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Remedies for Non-performance:

Perspectives from CISG, UNIDROIT Principles & PECL

Chengwei, Liu [*]
September 2003

[...]

PART III. TERMINATION

CHAPTER 7. RIGHT TO TERMINATION

  7.1 General Considerations
  7.2 Grounds for Termination
  7.3 Concluding Remarks

     Whether in a case of non-performance by one party the other party should have the right to terminate the contract depends upon the weighing of a number of considerations. On the one hand, performance may be so late or so defective that the aggrieved party cannot use it for its intended purpose, or the behaviour of the non-performing party may in other respects be such that the aggrieved party should be permitted to terminate the contract. On the other hand, termination will often cause serious detriment to the non-performing party whose expenses in preparing and tendering performance may not be recovered. [1]

7.1 GENERAL CONSIDERATIONS

Generally, the right to termination is said to be the most drastic remedy in case of non-performance, which reflects the gravity of the negative effects of non-performance or performance not complying with the terms of contract. The right to termination functions, however, as a far-reaching sanction for non-performance under many uniform laws. The advantages of early avoidance are clearly justified under the Convention: "Avoidance makes it possible for the aggrieved party to clarify his situation by reselling or repurchasing the goods required by the initial contract. The aggrieved party may not mind in such a detrimental situation, whether the non-performing party changes his mind and fulfils the contract."[2]

Furthermore, the right to termination remains unimpaired even in case of impediments where the non-performing party is excused, justified above all when there is a fundamental breach ascribed to that party. It is said that the objective character of breach of contract is not affected by the presence of impediments which exempt the breaching party from only certain legal consequences, leaving others untouched. The reason for it is a breach of contract cannot be eliminated as such by way of exemptions. From this it follows that the term "breach of contract" does not necessarily include an accusation.[3] For example, pursuant to Art. 79(5) which reads: "Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention", the claim to avoid the contract is not eliminated in situations of exemptions, if other provisions of the Convention give rise to it.[4] The Official Comment to the UNIDROIT Principles makes it clear, the right to terminate the contract is intended to "apply both to cases where the non-performing party is liable for the non-performance and to those the non-performance is excused so that the aggrieved party can claim neither specific performance nor damages for non-performance."[5] Following a similar approach, the PECL uses the same rules for termination whether or not the non-performance was excused; the aggrieved party may give notice of termination.[6]

Another respect worthy noting is that, under the CISG the buyer is not deprived of the right to avoidance even where the risk of accidental loss or damage to the goods during transport has passed to him in a manner regulated under Arts. 67, 68, and 69. Art. 70 CISG reads in this respect: "If the seller has committed a fundamental breach of contract, articles 67, 68 and 69 do not impair the remedies available to the buyer on account of the breach." This Article essentially states that the buyer is not deprived of rights because of a fundamental breach of contract where the risk has passed. This relates basically to the avoidance of the contract and the delivery of substitute goods because it (fundamental breach of contract) is a general prerequisite for the exercise of these rights. Hence, where non-conforming goods are delivered and the non-conformity constitutes a fundamental deficiency, the buyer can require the avoidance of the contract or delivery of substitute goods. This is true even where the goods accidentally perish or are damaged after the risk has passed, and also where those events have nothing to do with the deficiency.[7]

As a rule, termination is effective only if notice thereof is given by the aggrieved party to the defaulting party. There is no automatic termination under the three instruments, except for the provision of PECL Art. 8:106(4) (If a party is excused under Article 8:108 through an impediment which is total and permanent, the contract is terminated automatically and without notice at the time the impediment arises.) or unless it is so stated in the Nachfrist notice (see Chapter 4). Therefore, the aggrieved party may lose his right to termination if he doesn't give notice to the other party within a reasonable time. On the other hand, termination may be effected by the act of the aggrieved party alone; it does not have to bring an action in court in order to have the contract terminated.[8] "By way of contrast with the approach of some civil law jurisdictions, there is no requirement that the party avoiding the contract obtain judicial approval or confirmation."[9]

Nonetheless, one should note that other remedies protecting the interests of the aggrieved party such as the Nachfrist procedure (Chapter 4), the offer by the breaching party to cure (Chapter 5) or other circumstances may restrict the exercise of the right to termination to certain extent.

7.2 GROUNDS FOR TERMINATION

As mentioned above, the right to termination is regarded as the most drastic remedy in case of non-performance, which reflects the gravity of the negative effects of non-performance or performance not complying with the terms of contract. To prevent the abuse of this remedy, the aggrieved party has the right to terminate a contract only under specific conditions. If these conditions are given, he can, but does not have to, declare a contract avoided.[10]

Generally, one party is entitled to treat itself as discharged from its obligations if the other has committed a breach, but only if the breach is substantial:[11] "Today most lega1 systems agree in effect on the most important condition for allowing the aggrieved party to terminate the contract: The non-performance complained of must be of a serious nature. This criterion is expressed quite differently: English law requires breach of a condition and not of a mere warranty; in France where the contract, unless otherwise provided by the parties, can only be dissolved by judicial decision, the judge will not pronounce the dissolution unless there is a 'grave reason'; in Germany, a main obligation of the contract, and not merely an incidental one, must be violated. The uniform sales laws express the same idea by distinguishing 'fundamental' and other breaches of contract; only the former empower the aggrieved party to terminate the sales contract."[12]

The basic ground for the aggrieved party to terminate the contract is that the non-performance of the other party is fundamental, i.e. material and not merely of minor importance.[13] Under the CISG, according to Art. 49(1)(a)/64(1)(a) the typical situation in which the aggrieved party may declare the contract avoided is where the failure by the other party to perform any of his obligations amounts to a fundamental breach, which is defined in Art. 25 (for more details see Chapter 8). Both the UPICC and the PECL follows the basic idea established under the CISG that only if a party's failure to perform its obligation amounts to a fundamental non-performance, the other party may terminate the contract. Art. 7.3.1(1) UPICC reads in this respect: "A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance." Art. 9:301(1) PECL reads pertinently: "A party may terminate the contract if the other party's non-performance is fundamental."

On the one hand, if there has been a fundamental breach of contract, the buyer has an immediate right to declare the contract avoided. He need not give the seller any opportunity to remedy the breach under Art. 48. However, in some cases the fact that the seller is able and willing to remedy the non-conformity of the goods without inconvenience to the buyer may mean that there would be no fundamental breach unless the seller failed to remedy the non-conformity within an appropriate period of time (see Chapter 5).[14] Nonetheless, the typical practice under CIF and other documentary sales is to be noted, where there is a general rule that the documents presented by the seller in a documentary transaction must be in strict compliance with the contract, buyers have therefore often been able to refuse the documents if there has been some discrepancy in them even if that discrepancy was of little practical significance.[15] On the other hand, where there is a fundamental breach of contract by the buyer, the seller also need not give the buyer any prior notice of his intention to declare the contract avoided. It may be questioned, however, how often the buyer's failure to pay the price, take delivery of the goods or perform any of his other obligations under the contract and this Convention would immediately constitute a fundamental breach of contract if they were not performed on the date they were due. It would seem that in most cases the buyer's failure would amount to a fundamental breach as it is defined in Art. 25 only after the passage of some period of time.[16]

However, a party's fundamental non-performance is not the only circumstance where termination arises. Besides actual fundamental breach of contract, "anticipatory" fundamental breach constitutes another ground for termination (Chapter 9). The Convention, under Art. 72, provides the aggrieved party with the possibility to avoid the contract if it is clear, prior to the date of performance, that the other party will commit a fundamental breach of contract. The aggrieved party can declare avoidance before the performance is due; however, he should refrain from exercising this right, if the other party gives adequate assurance of his performance. A high degree of certainty about occurrence of the breach and its fundamental character is required.[17] Art. 7.3.3 UPICC adopts this rule and stipulates: "Where prior to the date for performance by one of the parties it is clear that there will be a fundamental non-performance by that party, the other party may terminate the contract." Art. 9:304 PECL also contains a substantially similar rule: "Where prior to the time for performance by a party it is clear that there will be a fundamental non-performance by it, the other party may terminate the contract."

Thirdly, there are the possibility to avoid parts of a contract under CISG Art. 51 (Art. 51 CISG), and the specific case of avoiding a contract for delivery by instalments under CISG Art. 73 (Chapter 10). PECL Art. 9:302 is most comparable to CISG Art. 73 as it considers a failure of performance in the situation: "If the contract is to be performed in separate parts and in relation to a part to which a counter-performance can be apportioned, there is a fundamental non-performance, the aggrieved party may exercise its right to terminate under this Section in relation to the part concerned. It may terminate the contract as a whole only if the non-performance is fundamental to the contract as a whole." Interestingly, however, there is no similar rule in the UNIDROIT Principles.

Finally, it is to be recalled that the discussion in Chapter 4 indicates that the so-called Nachfrist procedure makes performance of basic contractual obligations within the period fixed in the notice "of the essence" of the contract. It makes non-performance within the time so fixed the equivalent of a fundamental breach of contract and thus allows a party awaiting performance to eliminate uncertainty concerning the amount of delay that is serious enough to justify avoiding the contract. Despite the lack of clear guidance on the role played by such a procedure in determining fundamental breach, the Nachfrist provisions can and should be interpreted in a manner that does not undermine the fundamental breach standard for avoidance.[18]

7.3 CONCLUDING REMARKS

Whether the aggrieved party should have the right to terminate the contract in the case of a non-performance by the other party depends upon a weighing of conflicting considerations: "On the one hand, the aggrieved party may desire wide rights of termination. It will have good reasons for terminating the contract if the performance is so different from that for which it bargained that it cannot use it for its intended purpose, or if it is performed so late that its interest in it is lost. In some situations termination will be the only remedy which will properly safeguard its interests, for instance when the defaulting party is insolvent and cannot perform its obligations or pay damages. The aggrieved party may also wish to be able to terminate in less serious cases. A party which fears that the other party may not perform its obligations may wish to able to take advantage of the fact that the threat of termination is a powerful incentive to the other to perform to ensure that the other performs every obligation in complete compliance with the contract. For the defaulting party, on the other hand, termination usually involves a serious detriment. In attempting to perform it may have incurred expenses which are now wasted. Thus it may lose all or most of its performance when there is no market for it elsewhere. When other remedies such as damages or price reduction are available these remedies will often safeguard the interests of the aggrieved party sufficiently so that termination should be avoided."[19]

For these reasons it is a prerequisite for termination that the non-performance is fundamental. As outlined supra. 7.2, the major grounds or circumstances for a party's right to terminate the contract under the CISG, UNIDROIT Principles and PECL include the following: (a) a fundamental non-performance by a party; (b) an anticipatory non-performance that is or will become a fundamental one; (c) fundamental non-performance with respect to partial delivery or a given installment, future installments or both; and (d) a failure or refusal to perform within a reasonable Nachfrist. Strictly, however, all the four grounds focus on the fundamentality or substantiality of the non-performance, actual or anticipatory, and thus limit the availability of the right to termination.

In short, termination is permitted only if there has been a breach that substantially deprived the aggrieved party of its bargain, i.e. fundamental non-performance, or involved a delay in performing certain material obligations beyond the time made "of the essence of the contract" through the Nachfrist procedure, which is the only route to avoidance without an initial or anticipatory fundamental breach. In a word, it is assumed that restricting the right to termination promotes good faith and efficiency in commercial dealings.

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FOOTNOTES: Chapter 7

* Chengwei, Liu. LL.M. of Law School of Renmin University of China, P.O. Box 9-01 No. 1 (International Law), Law School of Renmin University of China, 59 Zhongguancun Street, Beijing 100872, China. E-mail: <Genes@263.net>.

1. See. Comment 2 on Art. 7.3.1 UPICC.

2. See Anna Kazimierska in "The Remedy of Avoidance under the Vienna Convention on the International Sale of Goods": Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000); p. 82. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/kazimierska.html>.

3. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 318. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

4. This solution resembles the typical legal consequences from changed circumstances (see the discussion in PART V). Exemptions, as can be seen particularly well from the context of impediments, only lead to the removal of certain legal consequences of the breach of contract, while others continue to exist. The aggrieved party, hence the partner of the party who is affected by the changed circumstances, thus has only two options left: either to avoid the contract or to accept in this way or another the wishes of the other party to adjust the contract - or wait for better times. (Supra. note 3.)

5. See Comment 1 on Art. 7.3.1 UPICC.

6. See Comment and Notes to the PECL: Art. 9:301. Note 2. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp49.html>.

7. Supra. note 3, p. 279.

8. Supra. note 6, Comment B.

9. See G H Treitel, Remedies for Breach of Contract (1988); p338. (Cf. J. W. Carter in "Party Autonomy and Statutory Regulation: Sale of Goods": 6 Journal of Contract Law, North Ryde NSW, Australia (1993); n. 72. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/carter3.html>.)

10. Alternatively, the aggrieved party even in such a detrimental situation justifying termination is certainly entitled to exercise other remedies vested in him and claim damages if the compensation for damages provide adequate protection.

11. See, e.g. Award ICC No. 2583, Clunet (1976) 950, and note Derains; No. 3540, Clunet (1981) 915; 7 YBCA 124.

12. See Ulrich Drobnig in "General Principles of European Contract Law"; Petar Sarcevic & Paul Volken eds., International Sale of Goods: Dubrovnik Lectures, Oceana (1986); p. 328. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/drobnig.html>.

13. Supra. note 1.

14. See Secretariat Commentary on Art. 45 of the 1978 Draft [draft counterpart of CISG Art. 49], Comments 5, 6. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-49.html>.

15. Ibid., Comment 7.

16. See Secretariat Commentary on Art. 60 of the 1978 Draft [draft counterpart of CISG Art. 64], Comment 5. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-64.html>.

17. Supra. note 2, p. 97.

18. See Harry M. Flechtner in "Remedies Under the New International Sales Convention: The Perspective from Article 2 of the U.C.C.": 8 Journal of Law and Commerce (1988) 53-108. Available online at <http://www.cisg.law.pace.edu/cisg/text/flecht47,63.html>.

19. Supra. note 6, Comment A.


CHAPTER 8. FUNDAMENTAL NON-PERFORMANCE

  8.1 General Considerations
  8.2 Foreseeable Substantial Detriment
        8.2.1 Introduction
        8.2.2 Substantial Detriment
    8.2.2.1 Existing detriment
    8.2.2.2 Substantial deprivation
    8.2.2.3 Discernible expectations
        8.2.3 Foreseeability
    8.2.3.1 Introduction
    8.2.3.2 Test for foreseeability
    8.2.3.3 Time for foreseeability
    8.2.3.4 Burden to prove unforeseeability
  8.3 Other Elements in Defining Fundamental Non-performance
        8.3.1 Strict Compliance of Essence
        8.3.2 Intentional Non-performance
        8.3.3 No Reliance on Future Performance
        8.3.4 Disproportionate Loss
  8.4 Concluding Remarks

     Generally speaking, only if one of the party's failure to perform his contractual obligations amounts to a fundamental breach will the other party be entitled to avoid the contract as of right (de pleno jure).[1]

8.1 GENERAL CONSIDERATIONS

Contract termination is a most drastic remedy, especially in the context of world-wide commercial trade, which normally involves expensive transaction costs. Consequently, the remedy of contract termination is not available for just any breach of contract, and usually requires fundamental non-performance as a precondition. Indeed, fundamental non-performance is one of the decisive prerequisites for the aggrieved party's right to termination. Thus, the distinction between "non-fundamental" and "fundamental" breach becomes of major importance. It is crucial to determine the different remedies available to the aggrieved party. For instance, in case of a "fundamental" breach, the injured party under the CISG cannot only claim damages, price reduction or the repair of non-conforming goods but may also declare the contract avoided or request the delivery of substitute goods.[2]

Under the CSIG, Art. 25 defines that a breach 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 result." The concept of "fundamental breach", as defined in Art. 25, is a milestone in the CISG's remedial provisions, which is said to be one of the pillars of the Convention because various sanctions available to the buyer and seller, as well as certain aspects of the passing of risk, depend on this concept: "Article 25 is a key article because the remedies of the buyer and seller under CISG turn on the character of the breach involved. Generally speaking, if the breach is fundamental the aggrieved party is entitled to avoid the contract; if it is not, he is remitted to a claim in damages although in appropriate circumstances he may also be entitled to seek an order for specific performance."[3]

The CISG uses the term "fundamental breach" in various settings: "A fundamental breach is a condition for the immediate avoidance of the contract in the case of non-fulfilment of an obligation (Art. 49, paragraph 1, subpara. (a); Art. 64, paragraph 1, subpara. (a) and/or of an anticipated non-performance of an obligation (Art. 72, paragraph 1) as well as of avoidance in the case of incomplete or partially conform[ing] delivery (Art. 51). The same applies to contracts on delivery by instalments where the contract is to be made void in regard to the affected partial delivery and possibly also in regard to other partial deliveries (Art. 73). It also holds true for the right to delivery of substitute goods in the event of non-conformity (Art. 46, paragraph 2). And, finally, it may cause certain rights to be retained which would otherwise be lost after the passing of risk (Art. 70)."[4]

Generally, Art. 25 CISG attempts to define "fundamental breach" in terms of (foreseeable) "substantial detriment". Art. 8:103 PECL, which corresponds in substance to CISG Art. 25, by contrast, further identifies three situations in which non-performance of an obligation is fundamental to the contract: "(a) strict compliance with the obligation is of the essence of the contract; or (b) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result; or (c) the non-performance is intentional and gives the aggrieved party reason to believe that it cannot rely on the other party's future performance." The UNIDROIT Principles provide a more detailed guideline as to which factors are relevant in determining fundamental non-performance. Art. 7.3.1(2) UPICC lists a number of circumstances that are relevant to the determination of whether, in a given case, failure to perform an obligation amounts to fundamental non-performance. In this context, regard shall be had, in particular, to whether: "(a) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result; (b) strict compliance with the obligation which has not been performed is of essence under the contract; (c) the non-performance is intentional or reckless; (d) the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party's future performance; (e) the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated."

The chapter will illustrate below how these relevant factors are used for determining fundamental non-performance. Reference will be made to pertinent provisions (including those mentioned above) of the CISG, UNIDROIT Principles and PECL, and a number of relevant scholarly writings in order to take a better insight into the concept of fundamental non-performance in international commercial transactions. Taking all relevant sources into consideration, I will focus on such elements, in determining whether a breach is fundamental, as may be roughly categorized under the following headings: (a) foreseeable substantial detriment; (b) strict compliance of essence; (c) intentional non-performance; (d) no reliance on future performance; (e) disproportionate loss.

8.2 FORESEEABLE SUBSTANTIAL DETRIMENT

8.2.1 Introduction

At the outset, it is to be mentioned that with regard to element of foreseeable substantial detriment, both the UNIDROIT Principles and the PECL adopt a substantially identical approach to the CISG, therefore as far as this element is concerned, the following discussion will focus on CISG Art. 25.

The concept of "fundamental" breach is already to be found in Art. 10 ULIS but was criticised for being too subjective. Then the definition in Art. 25 introduced more objective criteria and can be seen as a compromise between a strict subjective test and a strict objective test. The hypothetical will in Art. 10 ULIS was eliminated and instead a material test was adopted in Art. 25 CISG.[5] However, a "fundamental" breach had to be drafted in general terms since such a concept cannot specify all possible circumstances:[6] "Article 25 does not provide any examples of events that constitute such a fundamental breach. Instead, general terms and phrases are used to define fundamental breach, such as 'detriment', 'substantial deprivation', and 'foreseeability'. These terms hardly allow the parties to a sales contract, in case of dispute, to determine ex ante (before one of the parties deems the contract avoided) whether a breach was fundamental."[7]

In such a situation, there is a need for certainty and predictability since parties must use different measures to effect either a contract avoidance or continuance.[8] "As a result, the Convention adopts a solution similar to the one laid down in the German law in 286(2) and 326(2) of the German Civil Code (for the special case of delay) and in 325(1) sentence 2, and has further been developed by courts for other cases of breach of contract: There is a fundamental breach of contract, which justifies avoidance or the demand for substitute goods, if the injured party has no further interest in the performance of the contract after the particular breach. However, the determination of this interest depends entirely on the individual terms of the contract. The question of whether damages caused by a delay in delivery amount to a [fundamental] breach of contract does not depend on the amount of the damages, but rather on the terms in the contract concerning the time of delivery. Non-conforming goods only give rise to a right of avoidance if the contract expressly states that non-conformity is of special interest to the buyer - such as in the case of an express warranty - or if the terms of the contract make this clear. The late delivery of goods with a quoted market price is normally considered a fundamental breach. The question of whether goods which were not packaged according to the agreement presents a fundamental breach depends not only on whether the goods were damaged or at least endangered because of the packaging, but also on whether the packaging explicitly demanded by the buyer was necessary for further shipment or resale. Neglecting to insure the goods during transport, if the seller was obligated to do so by contract, can be a fundamental breach of contract even if the goods were not damaged, if the lack of insurance deprives the buyer of the possibility of reselling the goods in transit"[9]

It is also to be noted that the uncertainty created by the definition of fundamental breach can be avoided through a more specific avoidance regime negotiated by the parties or by making use of the Nachfrist avoidance mechanism (see Chapter 4).[10] These opportunities, however, do not resolve the uncertainty inherent in the definition of fundamental breach. Moreover, the aggrieved party cannot anticipate every problem that might arise. Thus, the circumstances which give rise to fundamental breach still must be determined. For this purpose, the definition of fundamental non-performance can be divided in two elements: first, a detriment such as substantially to deprive the other party of what he is entitled to expect under the contract -- the detriment component -- and second, the foreseeability of the detriment -- the foreseeability component.[11]

8.2.2 Substantial Detriment

The elements which define a substantial detriment are extremely complex. In this point, the substantial detriment itself is characterized by three aspects: in the end, and that is the decisive element, there has to be a relevant detriment to the aggrieved party; it has to be fundamental; and proportionate to the expectations justified under the contract.[12]

8.2.2.1 Existing detriment

The first foundation for a breach being fundamental is that it must cause the non-breaching party detriment. The Convention itself does not contain any definition of the term "detriment". Nor does it give any example of detriment that rises to the level of a fundamental breach.

In the absence of a precise definition, Jafarzadeh interprets the term "detriment" in light of the Convention's legislative history as well as its intended purpose. He quotes the Working Group report stressing that the term detriment "had to be interpreted in a broader sense and set against the objective test of the contents of the contract itself"; infers from the Secretariat Commentary that it is possible to conclude that the drafters intended the word "detriment" to be synonymous with "injury" and "harm", and it can also be exemplified by monetary harm and interference with the other activities; and further clarifies the term by considering its purpose, i.e. simply to allow the injured party to terminate the contract, demand substitute goods, or to prevent the risk of loss from passing to the buyer, that these purposes clearly require a broad sense which is beyond the realm of compensation for damages. Accordingly, Jafarzadeh submits that, keeping in mind both its history and purpose, the term has to be interpreted in a broad sense and any narrow construction must be excluded.[13]

In other words, a definition of "detriment" cannot be confined to an actual material loss or damage but has to be interpreted in a broader sense including also immaterial detriments such as losing a customer, losing resale possibilities or being brought into disrepute etc.[14] "Detriment basically means that the purpose the aggrieved party pursued with the contract was foiled and, therefore, led to his losing interest in the performance of the contract [...]. From this follows his interest in avoiding the contract. Though in commercial relations most things can be reduced to a damage, this is not the central issue here. On the contrary, when compensation for damages can serve as the adequate remedial action, this should be an indication of the fact that there is no detriment in the meaning of the Convention. It will be the case, however, when the aggrieved party in remaining bound to the contract is hindered in his commercial or manufacturing activities in such a way that he can no longer be expected to continue holding on to it. Hence, detriment can be a very complex phenomenon. But it must be in existence at the time of the avoidance of the contract. What matters most in commercial relations are economic results and not formal fulfilment of obligations."[15]

In short, it is possible to conclude that the CISG drafters simply and naturally intended the word "detriment" to be interpreted in a broader sense, and that the determination of a fundamental breach was to be made on a case-by-case basis. Detriment just fills the modest function of filtering out certain cases, as for example where breach of a fundamental obligation has occurred but not caused injury.

8.2.2.2 Substantial deprivation

The second major requirement for a breach to be regarded as substantial detriment is that the detriment caused by the breach must have some degree of seriousness so that it substantially deprives the victim of breach of what he is entitled to expect under the contract. Unlike the nature of detriment, which was not much at issue either by UNCITRAL's Working Group or in the Diplomatic Conference, determining "substantiality" causes major problems because it is open to various interpretations and each interpretation may conflict with certain provisions in the Convention or render them meaningless.

For instance, it was even argued that to define "fundamental" by "substantial" is an idem per idem definition and therefore mere tautology: "As to the substantiality, there is, no doubt, a tautology between substantial and fundamental as characterizing a breach of contract. That repetition seems to have been unavoidable to ensure congruence of the definiens and the definiendum."[16] Another commentator submits, however, that Arts. 71 and 72 distinguish between a threat of a fundamental breach and a threatened failure to perform a "substantial part" of contractual obligations. The latter triggers only a right to suspend performance whereas the former gives the more radical power to avoid the contract, suggesting that a breach may be "substantial" without being "fundamental".[17] Despite these ambiguities, it will become obvious that the relevant detriment is not a static element, but in many instances occurs only when the breach of contract continues. Hence, one of the greatest difficulties in analyzing the fundamentality of a breach is to determine the time when the detriment has become so great that the prerequisites are met.[18]

Anyway, the term "substantial" detriment is not sufficiently clear and the Convention seems to have left the question of determining the sufficient substantial deprivation of the aggrieved party from his contractual expectations to the tribunals to decide in the light of the circumstances surrounding any particular case. Therefore, it is eventually for the courts to develop rules in their case law that can be relied on by the parties. In some cases, courts determining fundamental breach have in particular looked at the gravity of the consequences of the breach in the light of: (a) the contract's overall value and the monetary loss suffered by the aggrieved party; (b) the fitness of the goods for the intended purpose and (c) whether or not an award of damages would adequately protect the aggrieved party, and other interference caused by the breach into his activities.[19] Of course, the international origin of the CISG and the fact that the "international legislator" attempted to find autonomous, original terms without using a single system of laws or legal terminology, and the need to promote uniformity in its application, make an autonomous method of interpretation necessary. This means, above all, not to proceed to interpret it from national juridical constructions and terms.[20]

Therefore, as Jafarzadeh does with the term "detriment" mentioned above, the term "substantially" should also be autonomously interpreted in the light of the Convention's legislative history, as well as its intended purpose. In the light of the legislative history and its intended purpose of the CISG, the degree of seriousness of the detriment resulting from the breach "should be considered as having quantitative as well as qualitative meaning".[21] The Secretariat Commentary also might shed the light on the meaning of "substantial detriment": "The basic criterion for a breach to be fundamental is that 'it results in substantial detriment to the injured party'. The determination whether the injury is substantial must be made in the light of the circumstances of each case, e.g., the monetary value of the contract, the monetary harm caused by the breach, or the extent to which the breach interferes with other activities of the injured party."[22] In this point, however, "[o]ne must consider that the Secretariat Commentary was written prior to the introduction of the refined expectation interest of Article 25. For the breach to be fundamental under Article 25, the aggrieved party must suffer a detriment which must be such as to 'substantially to deprive him of what he is entitled to expect under the contract'. From the history of Article 25 it is clear that -- unlike the drafts -- it does not refer to the extent of the damage, but instead to the importance of the interests which the contract and its individual obligations actually create for the promisee."[23] In other words, the final formulation of Art. 25 has to be understood not as relying on the amount of actual damages, but rather as meaning that the special interests of the creditor should be the yardstick to measure the seriousness of the breach.[24] This means that there is a fundamental breach of contract, if the injured party has no further interest in the performance of the contract after the particular breach; and thus suggests not merely a substantial or material breach of contract, or one which substantially impairs the value of the contract to the injured party, but a breach which goes "to the root" of the contract.[25]

However, on the one hand, in determining the substantiality of the detriment one factor which should be taken into account is the extent to which the detriment to the aggrieved party is the result of its own conduct. If the detriment was substantially due to its own conduct it might be inappropriate to say that the non-performance was fundamental. In other cases it may be appropriate to permit termination but to hold that the aggrieved party's conduct amounted to a non-performance itself for which the other party may claim damages.[26] On the other hand, although the right to termination remains unimpaired even in case of impediments where the non-performing party is excused (the right is given there above all when there is a fundamental breach of contract), it is not excluded that the existence of impediments is taken into consideration where a breach of contract is classified as fundamental. From a doctrinal point of view, this may be substantiated by the principle of good faith. A point in favour of this opinion is furthermore that the definition of a fundamental breach of contract in Art. 25 in a certain way refers to the conduct of the party in breach, even though it relates mainly to the effects the breach of contract has on the other party. The expectations of the latter, which is to be discussed below, may, however, be influenced by the possibility of impediments.[27]

8.2.2.3 Discernible expectations

After all above, the main question still remains: At what point does deprivation resulting from detriment reach the threshold of substantial deprivation? The legislative history of the provision shows that it was controversial.[28] Eventually, in order to reconcile the different proposals, it was decided that for a breach to be fundamental, it must result in such detriment as substantially to deprive the victim of breach of what he is entitled to expect under the contract.

According to Art. 25 CISG, the fundamentality test is satisfied if the aggrieved party can prove that a substantial deprivation of his expectation from the performance of the contract has occurred or will occur because of the breach. The major emphasis is laid upon the contractual expectation of the injured party: "of what he is entitled to expect under the contract". The expectation of a party under a contract is a central criterion to the determination whether a breach of contract is detrimental. The expectation interest adds an objective criterion to the definition since it is the contract that determines the party's obligations and it is also the contract that determines the importance of these duties. Consequently, it is not the personal and subjective interest of the injured party that matters but the expectation that can be assessed by looking at the contract itself.[29] Thus, to meet the substantial deprivation component, the expectations of the aggrieved party have to be discernible from the contract. In other words, to determine the degree of a given detriment, to draw the line between substantial and insubstantial, is no longer left to the judges' sole and sovereign appreciation, but tied to the expectation of the injured party, while those expectations, in turn, are not left to the party's inner feelings but instead tied to the terms of the existing contract.[30]

However, in relying on the phrase "of what he is entitled to expect under the contract", one should be careful. The extent to which a party suffers an injury to its expectations will be found not only in the language of the contract but in the circumstances surrounding the contractual relationship of the parties. The terms of the contract is not the only source for the aggrieved party's expectation interests. For instance, as mentioned above, the aggrieved party's expectations may be influenced by the possibility of impediments. Nonetheless, it does not mean that the assessment of the existence of substantial detriment will depend on the circumstances of any individual case, even those circumstances take place after the time of making the contract. If some particular circumstances are significant for a contracting party, he should bring them into the other party's attention at the time of contract. As will be seen in detail below, the test of the aggrieved party's expectations is further limited by the qualification, which takes account of what the non-performing party could reasonably foresee. Accordingly, it is fair to say that the Convention has not left the determination of the degree of a given detriment, and drawing the line between substantial and insubstantial deprivation, to the judge's sole and sovereign appreciation, but requires him to decide in the framework of the contract and the circumstances that existed at the time it was made.[31]

8.2.3 Foreseeability

8.2.3.1 Introduction

As discussed above, where the effect of non-performance is substantially to deprive the aggrieved party of the benefit of its bargain, so that it loses its interest in performing the contract, then in general the non-performance is fundamental. This is not the case, however, where the non-performing party did not foresee and could not reasonably have foreseen those consequences. According to the second part of Art. 25, a breach of contract causing material prejudice is not fundamental if 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". This means that where a breach of contract is classified as fundamental the non-performing party must have foreseen the detriment, as well as a reasonable person of the same kind in the same circumstances.

It is assumed that a party who knows the far-reaching consequences of a breach of contract for the other party, if he is not sure of his possibility to fulfil, either does not conclude the contract at all or makes increased efforts to prevent its violation. Therefore, the fundamentality of a breach is made dependent not only on its consequences but also on its foreseeability by the other party. The same consideration can be found in Art. 74 regarding the determination of the amount of damages. The rights of the aggrieved party are thus limited in the event that the other party did not foresee special consequences which make up the fundamentality of the breach of contract. It results that the parties should draw their respective attention to such consequences either in the contract itself or through additional information to be given in principle until the conclusion of the contract, e.g. particularly serious consequences in the case of acceptance not in time because of lack of storage facilities, substantiality of proof of technical check-up for re-sale of the goods.[32]

8.2.3.2 Test for foreseeability

This second part of Art. 25 is composed of a subjective and an objective test of foreseeability; it is meant to eliminate a "fundamental" breach where the substantial detriment occurs unexpectedly.

The concept of foreseeability developed out of Art. 10 of ULIS which completely based fundamental breach on the foreseeability of events. Art. 25 of the present Convention, however, adds an objective test into the determination of whether a breach is fundamental by asking two questions: (a) Did the party in breach foresee that the breach of contract would result in a substantial deprivation of the non-breaching party? and (b) Would a "reasonable person of the same kind in the same circumstances" have foreseen such a result? These two questions will require the court to view the contract from the subjective perspective of the party-in-breach, as well as from the objective perspective of a reasonable merchant of the same kind in the circumstances of the party in breach. These subjective and objective elements are cumulative, not alternative. The outcome is that a breach would be regarded as fundamental only where courts or tribunals are satisfied that both elements are proved.[33]

The first requirement for negativing the claim for breach under Art. 25 is whether or not the party in breach actually foresaw the harm caused by the given breach. Whether the detriment caused by the breach was actually foreseeable by the non-performing party depends on his knowledge of the facts surrounding the contract. Generally, foreseeability may depend on the party's knowledge and evaluation of the relevant facts, his experience, his perception of the circumstances, etc.[34] However, this requirement is a purely subjective one which focuses solely on the personal position of the breaching party. It cannot be inferred that one party indeed did not foresee the serious consequences of his breach of contract because this could be considered as professional competence below average. An objectivization is, therefore, made here.[35] As parties in breach are not likely to admit that they foresaw the detrimental result, the objective criterion of a "reasonable person standard" was introduced. Here the question has to be asked whether a "reasonable person of the same kind in the same circumstances would not have foreseen the result". This is an objective test requiring the party in breach to show that a reasonable person of the same kind in his circumstances would not have foreseen that the given default would have caused the injuries in question to the innocent buyer. Although this test is meant to add objectivity to the definition, it remains rather vague since numerous characteristic features have to be taken into account to determine a person of the same kind and it is suggested that the whole socio-economic background including religion, language, etc. must be taken into consideration.[36]

In particular, since parties to international sales contracts are presumed to be merchants, a "reasonable person" can be construed as a reasonable merchant. A reasonable merchant would include "all merchants that satisfy the standards of their trade and that are not intellectually or professionally substandard". The features that may characterise reasonable merchants include: (a) The merchant's degree of skill and professional qualifications (for example specialized licenses); (b) The merchant's professional associations or affiliations which may set competency standards; (c) The length of the merchant's business experience; and (d) The geographic region in which the merchant does business. The phrase "of the same kind" is the first element of precision intended to mitigate the effects of subjectivity of the first criterion of foreseeability. The meaning of the phrase has to be apparently inferred from the purpose of the clause. It is provided to tailor a reasonable person to the likeness of the party in breach. The hypothetical merchant ought to be engaged in the same line of trade, doing the same function or operations as the party in breach. Not only must business practices be taken into account, but the whole socio-economic background as well, including average professional standards. A further element is also provided by Art. 25 for the purpose of precision. Under this requirement, the court must take into account the reasonable merchant "in the same circumstances", in which the party in breach was. By this requirement, the whole range of facts such as conditions on world and regional markets, national legislation, prior trade usage between the parties, etc. must be taken into account to determine whether a reasonable person would have foreseen a detrimental result.[37]

In short, in order to determine foreseeability, the subjective and objective perspective of the party in breach must be considered. Additionally, the objective perspective of the reasonable merchant in the breaching party's position is relevant. In other words, the party in breach is considered to have been able to foresee the consequences of the breach if, when objectively viewed, it is determined that he could or should have known them. But what happens when the breaching party had special knowledge and thus could have foreseen more than the average merchant? The conjunction and, makes it possible to conclude that such special knowledge cannot be taken into account, allowing the breaching party to escape a finding of fundamental breach by hiding behind the paradigm of the reasonable person of the same kind in the same circumstances.[38]

8.2.3.3 Time for foreseeability

Unlike Art. 10 ULIS which was quite clear that the time point should have been "the time of the conclusion of the contract", the language of Art. 25 does not specify when the result of a fundamental breach should be or should have been foreseen, and it remains uncertain whether the time of the contract conclusion is crucial to assess foreseeability or whether foreseeability of a detrimental result occurring after the conclusion of contract also has to be taken into consideration.

Again, Art. 25 is open for interpretation on this point and has generated much controversy. It has been suggested that if a detrimental result was not foreseeable at the time of the conclusion of contract, and becomes foreseeable after that, the party in breach cannot claim that the detrimental result was unforeseeable. According to this view any foreseeability of a substantial detriment before the time of breach but after the time of conclusion is to be taken into consideration. Others suggest that foreseeability of detrimental results after the conclusion of contract can only be taken into consideration in exceptional cases and only up to the time when the preparations for performance of the contract performance started. These views consider the overall situation of the contract and leave room for a more individual evaluation of the circumstances. The relevant information often might be passed on to the party in breach after the conclusion of the contract and it is argued that the drafters of the Convention meant to provide courts with a rather flexible provision. The legislative history demonstrates that the omission was intentional, designed to permit courts to decide the issue on a case by case basis.[39]

In other words, while it is held that generally the time of the conclusion of the contract should be referred to, it is considered possible that in exceptional cases subsequent information should be taken into account as well. There is no reason to impose an interpretation on Art. 25's foreseeability requirement that ignores post-formation developments. Such information could be given until the actual and/or required commencement of the preparation in view of performance so that the other party can still adapt itself to it. This seems justified because it can be doubted that the information available at the time of the conclusion of the contract has really made possible the foreseeability or required foresight of the consequences. This doubt may be removed when subsequent information is taken account of. When, for instance, in the case of a contract for delivery of consumer goods to be manufactured the buyer signals immediately after the conclusion of the contract that the imprint of agreed data on the packaging is of decisive importance because the goods otherwise could not be sold in the envisaged sales area, this will have to be regarded as sufficient for the violation of the respective obligation to be characterized as fundamental.[40]

In short, foreseeability can be determined at any time up to the point of breach, and not only at the time of contract formation. The point at which foreseeability is determined could be when: (a) the contract is concluded; (b) performance begins; or (c) the defaulting party decides to breach. Unlike Art. 74, which deals with damages, Art. 25 was never drafted with the following words: "at the time of the conclusion of the contract". The absence of such words was not due to an inadvertent omission, because the drafters specifically rejected a proposal to make the "vantage point" for foreseeability only at the time of contracting. This clearly indicates that the point for foreseeability in Art.25 is not limited to when the contract is formed.[41] Accordingly, one may argue that the question was deliberately left unanswered because the working groups could not agree on the answer. They therefore left the question to the courts again.

8.2.3.4 Burden to prove unforeseeability

Finally, it is important to mention that the burden to prove unforeseeabilitylies with the breaching party. The mere allegation, however, does not suffice but, as explained below, the party in breach must prove his allegation.

The legislative history of Art. 25 reveals that the burden of proving unforeseeability of loss was originally on the party in breach. There was a consensus that this burden should be on the party in breach because of the logical difficulty of requiring the non-breaching party to prove what the party in breach actually foresaw or a reasonable man in its position could have foreseen. As was seen, a party alleged to be in breach thus has a difficult burden, but if he can show that he did not foresee the drastic effects of his default, and can prove that a reasonable merchant facing the same market conditions would not have foreseen such results, then the party claiming breach will not be able to rely on the other party's breach for termination.[42]

Thus, it is the responsibility of the aggrieved party to prove that he suffered a detriment that substantially deprived him of what he is entitled to expect under the contract. Where such detriment and substantial deprivation are established, the burden of proof is said to shift to the party in breach. To successfully invoke unforeseeability, the party in breach should prove two points: first, that he himself in no way anticipated the substantial detriment caused by the breach; and second, that a reasonable person in his place would not have done so. If the party in breach can prove that he did not foresee the substantial loss of expectation interest that the breach caused the non-breaching party, and can prove that a reasonable person similarly situated, facing the same market conditions, would not have foreseen that the breach would cause a substantial loss of expectation interests, there is no fundamental breach.[43] It appears that the foreseeability element has two functions: "first, a substantive function, i.e., the breaching party's knowledge or foreseeability of the harsh consequences of the breach; secondly, a procedural function, since the element of foreseeability shifts the burden of proof to the party in breach when that party claims that neither he nor any reasonable person of a similar class and in the same circumstances could have foreseen the result."[44]

In short, the aggrieved party cannot terminate the contract if the non-performing party can show that it did not foresee, and could not reasonably have foreseen, that the non-performance was fundamental for the other party.[45]

8.3 OTHER ELEMENTS IN DEFINING FUNDAMENTAL NON-PERFORMANCE

8.3.1 Strict Compliance of Essence

Clearly, the emphasis of Art. 25 CISG is "on the degree of the detriment resulting from the breach" rather than on the degree of substantiality of the performance itself. The definition of a fundamental breach in Art. 25 is, however, not final. The parties themselves may in any part of their contract derogate from the requirements of Art. 25 in line with Art. 6 CISG, and thereby set their own standards as to what will be regarded as a fundamental breach under the contract.[46] According to Art. 6 CISG, "not only may the parties determine the content and extent of their obligations by adopting contractual provisions that vary from the default rules in the Convention, but they may also indicate the circumstances under which the failure to perform by one party amounts to a fundamental breach. The principle of party autonomy thus requires looking at the nature of the contractual obligation for which strict performance might be essential."[47]

Thus, where the parties have expressly agreed or the established practices indicate that any deviation from all or specific contract terms constitutes a fundamental breach, the application of the approach focusing on the nature of the contract would entitle the aggrieved party to avoid the contract even if the breach is minor. For instance, the parties may, from the outset, characterize as fundamental, certain categories of non-fulfilment of obligations; e.g. by determining that time is of the essence. This would correspond to the principle of contract autonomy.[48] In this respect, the significant difference is that where the parties fail to characterize their terms in this fashion, then in the case of a minor breach, Art. 25 will prevent avoidance. Also, the typical practice under CIF and other documentary sales is to be noted, where there is a general rule that the documents presented by the seller in a documentary transaction must be in strict compliance with the contract, buyers have therefore often been able to refuse the documents if there has been some discrepancy in them even if that discrepancy was of little practical significance.[49]

The above approach is confirmed under the UNIDROIT Principles and the PECL, particular regards are explicitly had to the nature of the contractual obligation. Art. 7.3.1(2)(b) UPICC explicitly looks not at the actual gravity of the non-performance but at the nature of the contractual obligation for which strict performance might be of essence. The Official Comment thereon clearly states: "Such obligations of strict performance are not uncommon in commercial contracts. For example, in contracts for the sale of commodities the time of delivery is normally considered to be of the essence, and in a documentary credit transaction the documents tendered must conform strictly to the terms of the credit."[50] Similarly, under Art. 8:103(a) PECL, "the relevant factor is not the actual gravity of the breach but the agreement between the parties that strict adherence to the contract is essential and that any deviation from the obligation goes to the root of the contract so as to entitle the other party to be discharged from its obligations under the contract. This agreement may derive either from express or from implied terms of the contract. Thus, the contract may provide in terms that in the event of any breach by a party the other party may terminate the contract. The effect of such a provision is that every failure in performance is to be regarded as fundamental. Even without such an express provision the law may imply that the obligation is to be strictly performed. For example, it is a rule in many systems of law that in a commercial sale the time of delivery of goods or of presentation of documents is of the essence of the contract. The duty of strict compliance may also be inferred from the language of the contract, its nature or the surrounding circumstances, and from custom or usage or a course of dealing between the parties."[51]

In sum, the nature of the contractual obligation is also an important factor in the determination of fundamental breach: "Where the parties have expressly or implicitly agreed that in the case of a breach by one party the other party may terminate the contract, strict compliance with the contract is essential and any deviation from the obligation is to be regarded as a fundamental breach. Absent such an express provision, the duty of strict compliance may also be inferred from the language of the contract, the surrounding circumstances, custom, usage, or a course of dealing between the parties."[52] This consideration of the nature of the contractual obligation violated in determining fundamental breach is explicitly provided for respectively in Art. 7.3.1(2)(b) UPICC and Art. 8:103(a) PECL; and are as well implied by the text of Art 25 CISG, its legislative history and the principle of party autonomy, which allows the parties to determine the circumstances under which a breach of contract will be fundamental.[53]

8.3.2 Intentional Non-performance

Intentional non-performance is another factor in the determination of fundamental breach. For example, one party's express refusal to perform his obligation, such as to pay for the goods or to take delivery of them, constitutes fundamental breach, except where the promisor is entitled to refuse to perform.

Under the CISG, the approach that focuses on whether the breach was committed intentionally or recklessly "can be supported by the text of article 25. It is, however, incompatible with the remedial system of the Convention under which fault is not a condition of contractual liability and of no importance in the availability of either remedy. Recourse to this approach to determine fundamental breach is thus not permissible."[54] By contrast, Art. 7.3.1(2)(c) UPICC clearly contains such a rule dealing with the situation where the non-performance is intentional or reckless. Similarly, PECL Art. 8:103(c) is also confined to intentional non-performance.

It may, however, be contrary to good faith to terminate a contract if the non-performance, even though committed intentionally, is insignificant.[55] For example, in an Italian-German dispute over the delivery of textiles, some textiles were of a different color from that specified in the contract. After being informed by the Italian seller that he could not at that time deliver the remaining textiles of the ordered color, the German buyer declared the contract avoided. The Düsseldorf Court of Appeals held that a fundamental breach occurs if the seller declares seriously and definitely that he will not deliver substitute goods, but does not occur if he only declares that he cannot deliver at the moment.[56] It is to be mentioned here that, unlike Art. 7.3.1(2)(c) UPICC, PECL Art. 8:103(c) sets a link between intentional non-performance and no reliance on future performance (to be discussed below) with the conjunction "and". Under this provision even if the non-performance in itself is minor and its consequences do not substantially deprive the aggrieved party of what he is entitled to expect under the contract, it might be treated as fundamental if there is indication of intentionality that gives the aggrieved party reason to believe that he cannot rely on the other party's future performance.[57]

8.3.3 No Reliance on Future Performance

In determining fundamental breach, consideration is also given to whether the breach gives the aggrieved party reason to believe that he may not rely on the other party's future performance. Under Art. 7.3.1(2)(d) UPICC the fact that non-performance gives the aggrieved party reason to believe that it cannot rely on the other party's future performance is of significance. If a party is to make its performance in instalments, and it is clear that a defect found in one of the earlier performances will be repeated in all performances, the aggrieved party may terminate the contract even if the defects in the early instalment would not of themselves justify termination. Sometimes an intentional breach may show that a party cannot be trusted.[58] Such an approach is clearly found in PECL Art. 8:103(c) as mentioned above.

Another consideration gives the aggrieved party reason to believe that it cannot rely on the other party's future performance is the party's (in)ability to perform at all, e.g. in the context of sales of goods that is to say either to deliver the ordered goods or to pay the purchase price and to take delivery. Regardless of whether or not performance is due, non-performance is considered a fundamental breach where performance is objectively impossible, namely where the object of the transaction is unique and has been destroyed. For example, if a party contracts to sell his Kandinsky and it has perished, performance is objectively impossible since no one could deliver the painting. A fundamental breach has also been committed where only the party, which has yet to fulfill its obligation, is unable to perform the contract (subjective impossibility). If, in the foregoing example, the Kandinsky were not destroyed but stolen, the seller would only be subjectively prevented from performing, since the thief or any other person having bought the stolen painting from him would be able to deliver it to the buyer, if only theoretically.[59]

In practice, where a party has legitimately lost his faith and confidence in the other party's future performance and cannot be reasonably expected to continue the contractual relationship, courts have frequently found for fundamental breach. The reasons for the courts' findings can be best classified under the following headings: a) Violation of Exclusive Rights; b) Uncertainty as to Future Performance; c) Failure to Provide Security for the Purchase Price; d) Making Delivery Dependent on an Unjustified Condition.[60] But where no future performance is due from the non-performing party, other than the remedying of the non-performance itself, or where there is no reason to suppose that it will not properly perform its future obligations, the aggrieved party cannot invoke PECL Art. 8:103(c).[61]

8.3.4 Disproportionate Loss

Finally, Art. 7.3.1(2)(e) UPICC deals with situations where a party who fails to perform has relied on the contract and has prepared or tendered performance, e.g. by invoking his right to cure (see Chapter 5). In these cases regard is to be had to the extent to which that party suffers disproportionate loss if the non-performance is treated as fundamental. Non-performance is less likely to be treated as fundamental if it occurs late, after the preparation of performance, than if it occurs early before such preparation. Whether a performance tendered or rendered can be of any benefit to the non-performing party if it is refused or has to be returned to that party is also of relevance.[62]

However, under the CISG "[t]he criterion employed by the UNIDROIT Principles, which looks at whether the breaching party would suffer a disproportionate loss as a result of the avoidance in determining fundamental breach, cannot be supported by the various cross-references to fundamental breach. To the contrary, the drafting history of article 46(2) gives good reason to view recourse to this criterion, in general, as prohibited."[63] In other words, consideration of the extent to which the breaching party suffers disproportionate loss in determining whether a breach is fundamental is supported neither by the wording of Art. 25 CISG nor by its drafting history. This factor, therefore, cannot be employed in the determination of fundamental breach of a CISG contract.[64] Interestingly, neither is it explicitly dealt with under the PECL.

8.4 CONCLUDING REMARKS

The main objective of this Chapter has been to identify the various factors employed by the three instruments, as well as by scholars and the courts in determining when a breach of contract is fundamental. To that end, I have covered the following regards to be had in determining fundamental non-performance, roughly categorized under such headings: (a) foreseeable substantial detriment; (b) strict compliance of essence; (c) intentional non-performance; (d) no reliance on future performance; (e) disproportionate loss. All these approaches employed in determining fundamental non-performance seems undoubtedly to support the underlying purpose of this concept, namely to preserve the enforceability of the contract by limiting the remedy of termination.

On the one hand, all the three instruments attempt to protect the interests of the aggrieved party by recognizing in principle the right to termination. In this respect, by providing the right to termination they take into account that there are situations where the interests of the aggrieved party are not sufficiently protected by an award of damages. On the other hand, by requiring that the fundamental non-performance requirement is satisfied as a prerequisite to terminate the non-performed contract, they also considers the interests of the non-performing party. One should note, however, the underlying purpose of the fundamental breach requirement "is not so much concerned with protecting the interests of the breaching party as much as preserving the enforceability of the contract if it all feasible and to avoid economic waste in trade. This policy is also reflected in offering the breaching party the possibility to cure and requiring the aggrieved party wishing to avoid the contract due to late delivery to provide a Nachfrist."[65]

In short, in holding those regards as described above to be had in determining fundamental non-performance, the three instruments, differing slightly but not in substance, seem to incorporate a dual test based on a certain degree of severity of the non-performance, on the one hand; and whether the aggrieved party especially needs these remedies, on the other hand.

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FOOTNOTES: Chapter 8

1. See Robert Koch in "The Concept of Fundamental Breach of Contract under the United Nations Convention on Contracts for the International Sale of Goods (CISG)"; Pace Review of the Convention on Contracts for the International Sale of Goods (CISG) 1998, Kluwer Law International (1999); p. 185. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/koch.html>.

2. See Alexander Lorenz in "Fundamental Breach under the CISG". Available online at <http://www.cisg.law.pace.edu/cisg/biblio/lorenz.html>.

3. See Jacob S. Ziegel in "Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods". Available online at <http://www.cisg.law.pace.edu/cisg/text/ziegel25.html>.

4. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 112. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

5. Supra. note 2. Art. 10 ULIS reads: "For the purposes of the present Law, a breach of contract shall be regarded as fundamental wherever the party in breach knew, or ought to have known, at the time of the conclusion of the contract, that a reasonable person in the same situation as the other party would not have entered in to the contract if he had foreseen the breach and its effects."

6. See John HONNOLD, Uniform Law for International Sales under the 1980 United Nations Convention, 2nd edition, Deventer-Boston (1991); p. 181.

7. Supra. note 1, pp. 185-186.

8. The mercantile need for predictability and certainty is emphasized by Kenneth C. Randall & John E. Norris in "A New Paradigm for International Business Transactions": 71 Wash. U.L.Q. (1993); p. 599, 609.

9. See Peter Schlechtriem, Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods, Manz, Vienna (1986); pp. 59-60. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-25.html>.

10. Supra. note 1, p. 187.

11. See BABIAK, Andrew in "Defining 'Fundamental Breach' under the United Nations Convention on Contracts for the International Sale of Goods": 6 Temple International Law Journal (1992); p. 113, 118.

12. Supra. note 4.

13. See Mirghasem Jafarzadeh in "Buyer's Right to Withhold Performance and Termination of Contract: A Comparative Study Under English Law, Vienna Convention on Contracts for the International Sale of Goods 1980, Iranian and Shi'ah Law" (2001). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/jafarzadeh1.html>.

14. See M. WILL in Commentary on the International Sales Law: The 1980 Vienna Sale Convention, Cesare Massimo Bianca & Michael Joachim Bonell eds. (1987) [hereinafter Bianca & Bonell]; p. 209.

15. Supra. note 4, p. 113.

16. Ibid.

17. See Harry M. Flechtner in "Remedies Under the New International Sales Convention: The Perspective from Article 2 of the U.C.C.": 8 Journal of Law and Commerce (1988); pp. 53-108. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/flecht.html>.

18. Supra. note 15.

19. Supra. note 1, pp. 238 - 245.

20. See Hossam El-Saghir in "Fundamental breach: Remarks on the manner in which the Principles of European Contract Law may be used to interpret or supplement Article 25 CISG" (2000). Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp25.html>.

21. See Anna Kazimierska in "The Remedy of Avoidance under the Vienna Convention on the International Sale of Goods": Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000); p. 106. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/kazimierska.html>.

22. See Secretariat Commentary on Art. 23 of the 1978 Draft [draft counterpart of CISG Art. 25], Comment 3. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-25.html>. (One should note, however, significant changes were made to Art. 23 of the 1978 Draft. Accordingly, the Secretariat Commentary on 1978 Draft Art. 23 should not be regarded as entirely relevant to the interpretation of CISG article 25. See the match-up, available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-25.html>.)

23. Supra. note 20.

24. See Peter Schlechtriem in "Uniform Sales Law - The Experience with Uniform Sales Laws in the Federal Republic of Germany ": Juridisk Tidskrift (1991/92); pp. 1-28. Available online at <http://www.cisg.law.pace.edu/cisg/text/schlechtriem25.html>.

25. Supra. note 20.

26. See Comment and Notes to the PECL: Art. 9:301. Comment D. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp49.html>.

27. Supra. note 4, p. 332.

28. Examination of the legislative history of Art. 25 shows that it was first suggested that to ascertain whether breach was fundamental, it should have been proved that the detriment caused by the breach was substantial and the Committee welcomed that proposal and inserted it into the definition of fundamental breach. In the Diplomatic Conference, however, the debate on the words "substantial detriment to the other party" was extensive. Some delegations labelled it something between "vague", "subjective" and "objective and flexible". The main objection to the "substantial" criterion was that "substantial" as an adjective caused as much uncertainty as "fundamental" itself, and, therefore, required an objective yardstick. Various proposals were offered for this purpose. (Supra. note 4.)

29. Supra. note 2.

30. Supra. note 14, p. 210.

31. Supra. note 13.

32. Supra. note 4, p. 115.

33. Supra. note 13.

34. Supra. note 30.

35. Supra. note 4, p. 116.

36. Supra. note 2.

37. Supra. note 13.

38. Supra. note 1, p. 265.

39. Supra. note 13.

40. Supra. note 35; see also supra. notes 13, 17.

41. See Jianming Shen in "Declaring the Contract Avoided: The U.N. Sales Convention in the Chinese Context"; New York International Law Review, Vol. 10, No. 1, New York State Bar Association (Winter 1997); pp. 18-19. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/shen.html>. Nevertheless, there is the possibility of arguing in support of the first approach. As explained when dealing with the concept of the injured party's expectations under the contract, whether or not the injured party was entitled to expect to have a particular benefit should be ascertained within the contract terms and other circumstances which came to the attention of the party in breach at the time of making the contract. The same analysis seems to be applicable to the measurement of foreseeability of the consequences of the breach. It can even go further and argue that the language of Art. 25 is in line with this approach, since it defines the consequences relevant to the determination of fundamental breach in terms of what a party "is entitled to expect under the contract" and the second sentence of the Article refers to the foreseeability of "such result" by the party in breach. Accordingly, as contractual expectations are formed at the time of contracting, foreseeability of substantial deprivation of those expectations by the reason of breach should also be measured at that time. (Supra. note 11.)

42. Supra. note 13.

43. Supra. note 20.

44. Supra. note 1, pp. 229.

45. See Comment 3(a) on Art. 7.3.1 UPICC.

46. See Alison E. Williams in "Forecasting the Potential Impact of the Vienna Sales Convention on International Sales Law in the United Kingdom": Pace Review of the Convention on Contracts for the International Sale of Goods (CISG), Kluwer Law International (2000-2001); pp. 9-57. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/williams.html>.

47. Supra. note 1, p. 300.

48. The issue in such a case is whether the Convention's principle of party autonomy is limited by the Convention's good faith requirement to act reasonably. Unlike under the UNIDROIT Principles and the PECL, however, the principle of party autonomy is not expressly limited under the Convention, and attempts at the Vienna Diplomatic Conference to limit this principle by the concept of good faith were rejected. Within the scope of the Convention, the parties' freedom to determine the content of their individual contract is only restricted by otherwise applicable mandatory rules, be they of national, international, or supranational origin. It seems, therefore, that the Convention's principle of party autonomy prevails over the Convention's good faith requirement and that the breaching party cannot invoke good faith to invalidate a clause providing for avoidance or substitute delivery for any deviation from the contract, no matter how trivial. This view is confirmed by Art. 4, according to which the Convention is not concerned with the validity of the contract or of any of its provisions. (Supra. note 1, pp. 337-338.)

49. See Secretariat Commentary on Art. 45 of the 1978 Draft [draft counterpart of CISG Art. 49], Comment 7. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-49.html>.

50. See Comment 3(b) on Art. 7.3.1 UPICC.

51. See Comment and Notes to the PECL: Art. 8:103. Comment B. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp25.html>.

52. Supra. note 1, pp. 215-216.

53. Supra. note 1, p. 343.

54. Supra. note 1, p. 345.

55. See Comment 3(c) on Art. 7.3.1 UPICC. This differs from the approach under party autonomy which focuses on the nature of the contract entitling the aggrieved party to avoid the contract even if the breach is minor.

56. See Oberlandesgericht Dsseldorf, 10 February 1994, 6 U 119/93. The full text of the decision is published in German. See University of Freiburg Database, <http://www.cisg-online.ch/cisg/urteile/187.html>. An English abstract is available as CLOUT Case 82 and commented on by Ulrich Magnus, Probleme der Vertragsaufhebung mach dem UN-Kaufrecht (CISG) -- Anmerkung zu OLG Dsseldorf, Jus 870 (1995).

57. Supra. note 20.

58. See Comment 3(d) on Art. 7.3.1 UPICC.

59. Supra. note 1, p. 223; pp. 245-247. In addition, where one party can reasonably conclude from the other party's conduct that he will not perform a substantial part of his obligation, the former may ask the latter for an adequate assurance of performance, and failure to provide an additional guarantee is usually regarded as a fundamental breach. Furthermore, the regime for suspension in anticipatory non-performance (see Chapter 9) is helpful to lessen the risks inherent in matters such as creditworthiness.

60. Supra. note 1, pp. 247-253.

61. Supra. note 51, Comment D.

62. See Comment 3(e) on Art. 7.3.1 UPICC.

63. Supra. note 1, p. 331.

64. Supra. note 54.

65. Supra. note 1, p. 335.


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