any analysis of the CISG provisions, instead the courts here simply apply the provision verbatim to the situation. Thompson attributes the German jurisprudence in applying the CISG as a, "demonstration of the formalism and strictness that pervades German culture." She states, "The tendency is to criticise the German court for misconstruing the CISG provisions in a way that reflects civil law, rather than what American lawyers think that body of law should represent. One may consider, however, that perhaps Americans too can be blamed for seeing the CISG through their own domestic lenses. American criticism of foreign judicial interpretations may merely be a manifestation of distrust of anything unfamiliar. If the goal of uniformity is ever to be realized it requires all lawyers and courts, both foreign and domestic, to strive for international understanding. Unfortunately, in the meantime, the uncertainty of how courts will apply the CISG necessitates clearly drafted contractual provisions that leave no room for misinterpretation."[162]
2.9 Conclusion
After careful examination of the provisions of Article 49, we can appreciate the complexities that surround the buyer's right to avoid the contract. While the various contingencies can be overwhelming, in addition to the fact that much of the wording is ambiguous, this writer is of the opinion that we must not be disheartened. Rather, as Eörsi states, "Only practice has been able to define the meaning with reasonable certainty over the decades. In applying the concept the judge forms an opinion, taking all the circumstances into consideration whether the breach of contract is so significant as to justify avoidance or not. If it is, he then comes to the conclusion that the statutory definition has been fulfilled; otherwise, that it has not. In other words, he does not form his conclusion through confronting the facts and the statutory text. He resorts to the text merely to support his already existing instinctive conclusions."[163] Now that the provisions of Article 49 have been discussed in detail, we can proceed to the next chapter, the seller's right to cure defects under Article 48, and its impact on the buyer's right to avoid the contract; a subject of much controversy both in the drafting history and scholarly writings.
3. ARTICLE 48: THE SELLER'S RIGHT TO CURE DEFECTS IN PERFORMANCE
In the previous chapter we looked at the provision dealing with the buyer's right to avoid the contract and the various tests and criteria inherent in Article 49. This chapter intends to examine what is considered one of the most controversial issues in relation to the buyer's right to avoid the contract. Specifically, we will look at the provisions relating to the seller's right to cure any lack of conformity or any failure to perform his obligations under the contract.
First, we will look at Article 37 of the CISG, which addresses the issue of the seller's right to cure if he has delivered the goods before the date of delivery. I will then proceed to examine Article 48, which deals with curing any failures to perform after the date of delivery. This subject is potentially one of the most contentious factors in determining whether or not a fundamental breach of contract has occurred, thereby giving rise to the buyer's right to avoid the contract. During deliberations, the Drafting Committee wanted the notion of fundamental breach to be determined in light of an offer to cure, thus safeguarding against avoidance for minor breaches of contract.[164] However there has been no consensus on the issue.[165] It has been argued that the CISG was designed to make the outcome of disputes more predictable, however, the CISG has not been able to do this effectively. Honnold states, "The CISG contains rules that can save a contract from destruction on technical and trivial grounds by permitting a breaching party to cure a deficiency in performance under Articles 37 and 48 while limiting the right of avoidance of a contract to breaches which are fundamental under Articles 25 and 49."[166] This chapter will not only examine the stipulations of Article 48, we will look at the relevance of the UNIDROIT Principles in relation to this issue. I will then present the controversies surrounding the seller's right to cure, drawing comparisons from other jurisdictions, and examine the case law to determine whether the seller's right to cure prevails over the buyer's right to avoid the contract. This will be important when we come on to examining the impact of the CISG in different (product) sectors, specifically cure may not always be a feasible option for the buyer depending on the product in question.
3.1 The Seller's Right to Cure Before the Date of Delivery
The provision which addresses the seller's right to cure defects in the quality or quantity of the goods before the date of delivery can be found in the CISG Article 37:
"If the seller has delivered goods before the date for delivery, he may, up to that date, deliver any missing part or make up any deficiency in the quantity of the goods delivered, or deliver goods in replacement of any non-conforming goods delivered or remedy any lack of conformity in the goods delivered, provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention.
(a) Legislative History
The legal history leading up to the adoption of Article 37 in light of the Convention's high tensions has been relatively straightforward. The wording of the provision is nearly equivalent to that of ULIS Article 37 and the Secretariat Commentary indicates that the Draft Article 35 (which became CISG Article 37) was adopted by 47 votes to none.[167] Most common law jurisdictions were comfortable with the seller's right to cure before the date of performance had passed, in fact one of the first codified right to cure provisions is to be found in the Uniform Commercial Code of the United States (UCC) section 2-508.[168] Civil Law countries although unfamiliar with the seller's right to 'tender a second time' did not raise any concerns with this provision.[169] It is my proposition that one reason for this may be the stipulation that if the seller can cure the defect without any unreasonable inconvenience or expense, then in keeping with the strong civil law tradition of good faith, it should be allowed.
(b) Wording of Article 37
Article 37 stipulates that the seller may up until the end of an agreed period of time for performance, 'deliver any missing part or make up any deficiency in the quantity of the goods delivered, or deliver goods in replacement of any non-conforming goods delivered or remedy any lack of conformity in the goods delivered, provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense.' One has to question to what extent does curing the defect cause unreasonable inconvenience or expense to the buyer and how is this measured. Bianca argues, "Unreasonable is an inconvenience exceeding in an intolerable way the normal prejudice brought about to the buyer by the replacement or repair of the goods. An example of such inconvenience would be if the goods had to be delivered to the seller's place of business and the buyer could not arrange to take away the missing quantity at a convenient time."[170] Upon reading this I am somewhat doubtful that this would constitute the 'unreasonableness' to which the Convention refers, instead I put forth that such a situation would most likely not render the seller's right to cure void. It is my belief that the Convention in light of the principles examined in the first chapter, would require something more dire, rather than to allow avoidance of the contract on such seemingly trivial grounds. Enderlein further points out that, "There is ... a difference between inconvenience and expense. Whereas the Convention does not permit unreasonable inconvenience and unreasonable expense for the buyer, consistently using the notion 'unreasonable' in both cases, the inconvenience rests with the buyer but the expenses, even the reasonable ones, may be claimed from the seller as damages."[171] Upon reading this statement, we can immediately see how the expenses incurred by the buyer may not play a role in whether the seller should be allowed to cure any defects in performance. If the buyer can reclaim the expenses under the damages provision in the Convention then arguably it should not be an unreasonable request to cure. However, a caveat to this should be noted, while it is the seller who stands the expense for curing the defect, and it is for him to decide whether it is worth the expense, he cannot insist that the buyer present the sum of money necessary, up front, to cure the defect then proceed to repay that amount in damages.[172]
Another point worthy of examination is the wording, 'If the seller has delivered goods before the date for delivery,' this writer thinks it is important to note that under Article 52(1) the buyer is not required to take delivery of the goods prior to the delivery date. However, the extent to which refusal of early delivery is limited by the observance of good faith will have to be examined further in the case law.
3.2 The Seller's Right to Cure After the Date of Delivery
The provision that addresses the seller's right to cure defects in the quality or quantity of the goods after the date of delivery can be found in CISG Article 48:
"(1) Subject to article 49, the seller may, even after the date for delivery, remedy at his own expense any failure to perform his obligations, if he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer. However, the buyer retains any right to claim damages as provided for in this Convention.
"(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. The buyer may not, during that period of time, resort to any remedy which is inconsistent with performance by the seller.
"(3) A notice by the seller that he will perform within a specified period of time is assumed to include a request, under the preceding paragraph, that the buyer make known his decision.
"(4) A request or notice by the seller under paragraph (2) or (3) of this article is not effective unless received by the buyer."
(a) Legislative History
Article 48 contains a legislative history that is fraught with tensions; many changes were made to the original draft text, as few delegates could agree on what the correct balance between the seller and buyer's rights in relation to curing defects should be.
The counterpart to the current Article 48 provision can be found in the Draft Convention of 1978 Article 44. One of the criticisms of the original Article 44[173] was that the wording did not strike a balance between the seller's and buyer's interests, the reason for this being that it allowed the buyer to avoid the contract straight away for defective performance which resulted in a fundamental breach precluding the seller the chance to cure.[174] The Federal Republic of Germany disagreed with this view stating that for example, if the seller delivered a machine on the date agreed for performance and upon examination it was found defective, this should not be regarded as a prima facie fundamental breach and the buyer should not be allowed to avoid the contract if the seller was prepared to cure the defect within a reasonable time.[175] However, to counter this, seller's prevalent point of view, the United Kingdom pointed out that one should also take into consideration the case where the seller has delivered a machine which in all aspects failed to fulfil the buyer's expectations causing him to lose confidence in the seller's ability to cure the defects; in this case the buyer should be able to declare the contract avoided forthwith.[176] After much debate about the merits of each perspective, an alternative wording of the text was presented to the delegation, which is that of the present Article 48 and was subsequently adopted. However, this did not end the debate about whether the seller's right to cure should prevail over the buyer's right to avoid the contract or visa versa. In fact the Greek delegation presented a proposed amendment when the vote was taken that the words:
"Subject to article 45 [which became CISG article 49] at the beginning of the new paragraph 1 of article 44 [which became CISG article 48] should be understood as meaning: Subject to the contract not having been declared avoided in accordance with article 45 [which became CISG article 49]."[177]
This proposition was endorsed by some who agreed that the new wording was open to a number of interpretations. However the support was limited and the new text was incorporated into the Convention unchanged.
(b) Wording of Article 48
The provisions set forth in Article 48 examine the seller's right to cure any failure to perform his obligations under the contract; this most often includes his obligations under Article 35. Article 35(1) states the seller is required to deliver goods that are of the quantity, quality and description prescribed in the contract, any breach of these duties represents a breach of contract. Goods do not conform to the contract if they are not fit for ordinary use, or for the particular use by the buyer which the seller knew or should have known of, or do not conform to samples, or finally they are not properly packaged in a manner usual for such goods.[178] When a seller does not deliver the goods in a timely manner or presents non-conforming goods, Article 48 permits the seller to cure the defective performance if it does not result in unreasonable delay, unreasonable inconvenience or unreasonable uncertainty of reimbursement by the seller of expenses advanced by the buyer.[179] Article 48(2) states that if the seller requests the buyer communicate whether he will agree to a cure and the buyer does not respond within a reasonable time, the seller may carry out performance within the timeline specified in his request. The buyer cannot, during this time, decide to choose another remedy which would affect performance by the seller.[180]
Upon reading this provision, I think that Article 48 can be deemed to achieve some balance between seller's and buyer's rights. For example, paragraph 1 states that all expenses must be borne by the seller and the cure cannot cause the buyer unreasonable delay or inconvenience. This appears to offer the buyer some protection from the seller's right to cure; however, we have to determine the meaning to be given to the concepts of unreasonableness and what criteria must be satisfied. Therefore, issues of interpretation remain in regard to the buyer's right to avoid the contract and the resulting uncertainty lends to the criticisms that surround the CISG. If we proceed to examine paragraph 2, we can see a shift back to the seller's favour if the buyer does not respond to the seller's request for cure within a reasonable time. There are numerous circumstances which can hinder or delay the buyer's ability to respond to a request to cure defects, for example it may depend on the nature of the goods in question, the buyer may need to weigh his options to decide whether curing is advantageous to his situation. Therefore, if the buyer is silent on the issue and this period constitutes an unreasonable amount of time then the seller's right to cure the defect takes precedence and the buyer cannot resort to any other remedies under the Convention. Furthermore, it is worth noting that Article 50 precludes the buyer from declaring a reduction of price if he refuses to have the defect cured by the seller.
3.3 Can the UNIDROIT Principles Assist in Interpreting CISG Article 48?
The UNIDROIT Principles differ from the CISG in regard to the seller's right to cure. Under the Principles, there is no distinction between the seller's right to cure before or after the date of performance rather there is one general right regardless of time.
Article 7.1.4 UNIDROIT states:
"(1) The non-performing party may, at its own expense, cure any non-performance, provided that
(a) without undue delay, it gives notice indicating the proposed manner and timing of the cure;
(b) cure is appropriate in the circumstances;
(c) the aggrieved party has no legitimate interest in refusing cure; and
(d) cure is effected promptly
"(2) The right to cure is not precluded by notice of termination.
"(3) Upon effective notice of cure, rights of the aggrieved party that are inconsistent with the non-performing party's performance are suspended until the time for cure has expired.
"(4) The aggrieved party may withhold performance pending cure.
"(5) Notwithstanding cure, the aggrieved party retains the right to claim damages for delay as well as for any harm caused or not prevented by the cure."
Upon examination of the UNIDROIT provision, it is evident that there are some similarities as well as differences from the wording set out in Article 37; therefore we must proceed with caution if the Principles are to be used as a tool for interpreting the CISG on the issue of curing.
To begin, the CISG refers to the 'seller' as the only party to effect cure whereas, under the Principles the terminology used refers to the 'non-performing party', which backs a wider meaning of persons allowed to achieve a cure.[181] Although this may seem on the surface to be a trivial point, it is worth examining. For example, in relation to commodity contracts where there are different buyers and sellers as well as carriers in string sales, the non-performing may not always be the immediate seller, thus the Principles offer a wider alternative.
Under the provisions of Article 37, the right to cure is restricted by the criterion that it must not cause 'unreasonable inconvenience or unreasonable expense of the buyer' however Article 7.1.4 of the Principles offer different criteria as laid out in section (1)(a)-(d). In particular, the notion of a 'legitimate interest' in subparagraph (c) arguably establishes a subjective standard which is then curtailed by the objective standards in subparagraphs (a), (b) and (d) which deal with the requirement of notice, appropriateness, and prompt effect respectively.[182] We can draw an analogy between the provisions under Article 37 which refer to reasonableness and that of the objective factors mention above in the Principles as both can act to balance the interests of seller and buyer. Keller argues that although Article 37 does not stipulate the requirement of notice in order to cure, if the seller attempts to cure without notice this can be construed as an unreasonable inconvenience.[183] It can be argued that the subjective criteria under section (1)(c) of the Principles does not have a counterpart in the CISG. This writer advances the proposition that the idea of the wronged party needing a legitimate interest in order to refuse the seller's offer to cure can be linked to the Conventions general principles of maintaining the contract and the observance of good faith.
Other factors to be taken into consideration are the forms of cure available to the seller. Under Article 37, the seller has the choice of cure at his disposal regardless of the buyer's approval. This can be problematic because depending on the goods in question, a replacement or repair may not be feasible to the buyer; however, under the Principles section (1)(b) the cure needs to be appropriate in the circumstances.[184]
Similar to the Convention, the Principles require that the seller cure the defective performance at his own expense; however, expenses may be unreasonable for example if the buyer has to subsidise any costs and take on the possibility of bankruptcy.[185] This situation can be covered under the Principles section (1)(c), as a possible legitimate interest in refusing the seller's offer to cure, therefore, I believe these two concepts are reconcilable.[186]
The most important and potentially contentious difference between the CISG and the Principles in regard to curing is Article 7.1.4(2). It states that the seller's right to cure is not excluded by a notice to terminate; thus, the right to cure is indisputably a condition in relation to deciding if the non-performance is fundamental.[187] Koch argues that it is common practice in certain industries such as manufacturing, import/export, and retail for the seller's right to cure defects to be reserved.[188] However, in the absence of specific clauses to this effect, curability maybe a factor restricting whether or not a fundamental breach exists in order for the buyer to avoid the contract.[189] He proposes that curability should only be a limiting factor in determining fundamental breach where the cure is reasonable, the breaching party is willing to cure, and the aggrieved party is not substantially deprived of his expectations under the contract.[190]
With regard to Article 48 and the UNIDROIT Principles as mentioned above, there is no distinction under the Principles of the seller's right to cure before or after the date of performance. However, we will examine how Article 7.1.4 of the Principles impacts on Article 48 CISG. As noted above, in the CISG, the right to cure exists as a right on to itself, whereas under the Principles, it must be invoked by a valid notice to the buyer. In both instruments, the purpose of the request or notice as the case may be serves to eliminate any uncertainty. Kee further argues that in relation to the consequences of a notice to cure on a buyer's right to avoid the contract, " The rights of the buyer that are inconsistent with the seller's performance are suspended until the time for cure has expired including the effects of any notice of termination. This can only be in interpreted to mean that if the breach is capable of cure it cannot be a "fundamental non-performance"; otherwise it would mean that it was possible to do the impossible and breath new life into a terminated contract. As a result, the UNIDROIT provision has been rightly criticized for the uncertain position in which it places the buyer, and implicit in that criticism is a preference for the CISG Article 48 approach."[191]
3.4 Controversies Surrounding Article 48
When the legislative history of this article was examined earlier on, the issue of the wording 'Subject to Article 49, the seller may ... remedy ...' and its potential meanings were realised. This writer is of the opinion that this controversy is of the essence in determining whether the seller's right to cure prevails over the buyer's right to declare the contract avoided. Specifically, can the breach be determined as 'fundamental' if the seller has offered to cure the defects. Professor Honnold argues that the words leave little doubt that the seller's right to cure prevails over the buyer's right to avoid the contract. He states, "To find otherwise, would make meaningless the seller's right to cure."[192] He further goes on to state that if a replacement can be made without undue delay even after the date for performance has passed there cannot be any substantial detriment to the buyer as required to produce a fundamental breach. In one decision of the Swiss Court it was held that:
"According to [CISG Art. 25], the condition for a fundamental breach of contract is an especially weighty impairment of the buyer's interest in the performance Yet, besides the objective weight or importance of a defect, it is decisive of the substantiality of a breach of contract, whether the defect can be removed by subsequent repair or substitute delivery. The UN Sales Law proceeds from the fundamental precedence of preservation of the contract, even in case of an objective fundamental defect. When in doubt, the contract is to be maintained even in case of fundamental defects, and an immediate contract avoidance should stay exceptional. Because, as long as and so far as (even) a fundamental defect can still be removed by remedy or replacement, the fulfillment of the contract by the seller is still possible and the buyer's essential interest in the performance is not yet definitively at risk."[193]
Upon examining the reasoning of the court in this case, several issues are immediately apparent. First, the court appears to argue that even if the breach is fundamental it can be remedied and therefore the buyer's interest is not affected. I would have to disagree with this proposition because, if we recall, Article 25 not only looks at detriment in terms of substantial detriment of what the buyer was supposed to receive, i.e., the goods, but it also looks at what he is entitled to expect under the contract. This requirement goes beyond the contractual goods, it looks at the parties intentions when the contract was made and the terms of the contract, thus if those terms are breached, the aggrieved party would be substantially deprived of what was expected. Specifically, the buyer may have other interests in performance that a mere replacement or repairing or the goods cannot 'cure' as we saw in the previous chapter where the basis of trust had been destroyed. Thus, if the breach in question satisfies the meaning of 'fundamental' under Article 25, the question of a cure should not be relevant in determining the issue of avoidance. Professor Ziegel argues that, "There is no requirement in the Convention requiring an injured party to give a breaching party an opportunity to cure before exercising the right of avoidance."[194]
We can certainly see that academic opinion is divided on this issue; therefore, it is the purpose of this chapter to delve into the reasons why the provision is so unclear and what would be the policy reasons behind having one party's rights prevail over another. If we recall during the legislative process, the Greek delegation wanted to amend the proposed Article 48 to clarify the words so that only one interpretation would be evident; however, the other delegates rejected this proposal.
I believe that the reason for there being no clear cut answer in the text of the CISG as to whether the seller should be allowed to cure defects after the date of delivery is that it would depend on the circumstances of the case in question. For example, one would have to look at the terms of the contract, the nature of the breach in question, the purpose for which the goods were bought, and what is the status of the relationship between the buyer and the seller, specifically has the trust been destroyed.
3.5 Comparison with Other Legal Systems
(a) United States
Although the 'perfect tender' rule has been the default position under US law as evidenced in § 2-601 UCC,[195] there are other provisions which curtail the harsh effect of this rule, for example, by applying the good faith principle.[196] In addition, courts as evidenced in the cases below, in the United States treat the seller's right to cure as one of the factors to be taken into consideration in determining the expectations of the parties In interpreting the UCC, courts have restricted the right to cure to minor breaches and have placed importance on the buyers' expectations.[197] As mentioned earlier, § 2-508 UCC deals with the seller's right to cure, stating that the seller needs to notify the buyer of his intention to cure and bear any expenses that may arise.[198] Section 2-508(1) deals with curing prior to the date of performance. Specifically, the seller is allowed an unrestricted right to cure. This is referred to as the 'no harm, no foul' rule.[199] In the case of Clark Oil Trading Co. v. Amerada Hess Trading Co.[200] it was held that the buyer was liable for damages for depriving the seller of his statutory right to cure by rejecting the seller's offer to cure within the contract period.[201] Cure must be carried out promptly; therefore, as the date for performance gets closer the seller must inform the buyer of his intention to cure the defect.
Once the date for performance has passed, the seller's right to cure is restricted. He must establish three criteria as set out in section 2-508(2) UCC. First, the UCC permits the seller the right to replace a non-conforming tender; however, to do so the seller must have had reasonable grounds to believe that the first delivery would be acceptable to the buyer.[202] Second, he has to seasonably notify the buyer of his intention to cure and third, he must have substituted a conforming tender within a reasonable time. Trentacosta states that the reason for this is to, "avoid injustice to the seller by reason of a surprise rejection by the buyer."[203] However, the seller must show that he had reasonable grounds to believe the tender would be acceptable. The courts will examine the extent of the defect in question to determine how serious it is. In Johannsen v. Minnesota Valley Ford Tractor Co.[204] it was stated that, "any right to cure should be limited to cases in which the defects are minor, and we hold the seller has no right to cure defects which substantially impairs the good's value."[205] In addition, it is established that cure is not permissible unless the seller can tender goods which conform to the contract and provide monetary compensation for any damages the buyer has incurred because of the defective goods.
From examining the above provisions relating to the right to cure under US law, I surmise that the seller's right to cure under the UCC is to some extent more restricted than that of the CISG. First, in examining the provisions under § 2-508(1), we can see some similarities to Article 37 CISG. It is generally accepted that if the time for performance has not passed the seller should be able to make a conforming tender. Although the UCC provisions require that notice be given to buyer of the intention to cure, whereas the provisions of the Convention do not require this, one can argue that it may cause inconvenience to the buyer if notice is not given. The more restrictive view of the right to cure under the UCC is evident when we examine the provisions of § 2-508(2). First, the seller must have reasonably believed the buyer would have accepted the first non-conforming tender to be allowed the right tender a second time once the date for performance has passed. This is difficult to determine, namely what constitutes 'reasonable grounds' and to what degree must the seller be aware of the defect is unknown. Article 48 makes no such demand of the seller and indicates he may cure defects as long as he can do so without unreasonable delay or inconvenience to the buyer. Under § 2-508(2), the seller must also seasonably notify the buyer of his intention to cure which again could be reconciled with the provisions under Article 48. Both provisions are analogous on the issue of the seller reimbursing the buyer for any damages which may have resulted from the non-conforming tender. Schneider argues that the CISG and UCC are similar in that it is the expectations of the buyer as opposed to the seller's capacity and readiness to cure that characterise the concept of a fundamental breach.[206] He further argues that both the UCC and the CISG are silent on what should occur when there is a loss of co-operation between parties. However, U.S. courts have put emphasis on the factors of good faith, the reasonable expectations of the parties, in addition to the financial consequences of their decisions.[207]
(b) German Law
German Law differs from that of the CISG and the UCC in that it is only the buyer who can request cure of any defects in performance. The relevant section for this under the German Civil Code is §439 BGB.[208] This section states that the buyer may, at his option, have defects removed or alternatively be supplied with goods free from defects. Similar to the CISG provisions, the seller must bear all expenses arising from the tendering of supplementary performance. However, under Section 439(3), the seller may refuse the buyer's request for a cure if doing so will mean unreasonable expense. To determine this, regard is to be had to the value of the goods in question when free from defect, the extent of the defect, and whether there is some other form of remedy available to the buyer which would not cause him detriment.
I find this aspect of German sales law interesting in that the seller cannot exercise the right to cure, in this sense the BGB seems to be a buyer-oriented body of sales law. This may be a reflection of the recent EC directives which are protective of consumer rights and which influenced the new Modern Law of Obligations. However, these changes also influence commercial transactions where buyer's and seller's interests need to be finely balanced; therefore, opponents of the CISG who argue that domestic laws are better suited to deal with these transactions can see that in this particular situation it may not be the case.
(c) English Law
Unlike other sale of goods laws, the English position regarding the seller's right to cure defects is quite limited. Prior to the date of performance, the seller may re-tender, as this is a generally accepted provision in most jurisdictions.[209] However, after the date for performance has passed the position is much less certain. In the case of Bernstein v. Pamson Motors (Golders Green) Ltd [210] Rougier, J states, "Nowadays the buyer ... must put up with a certain amount of troubles and have them rectified." This leaves much room for interpretation thus, the Law Commission in 1983 suggested that the seller should have a right to repair minor defects.[211] Although the Law Commission suggested that the right to cure should only be in respect of consumers, stating, "Where cure or replacement could be effected easily and quickly, there will be cases where a buyer has lost confidence in the seller or the product and wishes to buy elsewhere or not at all. On the other hand, there may be cases (e.g., of complex products of a sort which often require adjustment soon after supply) where a refusal to accept cure is quite unreasonable. To give the seller a limited right to cure, placing the burden on him to show that rejection is unreasonable, seems to us to represent an acceptable balance between these interests."[212] However, in commercial transactions the Commission stated the right to cure would be, "positively inappropriate." The reasons for this were that commercial transactions were more complex and the cure regime may be impracticable in cases where the market has changed and parties were located in different countries.[213] Eventually some years later, the Commissioners changed their view with respect to consumer sales arguing that the right to cure gave the seller too much power.[214]
In the next section I will examine the CISG case law in regard to Article 48 to ascertain the criteria the courts have implemented when determining if the buyer's right to avoid the contract should be read in light of the seller's offer to cure.
3.6 Examination of the Case Law Regarding Article 48
The CISG Advisory Council in addressing the issue of the seller's right to cure recommends that regard is first to be had to the terms of the contract. However, where those terms are not evident, then if repair, delivery of substitute or missing goods is possible without causing unreasonable delay or inconvenience to the buyer, there can be no fundamental breach.[215] In deciding whether the breach is fundamental or not, the purpose for which the goods were bought must be examined. The CISG Advisory Council further recommends that if the buyer is in a better position to have the goods repaired or replenished he should be under an obligation to do so and may not declare the contract avoided for fundamental breach. However, where the basis of trust for the contract has been destroyed the buyer should not be expected to accept a cure by the seller. This criteria set out above presents very contentious factors to be taken into acco