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2008 UNCITRAL Digest of case law on the United Nations Convention on the International Sale of Goods

Digest of Article 49 case law [reproduced with permission of UNCITRAL] [*]

[Text of article
Overview
Avoidance in general
Avoidance for fundamental breach (art. 49(1)(a))
Specific instances of fundamental breach
Avoidance for non-delivery during additional period of time (art. 49(1)(b))
Period of time for declaration of avoidance when goods have been delivered (article 49(2))
Burden of proof]

Article 49

(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.

OVERVIEW

1. Article 49 specifies the conditions under which the buyer is entitled to declare the contract avoided. Avoidance under article 49 is available in two situations: 1) if the seller's failure to perform its contractual obligations amounts to a fundamental breach of contract as defined in article 25 (article 49(1)(a)); or 2) if the seller fails to deliver the goods within an additional period of time fixed in accordance with article 47 (article 49(1)(b)).

2. Avoidance of the contract is a remedy of last resort (ultima ratio) that is available when the buyer can no longer be expected to continue the contract.[1] A contract is avoided only when the buyer provides notice of avoidance (article 26). In cases of non-delivery, the buyer is entitled to avoid the contract at any time after all prerequisites for avoidance have been met. If the seller has delivered the goods, however, the buyer loses the right to avoid the contract if the buyer does not exercise it within the reasonable time periods specified in article 49(2).

Avoidance in general

3. The buyer must declare the contract avoided by means of a notice (article 26). No specific form is prescribed for that notice, although form requirements may be relevant if the reservation under articles 12 and 96 applies. The notice must clearly express that the buyer now treats the contract as at an end. A mere announcement of future termination, a statement urging delivery, or returning the goods without comment does not suffice.[2] Commencing a law suit claiming avoidance of contract has been treated as notice of avoidance.[3]

4. Where a buyer wishes to avoid because the seller has delivered goods that are non-conforming or subject to third party rights, not only must the seller's breach constitute a fundamental breach of contract but also the buyer must have given notice of the lack of conformity or of the third-party claim in accordance with articles 39 and 43(1) (unless such notice was excused under articles 40 or 43(2)). The buyer loses the right to avoid the contract if he fails to comply with the notice requirement.[4]

Avoidance for fundamental breach (article 49(1)(a))

5. Under article 49(1)(a) any fundamental breach as defined in article 25 justifies the avoidance of the contract. Thus in order for the buyer to have proper grounds to avoid the contract under article 49(1)(a), the seller must have failed to perform an obligation (i.e., have breached), and the seller's non-performance must substantially deprive the buyer of what he was objectively entitled to expect under the contract. The consequences of the seller's non-performance must be determined in light of all of the circumstances of the case.

6. A fundamental breach requires, first, that the seller has violated a duty it was obliged to perform either under the contract, according to trade usages or practices established between the parties, or under the Convention. The seller's non-performance of an agreed-upon duty beyond the core duty of delivering conforming goods (see article 30) can suffice -- for instance, the violation of duties under an exclusive sales contract.[5] Breach of an additionally-agreed duty entitles the buyer to avoid the contract if the breach is fundamental, i.e. if it deprives the buyer of the main benefit of the contract. In order to be fundamental, the breach must frustrate or essentially deprive the buyer of its justified contract expectations; what expectations are justified depends on the specific contract and the risk allocation envisaged by the contract provisions, on usages and established practices between the parties (where they exist), and on the additional provisions of the Convention. For instance, buyers are not normally justified in expecting that delivered goods will comply with regulations and official standards in the buyer's country.[6] Unless otherwise agreed, it is generally the standards in the seller's country that determine whether goods are fit for their ordinary purpose (article 35(2)(a)).[7] Therefore, e.g., the delivery of mussels with a cadmium level exceeding standards in the buyer's county was not regarded as a breach, let alone a fundamental breach, since the buyer could not reasonably have expected the seller to meet those standards (which were not shown to apply in the country of the seller) and since the consumption of the mussels in small amounts did not endanger a consumers health.[8]

7. A fundamental breach occurs only if the party in breach could reasonably foresee the substantial deprivation of expectations resulting from the breach (article 25). Even if the seller did not in fact foresee that the breach would deprive the buyer of most or all of the benefit of the contract, the breach remains fundamental if a reasonable person in the same conditions would have foreseen such a result. Article 25 does not state the time as of which the foreseeability of the consequences of the breach should be determined. One decision has determined that the time of the conclusion of the contract is the relevant time.[9]

Specific instances of fundamental breach

8. Guidelines have developed in case law that may help, to some extent, in determining whether or not a breach of contract qualifies as fundamental. It has been found on various occasions that final non-delivery by the seller constitutes a fundamental breach of contract unless the seller has a justifying reason to withhold its performance.[10] however, if only a minor part of the contract is left unperformed -- e.g., one of several instalments is not supplied -- the breach is not fundamental unless the performed part is, absent the missing performance, of no use to the buyer.[11] On the other hand, the serious, definitive and unjustified refusal of the seller to fulfil its contractual obligations amounts to a fundamental breach.[12] It has been also held that a complete and final failure to deliver the first instalment in an instalment sale gives the buyer reason to believe that further instalments will not be delivered, and that therefore a fundamental breach of contract was to be expected.[13]

9. As a rule, late performance does not by itself constitute a fundamental breach of contract.[14] Only when the time for performance is of essential importance -- either because that is so stipulated between the parties [15] or because timely performance is critical in the circumstances (e.g., seasonal goods) [16] -- will delay amount to a fundamental breach.

10. A fundamental breach has also been found where the length of a delay in performance approached, in its effect, non-performance -- for instance where the agreed delivery date was one week and the seller had delivered only one-third of the goods after two months.[17] Even if a delay in delivery is not shown to be a fundamental breach, article 47 of the Convention allows the buyer to fix an additional reasonable period of time for delivery beyond the contractual due date, and if the seller fails to deliver by the end of the additional period the buyer may declare the contract avoided under article 49(1)(b).[18] A seller's failure to deliver within an additional period set pursuant to article 47, therefore, is the equivalent of a fundamental breach of contract.

11. The most challenging issues in determining whether a breach is fundamental arise with respect to the delivery of defective goods. Court decisions on this point have concluded that a non-conformity relating to quality remains a mere non-fundamental breach of contract as long as the buyer, without unreasonable inconvenience, can use the goods or resell them, even if the resale requires a rebate.[19] Thus, e.g., the delivery of frozen meat with an excessive fat and water content -- and which, therefore, was worth 25.5 per cent less than meat of the contracted-for quality, according to expert opinion -- was not regarded as a fundamental breach of contract since the buyer could resell the meat at a lower price or could otherwise make use of it.[20] On the other hand, if the non-conforming goods cannot be used or resold using reasonable efforts, the delivery constitutes a fundamental breach and entitles the buyer to declare the contract avoided.[21] The buyer was also permitted to avoid the contract where the goods suffered from a serious defect that could not be repaired, even though they were still useable to some extent (e.g. flowers which should bloom the whole summer but did so only for part of the season).[22] A fundamental breach has also been found, without reference to whether resale or alternative use was possible for the buyer, when the goods had major defects and the buyer required the goods for manufacturing its own products.[23] The same result was reached where the non-conformity resulted from the seller adding substances to the goods, the addition of which was illegal in the country of both the seller and the buyer.[24] The rules governing the delivery of non-conforming goods apply equally if the seller delivers the wrong goods (i.e., an aliud).[25]

12. Special problems arise when the goods are defective, even seriously defective, but repairable. Some courts have held that a lack of conformity that can easily be repaired does not constitute a fundamental breach.[26] If the seller offers and effects speedy repair or replacement without inconvenience to the buyer, several decisions have denied a fundamental breach.[27] This is consistent with the seller's right to cure under article 48 of the Convention. If repair is delayed or causes the buyer unreasonable inconvenience, however, a breach that would otherwise qualify as fundamental remains fundamental. Furthermore, a fundamental breach cannot be denied merely because the buyer did not first request the seller to cure the defective performance.[28]

13. Defects in documents relating to the goods constitute a fundamental breach if they fundamentally impair the buyer's ability to resell or otherwise deal in the goods.[29] If the buyer itself can easily cure the defects in the document, e.g. by requesting new documents, however, the breach will not be considered fundamental.[30]

14. Violation of contractual obligations other than the aforementioned ones can also amount to a fundamental breach. Such a breach is fundamental if it deprives the buyer of the main benefit of the contract and that result could reasonably have been foreseen by the seller. Thus a court has held that the delivery of false certificates of origin did not constitute a fundamental breach if the goods were nevertheless merchantable and if the buyer itself could easily get the correct certificates.[31] Likewise, the unjustified denial of contract rights of the other party -- e.g. denying the validity of a retention of title clause and of the seller's right to possession of the goods,[32] or the unjustified denial of a valid contract after having taken possession of the goods [33] -- can amount to a fundamental breach of contract. Avoidance has also been permitted when resale restrictions were violated in a substantial fashion.[34]

Avoidance for non-delivery during additional period of time (article 49(1)(b))

15. Article 49(1)(b) states a second ground for avoidance of contract, applicable only in cases of non-delivery: the buyer can avoid if the seller does not deliver within the additional period of time for delivery that the buyer has fixed under article 47(1). The buyer can also avoid the contract if the seller declares that it will not deliver within the additional period so fixed.

Period of time for declaration of avoidance when goods have been delivered (article 49(2))

16. Generally the buyer is not required to declare the contract avoided within a certain period of time; he can do so at any time if a ground for avoidance exists.[35] This principle is, however, subject to a limitation under article 49(2) if the goods have been delivered. In such a case, the buyer must declare avoidance within a reasonable time. The moment as of which the reasonable time begins to run differs depending on whether the breach involves late delivery or a different kind of breach. In case of late delivery the period starts when the buyer becomes aware that delivery was made (article 49(2)(a)). In case of other breaches the reasonable period of time for declaring the contract avoided starts running when the buyer becomes aware or ought to have been aware of the breach;[36] if, however, the buyer has fixed an additional period for delivery in accordance with article 47(1), or if the seller has set a period for cure in accordance with article 48(2), the buyer's reasonable time for avoidance begins to run from the expiration of the fixed period. Five months after the buyer was informed of the breach has been found not to constitute a reasonable period for declaring avoidance under article 49(2)(b);[37] an avoidance declaration made eight weeks after the buyer became aware of the breach has been held too late;[38] and avoidance eight months after the latest time that the buyer knew or ought to have known of the seller's alleged breach has been deemed untimely.[39] On the other hand, five weeks has been regarded as a reasonable period of time to declare the contract avoided under article 49(2)(b).[40] A declaration of avoidance made after several extensions of time for performance had been granted was found to be timely,[41] as was a declaration given within 48 hours after late delivery of an installment.[42] A declaration of avoidance made three weeks after notice of lack of conformity under article 39, furthermore, was considered timely.[43]

Burden of proof

17. It has been observed that, to justify avoidance of contract, the burden is on the buyer to prove that the seller's breach of contract was fundamental and substantially deprived the buyer of what he was entitled to expect under the contract.[44]


NOTES

* This presentation of the UNCITRAL Digest is a slightly modified version of the original UNCITRAL text at <http://www.UNCITRAL.org/pdf/english/clout/CISG_second_edition.pdf>. The following modifications were made by the Institute of International Commercial Law of the Pace University School of Law:

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1. See, e.g., [GERMANY Bundesgerichtshof 3 April 1996 (Cobalt sulphate case)] (see full text of the decision); [AUSTRIA Oberster Gerichtshof 7 September 2000 (Tombstones case)]; see also [ITALY Tribunale di Busto Arsizio 13 December 2001 (Machinery case)].

2. [GERMANY Landgericht Frankfurt a.M. 16 September 1991 (Shoe case)]; [GERMANY Oberlandesgericht Koblenz 31 January 1997 (Acrylic blankets case)].

3. See [FRANCE Cour d'appel Paris 14 June 2001 (Decorated laminated glass panels case)].

4. See, e.g., [SWITZERLAND Handelsgericht des Kantons Zürich 26 April 1995 (Saltwater isolation tank case)]. A buyer who has a reasonable excuse for failing to give the notice required by articles 39(1) or 43(1) retains certain remedies, but not the right to avoid the contract. See the Digest for art. 44, para. 1.

5. See, e.g., [GERMANY Oberlandesgericht Frankfurt a.M. 17 September 1991 (Shoes case)]; [GERMANY Oberlandesgericht Koblenz 31 January 1997 (Acrylic blankets case)]; [SWITZERLAND Handelsgericht des Kantons Aargau 26 September 1997 (Cutlery case)]; [FRANCE Cour d'appel Grenoble 22 February 1995 (Jeans case)] (failure to disclose destination of goods sold).

6. [GERMANY Bundesgerichtshof 8 March 1995 (New Zealand mussels case)]. See also [UNITED STATES Federal District Court, Eastern District of Louisiana, 17 May 1999 (Medical Marketing v. Internazionale Medico)] (citing New Zealand mussels case); [AUSTRIA Oberster Gerichtshof 13 April 2000 (Machines case)].

7. See the decisions cited in footnote 5.

8. [GERMANY Bundesgerichtshof 8 March 1995 (New Zealand mussels case)].

9. [GERMANY Oberlandesgericht Düsseldorf 24 April 1997 (Shoes case)].

10. [ITALY Pretura circondariale de Parma 24 November 1989 (Knapsacks, bags, wallets case)] (partial and very delayed delivery); [GERMANY Oberlandesgericht Celle 24 May 1995 (Used printing press case)].

11. [GERMANY Oberlandesgericht Düsseldorf 24 April 1997 (Shoes case)].

12. See [GERMANY Oberlandesgericht Celle 24 May 1995 (Used printing press case)] (see full text of the decision) (seller gave notice that he had sold the goods to another buyer). Cf. [RUSSIA Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce, Award 387/1995 of 4 April 1997 (Coal case)] (buyer's final refusal to pay the price).

13. [SWITZERLAND Handelsgericht des Kantons Zürich 5 February 1997 (Sunflower oil case)].

14. [GERMANY Landgericht Oldenburg 27 March 1996 (Clothes case)] (one day delay in dispatch of seasonal goods not a fundamental breach); [ITALY Corte di Appello di Milano 20 March 1998 (Knitwear case)] (late delivery); [GERMANY Oberlandesgericht Düsseldorf 24 April 1997 (Shoes case)] (late delivery).

15. [GERMANY Oberlandesgericht Hamburg 28 February 1997 (Iron molybdenum case)] (on the facts of the particular case late delivery under a CIF sale was found to be a fundamental breach of contract).

16. [ITALY Corte di Appello di Milano 20 March 1998 (Knitwear case)] (buyer ordered seasonal knitted goods and pointed out the essential importance of delivery at the contract date, although it did so only after conclusion of the contract); [ICC International Court of Arbitration, Award 8786 of January 1997 (Clothing case)].

17. [ITALY Pretura circondariale di Parma 24 November 1989 (Knapsacks, bags, wallets case)].

18. See, e.g., [GERMANY Oberlandesgericht Düsseldorf 10 February 1994 (Fabrics case)]; para. 15 infra.

19. [GERMANY Bundesgerichtshof 3 April 1996 (Cobalt sulphate case)]; [SWITZERLAND Bundesgericht 28 October 1998 (Meat case)].

20. [SWITZERLAND Bundesgericht 28 October 1998 (Meat case)].

21. [FRANCE Cour de cassation 23 January 1996 (Wine case)] (artificially sugared wine); GERMANY Oberlandesgericht Frankfurt a.M. 18 January 1994 (Shoes case)] (shoes with cuts or cracks in the leather); [GERMANY Landgericht Landshut 5 April 1995 (Sport clothing case)] (T-shirts which shrink by two sizes after the first washing).

22. [AUSTRIA Oberlandesgericht Innsbruck 1 July 1994 (Garden flowers case)]; see also [ITALY Tribunale di Busto Arsizio 13 December 2001 (Machinery case)] (declaration of avoidance before waiting for result of seller's attempt to cure would be contrary to good faith).

23. See [UNITED STATES Federal Court of Appeals for the Second Circuit 6 December 1995 (Delchi Carrier, S.p.A. v. Rotorex Corp.)] (compressors with lower cooling capacity and higher power consumption than those contracted for, where buyer needed the compressors for manufacturing its air conditioners); [FRANCE Cour de cassation 23 January 1996 (Wine case)] (artificially sugared wine); [FRANCE Cour de cassation 26 May 1999 (Laminated sheet metal case)] (metal sheets unfit for the manufacturing processes of the buyer's customer); see also [ITALY Tribunale di Busto Arsizio 13 December 2001 (Machinery case)] (delivery of a machine totally unfit for the particular purpose that was made known to the seller, and which was incapable of reaching the promised production level, represented a serious and fundamental breach of the contract, since the promised production level had been an essential condition for the conclusion of the contract; the breach therefore justified avoidance of the contract).

24. [FRANCE Cour de cassation 23 January 1996 (Wine case)] (artificially sugared wine, forbidden under EU-law and national laws); [GERMANY Landgericht Trier 12 October 1995 (Wine case)] (artificially sugared wine).

25. [AUSTRIA Oberster Gerichtshof 29 June 1999 (Dividing wall panels case)]. See [GERMANY Oberlandesgericht Celle 10 March 2004 (Commercial vehicles case)] (see full text of the decision).

26. [SWITZERLAND Handelsgericht des Kantons Zürich 26 April 1995 (Saltwater isolation tank case)].

27. [FRANCE Cour d'appel, Grenoble 26 April 1995 (Marques Roque v. Manin Reviere) (Candy case)]; [GERMANY Oberlandesgericht Koblenz 31 January 1997 (Acrylic blankets case)].

28. See Digest, article 48.

29. [GERMANY Bundesgerichtshof 3 April 1996 (Cobalt sulphate case)].

30. Id.

31. Id.

32. [AUSTRALIA Federal Court of Adelaide 28 April 1995 (Roder v. Rosedown)].

33. [FRANCE Cour d'appel, Grenoble 21 October 1999 (Footwear case)] (seller retained pattern samples) (see full text of the decision).

34. [GERMANY Oberlandesgericht Frankfurt a.M. 17 September 1991 (Shoes case)]; [FRANCE Cour d'appel Grenoble 22 February 1995 (Jeans case)]; [GERMANY Oberlandesgericht Koblenz 31 January 1997 (Acrylic blankets case)]; [SWITZERLAND Handelsgericht des Kantons Aargau 26 September 1997 (Cutlery case)].

35. But see also [GERMANY Oberlandesgericht München 8 February 1995 (Automobile case)], where the court denied the buyer's right to declare the contract avoided after 2 years even though the goods had not been delivered. The court based its decision on the principle of good faith.

36. One court grappled with the question of when the reasonable time under article 49(2) began to run where the buyer had received delivery of allegedly-non-conforming goods. It was unclear whether the lack of conformity arose during the seller's production of the goods as a result of transporting the goods (the buyer bore the risk of damage occurring during transportation), and the buyer arranged to have experts examine the goods to determine the source of the problem. The court suggested that the reasonable time might begin to run as soon as the buyer discovered the goods were defective, even before the experts had an opportunity to determine the cause: the court noted that only examination by a judicial expert would definitively establish the source of the non-conformity, and thus the period for declaring avoidance could not depend on the buyer being certain that the seller was responsible. The court did not rely solely on this view, however, as it noted that the buyer's avoidance was too late even if the reasonable time commenced when the last report by the experts was issued. See [Court d'appel Paris, France, 14 June 2001].

37. [GERMANY Bundesgerichtshof 15 February 1995 (Key press stamping machine case)]; see also [GERMANY Oberlandesgericht München 2 March 1994 (Coke case)] (four months).

38. [GERMANY Oberlandesgericht Koblenz 31 January 1997 (Acrylic blankets case)].

39. [FRANCE Cour d'appel Paris 14 June 2001 (Decorated laminated glass panels case)].

40. [GERMANY Oberlandesgericht Oldenburg 1 February 1995 (Furniture case)].

41. [FRANCE Cour d'appel de Versailles 29 January 1998 (Machines case)].

42. [SPAIN Audiencia Provincial de Barcelona 3 November 1997 (Rolled steel case)] (delayed).

43. [GERMANY Oberlandesgericht Hamburg 26 November 1999 (Jeans case)] (see full text of the decision); see also [ITALY Tribunale di Busto Arsizio 13 December 2001 (Machinery case)] (a reasonable time for art. 49 purposes differs from a reasonable time for art. 39 purposes both in starting point and duration; the time for notice of non-conformity under article 39 begins to run as soon as the lack of conformity is discovered (or ought to have been discovered), but avoidance can be declared only after it appears that the non-conformity amounts to a fundamental breach that cannot be otherwise remedied).

44. [GERMANY Bundesgerichtshof 3 April 1996 (Cobalt sulphate case)] (see full text of the decision).


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