Go to Database Directory || Go to Bibliography
Search the entire CISG Database (case data + other data)

Reproduced with permission of 11 Vindobona Journal of International Commercial Law & Arbitration (2/2007) 219-236

The Remedy of Fundamental Breach and the United Nations Convention on the International Sale of Goods (CISG) - A Principle Lacking Certainty?

Bruno Zeller [a1]

  1. Introduction
  2. Breach of Contract Generally
  3. Fundamental Breach under the CISG
    3.1     The operation of Article 25
                   3.1.1     Where the goods have not been delivered
                   3.1.2     Where the goods have been delivered
  4. Consequences of Fundamental Breach
    4.1     Avoidance and Articles 46 and 50
    4.2     The problem of restitution
  5. Conclusion

1. INTRODUCTION

This paper will look at fundamental breach under the CISG.[1] This topic will be approached only from the perspective of the buyer. This paper does not attempt to give an in depth analysis of avoidance. It attempts to 'map the territory'. Its purpose is to assist in the development of a basic understanding of how the CISG is constructed by analysing some of the Convention's breach of contract provisions. This paper is not analytical but rather descriptive in nature, as it attempts to describe the current 'state of play'. The intended use of this paper is as a practical guide to the problem of avoidance of contractual obligations under the CISG.

The CISG has many features which are clear and concise. The Article that deals with fundamental breach has, however, often been criticised as vague. This paper will argue that this is not vague, as vagueness has often been linked to a lack of uniformity of outcomes. However, uniformity has two facets or expressions. First, uniformity can be judged by outcomes. Secondly, and more importantly from the point of view of the buyer, uniformity can be judged by solutions or remedial processes. [page 219]

In brief, it is argued that the process approach is to be preferred over the outcome approach in the application of the CISG by tribunals and national courts. Arguably, because of the nature of fundamental breach, not every decision that is the outcome is uniform. Each decision can be unique to each case. However the method by which the decision has been reached is uniform. This is so because the methodology for applying and interpreting the CISG is clearly described. Any inconsistency or vagueness is not attributable to the CISG, but rather to those applying it. This is because any interpretation of the CISG must be approached with Art. 7 in mind.

Two points need to be observed. First, the drafters of the CISG purposefully incorporated words which need to be understood in an inter-national (rather than national) context. Honnold suggested that the drafters solved this problem by 'rooting out words with domestic connotations in favor of non-legal earthy words to refer to physical acts'.[2] Secondly -- and it follows from the first point -- recourse to domestic law is only appropriate in cases where the CISG is silent. In his 'Celebration Anthology' of 50 Years of the German Federal Supreme Court, Schlechtriem explains the relationship between Art. 7 and any municipal court.

The rule in Art. 7(1) CISG compels the discipline, so to speak, that members of an orchestra without a conductor must exercise: no easy task when one essentially gives the cadence himself, which the others must follow. Moreover, this task is especially difficult because one must constantly observe how other highest courts decide and one is more dependant on the receipt of information via the legal academic community than is the case with domestic law.[3]

'Giving the cadence' allows the court or tribunal to investigate the facts as they exist in each case. It follows that a variance of outcomes is possible, if not inevitable. The criticism that fundamental breach is not clear, or is not a successful solution to the problem of a breach of contract, is arguably based on an observation of the variability of outcomes. However, as this paper has already indicated, the key fact is that uniformity is achieved in the process, because each court and tribunal will use the same principles (i.e. those contained within the CISG). Of importance in achieving this goal is Art. 8 which examines how a contract is interpreted. In summary, Art. 8 allows national courts to interpret a contract in a way which reflects the true intentions of the parties. [220]

2. BREACH OF CONTRACT GENERALLY

The problem of a breach of contract attracts widely divergent solutions. In every legal system there are expressions and techniques recognised nowhere else.[4] For a remedial system to be successful, the remedies it provides must be economically defendable and must account for the rights of both (or all) parties to any given contract.

Certainty is required in order for parties to calculate the risk of entering into contracts. Doubt is cast upon the utility of a remedial model when a party can only discover its merits once they lodge a claim. There are comparatively few national legal systems in the world where certainty of remedy cannot be known in advance. The system established by the CISG is no exception.

As indicated above, different systems use different solutions to deal with the same problem. By way of brief example, the German legal system distinguishes between 'impossibility', 'delay' and 'positive breach'. Such distinctions have not been well received elsewhere. Similarly, neither Germanic nor Anglo-American lawyers appreciate the French system where it takes a judicial decree to release parties from their contractual obligations.[5]

It should be pointed out that the German Law of Obligations has been modernised as a result of European Union (EU) endeavours to reach common principles and structures for the law of Obligations in Europe. As a consequence of these EU initiatives the German Civil Code was revised and, amongst other reforms, the basic concept of a breach of contract was rewritten by following solutions of the CISG.[6]

In common law jurisdictions distinctions are drawn between minor breaches and major breaches, the former being a breach of a warranty and the latter a breach of condition. The general the effect of a breach of contract was succinctly put by Holmes when he stated: 'The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it -- and nothing else.'[7]

Whilst this statement does overlook the fact that compulsory or specific performance may be available, the commercial reality is that damages are often the only option for a party who incurs loss due to a breach of contract. [page 221]

The differences between these legal systems have not been proven to be insurmountable. It has become possible for nations to adopt what one may call a 'compromise' in the form of the CISG. The fact that UNIDROIT and the European Commission on Contract Law used the CISG as the basis for their deliberations indicates that the CISG is a successful product borne out of intensive comparative legal studies of other legal systems. Rosett summed it up when he discussed Chapter 7 of the UNIDROIT Principles. Chapter 7 is the counterpart of the remedial scheme of the CISG. He noted that:

In practical terms, [the remedial provisions are] the substantive heart of the whole Principles. ... Chapter 7 is probably the most imaginative synthesis to emerge in this generation to some of the most difficult questions of contract law.[8]

Rosett's characterisation of the CISG as a 'synthesis' is well founded, as the CISG embodies a remedial system which is in some parts new and in others parts old. The CISG follows time tested general principles in some areas, such as awarding damages to the aggrieved party.

Fundamental breach on the other hand, which gives rise to avoidance of contract, is a unique principle -- or as some authors stated, a 'milestone concept'.[9] That said, the term 'fundamental breach' was not unknown at the time the CISG was settled, and has in one form or another been in use as a contractual cure in a wide range of legal systems for some time.

3. FUNDAMENTAL BREACH UNDER THE CISG

As has been observed it is important to note that, in contrast to its treatment in Common Law states, fundamental breach under the CISG is not restricted to the interpretation of exception clauses.

It goes to the heart of the contract and, therefore, a fundamental breach is the essential precondition for avoiding a contract. In other words, it decides whether a contract lives or dies. Another point needs to be made here. In the 'unwinding of failed contracts' the application of the CISG is limited to those cases where there has been a breach of a contract.[10] All issues of avoidance that relate to the validity [page 222] of a contract are excluded by operation of Art. 4 of the CISG. They must be dealt with under domestic law.

Fundamental breach may be available as a remedy to the buyer in two main situations. The first is where the goods are delivered, but there is a breach of a term of the contract. The second situation is that the goods have not been delivered. This distinction is important as the steps which need to be taken, and the conditions that need to be fulfilled, can vary substantially.

This paper will consider both situations. Article 49 is the starting point for any investigation of avoidance. Article 49(1)(a) makes the obvious point hat any failure of a seller to perform his obligation under the contract can amount to a fundamental breach.[11] In this case a court or tribunal must decide whether a fundamental breach, or merely a breach of the contract, has occurred.

As pointed out above, this distinction is vital. It is explained in Art. 49. It is perhaps unfortunate that Art. 49(1)(a) delivers what may be termed a 'mother-statement' here -- if the failure of the seller to perform any of their obligations amounts to a fundamental breach under the contract or the Convention, then the contract may be avoided by the buyer. It is clear that simply not performing any obligation in itself does not give rise to avoidance. The non-performance must be fundamental.

The problem is that Art. 49 proceeds only to distinguish between two situations. First where the goods have been delivered, and secondly where delivery has not taken place. Article 49(2) describes the situation when the goods have been delivered. The general rule in that case is that the buyer loses the right to declare the contract avoided. It follows that any proposed application of avoidance should be preceded by an investigation whether delivery has taken place. A preliminary focus on fact is justified by the drafting of Art. 49, under sub-article (1)(a) of which the requirements for avoidance are repeated but vary depending whether the goods have been delivered or not.

The next issue is definition. The question of what will amount to a fundamental breach is not answered in Art. 49. Article 25 contains an explanation of [page 223] fundamental breach.[12] As has been noted above, it has been argued that the provisions of the CISG that deal with fundamental breach contain vague language causing uncertainty and unpredictability.[13] This is partly due to the history of the CISG. The perceived vagueness was due to the fact that the drafters could not come to an agreement on the type of breach which leads to an avoidance.[14]

As has been noted, the reason for this lack of consensus was the range in the definition of fundamental breach in the legal systems of origin of the drafting parties. In the end, a political compromise resulted in the language contained in Arts. 49 and 25. However, much of the uncertainty and unpredictability of the concept of avoidance of contracts has been removed by the usage of practitioners.

3.1 The operation of Article 25

To begin with, Art. 25 is not a free standing provision. It is arguably only 'declaratory' and not substantive in character. The requirement is that it must be read in conjunction with 'functional' Articles such as, in the case of the buyer, Art. 49.

The CISG in Art. 25 only provides general interpretative guidelines by highlighting the criteria which must be met. It is not an argument to simply point out that it is 'difficult for a buyer and his advisors [to determine] how high a hurdle will be set in any particular case'.[15] Many of these problems of determining avoidance can be overcome by applying Art. 8 -- the intent of the parties -- to the principle of fundamental breach.

A breach of a contract is fundamental:

if it results in such a detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.[16] [page 224]

To determine whether a fundamental breach has occurred, a dual test must be applied. The elements of this dual test are (1) 'substantial detriment' and (2) 'unforeseeability'.[17]

In addition it must also be pointed out that the party wishing to avoid the contract must send a clear declaration of avoidance to the breaching party. Article 25 contains what may be termed an obvious statement in the form of its guarantee that the CISG will protect what 'a party is entitled to expect under the contract'. To take the promisee's expectations into account requires a clear reference to Arts. 8(1) and (2).

Article 8 is therefore of great importance, as it allows the court to take into account not only the objective intent of the parties but also their subjective intent. All the relevant circumstances of the case 'including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties' [18] can be used to determine the intent of the parties. The threshold issue for the court is to determine what the party expected to receive under the bargain in question. The second step is then to find out whether there was a breach of the contract. As a third step, the court must determine whether a fundamental breach has occurred by applying the dual test.

Article 25, as the first part of the test, requires that substantial detriment to one party must have occurred before the breach can be termed 'fundamental'. Such a term cannot be uniformly defined as it depends on each party's expectation of their contractual entitlements. It follows that what amounts to a fundamental expectation, or Kardinalpflicht, will vary from contract to contract. This relativity is strengthened when consideration is given to the fact that 'substantial detriment' is not narrowed to a specific harm but rather widened 'to all detrimental effects in the particular context of the other party's situation'.[19]

In essence the term 'detriment' fulfills a filtering function as it only takes on substance within the particular context of the contract in question. The Landgericht Saarbrücken, in reading Art. 25, concluded that all its requirements 'can be founded in the delivery of non-conforming goods'.[20] Article 25 supplied the policy statement and, in this case, non-conforming goods took on substance within the contract. OLG Stuttgart compliments this decision. Again, the goods were non-conforming, and a fundamental breach case was argued. However, the court [page 225] rejected this argument on the grounds that, in determining avoidance, it was decisive whether:

the buyer was without unreasonable expenditure able to process the goods differently or sell them in the normal course of business, if only with a price discount, and if the buyer could reasonably be expected to take such measures.[21]

It is clear from the above examples that 'substantial detriment' goes beyond damages as described in Art. 74. Simply put, detriment does not equal damages. It is left to the parties to determine what importance they attach to contractual obligations.[22] The reason for this drafting is that the promoters of the CISG would not have introduced a particular principle which, as Will coined, 'is a fresh legal concept and is not fraught with history'.[23] Furthermore, the second part of the dual test under Art. 25 includes a proviso that the party in breach ought to have foreseen the damage. In other words, the breaching party must have, or ought to have, the knowledge that a breach would result in substantially depriving the other party 'of what he is entitled to expect'.[24]

Hence foreseeability of the detriment must be proven. Foreseeability is a general principle of the CISG and must be understood in conjunction with Art. 74. It should be noted that frequently Hadley v Baxendale [25] is quoted as the source of the foreseeability principle. However caution must be applied and Murphy was correct when he observed that: judges should try to divorce themselves from the influence of Hadley as much as possible: its rules are not the same as those under the [foreseeability principle of] article [74] of the CISG.[26]

Case law -- not surprisingly -- lists the delivery of defective goods [27] as the most commonly recurring situation in determining whether a fundamental breach has occurred. It is obvious that in all cases a breach of the contract has occurred. [page 226]

However, precisely where the 'line in the sand' between a breach and a fundamental breach has been drawn is not easily ascertainable. Most cases -- but not all -- appear to rule in favor of avoidance if a high proportion of goods do not conform to the contract. But this is not uniformly so. In determining a fundamental breach, 'although without expressly saying so, case law seems to favor an economically oriented approach based on the actual loss suffered by the aggrieved party'.[28]

The fact that economic loss is of importance is shown in a German case. The German Bundesgerichtshof in 1979 delivered what could be termed a 'classic' decision.[29] Only 3% of the delivered cheese in the transaction in question was actually defective. Because at the time of contractual formation both seller and buyer knew that the cheese market in Germany was saturated, it was foreseeable that customers would change to other suppliers even for trivial unsatisfactory deliveries. It can be argued that in this case the German court considered the foreseeable losses of the buyer in the context of the foreseeable behaviour of the buyer's customers.[30]

Graffi came to the conclusion that courts in general do not seem to pay great attention to contractual expectations or the principle of foreseeability. Rather, in Graffi's view evidence of a substantial detriment which was suffered seems to play an important role in determining whether a fundamental breach had occurred.[31] However, it is difficult to see how determination of a 'substantial detriment' can be undertaken in a vacuum without taking the expectations of the parties, or at least the economic circumstances of their bargain, into consideration. Such a determination requires the application of Art. 8.

In order to apply the dual test within the context of Art. 49, it must be first established whether goods have been delivered or not. As suggested above, such a distinction is important, as the requirements to prove fundamental breach are case specific.

3.1.1 Where the goods have not been delivered

This situation does not pose any problems besides the fact that it leaves open the issue of whether the failure of the seller actually amounts to a fundamental breach. As has been noted, Art. 8 will assist a tribunal or court in their determining the purpose of the contract, and hence also to identify what the buyer was entitled to [page 227] under the contract and whether the seller 'substantially deprived him of what he was entitled to'.[32]

However, the CISG assists the buyer in allowing the aggrieved party to avoid having to define the failure of the seller as being 'fundamental'. The buyer only needs to give the seller an additional time period, or Nachfrist, to perform his obligations.[33] If the seller fails to do so this second breach amounts to a fundamental breach.

It is not the non-delivery which is the trigger of a fundamental breach but the failure to respond to the invitation to deliver. The Nachfrist contemplated by Art. 47 must be of a reasonable length. Article 47(2) does protect the seller during that time, as the buyer is not allowed to resort to any remedy for breach of contract until the extension is exhausted. Arguably, the contract can be termed to have been 'suspended' until it becomes clear whether delivery will take place or not.

Of interest in this context is the decision of the Appellate Court of Düsseldorf [34] where the question of Nachfrist was discussed. If time is of the essence, and both parties are aware of this fact, setting a Nachfrist in case of non delivery is not essential. The Düsseldorf court went further and explained that the mere fact that the seller sets a later delivery date acts as a Nachfirst and avoidance pursuant to Art. 49 can be affected in the same manner as if the buyer would have set a Nachfrist.

3.1.2 Where the goods have been delivered

If goods have been delivered the situation becomes more complicated as the operation of several legal principles, including restitution and unjust enrichment, may be triggered. However, a careful reading of the CISG reveals that adherence to the Convention's rules furnishes the desired explanations. The CISG starts with the premise that once goods have been delivered, the remedy of fundamental breach is lost.

In essence, delivery means the aggrieved buyer can claim damages or any other remedy as described in Art. 45, except avoidance. However this is not a strict rule as certain exceptions have been listed. The CISG makes a distinction between late delivery and breaches other than late delivery. Once late delivery is made, a declaration of avoidance must be made in a timely fashion. Once the goods have [page 228] left the country of origin it may be argued that avoidance is no longer an appropriate remedy. The CISG is conscious of the 'tyranny of distance' and the associated costs. It is therefore not surprising that once goods have been delivered the CISG, only allows avoidance in exceptional circumstances.

Once goods have been delivered many possible breaches can occur. For example, goods may be delivered which do not conform to the contract. Non-conformity will be made out where the goods are faulty or simply do not correspond to the quality or fitness as desired under the contract. Article 49 simply points to the fact that avoidance must be communicated to the seller within a reasonable time after he 'knew or ought to have known of the breach'.[35]

The problem with Art. 49 is that it does not fill the time gap between inspecting the goods and giving notice of the defects or lack of conformity to the seller. Reading the CISG within its four corners will, however, solve this problem. The problem of the time gap is governed by Arts. 38 and 39. The question of conformity is dealt with at Art. 35.[36]

This is only one example of a possible breach of contract and its solution. The CISG describes other breaches, such goods not being free from any right or claim of a third party pursuant to Art. 41. Furthermore, even when goods have been delivered and a breach occurs, the CISG gives the buyer the opportunity to avoid having to define fundamental breach. The CISG confers this opportunity by the deployment of the principle of Nachfrist, much as it does for cases where goods have not been delivered.

The solution to fundamental breach is that a buyer, if time permits, should simply give the seller a Nachfrist in order to avoid the problem of definition. The question of time, or even the essential requirement to give a Nachfrist, is dependent on the circumstances.

If time is of the essence -- or even if a contract stipulates 'as soon as possible'[37] -- then Art. 8 holds that the seller could foresee the significance of prompt delivery. The result will be that the buyer was not obliged to set a Nachfrist.[38] [page 229]

In all of these cases the lack of conformity or non-delivery becomes immaterial because the non-performance of the seller within the given period in itself amounts to a fundamental breach. This solution is simple and provides no real controversy. As a mater of fact there are no cases reported where the non-observance of a Nachfrist was subsequently questioned by a court or tribunal as not to constitute fundamental breach.

4. CONSEQUENCES OF FUNDAMENTAL BREACH

Once a fundamental breach is established the parties are released from their respective obligations. However this does not prevent the aggrieved party claiming damages which are due to them.[39] Such damages are always in addition to the specific rights a buyer has when the contract is avoided. In general the buyer can rely on Arts. 75 and 76 for remedies. These two articles are interrelated. Article 75 allows a buyer to claim 'the difference between the contract price and the price in the substitute transaction'.[40] Replacement purchases may be made by the buyer when the goods are not delivered or where faulty goods have been delivered. Again, in cases of non-delivery the situation is simple and Art. 75 will resolve the buyer's claim. The same can be said if the seller resold the goods.

Article 76 resolves the problem if the buyer has not made a substitute purchase or has not resold the goods. He simply recovers the difference between the current price and the price fixed by the contract. The problem as to when the current price is to be calculated is also determined by Art. 76(1). If the goods have not been delivered it is the price at the time of avoidance. If the goods have been delivered it is the prevailing price at the time when the goods were taken over.

4.1 Avoidance and Articles 46 and 50

In addition, once a fundamental breach is established and the goods do not conform to the contract, it will act as a trigger to claim delivery of substitute goods pursuant to Art. 46(2). Alternatively, Art. 46(3) will allow the buyer to ask for repair of delivered goods. Only in cases of fundamental breach is the buyer in a position to choose between the two remedies provided for by Art. 46. In all other cases repair is the only available remedy.

It is important to note here that giving an additional time period is not asking for specific performance. The right to avoid a contract is diametrically opposed to the right to specific performance. Specific performance can be claimed in respect of all breaches of a contract but the availability of avoidance is limited.[41] The [page 230] question of specific performance is only of relevance in circumstances where the risk has shifted from the seller to the buyer. The question is whether the buyer has access to the remedies under Arts. 46(2) and 50 (i.e. rectification of defects or the reduction of price). The solution is not without controversy and is the subject of divergent authority.[42] The prevailing view is that Arts. 46(2) and (3) only apply for defects in quality.[43]

At this point an interesting observation may be made concerning situations where goods are shipped by sea. It has been argued that trade in commodities raises different issues to trade in machinery and other capital goods where a breach of contract is envisaged.[44] The argument is that in commodity trade the volume of paper trading exceeds the volume of dealing in the underlying goods.[45] This may be the case.

In cases of this nature the original question -- where has the breach occurred -- is of importance. It is obvious that at the end of a transaction, whether in commodity goods or otherwise, the goods must be delivered. Only at the time of delivery will the relationship between the ultimate purchaser and seller be revealed. The trade in documents, or more specifically the trade in negotiable instruments, is specifically excluded under the CISG and does not concern the ultimate buyer at all. It is the delivery or non-delivery to the buyer of the actual goods which is covered by the Convention. Hence, the argument that the CISG does not apply to commodities is an over-simplification and is not correct.

Whilst it is true that the negotiable instruments traded in respect of a commodity are outside the scope of the Convention, this is not the end of it. The CISG still applies to commodity transactions in so far as it covers the actual sale and delivery of the commodity. The paper trading that is outside the scope of the Convention is a matter for the domestic law of the site where the instruments were traded.

4.2 The problem of restitution

In cases where the goods have been delivered and the buyer wishes to make a replacement purchase the whole matter rests on the question whether the buyer is [page 231] able to make restitution [46] of the disputed goods substantially in the same condition as he received them.[47]

If both parties are obliged to make restitution they must do so concurrently.[48] However, there are exceptions. One arises where the goods have perished, deteriorated or have been damaged in transit and the damage is not the buyer's fault.[49] Furthermore, it is not surprising that the CISG requires the buyer or seller to account for all benefits they derived under the contract.[50]

Avoidance is very closely linked to restitution as the buyer will forfeit the right to avoid the contract if it is impossible to make restitution. Article 82(1) basically provides the bar on the exercise of avoidance. Article 82(1) is not unique as it corresponds with article 2-608(2) of the UCC. But the same article also sets out many exceptions to the general rule.

Before our discussion of restitution begins, a further problem needs to be addressed, namely whether Art. 82(2)(c) is only confined to defects in quality. The problem stems from the fact that this article uses the expression 'lack of conformity'.

'Lack of conformity' can be interpreted in several ways. First, it may only refer to the conformity of goods. This is a very narrow interpretation. Secondly, the word 'conformity' can be extended to mean conformity with the contract. Taking into consideration what Honnold said in relation to the usage of words -- '[root] out words with domestic connotations in favor of non-legal earthy words [referring] to physical acts'[51] -- the wider interpretation would seem most appropriate. However, words cannot be given meaning in isolation, as the CISG needs to be read within its four corners.[52] The question of conformity, or lack thereof, must therefore be investigated within the four corners of the Convention.

Conformity is mentioned in no less than nine articles of the CISG. Many of the Articles are listed in Section II 'Conformity of the goods and third party claims'. This distribution suggests that conformity must be read as meaning more than just conformity as to quality. [page 232]

Mohs points to the fact that Art. 82(2)(c) refers to quality, third party intellectual property rights and provides a limited remedy in relation to defects in title.[53] In relation to defects in title to goods, the buyer obviously has no interest in keeping the goods. The only remedy they would be seeking is to avoid the contract. Therefore, whether Art. 50 allows a price reduction or not is of no real practical significance.

The same argument can be advanced if goods are either destroyed or lost. In such cases it will be unlikely that the buyer will ask for a price reduction, whether permitted under Art. 50 or not. Furthermore, whether a price reduction is allowed in certain circumstances does not influence the question of uniformity. It merely narrows down the remedies once a fundamental breach has been accepted by the tribunal. Whether remedies are narrowed down by choice, necessity or law does little to suggest that the question of fundamental breach, and for that matter the uniformity of the CISG, has been put in doubt.

Article 84 recognises that not in all circumstances the goods can be returned in the same condition the buyer received them or at all. The buyer nevertheless owes the seller all the benefits which they derived having been in possession of the goods. The buyer has to account for the concrete amount even if they sold the goods at a 'give-away' price.[54] However, the CISG does place a limitation on 'bargain sales'. While it is possible for the aggrieved buyer to sell the goods cheaply due to their condition, the limitation is that the sale must be in the normal course of business as described in Art. 82(2)(c). In cases of genuine lower than expected prices the bar to avoidance does not apply.

The conclusion is that the wording in Art. 82 must be read widely taking general principles into consideration. Hence, even in cases where restitution is impossible, the buyer is still entitled to avoid the contract.[55] It is of special significance that the CISG included many remedies into its regime. Not all remedies suit every opportunity, and an aggrieved party must select the remedy which is appropriate under the circumstances of the breach to which they have been exposed.

There is a further point to be considered. Article 70 -- one of the articles which explains when risk passes from the seller to the buyer -- furnishes an exception to the rule. If a fundamental breach has been committed the buyer is not barred from all those remedies available on account of the breach.[56] In effect a buyer -- despite the risk having passed -- can still declare the contract avoided and require the delivery of substitute goods pursuant to Art. 46(2). [page 233]

But without Art. 70 a buyer could not avoid the contract, nor ask for substitute deliveries, because both remedies require the return of the goods in the same condition as received. This would be rather difficult if the goods have been lost or damaged in transit, such as if they fall overboard on a ship. Because of Art. 70, the risk has been shifted back to the seller who breached the contract.

5. CONCLUSION

As has been shown, the CISG has introduced a system by which contracts can be unwound due to fundamental breach. The Principles of European Contract Law, the UNIDROIT Principles of International Commercial Contracts and the Avant-projet d'un Code Europeen des Contracts have introduced similar rules into their respective documents. Arguably, therefore, fundamental breach has been conceived as being of interest and value in any attempt to unify contract law.

The CISG has attempted to balance the needs of the buyer to have the opportunity to avoid the contract in case of non-performance with those of the seller, who requires compensation for any performance or part performance of the contract. In other words, despite an unwinding of the contract a party must account for all the benefits it has derived from a contract before the avoidance.

The avoidance of a contract in case of non-delivery does not appear to attract much criticism. However, once a contract has been performed, either in full or only partially, some academics have seen fit to point to shortcomings within the Convention. Zimmermann argues that:

the CISG offers a risk rule, it is unnecessarily complex and leaves a number of questions unanswered. It is a solution that is founded on an outdated approach since it distributes the risk of accidental loss in the same way as German law did before the recent reform of the law of obligations, namely by excluding the right to avoid the contract.[57]

It is submitted that the aspect of avoidance where an attempt at performing has been made is not always clear-cut. Professor Treitel commented that fundamental breach under the CISG lacks certainty. He noted: 'It is open to criticism on the ground that it is likely to lead to uncertainty since the open-textured nature of the definition in article 25 makes it hard to predict just when a breach will be regarded as 'fundamental'.'[58]

That may be so but if a buyer is concerned, as regardless of the presence or absence of fundamentality the buyer can simply give a Nachfrist, and the subsequent breach will be automatically treated as a fundamental breach. [page 234]

Arguably, English law is not as predictable as it has been suggested. A business person may still have some considerable problems in predicting how an English court will classify an 'unclassified' term. Even if it will be classified as an intermediate term, the trader's problems are not over.[59]

In domestic situations the problem of making restitution is relatively simple. This is because distances are not as big as in international transactions, and the matter remains within one jurisdiction. Considering that in international trade both parties are domiciled in different jurisdictions, the question of certainty and trust is of far greater concern to the parties than it is in a sale conducted within a domestic community. A seller or buyer must be assured that the law will protect their interests and that the 'tyranny' of distance will not thwart attempts at restitution.

Arguably, therefore, once the goods have been dispatched and are not lost or irreparably damaged, avoidance is and will be the choice of last resort for an aggrieved party. Damages are a far greater incentive in international trade once performance has been established. However, non-delivery will attract the remedy of avoidance, as it is efficient, clear cut and definite.

Considering the problematic status of fundamental breach why then should the CISG be applied? Simply put, it is a uniform international sales law and is applied very often in international arbitrations. For example, the CISG is the de facto sales law in the EU. Furthermore, the CISG 'provide[s] rules governing the international sale of goods which, apart from being uniform, also take into account the fact that export or import transactions are often entered into by parties who do not possess equal bargaining power'.[60] Forum shopping is not eliminated, but is, as a practice, drastically reduced.

It is submitted that this in itself is a major advantage for international business. The most important aspect of this discussion, however, is the need to appreciate that the general principles packaged in the CISG must be understood as driving a process. That is, the CISG is process driven and not outcome driven. It is left to the intuition of the courts or tribunals -- based on the available facts -- to arrive at a just conclusion. Outcomes must vary because the facts are not the same in all cases. Uniformity and predictability are achieved by applying the same process by which a result is achieved. This is arguably no different to the common law system of precedent where, once the same facts have been discovered, previous decisions are applied to determine the outcome. Uniformity is thereby achieved.

Recognition amongst members of the international legal community that the Convention is process driven, and that the outcomes are tailored to the situation of [page 235] the transaction, may strengthen the uniformity of the CISG. The 'precedent' in the CISG is not the outcome but the process. To argue that fundamental breach 'is open to criticism on the ground that it is likely to lead to uncertainty'[61] is not correct. It also reveals that the true purpose and aim of the CISG has not been fully appreciated. [page 236]


FOOTNOTES

a1. Assoc/Professor, Victoria University, Melbourne, Adjunct Professor, School of Law, Murdoch University, Perth, Australia.

1. The seller's remedies are in essence the same except those which specifically are unique such as paying the price.

2. Honnold, J. 'Uniform Laws for International Trade: Early "Care and Feeding" for Uniform Growth', (1995) 1 International Trade and Business Law Annual 2.

3. Schlechtriem, P., 'Uniform Sales Law in the Decisions of the Bundesgerichtshof' 50 Years of the Bundesgerichtshof, A Celebration Anthology from the Academic Community. Available at: <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem3.html>.

4. Zweigert & Kötz, Introduction to Comparative Law, 1998, Clarendon Press, Oxford, at p. 510.

5. Ibid.

6. See Schlechtriem, P., 'The German Act to modernize the Law of Obligations in the Context of Common Principles and Structure of the Law of Obligations in Europe' (2002) Oxford University Comparative Law Forum; available at: <http://oucif.iuscomp.org>.

7. Holmes, W., 'The Path of the Law', (1897) Harvard Law Review 462.

8. Rosett, A, 'UNIDROIT Principles and Harmonisation of International Commercial Law; Focus on Chapter Seven'; available at: <http://www.unidroit.org/English/publications/review/articles/1997-3.htm>.

9. Graffi, L., 'Case Law on the Concept of "Fundamental Breach" in the Vienna Sales Convention', (2003) No 3 International Business Law Journal 338.

10. Zimmermann. R. 'Restitutio in Integrum: The Unwinding of Failed Contracts under the Principles of European Contract Law, the UNIDROIT Principles and the Avant-project d'un Code Europeen des Contrats', 2005-4 Uniform Law Review 729.

11. For examples of fundamental breach see: Bundesgericht (Switzerland) November 13 2003 available at: <http://cisgw3.law.pace.edu/cases/031113s1.html>; Tribunal of International Commercial Arbitration at the Ukraine Chamber of Commerce and Trade, 18 November 2004, available at: <http://cisgw3.law.pace.edu/cases/041118u5.html>; OLG Düsseldorf, 21 April 2004, available at: <http://cisgw3.law.pace.edu/cases/040421g2.html>, Landgericht Stendal, 12 October 2000, available at: <http://cisgw3.law.pace.edu/cases/001012g1.html>; and OLG Stuttgart, 12 March 2001, available at: <http://cisgw3.law.pace.edu/cases/010312g1.html>.

12. For examples see LG Frankfurt, 11 April 2005, available at: <http://cisgw3.law.pace.edu/cases/050411g1.html>; LG Saarbrucken, 1 June 2004 available at: <http://cisgw3.law.pace.edu/cases/040601g1.html>; OLG Dusseldorf, 21 April 2004, available at: <http://cisgw3.law.pace.edu/cases/040421g2.html>; OLG Stuttgart, 12 March 2001, available at: <http://cisgw3.law.pace.edu/cases/010312g1.html>.

13. Cook, S. 'The UN Convention of Contracts for the International Sale of Goods, A Mandate to Abandon Legal Ethnocentricity' 16 J.L. & Com. 258.

14. Graffi, supra fn 9, at p. 338.

15. Ibid.

16. Article 25 CISG.

17. Will, M., in Bianca and Bonell (eds) Commentary on the International Sales Law: The 1980 Vienna Sales Convention (1987) Giuffre Milan, at p. 210.

18. Article 8(3) CISG.

19. Will, supra fn 17, at p. 208.

20. LG Saarbrücken, 1 June 2004 available at: <http://cisgw3.law.pace.edu/cases/040601g1.html>.

21. OLG Stuttgart, 12 March 2001, available at: <http://cisgw3.law.pace.edu/cases/010312g1.html>.

22. See for example LG Frankfurt, 11 April, 2005, available at: <http://cisgw3.law.pace.edu/cases/050411g1.html>.

23. Will, supra fn 17, at p. 210.

24. Article 25.

25. (1843-60) All E.R. Rep. 461.

26. Murphy, A.G., 'Consequential Damages in Contracts for the international Sale of Goods and the Legacy of Hadley' 23 Wash. J. Int'l L. & Econ (1989) 415 - 474. Reprinted and available at: <http://cisgw3.law.pace.edu/cisg/biblio/murphy.html>.

27. The lack of conformity is addressed by Art. 35 of the CISG and a substantial body of law is available. In this context see for example, OLG Stuttgart, 12 March 2001, available at: <http://cisgw3.law.pace.edu/cases/010312g1.html>.

28. Graffi, supra fn 9, at p. 343.

29. Avaliable at: <http://cisgw3.law.pace.edu/cases/791024g1.html>.

30. Ibid.

31. Graffi, supra fn 9, 345.

32. Article 25 CISG.

33. See KG Appenzell Ausserrhoden, 10 March 2003, available at: <http://cisgw3.law.pace.edu/cases/030310s1.html>; OLG Karlsruhe, 20 July 2004, available at: <http://cisgw3.law.pace.edu/cases/040720g1.html>; and OLG Düsseldorf, 21 April 2004, available at: <http://cisgw3.law.pace.edu/cases/040421g2.html>.

34. OLG Düsseldorf, 21 April 2004, available at: <http://cisgw3.law.pace.edu/cases/040421g2.html>.

35. Article 49(2)(b)(i) CISG.

36. See Bundesgericht Switzerland, 13 November 2003, available at: <http://cisgw3.law.pace.edu/cases/031113s1.html>; LG Saarbrücken, 26 October 2004, available at: <http://cisgw3.law.pace.edu/cases/040601g1.html>; LG Bielefeld, 15 August 2003, available at: <http://cisgw3.law.pace.edu/cases/030815g1.html>; LG Bayreuth, 10 December 2004, available at: <http://cisgw3.law.pace.edu/cases/041210g1.html>; and LG Frankfurt, 11 April 2005, available at: <http://cisgw3.law.pace.edu/cases/050411g1.html>.

37. See OLG Düsseldorf, 21 April 2004, available at: <http://cisgw3.law.pace.edu/cases/040421g2.html>.

38. Ibid.

39. See Art. 81(1) CISG and also LG Braunschweig, 30 July 2001.

40. Article 75.

41. Eiselen, S, 'A Comparison of the Remedies for Breach of Contract under the CISG and South African Law', in Basedow et al; (eds) Aufbruch nach Europa -- 75 Jahre Max-Planck-Institut für Privatrecht, (2001) Mohr Siebeck: Tübingen.

42. Mohs, F., 'The Restitution of Goods on Avoidance of the Contract fro Lack of Conformity within the Scope of Art. 82(2)(c) CISG', Review of the Convention on Contracts for the International Sale of Goods (CISG) (2003/2004), at p. 55.

43. For a full discussion see Mohs, F., ibid, at p. 58.

44. See Mullis, A., 'Avoidance for breach under the Vienna Convention; A Critical Analysis of Some of the Earlier Cases', in Andreas & Jarborg (eds), Anglo-Swedish Studies in Law, 1998, Lustus Forlag, at p. 328.

45. Ibid, at p. 329.

46. See Arts. 81 to 84 CISG.

47. Article 82(1) CISG.

48. Article 81(2) CISG.

49. Article 82(2) CISG.

50. Article 84 CISG.

51. Honnold, J., 'Uniform Laws for International Trade: Early "Care and Feeding" for Uniform Growth', (1995) 1 International Trade and Business Law Annual, 2.

52. For a treatment of the four corner approach see Zeller, B. 'Four-Corners -- The Methodology for Interpretation and Application of the UN Convention on Contracts for the International Sale of Goods' available at: <http://www.cisg.law.pace.edu/cisg/biblio/4corners.html>.

53. See Mohs supra fn 42, at pp. 66 and 69.

54. Mohs, supra fn 42, at p. 70.

55. Ibid, at p. 72.

56. Article 70 CISG.

57. Zimmermann, supra fn 10, at p. 730.

58. Benjamin on Sales (Sweet & Maxwell) 5th ed. (1997), at pp. 18-116.

59. Mullis, A., supra fn 44, at p. 334.

60. Bonell, J. 'Introduction to the Convention' in Bianca and Bonell (eds) Commentary on the International Sales Law: The 1980 Vienna Sales Convention, (1987) Giuffre Milan, at p. 1.

61. Treitel G., in Benjamin's Sale of Goods (2006) Sweet & Maxwell, at para. 18.004.


©Pace Law School Institute of International Commercial Law - Last updated January 8, 2010
Go to Database Directory || Go to Bibliography
Comments/Contributions