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Reproduced with permission from 8 Journal of Law and Commerce (1988) 53-108

excerpt from

Remedies Under the New International Sales Convention: The Perspective from Article 2 of the U.C.C.

Harry M. Flechtner [*]

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[The right to avoid the contract]

Article 49(1) of the Convention permits a buyer to avoid the contract whenever the seller commits a fundamental breach or fails to deliver in response to a Nachfrist ultimatum under Article 47.[37]

Avoidance relieves both parties of executory performance obligations.[38] It gives the buyer a right to restitution of amounts "paid under the contract" [39] and an obligation to return whatever the seller has "supplied . . . under the contract." [40] Thus if the seller has delivered goods, an avoiding buyer must preserve [41] and return the goods, although it may retain them until reimbursed for reasonable expenses of preservations. Indeed, subject to certain broad exceptions, the buyer loses the right to avoid if it cannot return the goods "substantially in the condition" in which it received them.[43] The buyer will also lose the right to avoid unless it sends notice of avoidance within a reasonable time after it knew (or should have known) of the breach.[44] Furthermore, the buyer will lose the right to avoid on the basis of non-conformity in the goods unless it sends notice "specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it" [45] or, at the latest, within two years from the date of delivery.[46] Successful avoidance entitles the buyer to damages measured by the market price of the goods or the price paid in a substitute transaction ("cover").[47]

The buyer's power under the Convention to avoid after the goods have been delivered is strikingly similar to the buyer's power to reject or revoke acceptance under Article 2 of the U.C.C. A rejecting or revoking buyer, like an avoiding buyer, has a right to recover "so much of the price as has been paid" [48] and an obligation to preserve and return the goods to the seller,[49] subject to a security interest for reasonable expenses of "inspection, receipt, transportation, care and custody. . . ." [50] A buyer loses the right to revoke acceptance under Article 2 if the goods have undergone "any substantial change in condition" not caused by their own defects [51] -- a limitation similar to that in Article 82 of the Convention. Article 2 requires a buyer to send notice of rejection or revocation within time constraints similar to those applicable to notice of avoidance under the Convention.[52] By failing to specify "ascertainable" defects in the notice of rejection, an Article 2 buyer may waive the right to base rejection on such defects [53] much as a Convention buyer may, under Article 39, lose the right to rely on discoverable defects by failing to specify them in notice to the seller.[54] Where the seller has delivered, successful rejection or revocation is a prerequisite to the Article 2 buyer's claim for cover or market-price differential damages,[55] just as successful avoidance by buyer is a prerequisite to those damage measures under the Convention.

A seller's right under the Convention to avoid the contract is the mirror image of the buyer's avoidance right. If the contract is avoided because the buyer has committed a fundamental breach or has failed to accept or pay in response to a Nachfrist notice,[56] the seller is relieved of responsibility to perform under the contract.[57] Avoidance gives the seller a right to restitution of whatever it has "supplied . . . under the contract"[58] and an obligation to return whatever the buyer has "paid under the contract." [59] An avoiding seller, furthermore, can claim market-price differential or resale damages.[60] An Article 2 seller has similar rights and obligations as long as the buyer breaches without continuing to accept the goods -- that is, if the buyer "wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates." [61] In these situations the Article 2 seller can "cancel," [62] terminating its contractual obligations with respect to the affected goods,[63] and recover resale [64] or market-price differential damages.[65] Because the seller normally has control of goods that are not accepted, Article 2 does not specifically give the seller a right to restitution.[66] Where the seller withholds delivery, however, it may be required to make restitution of a portion of any payments received.[67]

A Convention seller's right to avoid, however, is not limited to non-acceptance situations. It can avoid even after the goods have been delivered to and retained by the buyer, in which case the seller has a right to restitution of the goods under Article 81(2) [68] as well as a claim for resale or market-price-differential damages under Articles 75 and 76. Under U.C.C. Article 2, in contrast, a seller has extremely limited rights to "undo" an exchange after the goods have been accepted by a breaching buyer. In a credit sale, for example, an Article 2 seller can reclaim goods that have been accepted only if the buyer received them while insolvent and either the seller made demand within ten days after receipt or the buyer misrepresented solvency in writing within three months before delivery.[69] Successful reclamation in a credit sale, furthermore, precludes "all other remedies" including the right to resale or market-price damages.[70] In short, under U.C.C. Article 2 the seller's normal remedy if the buyer accepts the goods is an action for the price. The seller's right under the Convention to avoid the contract, claim restitution of goods that have been accepted, and recover resale or market-price damages represents a significant departure from the U.C.C. Article 2 scheme of remedies.

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Avoidance Procedure and Time Constraints

The Convention requires that avoidance of contract be effected by notice to the other party.[143] CISG does not specify the contents of the notice, although it presumably should contain information sufficient to inform a reasonable person in the breaching party's position that the contract has been avoided.[144] Article 27 provides that a contract is avoided despite errors or delays in the transmission of notice of avoidance, or even failure of the notice to arrive, provided the aggrieved party attempted to communicate "by means appropriate in the circumstances." An aggrieved buyer who wishes to avoid must also take account of Article 39, which provides that a buyer "loses the right to rely on a lack of conformity of the goods" unless it gives [timely] notice specifying the non-conformity.

Article 2 of the U.C.C. contains notice requirements that parallel those under CISG. Both an Article 2 buyer that is rejecting or revoking acceptance of goods and a Convention buyer that is avoiding the contract after delivery must give notice.[145] Both may lose their rights with respect to defects in the goods unless they notify the breaching party of the defects.[146] Under Article 2, however, a buyer that has not received delivery and an unpaid seller need not give notice to cancel the contract,[147] although notice is a prerequisite to one of the seller's avoidance-type remedies -- resale damages.[148] Under the Convention, in contrast, notice of avoidance is always required.

The Convention includes somewhat complex rules on the time for avoidance of the contract. Article 49(2) puts time constraints on the buyer's power to avoid. They apply, however, only where the seller has delivered the goods. Thus if the seller fails to deliver, the Convention does not specifically limit the time for avoidance by the buyer. Where the seller has delivered, the time within which the contract must be avoided depends on the type of breach. If the seller's delivery was late, the buyer will lose the right to avoid unless it does so "within a reasonable time after [the buyer] has become aware that delivery has been made." [149] If the seller's breach is something other than late delivery -- for example, delivery of goods that do not conform to the contract -- the buyer must generally avoid within a reasonable time after it "knew or ought to have known of the breach." [150] In the case of non-conforming goods, furthermore, the buyer must give notice specifying the defects within a reasonable time (not to exceed two years from the date of actual delivery) after it discovered or should have discovered the non-conformities.[151]

The avoidance rights of an unpaid seller, like those of a buyer that has not received delivery, are not limited in time. Where the buyer has paid the price, however, Article 64(2) imposes time constraints on the seller's power to avoid that are similar to those applicable to buyers who have received delivery.[152] If the buyer's breach consists of late performance (e.g., delay in paying or taking delivery), the paid seller must avoid before it "has become aware that performance has been rendered." [153] A paid seller loses the right to avoid for breaches other than late performance (e.g., wrongful failure to accept delivery) unless it does so within a reasonable time after it "knew or ought to have known of the breach." [154]

Professor Honnold notes that the lack of time constraints on avoidance by sellers awaiting payment and buyers awaiting delivery means that an aggrieved party is not forced to estimate when delay in receiving basic performance is sufficient to constitute a fundamental breach.[155] If the seller fails to deliver by the date called for in the contract, for instance, the buyer can safely put off avoiding the contract. If the seller eventually delivers, the buyer still has "a reasonable time after he has become aware that delivery has been made" [156] to determine whether the "late action" constitutes a fundamental breach and, if it does, to avoid the contract. In the case of a seller awaiting late payment, however, the Convention's execution appears flawed. The seller must avoid for late performance before it "become[s] aware that performance has been rendered," [157] without benefit of a "reasonable time" grace period. The seller awaiting a late payment, therefore, must estimate when the buyer's delay constitutes a fundamental breach in order to preserve its avoidance rights. If the seller puts off avoiding the contract and then learns that payment has been made, it will lose the right to avoid even if the buyer's delay constituted a fundamental breach.

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Go to entire text of Flechtner commentary


FOOTNOTES

* Assistant Professor, University of Pittsburgh School of Law. A.B. 1973, Harvard College; A.M. 1975, Harvard University; J.D. 1981, Harvard University School of Law. . . .

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37. Nachfrist is a procedure through which an aggrieved party can make the other side’s failure to perform its basic obligations by a particular date the equivalent of a fundamental breach. For further discussion of Nachfrist, see infra notes 82-91, and accompanying text.

38. See Sales Convention, supra note 1, art. 81(1).

39. Id. art. 81(2). In addition, an avoiding buyer can claim interest from the date of payment. Id. art. 84(1).

40. Id. art. 81(2). In addition, the avoiding buyer "must account to the seller for all benefits which he has derived from the goods or part of them. . . ." Id. art. 84(2).

41. Article 86-88 of CISG detail the avoiding buyer’s obligations to preserve delivered goods.

42. See Sales Convention, supra note 1, art. 86(1). Under Article 88(1) and (2), however, an avoiding buyer may in certain circumstances have a right or even a duty to sell goods in its possession. In that case, the buyer may retain the reasonable costs of preservation and sale from sale proceeds and must account to the seller for the balance. Id. art. 88(3).

43. The buyer retains the right to avoid if (1) its inability to restore the goods substantially in their original condition is not due to its own act or omission, (2) the goods changed condition as a result of the inspection provided for in Article 38, or (3) the buyer has sold, consumed or transformed the goods in the normal course before discovering their nonconformity. Id. art. 82.

44. Id. art. 49(2)(b)(i). Subsections (ii) and (iii) of Article 49(2)(b) adjust the time within which buyer must avoid if the buyer has given a Nachfrist ultimatum under Article 47 or if the seller has exercised its right under Article 48(2) to demand the buyer declare whether it will accept performance.

45. Id. art. 39(1).

46. Id. art. 39(2).

47. Id. art’s. 75, 76.

48. U.C.C. § 2-711(1) (1978). Article 2, however, does not specifically give buyer the right to recover interest on payments. Contrast Article 84(1) of the Convention.

49. U.C.C. §§ 2-602(2)(b), 2-608(3) (1978). Article 84(2) of the Convention requires the avoiding buyer to "account to the seller for all benefits which he has derived from the goods or part of them." Several cases and commentators have found an equivalent implied duty under Article 2. See American Container Corp. v. Hanley Trucking Corp., 11 N.J. Super. 322, 268 A.2d 313 (1970); White & Summers, supra note 9, at 317-18 and cases cited at 318-19 n.72; Phillips, Revocation of Acceptance and the Consumer Buyer, 75 Com. L.J. 354, 357 (1970).

50. U.C.C. § 2-711(3) (1978). Under U.C.C. §§ 2-603, 2-604 and 2-608(3), the rejecting or revoking buyer may have a right or even an obligation to sell the goods which is similar to an avoiding buyer’s right or obligation to sell under Article 88(1) and (2) of the Convention. When a U.C.C. Article 2 buyer resells, it is entitled to retain from the proceeds of sale an amount equal to its "reasonable expenses of caring for and selling" the goods, including a sales commission even if the buyer has not paid a commission to a third party. U.C.C. § 2-603(2) (1978); see id., §§ 2-604, 2-608(3). Except for the matter of the buyer’s right to retain a commission when it has itself conducted the resale, the right to retain proceeds for "reasonable expenses of caring for and selling" the goods under U.C.C. § 2-603(2) appears identical to the avoiding buyer’s right to retain proceeds for "reasonable expenses of preserving the goods and of selling them" under Article 88(3) of the Convention. Under U.C.C. § 2-706(6), however, a buyer that has rightfully rejected or justifiably revoked may sell goods in its possession and retain proceeds for items covered by its § 2-711(3) security interest. Those items include expenses of "inspection, receipt, [and] transportation" of the goods, which may go beyond the expenses of preserving and reselling covered by U.C.C. § 2-603(2) and Article 88(3) of the Convention. The buyer’s security interest under U.C.C. § 2-711(3) (and thus its right under § 2-706(6) to retain proceeds from the resale of the goods), furthermore, covers "any payments made on [the goods’] price." Under the Convention, an avoiding buyer’s right to deduct the amount of its payments to seller from proceeds of the resale of delivered goods is unclear. See infra, notes 132-33 and accompanying text.

51. U.C.C. § 2-608(2) (1978). Article 2 does not specify the effect of a change in the condition of the goods on a buyer’s right to reject. If the change is due to action by the buyer that is "inconsistent with the seller’s ownership," the buyer has accepted under § 2-606(1)(c) and must look to its right to revoke in order to thrust the goods back onto the seller. Whether a buyer who has not accepted but who breaches its obligation under § 2-602(2)(b) to hold rejected goods "with reasonable care" would lose the right to reject is unclear. The buyer may merely be liable for resulting damages. Cf. id. § 2-603 comment 5 (buyer who fails to make salvage sale required under § 2-603(1) "is subject to damages. . . ."). A change in the goods’ condition that does not give rise to acceptance or result from a breach of the buyer’s duty to preserve presumably would not preclude rejection.

52. Under Articles 26 and 49(2)(b) of the Convention, a buyer who has received non-conforming goods and who wishes to avoid the contract must send notice within a reasonable time after it knew or should have known of seller’s breach. Similarly, an Article 2 buyer must reject goods "within a reasonable time after their delivery or tender," U.C.C. § 2-602(1) (1978), with due allowance for a "reasonable opportunity to inspect" the goods, id. § 2-606(1)(b). An attempted rejection is "ineffective unless the buyer seasonably notifies the seller," id. § 2-602(1)(b), which requires notice "at or within the time agreed or if no time is agreed at or within a reasonable time," id. § 1-204(3). Thus a buyer who wishes to reject on the basis of a non-conformity in the goods must send notice within a reasonable time after an opportunity to inspect. See id. § 2-602 comment 1. If an Article 2 buyer has accepted goods, it can revoke only by giving notice "within a reasonable time after the buyer discovers or should have discovered the ground for [revocation]. . . ." Id. § 2-608(2).

53. U.C.C. § 2-605 (1978). This provision does not apply to revocation of acceptance, although a requirement to specify defects in the notice of revocation may be implied by "considerations of good faith, prevention of surprise, and reasonable adjustment." Id. § 2-608 comment 5.

54. Differences between an aggrieved buyer’s obligations under the Convention and Article 2 are explored at infra notes 234-44 and accompanying text.

55. U.C.C. § 2-711(1)(a), (b) (1978).

56. For a discussion of the Nachfrist procedure available to an aggrieved seller under Article 63, see infra notes 234-44 and accompanying text.

57. See Sales Convention, supra note 1, art. 81(1).

58. Id. art. 81(2). In addition, the buyer must "account to the seller for all benefits which he has derived from the goods or part of them. . . ." Id. art. 84(2).

59. Id. art. 81(2). In addition, the avoiding buyer can claim interest from the date of payment. Id. art. 84(1).

60. Id. art. 75.

61. U.C.C. § 2-703 (1978).

62. Id. § 2-703(f).

63. Id. § 2-106(3), (4).

64. Id. §§ 2-703(d), 2-706.

65. Id. §§ 2-703(e), 2-708(1).

66. That is, if the buyer has repudiated or failed to make a payment due on or before delivery, the seller will normally exercise its rights under U.C.C. § 2-703(a) and (b) to withhold delivery or to stop delivery by a bailee. Where the buyer wrongfully rejects or revokes acceptance, it normally insists that the seller take back the goods. There is one situation that may impliedly require a right to resitution for the U.C.C. seller. If the buyer sends notice of rejection and thereafter exercises "ownership" over the rejected goods (e.g., refuses to return the goods to the seller), the buyer’s action is "wrongful as against the seller." Id. § 2-602(2)(a). Under U.C.C. § 2-606(1)(c), the seller has the option to treat the buyer’s action as acceptance. If the seller refuses to ratify the buyer’s "acceptance" – that is, if the seller opts to treat the goods as rejected – the seller should recover the goods. Cf. 3 W. Hawkland, Uniform Commercial Code Series § 2-602:01 at 20 ("exercise of dominion over the goods by the buyer after rejection is wrongful, giving the seller the option to treat this conduct . . . as an act of conversion or trespass"). Unless the seller’s election under U.C.C. § 2-606(1)(c) is limited to situations where the buyer has voluntarily returned the goods or the seller can reacquire the goods under a conversion theory, the seller should have an implied right to restitution.

67. U.C.C. § 2-718(2) (1978).

68. The buyer must also "account to the seller for all benefits which he has derived from the goods . . ." See Sales Convention, supra note 1, art. 84(2).

69. U.C.C. § 2-702(2) (1978).

70. Id. § 2-702(3). Beyond credit sales covered by U.C.C. § 2-702(2) and (3), the only other situation in which Article 2 contemplates that a seller can reclaim accepted goods is where payment fails in a cash sale. See id. §§ 2-511(3), 2-507(2); Mann & Phillips, The Cash Seller Under the Uniform Commercial Code, 20 B.C.L. Rev. 370 (1979). Comment 3 to U.C.C. § 2-507 suggests that the 10 day demand requirement placed on reclaiming credit sellers by § 2-702(2) also applies to reclaiming cash sellers. Courts have split on this suggestion. Compare Szabo v. Vinton Motors, Inc., 630 F.2d 1 (1st Cir. 1980) (applying 10 day limitation) with Burk v. Emmick, 637 F.2d 1172 (8th Cir. 1980) (rejecting 10 day limitation). Burk also held that the reclaiming cash seller, unlike the reclaiming credit seller, retains the right to resale damages. 637 F.2d at 1175.

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143. See Sales Convention, supra note 1, art. 26.

144. See id. art. 8.

145. Id. art. 26; U.C.C. §§ 2-602(1), 2-608(2) (1978).

146. See Sales Convention, supra note 1, art. 39; U.C.C. § 2-605(1) (1978). Under Article 39 of the Convention, the buyer must give notice specifying non-conformities whether or not it intends to avoid the contract. U.C.C. § 2-605(1), in contrast, requires the buyer to give notice of particular defects only where it is rejecting; a revoking buyer’s obligations to specify defects are those implied "by considerations of good faith, prevention of surprise, and reasonable adjustment." Id. § 2-608 comment 5. For a comparison of the particularization requirements of the Convention and Article 2 if the buyer intends to retain the goods, see infra notes 234-44 and accompanying text.

There are other differences between the particularization requirements in Article 39 of the Convention and U.C.C. § 2-605(1). The U.C.C. requires the buyer to specify defects only where the seller could have cured or, between merchants, where the seller requests a written statement of defects. U.C.C. § 2-605(1)(a), (b). No such limitation appears in Article 39 of the Convention. On the other hand, the Article 2 particularization requirement applies to any defect in tender, id. § 2-605(1), id. § 2-605 comment 1, whereas the particularization requirement in Article 39 applies only to "a lack of conformity of the goods."

147. R. Speidel, Sales and Sales Financing 148 (1984). In an installment contract, however, a buyer that accepts a non-conforming delivery and a seller that accepts a late payment must give "seasonable" notice in order to cancel the executory portion of the contract. U.C.C. § 2-612(3) (1978); id. § 2-612 comment 7.

148. U.C.C. § 2-706(3), 4(b) (1978).

149. See Sales Convention, supra note 1, art. 49(2)(a). The language of Article 49(2)(a) suggests that the "reasonable time" for avoidance starts running only upon buyer’s actual subjective awareness of delivery.

Although Article 49(2) and the comparable provision applicable to sellers (Article 64(2)) state that a party who fails to comply with the timing requirements in these Articles loses the right to avoid, it would probably be more accurate to describe this as a loss of power to avoid. In other words, the drafters apparently intended untimely attempts at avoidance to be ineffective rather than wrongful. Similar observations apply to Article 82, which provides that the buyer may lose "the right to declare the contract avoided" if it cannot make restitution of delivered goods substantially in their delivered condition.

150. Id. art. 49(2)(b)(i). The time at which the buyer should discover defects in the goods must be determined by reference to Article 38, which generally requires the buyer inspect the goods "within as short a period of time as is practicable in the circumstances." Honnold, supra note 25, at 321. If the buyer has used the Nachfrist procedure, however, the reasonable time to avoid for breach other than later delivery begins to run after the date for performance set in the Nachfrist notice (or after the seller has declared that it will not perform by that date). Sales Convention, supra note 1, art. 49(2)(b)(ii).

A seller’s right to cure after the time for performance includes a right to request that the buyer indicate whether late cure will be accepted; if "the buyer does not comply with request within a reasonable time, the seller may perform within the time indicated in [the seller’s] request." Id. art. 48(2). Where the seller has made a request under Article 48(2), the buyer’s reasonable time for avoidance begins to run after the additional period indicated by seller or after the buyer declares that it will not accept the proposed cure. Id. art. 49(2)(b)(iii).

151. See Sales Convention, supra note 1, art. 39(1), (2).

152. It is not clear whether the time constraints in Article 64(2), which apply only "in cases where the buyer has paid the price," come into play where the buyer has paid a portion of the price. The statutory language suggests that any failure to pay makes Article 64(2) inapplicable. The reasons for exempting unpaid sellers from the time limitations in Article 64 (see infra notes 155-56 and accompanying text), furthermore, may well exist in the partial-payment situation. Because the seller can avoid only if the buyer’s failure to pay constitutes a fundamental breach or if the buyer has failed to pay a substantial portion of the price in response to a Nachfrist notice (see supra notes 80-91 and accompanying text), there is little reason to subject the partially-paid seller to the time constraints in Article 64(2).

153. Sales Convention, supra note 1, art. 64(2)(a). The text of Article 64(2)(a) suggests that only actual knowledge of the buyer’s performance precludes avoidance by the seller. Compare Article 49(2) and supra note 149.

154. See Sales Convention, supra note 1, art. 64(2)(b)(i). If the seller has employed the Nachfrist procedure, however, its reasonable time for avoidance begins to run after the date for performance set in the Nachfrist notice (or after the buyer has declared that it will not perform within the additional period). Id. art. 64(2)(b)(ii).

155. Honnold, supra note 25, at 320, 363-64.

156. See Sales Convention, supra note 1, art. 49(2)(a).

157. Id. art. 64(2)(a).

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Pace Law School Institute of International Commercial Law - Last updated August 16, 1999
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