lumsa – international commercial law november 13, 2014 prof. avv. roberto pirozzi email:...

LUMSA – International Commercial Law November 13, 2014

Prof. Avv. Roberto PirozziEmail: [email protected]

LUMSA – International Commercial Law

BREACH OF CONTRACT

Art. 25 CISG

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


BREACH OF CONTRACT

Art. 25 CISG

Article 25 attempts to define «fundamental breach». This concept is fundamental to the CISG’s remedy system.

It can lead to remedies, such as (i) substitution of non-conforming goods by the seller (Art.46(2)), (ii)avoidance of the contract on the ground of non-performance by the other party(Art.49(1)(a), 64(1)(a) and 73), (iii)avoidance of the contract for partial delivery (Art.51)and (iv) transfer of risk (Art.70).


BREACH OF CONTRACT

Art. 25 CISG

The core elements constituting a fundamental breach must be analyzed according to the terms of the convention, since Art.7(1) provides an interpretative rule, which aims for the protection of its uniformity of application in all jurisdictions where it is applied. Hence, the terms of the convention itself, the official commentary and the application of the article in different jurisdictions may well assist to understand the concept.


BREACH OF CONTRACT

Art. 25 CISG

Definition of Breach

Although there is no definition of the breach in the CISG, it is understood that the breach is considered as any failure in the performance of any obligation of any party, whether that failure is excused or not. This unitary approach entails all violations of any nature.


BREACH OF CONTRACT

Definition of Fundamental

While determining whether the breach is a fundamental one, the article provides an objective test to be done by the judge or the arbitrator. The core element of a fundamental breach is detriment. Although it can be argued that detriment is a wider concept than damage, thus may include non-economical loss, in international commercial transactions there is almost always synallagmatic contract, in which one party promises to provide good or commodity and the other promises to pay the consideration.


BREACH OF CONTRACT


Therefore, in practice detriment refers to economic loss of a party. Given that a detriment is established, it must be as substantial to deprive the other party of what she is “entitled to expect‟. Thus, the party’s special interest in receiving performance is a key element for establishing whether a breach is substantial. This element belongs to the subjective sphere of contractual expectation.


BREACH OF CONTRACT


As far as the cases mentioned below concerns, one of the most controversial points of the concept is identification of the contractual expectation. Once the contractual expectation is determined, it is argued that there is a fundamental breach when the buyer’s intended use becomes impossible or when the party her interest in receiving the performance.


BREACH OF CONTRACT


There are two scenarios in which the contractual expectation can be determined. First, the parties may have defined for themselves what is and what is not fundamental in the contract with express terms. Actually, the reference to the expectations of the other party suggests this possibility.

In this case the court or the arbitral tribunal will first look at the express terms of the contract.


BREACH OF CONTRACT


If the obligation violated is one of the fundamental elements of the contract, the breach will attain the level of ‘fundamental breach’. However, at this point the party proving fundamental breach may not use the right to avoid the contract. Good faith rule in Art.7(2) may supersede avoidance in spite of such an express clause in the contract, depending on the approach of the arbitral tribunal or the court to the nature of good faith rule in the CISG.


BREACH OF CONTRACT


In the case that good faith is considered as a positive duty, which entails the prevention of abuse of rights, avoidance of the contract may be prevented, even though she refers to the breach of a fundamental obligation expressed in the contact.


BREACH OF CONTRACT


Second, parties may have never expressly stated what is fundamental and what is not in their contracts. In this case the nature and the extent of default will determine whether it is a fundamental breach. Although the tendency of courts has been to refuse to allow avoidance unless the goods are so defective that the buyer cannot use them for his original purpose, the terms “entitled to expect” can be used in a positive way to identify expectations of a party through economic analysis and the nature of the contract.


BREACH OF CONTRACT


In addition, it is argued that this term may lead to take negotiations, trade usages or other facts subsequent to the conclusion of the contract into account. Before analyzing the relevant cases, it must be recalled that the article provides the breaching party with a defense against the alleged breach. The defense based on lack of foreseeability give that party to escape from avoidance of the contract. In order to escape from avoidance, the party must prove that she did not foresee and the any business people of the same trade sector would have foreseen the event. LOOK AT THE DOCUENTS


BREACH OF CONTRACT

Art. 25 CISG

«Fundamental breach» in the Convention, to begin with, calls for a warning: it has nothing to do with the English doctrine of «fundamental breach», which certain common law jurisdictions used to apply in a different context, namely in order to determine whether disclaimer clauses survived a particular breach of contract.


BREACH OF CONTRACT

Art. 25 CISG

The breach of any obligation under the contract suffices irrespective whether the duty had been specifically contracted for or followed from the provisions of the Convention.

Even the breach of any collateral duty can amount to a fundamental breach.


BREACH OF CONTRACT

Art. 25 CISG

For example, a manufacturer’s duty to deliver goods under a certain trademark exclusively to the buyer has been held to have been fundamentally violated when the manufacturer displayed those goods at a fair for sale and kept them there despite a warning by the buyer. See CLOUT case No. 2 [GERMANY Oberlandesgericht [Appellate Court] Frankfurt 17 September 1991, at <http://cisgw3.law.pace.edu/cases/910917g1.html>];

CLOUT=Case Law on UNCITRAL Texts

http://cisgw3.law.pace.edu/cases/910917g1.html


BREACH OF CONTRACT

Art. 25 CISG

In order to rank as fundamental a breach must be of a certain nature and weight. The aggrieved party must have suffered such detriment as to substantially deprive it of what it was entitled to expect under the contract.

The breach must therefore nullify or essentially depreciate the aggrieved party’s justified contract expectations.


BREACH OF CONTRACT

Art. 25 CISG

What expectations are justified depends on the specific contract and the risk allocation envisaged by the contract provisions, on customary usages and on the additional provisions of the Convention.

For example, buyers cannot normally expect that delivered goods comply with regulations and official standards in the buyer’s country.


BREACH OF CONTRACT

Art. 25 CISG

Therefore, e.g., the delivery of cadmium-contaminated mussels has not been regarded as a fundamental breach since the buyer could not have expected that the seller met the contamination-standards in the buyer’s country and since the consumption of the mussels in small portions as such did not endanger a consumer’s health. See CLOUT case No. 123 [GERMANY Bundesgerichtshof [Supreme Court] 8 March 1995, available online at <http://cisgw3.law.pace.edu/cases/950308g3.html>].


BREACH OF CONTRACT

Art. 25 CISG

Article 25 requires further that the violating party must have foreseen the result of the breach of the contract. However, the provision does not mention at which time the consequences of the breach must have been foreseeable. One court has decided that the time of conclusion of contract is the relevant time. See CLOUT case No. 275 [GERMANY Oberlandesgericht [Appellate Court] Düsseldorf 24 April 1997, available online at <http://cisgw3.law.pace.edu/cases/970424g1.html>]


BREACH OF CONTRACT

Art. 25 CISG

Courts have decided whether certain typical fact patterns constitute fundamental breaches. It has been determined on various occasions that the failure to perform a contractual duty constitutes a fundamental breach of contract unless the party has a justifying reason to withhold its performance. This has been decided in the case of final non-delivery as well as in the case of final non-payment. See CLOUT case No. 90 [ITALY Pretura circondariale [Court of First Instance] Parma 24 November 1989, online at <http://cisgw3.law.pace.edu/cases/891124i3.html>]


BREACH OF CONTRACT

Art. 25 CISG

However, if only a minor part of the contract is finally not performed, e.g., one delivery out of several deliveries is not supplied, this remains a simple, non-fundamental breach of contract. See CLOUT case No. 275 GERMANY Oberlandesgericht [Appellate Court] Düsseldorf 24 April 1997, available online at <http://cisgw3.law.pace.edu/cases/970424g1.html>]


BREACH OF CONTRACT

Art. 25 CISG

On the other hand a final and unjustified announcement of the intention not to fulfil one’s own contractual obligations has been found to constitute a fundamental breach. See CLOUT case No. 136 [GERMANY Oberlandesgericht [Appellate Court] Celle 24 May 1995, at http://cisgw3.law.pace.edu/cases/950524g1.html].

In that case the seller had given notice that he had sold the specified good to another buyer.


BREACH OF CONTRACT

Art. 25 CISG

Likewise, the insolvency and placement of the buyer under administration has been held to constitute a fundamental breach under article 64 since it deprives the unpaid seller of what it was entitled to expect under the contract, namely payment of the full price. See CLOUT case No. 308 [AUSTRALIA Roder v. Rosedown [Federal Court] 28 April 1995, available online at <http://cisgw3.law.pace.edu/cases/950428a2.html>]


BREACH OF CONTRACT

Art. 25 CISG

It has also been determined that non-delivery of the first instalment in an instalment sale gives the buyer reason to believe that further instalments will not be delivered and therefore a fundamental breach of contract was to be expected (art. 73(2)). See CLOUT case No. 214 [SWITZERLAND Handelsgericht [Commercial Court] Zürich 5 February 1997, available at <http://cisgw3.law.pace.edu/cases/970205s1.html>].


BREACH OF CONTRACT

Art. 25 CISG

As a rule late performance – be it late delivery of the goods or late payment of the price – does not constitute in itself fundamental breach of contract. Only when the time for performance is of essential importance either if it is so contracted or if it is due to evident circumstances (e.g., seasonal goods) then delay as such can amount to a fundamental breach.


BREACH OF CONTRACT

Art. 25 CISG

But even if there is no fundamental breach, the Convention allows the aggrieved party to fix an additional period of time for performance.

If the party in breach fails to perform during that period, the aggrieved party thereupon may declare the contract avoided (arts. 49(1)(b) and 64(1)(b)). See, e.g. CLOUT case No. 301 [ICC Court of Arbitration case No. 7585 of 1992, available online at <http://cisgw3.law.pace.edu/cases/927585i1.html>]


BREACH OF CONTRACT

Art. 25 CISG

Therefore in case of a delay in the performance, but only in that case, the lapse of that additional period turns a non-fundamental breach into a fundamental one.


BREACH OF CONTRACT

Art. 25 CISG – defective goods

If defective goods are delivered, the buyer can terminate the contract when the non-conformity of the goods is to be regarded as a fundamental breach (art. 49 par. 1 (a)).

It therefore becomes essential to know under what conditions delivery of non-conforming goods constitutes a fundamental breach of contract.


BREACH OF CONTRACT


Court decisions on this point have found that any non-conformity concerning 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 with a rebate (i.e. partial refund). See CLOUT case No. 171 [GERMANY Bundesgerichtshof [Supreme Court] 3 April 1996, available online at <http://cisgw3.law.pace.edu/cases/960403g1.html>]


BREACH OF CONTRACT


For example, the delivery of frozen meat which was too fat and too wet and consequently worth 25.5% less than meat of the contracted quality according to an expert opinion was not regarded as a fundamental breach of contract since the buyer had the opportunity to resell the meat at a lower price or to otherwise process it. See CLOUT case No. 248 [SWITZERLAND Bundesgericht [Supreme Court] 28 October 1998, available online at <http://cisgw3.law.pace.edu/cases/981028s1.html>


BREACH OF CONTRACT


On the contrary, if the non-conforming goods cannot be used or resold with reasonable effort this constitutes a fundamental breach and entitles the buyer to declare the contract avoided. This has been held to be the case as well where the goods suffered from a serious and irreparable defect although they were still useable to some extent (e.g. flowers which were supposed to flourish the whole summer but did so only for part of it).


BREACH OF CONTRACT


Courts have considered a breach to be fundamental without reference to possible alternative uses or resale by the buyer when the goods had major defects and the buyer needed the goods for manufacture.

The same conclusion had been reached where the non-conformity of the goods resulted from added substances the addition of which was illegal both in the country of the seller and the buyer.


BREACH OF CONTRACT


Special problems arise when the goods are defective but repairable. Some courts have held that easy reparability excludes any fundamentality of the breach.

Courts are reluctant to consider a breach to be fundamental when the seller offers and effects speedy repair without any inconvenience to the buyer.


BREACH OF CONTRACT


The violation of other contractual obligations can also amount to a fundamental breach. It is, however, necessary that the breach deprives the aggrieved party of the main benefit of the contract and that this result could have been foreseen by the other party.


BREACH OF CONTRACT


Thus, a court stated that there is no fundamental breach in case of delivery of the wrong certificates pertaining to the goods if either the goods were nevertheless merchantable or if the buyer itself could – at seller’s expense – easily get the correct certificates.


BREACH OF CONTRACT


A special case is the delayed acceptance of the goods. A delay in accepting the goods will generally not constitute a fundamental breach, particularly when there is only a few days of delay


BREACH OF CONTRACT


The cumulated violation of several contractual obligations makes a fundamental breach more probable but does not automatically constitute a fundamental breach. Whether a fundamental breach exists depends on the circumstances of the case as well as on whether the breach resulted in the aggrieved party losing the main benefit of, and the interest in, the contract.


BREACH OF CONTRACT

Art. 25 CISG – burden of proof

Article 25 regulates also to some extent the burden of proof. As far as foreseeability is concerned the burden lies on the party in breach. This party has to prove that it did not foresee the detrimental effect of its breach and that a reasonable person of the same kind in the same circumstances would not have foreseen such an effect. The aggrieved party on the other hand has to prove that the breach deprived it substantially of what it was entitled to expect under the contract.

lumsa – international commercial law november 13, 2014 prof. avv. roberto pirozzi email:...

Documents

fundamental breach

cisg definition of breach

synallagmatic contract

cisg article

practice detriment

wider concept

key element

non economical loss