With the modern day increase in international trade and commerce, national commercial law has often proved inadequate to international business needs and the resolution of disputes involving international contracts.[1] As the needs of commerce have changed, so have the practices by which businessmen conduct their trade. Increased trade overseas has drawn attention to the problems that are caused by the different ways in which countries have chosen to regulate international sales. Businessmen have found that their contracts and dealings with foreign traders have been subject to different standards and usages.[2]

1.1 INTRODUCTION

The last century has seen a huge change in the field of international trade. The development of the market economy, the growth of markets for manufactured goods and the opening up of new markets in raw products from developing countries has led to a boom in overseas trade. Newer and faster methods of communication have enabled traders to buy and sell goods at a distance more reliably, and modern technology has made it much easier to transport goods around the globe in shorter periods of time. It has become clear that in the modern world, it is no longer possible for a country to isolate itself from the international circulation of goods and persons. This growth in international trade has led to the re-emergence of the need for the harmonization of the services that facilitate overseas trade: global monetary mechanisms, cross-border transport possibilities, and universal rules and standards which allow traders the world over to conduct business on the same terms.[3]

Against such a background, the legal community has tried to facilitate overseas trade through efforts to harmonise national laws by legislative or non-legislative means; thereby reducing the uncertainties and potential costs associated with transacting business under unfamiliar laws. Among such efforts, there is above all in this contribution the reference to the relevant rules of the United Nations Convention on Contracts for the International Sale of Goods (1980; hereinafter "CISG" or "Convention"). On the other hand, the need of general principles in international contract law, usage and custom of international trade and lex mercatoria has led to certain other unification actions in addition to the CISG. Since the CISG came into force in 1988, there have been other efforts to develop overall unifying principles covering the field of contract law. The UNIDROIT Principles of International Commercial Contracts (1994, hereinafter "UPICC" or "UNIDROIT Principles") and the Principles of European Contract Law (1998, hereinafter "PECL" or "European Principles") represent the core of such other efforts. As these two Principles were introduced in 1994 and 1998 it is perhaps premature to consider these principles as a "generally accepted lex mercatoria". However, these rules have potential to be generally accepted by the international trading community and thereby achieve a position to be regarded as lex mercatoria.[4]

Thus, the studied legal instruments in this contribution will be focused on the three instruments mentioned above -- CISG, UNIDROIT Principles and PECL. These instruments are internationally drafted instruments governing contracts which combine elements from both civil law and common law systems. The CISG harmonised interests and ideas of different legal systems and of countries on different levels of economic development and is understood as a modern uniform substitute for the wide array of foreign legal systems; thus, a text that is suited for implementation in civil law countries and common law countries and for economies that are developed and those which are developing. The UNIDROIT Principles and the European Principles in turn represent the latest developments in the field of contract law and combine civil law and the common law as well as international contract practices.

1.2 OVERVIEW OF THE STUDIED INSTRUMENTS

1.2.1 CISG

In April, 1964, twenty-eight states approved two conventions which were the Uniform Law on the International Sale of Goods (ULIS) and the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF) referred to collectively as the 1964 Hague Conventions, which were not very successful.[5] The United Nations Commission on International Trade Law (UNCITRAL), which is the core legal body within the UN system in the field of international trade law and was tasked by the UN General Assembly to further the progressive harmonization and unification of the law of international trade, set out to study the 1964 Hague Conventions to improve and reform them hopefully ending up with a product more successful than the first. Finally, after several drafts after the realization that an entirely new text was needed, the General Assembly convened a conference on a product that is today the CISG.

As suggested by the legislative history, consideration of each individual article of the CISG proceeded on the basis of compromise. For this reason, there was a conscious desire to restrict the content of the CISG to those areas on which it was possible to agree.[6] As a result, certain kinds of sales were excluded according to Art. 2 and matters such as the validity of the contract and the passing of property (Art. 4), the liability of the seller for death or personal injury caused by the goods to any person (Art. 5) were not included. In addition, there was a deliberate attempt not to rely on existing legal definitions which could then be subject to contradicting interpretations in different member states. The aim was not to take the best from every jurisdiction, but to develop an empirical code which, where possible, used independent terms to convey its meaning. Indeed, no international commercial legal regime can expect to be perfect, especially when it is developed on the basis of compromise between legal systems.

While the drafters of the CISG represented various legal systems that possessed their own unique methods of solving certain problems, a commonality existed among the majority of the drafters. So while the remedies provided for by the CISG might not represent part of the "consistent and universal form of international mercantile law" desired by a modern lex mercatoria, they do represent a step forward in that process. From the point of view of legislation as well as from the point of view of practical application, the Convention seems to be a success. Moreover, this success may fuel further uniformity as it is already influencing other fields of international trade law. Indeed, after it came into force on January 1, 1988, the CISG has gained tremendous political and economic significance as the uniform sales law for sixty-two countries that account for two-thirds of all world trade.[7]

As for the application issue, the CISG is the domestic law of each Contracting State. Important conclusions and recommendations follow from this: For parties with their relevant places of business in different Contracting States, where their contract falls within the scope of the CISG, the contract is automatically governed by the CISG, unless the parties indicate otherwise. In other words, where without reference to the CISG, the parties state that the contract is governed by the law of a Contracting State or the applicable law so holds, the contract is likely to be governed by the CISG. For parties to such international sales transactions who do not wish to have them governed by the CISG, the recommended procedure is to so state in their contracts. The above conclusion and recommendation can also apply when only one of the parties has his relevant place of business in a Contracting State of the applicable domestic law regards the law of that Contracting State as the governing law. In these two situations -- contracting parties from different Contracting States, and a contract between a party from a Contracting State and a party from a non-Contracting State -- the relevant CISG provisions are Arts. 1(1) and 95. On the other hand, there are also cases in which principles of the CISG can apply to transactions between parties neither of whom has his relevant place of business in a Contracting State. The CISG can apply to such a contract solely by the election of the parties.

One should note that, however, subject to the fact that when the CISG applies by law it can supersede otherwise applicable domestic law to the contrary; when the CISG applies solely by contract, it acts somewhat like a set of terms and conditions incorporated in the contract -- in other words, in this situation it does not supersede mandatory provisions of the applicable domestic law where that law does not so permit.[8]

1.2.2 UNIDROIT Principles

The regime covering the greatest geographical scope among the studied instruments is the UNIDROIT Principles resulted from the work of the International Institute for the Unification of Private Law (UNIDROIT), which was set up in 1929 as an auxiliary organ of the League of Nations and whose primary task was to draft a uniform sales law which aimed to combat the problems of trading goods across different jurisdictions.[9] The UNIDROIT Principles do not apply to domestic contracts and are intended to operate globally, which are broader in scope and more detailed in provisions than the CISG.

Because the UNIDROIT Principles are not in the form of a convention or a model law, they do not have a binding effect. They will be applied in practice only because of their persuasive character. According to the Preamble, application of the UNIDROIT Principles to international commercial contracts in four different contexts is possible: (a) Where the parties agree that their contract shall be governed by the UNIDROIT Principles, the Principles are undoubtedly applicable because they are incorporated into the contract like any other contractual clause. Here, the principles will bind the parties only to the extent that they do not contradict mandatory rules of the applicable law. (b) The Principles may also apply when the parties have agreed that their contract be governed by "general principles of law" or the lex mercatoria. (c) The Principles may also be of relevance if the contract is governed by a particular domestic law, even though the application of the Principles is not provided for in the contract. This is the case, whenever dealing with a specific issue, it proves impossible to establish the relevant rule of that particular domestic law and a solution can be found in the Principles. Recourse to the Principles, however, as a substitute for otherwise applicable domestic law is a last resort. (d) The Principles may further serve as instruments for the interpretation and filling the gap of international uniform law. The main idea is to preclude an easy resort to the domestic law indicated by the conflict of laws rule by the forum. In conclusion, it can be said that the UNIDROIT Principles apply only if incorporated into the contract, or if they find enough favour with an arbitrator or judge looking for a rule to fill a gap encountered in the regulation of a given international commercial contract.[10]

A stated purpose as suggested in the Preamble is to be stressed: "They may be used to interpret or supplement international uniform law instruments". In practice the question is particularly relevant in the context of the CISG, Art. 7 of which expressly states that "[i]n the interpretation of this Convention regard is to be had to its international character and to the need to promote uniformity in its application" and that "[q]uestions concerning matters governed by this Convention which are not expressly settled it are to be settled in conformity with the general principles on which it is based". In this respect, Bonell, one of the principal architects of the Principles has stated: "The answers given are sharply divided. On the one hand there are those who categorically deny that the UNIDROIT Principles can be used to interpret or supplement the CISG, invoking the rather formalistic and not necessarily convincing argument that the UNIDROIT Principles were adopted later in time than the CISG and therefore cannot be of any relevance to the latter. On the other hand there are those who, perhaps too enthusiastically, justify the use of the UNIDROIT Principles for this purpose on the mere ground that they are 'general principles of international commercial contracts'. The correct solution would appear to lie between these two extreme positions. In other words, there can be little doubt that in general the UNIDROIT Principles may well be used to interpret or supplement even pre-existing international instruments such as the CISG; on the other hand in order for individual provisions to be used to fill gaps in the CISG, they must be the expression of general principles also underlying the CISG."[11]

It is said that to the extent that the two instruments address the same issues, the rules laid down in the UNIDROIT Principles are normally taken either literally or at least in substance from the corresponding provisions of CISG; cases where the former depart from the latter are exceptional.[12] On the other hand, to the extent that they formulate general principles which cannot be derived directly from the CISG, these Principles can be utilized for filling gaps in the Convention.[13] However, an important caveat to recourse to the UNIDROIT Principles to interpret the general principles of the CISG has been pointed out by Bonell: there is a need to show that the relevant provisions of the UNIDROIT Principles are the expression of a general principle underlying the CISG. This need is, of course, not satisfied where the Principles and the CISG adopt different solutions -- for example, in their approach to the battle of the forms.[14]

Indeed, the approach in developing the Principles appears appropriate with respect to the current state of attempts to unify law.[15] The UNIDROIT Principles was published in 1994 as a result of comparative research and deliberations by a group composed of representatives of all the major legal systems of the world. The UNIDROIT Principles have, in practice, only a persuasive value. The Principles can, however, have significant role in international and domestic legislator's adoption policy, court and arbitration proceedings, contract drafting or choice of law clauses. The reason for such significance can generally be seen in the modern and functional solutions adopted in the principles. The potential users of the UNIDROIT Principles to which they are addressed to are especially international law firms, corporate lawyers, arbitration courts and the like. The Principles have so far proved to be successful and widely accepted.[16] The UNIDROIT Principles are regarded to be especially useful in arbitration proceedings. Although there have been only a handful of cases actually decided solely by reference to the UNIDROIT Principles, research has shown that the Principles are being referred to in a growing number of cases as representative of the general principles and established trade practices on which international trade is based.[17]

According to the Preamble, the UNIDROIT Principles set forth "general rules for international commercial contracts". It is also said that the aim of UNIDROIT was to specifically elaborate a general regulatory system which could apply universally and restate the general principles of contract law, thus reflecting all the major legal systems of the world.[18]

1.2.3 PECL

Unlike the CISG which is a uniform sales law adopted by countries that account for over two-thirds of all world trade in goods, the PECL, like the UNIDROIT Principles except for their sphere of application, are a set of principles whose objective is to provide general rules of contract law in the EU, and will apply when the parties have agreed to incorporate them into their contract or that their contract is to be governed by them.

The PECL (also known as the "Lando-Principles") is the product of work carried out by the Commission on European Contract Law (the "Lando Commission"). The Lando Commission was founded in 1982, which is a body of lawyers drawn from all of the Member States of the European Union (EU), under the chairmanship of Professor Ole Lando. The Commission ran with funding from the European Community (EC) and its work was specifically endorsed by the European Parliament in a Resolution in 1994. In 1989, the European Parliament passed a resolution in favour of pursuing a European Code of Private Law. In 1994, this intent manifested itself with a resolution in favour of the Lando Commission's efforts at the harmonisation of contract law. The ambit of the Commission was to draft a European Restatement of Contract law which was to serve as: a basis for the future codification of European contract law; a legal guide for the EU Organs; a text to be used by member states in future codification or updates of their own law; and a text which parties could chose as the applicable law of their contracts. In 1995, the Lando Commission published the first part of its Principles of European Contract Law (the PECL). After three years, a second version were finalized in 1998, and reflects aspects of contract law from many of the EU's member states.

Unlike the UNIDROIT Principles (as well as the CISG) which applies exclusively to international contracts, the European Principles are to be applicable (a) to domestic European contracts as well as to trans-European Union international contracts and (2) to virtually all European contracts, including merchant consumer contracts as well as contracts between commercial parties. Moreover, in addition to the express purpose, similar to the UNIDROIT Principles, of being applied "as general rules of contract law in the European Union" (Art. 1:101), the PECL is intended to represent a modern European lex mercatoria and most importantly for future legal developments, "as a model on which [European] harmonisation work may be based". If the PECL will in fact be used by EU entities in interpreting European contract law or as the basis for further harmonisation efforts, it is a particularly important document to consider as indicating future legal developments.[19] Furthermore, work is already underway to compile a third version of the Principles, and it is envisaged that the Principles will eventually form part of a future European Civil Code. At present, though, the principles are more of academic value as opposed to being applied in practice.[20]

1.2.4 Brief Comparison

So far as the general nature of the studied instruments is concerned, there already exists one important binding instrument in the field of international commercial law - the CISG, which contains the core of a true international commercial code.[21] The Convention has already codified a substantial part of the lex mercatoria and is currently adopted as the law in sixty-two countries. The Convention elaborates the common law and practices of international sales and the common core of domestic commercial rules.[22]

In contrast to the governmental negotiation and compromise leading to the CISG, the UNIDROIT Principles and the PECL were fundamentally born of the same need for a uniform body of law applicable to contracts and do not have the status of an international convention; therefore, their applications mainly rely on express or implied incorporation into a contract by the parties. On the other hand, the two Principles, unlike the CISG, where, due to the divergent legal regimes and views, consensus could only be reached on compromise solutions with some ambiguous wording and gaps in coverage, were not bound to take the viewpoints of every single country, legal regime or rule into account. The final choice among possibly conflicting rules was made on the persuasiveness or suitability of the rule within the overall regime. These efforts can thus be seen as more unified and coherent regimes than the CISG. These regimes definitely are a step forward in legal thinking and the number of similarities between the two regimes suggests that they represent the main directions being taken by international contract law.[23]

As for the relationship between the two sets of Principles, it is also found that the PECL covers similar areas of law to the UNIDROIT Principles, but its geographical sphere of application is confined to the EU. The material scope of the application of the PECL is, however, wider than that of the UNIDROIT Principles, as it is intended to apply to all contracts including domestic transactions and those involving consumers and merchants.[24] So while the PECL is of a narrower geographic focus than the UNIDROIT Principles, it covers a wider area of law. Despite of this, the substantial scope of application of the two Principles is identical in that they both aspire to be general principles of contract law. To use an expression well known in the world of international commerce, both are held out as a sort of codification of the modern lex mercatoria. Both of the two undertakings aspire to be models for national and international legislators, they each describe themselves as formulations of the lex mercatoria, and to some extent promote the harmonization of the law of contracts. It may be said that in the not too far future principles for international commercial contracts as elaborated in the UPICC and the PECL, in the light of the CISG which is the only one among the three instruments with mandatory application to the signatory States, will be developed and worthy of the name lex mercatoria which expresses rules accepted and observed by the international economic community.[25]

The need for uniformity and harmony in international trade can be expected to lead to growth of international transactions subject to the CISG, UNIDROIT Principles, and PECL. In a summary fashion as to the relationship between the three instruments, to some extent it can be described briefly that they enable themselves to supplement each other and fit well with each other as part of the multi-layered approach that is becoming dominant, rather than compete or claim to displace the other harmonizing projects. In so far as the three instruments seem to have their own raison d'être they not only do not compete with each other but may actually fulfil very important functions side by side. Particularly, so as to preclude an easy resort to the domestic law indicated by the conflict of law rule of the forum, the two sets of Principles serve a gap-filling role for the interpretation of CISG contracts; they endorse and promote many of the principles outlined in the CISG. Although, in this instance, the articles are not drafted in an identical or substantially similar manner, it is nonetheless possible to identify some supports and the two Principles can be used to: (1) interpret the CISG; (2) answer unresolved questions that fall within the scope of the CISG; or (3) resolve issues that are not addressed in the CISG.

Finally, one must become aware of the existence and basic content of different concepts contained in these instruments, because they will be shaping the rules for contractual dealings in the future. Particularly, one must be on the lookout for superficial harmony which merely mutes a deeper discord and for verbal conflict which hides a fundamental identity of aim. In both cases the key lies in the conceptual presuppositions of each system or family of systems. The deeper discord escapes notice because the same formula means different things according to the frame-work in which it is read; the fundamental agreement on the end to be achieved is not seen because the conceptual routes which lead that to end are different.[26]

1.3 MAJOR SOURCES OF INFORMATION

In view of their close relationship, these instruments merit a comparative study in order to understand their similarities and differences, at least with respect to certain matters. In so doing, every conscientious author would refer to an extensive amount of sources of information available for the three instruments. In this contribution, I carry on my analysis depending mostly on the followings which bear the greatest significance: as for the CISG, it is above all the Secretariat Commentary on the 1978 Draft of the CISG (hereinafter "Secretariat Commentary"). To the extent it is relevant to the Official Text, the Secretariat Commentary is perhaps the most authoritative source one can cite. It is the closest counterpart to an Official Commentary on the CISG.

Indeed, the drafting history of the Convention is a legitimate and valuable aid in the interpretation of the Convention's provisions. The CISG has a rich and detailed legislative history. The challenge is not paucity of material, but an overabundance of travaux préparatoires spread over thousands of pages of un-indexed volumes, located in sources we are not used to accessing, with frames of reference (article numbers) that generally differ from those of the CISG.[28] The most recent and, generally, the most important segment of the legislative history of the CISG is contained in the Official Records of the Conference (Vienna, 10 March - 11 April 1980 [A/CONF.97/19]; hereinafter "O.R."), which is very useful as a guide to the rationale behind many of the Articles.

As for the UNIDROIT Principles, unlike the CISG to whose text there is no official commentary, each article of the Principles is accompanied by the Official Commentary. The Official Commentary consists of comments and, where appropriate, factual illustrations intended to explain the reasons for the black letter rule and the different ways in which it may operate in practice. The comments are an integral part of the UNIDROIT Principles, all the more so as sometimes they not only explain but to a certain extent even supplement the black letter rule.28 Like the commentary to the UNIDROIT Principles, the Commentary to the PECL contains comments and, where appropriate, factual illustrations helping explain the text. In addition, the Notes contained in the Commentary to the PECL identify civil law and common law antecedents and related domestic provisions.[29]

Furthermore, all of the three instruments expressly state, inter alia, that in their interpretation regard is to be had to their international character and the need to promote uniformity in their application (CISG Art. 7(1); UPICC Art. 1.6(1); and PECL Art. 1:106(1)). This signifies that overviews of the existing case law with parallel references to the areas where there is theoretical debate concerned are, at least in abstracto, useful for practical purposes. Importantly, theory is tested by outcome. It is of great importance to draw on experience from arbitral awards or domestic courts' decision. Therefore, in this contribution regards are also to be had to what national or international courts have already done and, where there are no "precedents", to the solutions proposed by legal scholars. In this context, particular regard is had to the case law on the CISG, which is widely available via the UNCITRAL Database- CLOUT (Case Law on UNCITRAL Texts; available online at <http://www.uncitral.org>>), which is a systematic collection and distribution mechanism for information on court decisions and arbitral awards relating to the Conventions and Model Laws including the CISG that emanated from the work of the UNCITRAL.[30]

Finally, it is to be found that a significant feature of this contribution is its referring to extensive sources of information available over the Internet online. In this point, besides the CLOUT database mentioned above, there are other three databases most frequently used so contributed to this contribution that I would like to list them so as to express my gratitude here: (a) the Pace database on the CISG and International Commercial Law (available online at <http://www.cisg.law.pace.edu>) produced as a public service by the Pace University School of Law in New York, which has compiled lots of valuable sources of information on the CISG including a Bibliography listing all articles and books on the CISG and thus is extremely useful and user friendly. (b) UNILEX database (available online at <http://www.unilex.info>), which is an “intelligent” database of international case law and bibliography on the CISG and on the UNIDROIT Principles. (c) TLDB (CENTRAL Transnational Law Database; available online at <http://tldb.uni-koeln.de/TLDB.html>), which contains the largest bibliography on the new lex mercatoria in the internet and provides the hithereto missing link between the theory of transnational commercial law and international legal practice.

Go to table of contents to full text of Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL.

FOOTNOTES: Chapter 1

1. See Rivkin, David R. in “Lex Mercatoria and Force majeure”: Gaillard ed., Transnational Rules in International Commercial Arbitration (ICC Publ Nr. 480,4; Paris 1993); p. 163. Available online at <http://tldb.uni-koeln.de/TLDB.html; TLDB Document ID: 116100. It is not questioned here that the majority of contracts in international business are still subject to a specific national law and the questions are left aside regarding the conditions under which a contract may be insulated from the application of any such law.

2. 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>.

3. Ibid.

4. See Jussi Koskinen in “CISG, Specific Performance and Finnish Law”: Publication of the Faculty of Law of the University of Turku, Private law publication series B:47 (1999). Available online at <http://http://www.cisg.law.pace.edu/cisg/biblio/koskinen1.html>.

5. Few countries signed the treaties and there were many criticisms that the treaties “primarily reflected the legal traditions and economic realities of continental Western Europe”.

6. Supra. note 2.

7. As of 10 October 2002, the UN Treaty Section reports that 62 States have adopted the CISG: Argentina, Australia, Austria, Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Burundi, Canada, Chile, China (PRC), Columbia, Croatia, Cuba, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Guinea, Honduras, Hungary, Iceland, Iraq, Israel, Italy, Kyrgystan, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldova, Mongolia, Netherlands, New Zealand, Norway, Peru, Poland, Romania, Russian Federation, Saint Vincent & Grenadines, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Syria, Uganda, Ukraine, United States, Uruguay, Uzbekistan, Yugoslavia, and Zambia. (<http://http://www.cisg.law.pace.edu/cisg/countries/cntries.html>)

8. See General Information on the Application of the CISG; available online at <http://cisgw3.law.pace.edu/cisg/cisgintro.html>. In addition, there are situations in which principles of the CISG can be deemed applicable even when neither party has his relevant place of business in a Contracting State and the parties have made no reference to the CISG in their contract. There are cases in which tribunals have so held (see, for example, ICC Arbitration Case No. 5713 of 1989).

9. The fruits of its efforts were the 1964 Hague Conventions. These Conventions, as mentioned previously, since entering into force in 1972, have, however, failed to achieve widespread acceptance. Other works of UNIDROIT have met with greater success; most notably in the area of international trade are the 1994 UNIDROIT Principles.

10. See Joern Rimke in “Force majeure and hardship: Application in international trade practice with specific regard to the CISG and the UNIDROIT Principles of International Commercial Contracts”: Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000); pp. 237-238. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/rimke.html>.

11. See Michael Joachim Bonell in “General Report: A New Approach to International Commercial Contracts: The UNIDROIT Principles of International Commercial Contracts”: XVth International Congress of Comparative Law, Bristol, 26 July-1 August 1998, Kluwer Law International (1999); p. 13.

12. See Michael Joachim Bonell in “THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS AND CISG -- ALTERNATIVES OR COMPLEMENTARY INSTRUMENTS?”: 26 Uniform Law Review (1996); pp. 26-39. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/ulr96.html>.

13. See Ulrich Magnus in “Die allgemeinen Grundsätze im UN-Kaufrecht”: 59 Rabels Zeitschrift (1995); pp. 492-493. English version: General Principles of UN-Sales Law, Lisa Haberfellner, trans. Available online at <http://www.cisg.law.pace.edu/cisg/text/magnus.html>.

14. See Albert H. Kritzer in “General observations on use of the UNIDROIT Principles to help interpret the CISG”. Available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/general-observations.html>.

15. Supra. note 13.

16. Supra. note 4.

17. See Austrian Arbitral Proceeding SCH-4318 and Arbitral Proceeding SCH-4366 (both dated 15 June 1994); see also ICC Arbitral Award No. 8128 of 1995 and the ruling of the French Court of Appeal of Grenoble 23 October 1996, examples of cases in which tribunals have referred to the UNIDROIT Principles as it helped them reason through the CISG. One can anticipate many such references to the UNIDROIT Principles in CISG proceedings. (Supra. note 14.)

18. See Michael Joachim Bonell in “Unification of Law by Non-Legislative Means: The UNIDROIT Principles for International Commercial Contracts”, 40 Am. J. Intl L. (1992); p. 618.

19. See Peter A. Piliounis in “The Remedies of Specific Performance, Price Reduction and Additional Time (Nachfrist) under the CISG: Are these worthwhile changes or additions to English Sales Law?”(1999). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/piliounis.html>.

20. Supra. note 2.

21. Nonetheless, the parties have the general right to derogate from or modify any of the provisions in the CISG (subject to Art. 12) and they may even make the decision to exclude the CISG in its entirety. This need not be done explicitly. One example of implicit exclusion of the CISG is the choice of the law of a non-contracting state. The crucial factor is to be able to determine the will of the parties and in determining this will, Art. 8 is applicable.

22. See Bernard Audit in “The Vienna Sales Convention and the Lex Mercatoria”: Thomas E. Carbonneau ed., Lex Mercatoria and Arbitration, rev. ed. [reprint of a chapter of the 1990 edition of this text], Juris Publishing (1998); p. 194. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/audit.html>. While compromises were made on all fronts, and all Contracting States will notice distinctions between their domestic law and that of the CISG, the common lawyer as opposed to the civil lawyer will face greater obstacles in understanding and applying the CISG. As compared to those schooled in the common law, the majority of the drafters had been trained in civil law. Thus, it is not surprising to find that the CISG is highly reflective of civil law principles. (See Erika Sondahl in “Understanding the Remedy of Price Reduction – A Means to Fostering a More Uniform Application of the United Nations Convention on Contracts for the International Sale of Goods” (2003); available online at <http://www.cisg.law.pace.edu/cisg/biblio/sondahl.html>.)

23. Supra. note 19.

24. While the UNIDROIT Principles are designed only for international commercial contracts, they are in no way intended to take over the distinction traditionally made in some legal systems between “civil” and “commercial” parties and/or transactions, i.e. to make the application of the Principles dependent on whether the parties have the formal status of “merchants” (commerçants, Kaufleute) and/or the transaction is commercial in nature. The idea is rather that of excluding from the scope of the Principles so-called “consumer transactions” which are within the various legal systems being increasingly subjected to special rules, mostly of a mandatory character, aimed at protecting the consumer, i.e. a party who enters into the contract otherwise than in the course of its trade or profession. The criteria adopted at both national and international level also vary with respect to the distinction between consumer and non-consumer contracts. The Principles do not provide any express definition, but the assumption is that the concept of “commercial” contracts should be understood in the broadest possible sense, so as to include not only trade transactions for the supply or exchange of goods or services, but also other types of economic transactions, such as investment and/or concession agreements, contracts for professional services, etc. (See Comment 2 on the Preambles of the UPICC.)

25. Notably, it is also said that the Convention itself purports to formulate the most common practice and therefore qualifies as an expression of lex mercatoria”. (See Bernard Audit, supra. note 22.)

26. See Barry Nicholas in “Force Majeure and Frustration”: 27 American Journal of Comparative Law (1979); pp. 231-245. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/nicholas.html>.

27. In this respect, roadmaps for each article of the CISG are available, which are designed as navigation aids (pilots) to identify paths and shoals (caveats) of the legislative history. Alternative versions of the roadmap may be accessed: short form; long form. The short form is limited to citations to printed texts and electronic links to further data on this article. The long form adds to this material with background information and other data which, once read, should be regarded as applicable to each roadmap presented.

28. See Michael Joachim Bonell, AN INSTERNATIONAL RESTATEMENT OF CONTRACT LAW: The UNIDROIT Principles of International Commercial Contracts, 2nd ed., Transnational Publishers (1997); p. 44.

29. The source of the Commentary to the PECL is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000).

30. The purpose of the system is to promote international awareness of the legal texts formulated by the UNCITRAL and to facilitate uniform interpretation and application of those texts. Currently, CLOUT covers the Convention on the Limitation Period in the International Sale of Goods (New York, 1974), as amended by the Protocol of 1980, the CISG, the UNCITRAL Model Law on International Commercial Arbitration (1985), and the United Nations Convention on the Carriage of Goods by Sea, 1978 (the “Hamburg Rules”).

CHAPTER 2. REMEDIES AVAILABLE UPON NON-PERFORMANCE

     No aspect of a system of contract law is more revealing of its underlying assumptions than is the law that prescribes the relief available for breach.[1] The remedies available to an aggrieved party for a breach of contract can in all significant legal systems be classified into three basic categories. Firstly, an aggrieved party may be able to claim specific performance. As such, specific performance hardly gives the aggrieved party exactly the performance to which he was entitled to, unless it is supplemented with some kind of an additional remedy, such as a monetary relief. Secondly, the aggrieved party may have the right to require substitutionary relief. A relevant relief here is compensation, and almost always a monetary compensation, for the loss that the party has suffered for performance not received. Finally, the aggrieved party may have the right to put an end to the contractual relationship. In such a case the third remedy can also be seen in that the aggrieved party is put into a position where he would have been had the contract never been made. The three categories are not exclusive in that monetary compensation will also very often be available together with a claim for specific performance and an act to put an end to the contract. Furthermore, the above mentioned three basic categories of remedies also appear in different variations, such as a right to price reduction and suspension of performance.[2]

2.1 INTRODUCTION

The first and paramount task of international commercial contracts is organizing the relationship between the parties in an optimal manner. This means that contracts must determine the rights and duties of the parties so that the transaction works smoothly and its costs can be minimized. A second important task is providing remedies for cases of breach of contract. Requirements as to the rules for such contracts, as well as to the contracts themselves, have to be assessed in light of these aims. The attainment of the first goal is mainly a task of the parties in drafting their individual contracts, but nevertheless may be supported by the applicable rules, as the UNIDROIT Principles do in Chapter 6, Section 1 (Performance in General). Though the parties to a contract very often deal with the consequences of breaches of contract as well, they rely more often on the applicable rules. It is easier for parties to organize their relationship than to deal with its destruction.[3]

Remedies available to a party are a key consideration for that party, particularly if the contract is breached. However, the issue of remedies is one of the areas in which the diversity of legal systems is obvious.[4] During the drafting of the Convention the most difficult to formulate were those dealing with the remedies of buyer and seller for breach of contract by the other party, which are still among the most likely to generate controversy. Many aspects of the law of sales reflect merchant practice, and to the extent that this practice is standardized in international sales transactions, the problems in formulating the text of the Draft Convention were reduced. However the provisions in respect of breach of contract do not reflect merchant practice. They reflect the efforts of lawyers from many legal systems to reconcile their views on the appropriate actions to be taken by the parties and by a tribunal in case of breach. The result has been a series of provisions which are in general harmony with one another but which will often be unfamiliar to lawyers from any given legal system.

Thus, the present Chapter identifies generally the scope of relief available under each of the three bodies of rules, namely Part III (partial) of the CISG, Chapter 7 of the UNIDROIT Principles and Chapters 8 and 9 of the PECL, in light of traditional and modern theories. This Chapter seeks to take an overview of remedies in the event of non-performance while leaving the substantively major remedial provisions to be discussed in the following chapters. In so doing, it firstly touches on the definition of non-performance in general. After that, the available remedies are shown in a manner limited to a descriptively bare outline rather than a more detailed discussion. Finally, this Chapter outlines briefly the structure of this contribution.

2.2 THE CONCEPTS: BREACH OF CONTRACT vs. NON-PERFORMANCE

"Non-performance" is the term used in the UPICC and the PECL, analogous to "breach of contract" used in the CISG. A brief survey reveals that breach of contract as a unitary institution of contract law is not familiar to all legal systems.[5] The concept as such is derived from Anglo-American law. But a unitary approach is also adopted in the Romanic legal systems; there it is called non-performance.[6] To avoid plunging into a battle of conceptual issues, I will use the both terms, i.e. "non-performance" and "breach" equally in this contribution to mean that a contract is not performed as originally contracted.

The Convention uses the basic and unitary concept of "breach of contract", which may now be regarded as widely, although not yet generally accepted. Under the Convention the notion "breach of contract" covers all failures of a party to perform any of his obligations. There is no distinction between main obligations and auxiliary obligations. And it does not matter whether the obligation had its origin in the contract, in a usage or in the Convention itself. Under certain conditions a breach of contract is considered to be fundamental (Art. 25).[7] A breach of contract is always given when the objective facts of a breach have occurred, hence irrespective of whether there are grounds for exemption or not. It follows from that the term failure to perform as contained in Arts. 79, 80 (Exemption) refers to any breach of contract, which is "to be conceived here in the broadest sense of the word. Apart from late performance and non-performance it includes, in particular, non-conform[ing] performance and relates to the obligations of both the seller and the buyer".[8]

On the other hand, both the UNIDROIT Principles and the PECL, where "breach" is called non-performance, set up a substantially identical definition to the CISG. In the UNIDROIT Principles, it is expressly set out in Art. 7.1.1 that: "Non-performance is failure by a party to perform any of its obligations under the contract, including defective performance or late performance." This article defines "non-performance" for the purpose of the Principles. Particular attention should be drawn to two features of the definition. The first is that "non-performance" is defined so as to include all forms of defective performance as well as complete failure to perform. So it is non-performance for a builder to erect a building which is partly in accordance with the contract and partly defective or to complete the building late. The second feature is that for the purposes of the Principles the concept of "non-performance" includes both non-excused and excused non-performance.[9] The PECL has set up a similar structure and terms for a future European Code. "Breach" is called non-performance, and occurs whenever a party fails to perform any of its obligations under the contract. As the Official Comment to the PECL makes it clear: "Under the system adopted by the Principles there is non-performance whenever a party does not perform any obligation under the contract. The non-performance may consist in a defective performance or in a failure to perform at the time performance is due, be it a performance which is effected too early, too late or never. It includes a violation of an accessory duty such as the duty of a party not to disclose the other party's trade secrets. Where a party has a duty to receive or accept the other party's performance a failure to do so will also constitute a non-performance."[10]

Clearly, the difference between these two basic concepts, i.e. "breach of contract" as used in the CISG and "non-performance" in the UNIDROIT Principles or in the PECL, is not of essence. Indeed, the process of legal harmonization in global economic markets has made a further step forward when non-performance is defined in terms under it that include all failures and defects in performance, including those that are excused, and avoids terminology emphasizing breach or fault. A commentator's statement on the CISG confirms this: "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 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."[11]

2.3 REMEDIAL SCHEMES OF THE STUDIED INSTRUMENTS

2.3.1 CISG Part III (Partial)

The CISG grants reciprocal remedies within three basic categories to the buyer and seller and clearly establishes that the primary remedy available to an injured party is specific relief, i.e. specific performance. Secondly, the Convention establishes that an injured party shall have a right to a substitutionary relief, which requires the party in breach to pay some amount of money to compensate the loss suffered by the other party. Finally, an aggrieved party shall have a right to avoid (terminate) the contract and thus put an end to the contractual relationship. As such, the remedial provisions of the CISG generally correspond with all major legal systems.[12] The CISG also follows the above mentioned three-category system and thus provides three basic remedies, namely specific performance, damages and avoidance of the contract.

Under the Convention, the remedies available for both the buyer and the seller, each dealt with under a section in Part III, are described in a unified scheme that is clear and easy to follow.[13] In this respect, the remedies available for a breach of contract are summarized in Arts. 45 and 61, which set forth reciprocal remedies for the buyer and seller, respectively. Art. 45(1) gives an overview of the remedies available to the buyer in the event of breach of the seller, namely specific performance, avoidance, compensatory damages, and reduction in price. The seller's remedies are enumerated at Art. 61(1). They differ from the remedies available to the buyer for obvious reasons in two respects. First, the remedy of claiming a reduction in price is not available to the seller. Second, there is no need for substitutional performance or the requirement that the buyer cure a defect in his performance.[14]

Generally, the CISG represents a compromise between the civil law and common law systems, sometimes reflecting concepts that are unique to one system and not the other.[15] Especially, the availability of specific performance as a primary remedy for a breach of contract under the CISG, corresponds with the civil law countries, contrary to the common law countries which regard damages as the primary remedy for a breach of contract.[16] The CISG makes specific performance available to both the seller (Art. 46) and the buyer (Art. 62). Before the parties have fulfilled their obligations, at least in terms of its placement in the Convention's overall scheme, specific performance is the primary remedy although damages are equally available. Under Art. 46, specific performance of the breaching seller may arise in the form of the seller's right to delivery, substitute delivery and repair. While under Art. 62, the seller may require the breaching buyer to pay the price, take delivery or perform his other obligations, unless the seller has resorted to a remedy which is inconsistent with this requirement.

Besides specific performance, the right to obtain damages for a breach of contract plays an important role within the CISG. Damages (or monetary compensation) may be the only available remedy for an aggrieved party if, e.g. the requirements for granting specific performance or the right to avoid the contract are not met. It can, therefore, also be argued that damages are the primary remedy pursuant to the CISG. Moreover, the aggrieved party's right to obtain monetary compensation supplements substantionally the rights to require specific performance and avoidance in that he always has the right obtain damages. For the sake of putting the aggrieved party into as good a position as he would have been had the contract been performed as agreed, the aggrieved party has, therefore, always a right to claim for damages in addition to a claim for specific performance or avoidance.[17] Damages include not only compensation for the expenses incurred by a party, but also the loss of profit. The amount of damages is limited by two conditions: foreseeability and mitigation. Foreseeability means that damages may not exceed the loss that the party in breach foresaw or should have foreseen (Art. 74). The mitigation rule imposes on the innocent party the duty to mitigate the loss (Art. 77). The right to receive interest is also available in addition to the right to damages (Art. 78).

Arts. 49 and 64 of the CISG provide an aggrieved the right to declare the contract avoided. Avoidance of contract under the CISG puts an end to the performance obligations of both parties. It is, however, required that the breach is a fundamental breach.[18] The idea behind this is said that the CISG was designed to take into account the special characteristics of the international sale of goods, such as long distances involved, costs of transportation and the length of the term of the contracts. Due to this design, the CISG emphasises remedies that seek to preserve the contract notwithstanding a breach.[19] This deliberation is further supported when the CISG provides a tool in Art. 47/63, familiar to the German legal system and known as the Nachfrist principle, where the aggrieved has the option of fixing an additional period of time for the breaching party to perform his obligations, and during that period he may not resort to any other remedy for the breach, unless he receives notice that the other party will not perform.

Moreover, the CISG contains additional remedies besides the above mentioned. Firstly, as for the anticipatory breach, besides the right to avoid the contract as contained in Art. 49/64 when an anticipatory fundamental breach exists (Art. 72), the CISG provides a possibility to suspend performance in certain situations as provided for in Art. 71. Under this Article a party may suspend the performance of his obligations if, after conclusion of the contract, it becomes apparent that the other party will not perform a substantional part of his obligations. Secondly, the CISG evidences a solicitude for the interests of the seller in "curing" defective performance of the contract. Where a breach has occurred, the CISG encourages the Seller to keep his contractual promises by offering him the express right to cure his own mistakes (Art. 48). Thirdly, the Buyer has, according to Art. 50, the right to a reduction of price in the case of non-conformity of goods. The right to a reduction in price serves as an alternative to damages being a kind of restitutionary measure of monetary relief, available even where the buyer is not entitled to avoidance. Fourthly, if under the contract the buyer is to specify the form, measurement or other features of the goods and he fails to make such specification either on the date agreed upon or within a reasonable time after receipt of a request from the seller, the Seller may, without prejudice to any other rights he may have, make the specification himself in accordance with the requirements of the buyer that may be known to him (Art. 65).

2.3.2 UNIDROIT Principles Chapter 7

Chapter 7 of the UNIDROIT Principles dealing with remedial issues is significant on at least two levels. In practical terms, it is the substantive heart of the whole Principles. It is where the Principles' solutions to a large proportion of real world disputes in commercial transactions are to be found. It will be a powerful support for the harmonization of actual outcomes and improve the reliability of the often unpredictable results of disputes. The substantive content of Chapter 7 is important as an illustration of the creative power of the UNIDROIT Principles. Chapter 7 is also important as an example of how the Principles work and of their usefulness in the emerging pattern of harmonized international commercial law. Chapter 7 brings closer together the substantive outcomes in courts, arbitral tribunals, and institutions of alternative dispute resolution in different legal systems, thus providing a prime example of how harmonization of international commercial law can improve the law.[20]

Chapter 7 is divided into four sections made up of 31 articles. Like the CISG PART III, UPICC Chapter 7 is systematically structured to favor the existence and performance of the contract and to minimize the instances in which the contract is terminated before performance is complete. Section 1 focus on bringing about performance of the contract and avoiding termination, especially with the devices such as Cure by Non-performing Party (Art. 7.1.4) and Additional Period for Performance (Art. 7.1.5), designed to bring about performance rather than contract failure after difficulties have been encountered by the parties during performance. Moreover, Section 2 takes a superior and more harmonious path dealing with the right to performance, what Common-Lawyers call specific performance and which is the basic preferred remedy in the CISG as well as in many legal systems of the world. Arts. 7.2.1 (Performance of Monetary Obligation) and 7.2.2 (Performance of Non-monetary Obligation) states the general preference for orders to perform, but Art. 7.2.2 notes exceptions to this general rule. Art. 7.2.3 further deals with the issue of Repair and Replacement of Defective Performance.

Although often regarded as the most drastic and last resorted remedy in case of non-performance, the right to termination is ensured by Section 3 of Chapter 7, functioning equally as CISG's avoidance provisions, when performance are 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. In this Section, Arts. 7.3.1 and 7.3.2 state generally the issues of Right to Terminate the Contract and Notice of Termination. Arts. 7.3.3 and 7.3.4 then deal with Anticipatory Non-performance and Adequate Assurance of due Performance in case of anticipatory non-performance. And Arts. 7.3.5 (Effects of Termination in General) and 7.3.6 (Restitution) finally clear the effects of termination.

Finally, as almost all legal systems or instruments do, Section 4 of Chapter 7 provides damages to the aggrieved party. Arts. 7.4.1 and 7.4.2 state the general Right to Damages and the underlying principle of Full Compensation, subject to the limitations such as Certainty of Harm (Art. 7.4.3), Foreseeability of Harm (Art. 7.4.4) and Mitigation of Harm (Art. 7.4.8), and lessing Harm Due in Part to Aggrieved Party (Art. 7.4.7). In addition, interests is also grouped under the heading of damages in Section 4 and dealt with separately under the titles of Interest for Failure to Pay Money (Art. 7.4.9) and Interest on Damages (Art. 7.4.10).

2.3.3 PECL Chapters 8, 9

Under the PECL, two chapters establish the remedial scheme: Chapter 8 deals with Non-performance and Remedies in General. Art. 8:101 states the remedies available as: "(1) Whenever a party does not perform an obligation under the contract and the non-performance is not excused under Article 8:108, the aggrieved party may resort to any of the remedies set out in Chapter 9. (2) Where a party's non-performance is excused under Article 8:108, the aggrieved party may resort to any of the remedies set out in Chapter 9 except claiming performance and damages. (3) A party may not resort to any of the remedies set out in Chapter 9 to the extent that its own act caused the other party's non-performance."

Thus, the remedies available for non-performance depend upon whether the non-performance is not excused, is excused due to an impediment under Art. 8:108 or results from behaviour of the other party. A non-performance which is not excused may give the aggrieved party the right to claim performance - recovery of money due (Art. 9:101) or specific performance (Art. 9:102) - to claim damages and interests (Arts. 9:501 through 9:510), to withhold its own performance (Art. 9:201), to terminate the contract (Arts. 9:301 through 9:309) and to reduce its own performance (Art. 9:401). If a party violates a duty to receive or accept performance the other party may also make use of the remedies just mentioned. A non-performance which is excused due to an impediment does not give the aggrieved party the right to claim specific performance or to claim damages (Article 8:108). However, the other remedies set out in Chapter 9 may be available to the aggrieved party. The fact that the non-performance is caused by the creditor's act - or omission has an effect on the remedies open to the obligee. It would be contrary to good faith and fairness for the creditor to have a remedy when it is responsible for the non-performance. This effect may be total, that is to say that the creditor cannot exercise any remedy, or partial. The exact consequence of the creditor's behaviour will be examined with each remedy.[21]

It is to be noted that the PECL similarly provides the additional remedies as contained in the CISG or in the UPICC such as cure by non-performing party (Art. 8:104), assurance of performance in case of anticipatory non-performance (Art. 8:105) and notice fixing additional period for non-performance (Art. 8:106). However, it is should also be mentioned here that the party's right to withhold its own performance as contained in PECL Art. 9:201 (as well as in UPICC Art. 7.1.3, CISG Art. 58) until the other party performs its obligation will not be given detailed discussion in this contribution. This right is not regarded as a remedy for breach of contract.[22]

 2.3.4 Concluding Remarks

As demonstrated above, three basic remedies are provided by each of the three instruments, namely specific performance, damages and termination of the contract. However, the discussions in this contribution are premised on the assumption that the parties have not chosen some other remedy or remedies within their contractual relationship. Any such remedies chosen by the parties would obviously fall outside the scope of this contribution and will not be given detailed discussion. The most important principle of each of the three instruments must be mentioned here, however, that is to regard the contract made between the parties as prevailing.

Contractual freedom is thus the rule, also reflecting the start point for various legal systems in general. Moreover, it is important to note that the remedies available for a breach of contract will be subject to, not only the agreement made between the parties, but also any practice or usage which can be regarded as an implied part of the agreement. In case of a breach of contract it is, therefore, necessary to first look into the contract executed between the parties or any practice or usage of relevance.[23] Only if the agreement and any relevant practice or usage is silent, the provisions of the applicable rules - CISG, UNIDROIT Principles or PECL or any other laws-- concerning remedies will be at hand. However, it should also be noted that, in cases of such remedies chosen by the parties or implied by relevant practice or usage, potential uncertainty may arise depending on the types of remedies chosen by the parties. This becomes a clearer problem in the context of the CISG. Art. 4 of the CISG sets forth the scope of the CISG and expressly excludes "the validity of the contract or of any of its provisions or of any usage". Although the CISG does give the parties the freedom to choose their own remedies, it is not necessarily clear that these remedies will be enforced the same way in every country, if at all.[24]

Another important issue related closely to remedial scheme deals with situations in which a party is not able to perform due to the change of circumstances, in the form of hardship or force majeure. It is true that, unlike under ULIS, the remedies available under the Convention or in the two Principles are not effected by a particular type of breach. In general, the type of the breach is of no importance in determining which remedies are available.[25] However, on the other hand, the remedies available for non-performance depend on whether the non-performance is excused. This point is made clear by the Official Comment to the PECL,[26] and similar approaches may also be found in the CISG or in the UNIDROIT Principles. In general, if the non-performance is excused, the aggrieved party does not have the right to claim damages under each of the three instruments. Nor, under the UNIDROIT Principles and the PECL where an excused non-performance arises, can the aggrieved party require specific performance. While under the CISG Art. 79, there seems to be no textual basis for the exclusion of specific performance even in such impediments as making performance impossible.

Finally, it should be noted that "fault" is not generally a prerequisite to a finding of contractual liability. However, if the non-performance is caused by the obligee's act - or omission - he may not resort to any of the remedies. Non-performance is applied for cases of failure to perform where the obligor carries the risk. The obligee has no remedies against the obligor if he is unable to receive the performance due to his own "fault". His failure to receive performance may in itself be a non-performance which may give the other party remedies such as the right to terminate the contract.

2.4 STRUCTURE OF THIS PRESENTATION

After the general review made in this Chapter (as well as in Chapter 1), in line with the three major remedies and other valuable deliberations, the discussion in this contribution, although the description of the major substantive contents will have to be limited here to a bare outline, is furthered in details grouped roughly under the headings as follows:

PART II. PRESERVING PERFORMANCE

Preserving performance by means of specific performance, so-called Nachfrist procedure, cure by non-performing party or the reduction of price is of great significance in the context of international commercial transactions, where a great deal of time and effort may be incurred by the innocent party in finding an alternate one. This is particularly true when the contract concerns unique and otherwise identified or specific items. But even in cases where the items are not especially unique or otherwise identified it might be easier and less expensive to require performance of obligations of the breaching party instead of seeking damages or obtaining the subject matter from somewhere else.

A clear indication from the present CISG is that it provides an aggrieved party, both the seller (under Art. 46) and the buyer (under Art. 62), a clear right to require performance of obligations under the contract. As a rule, the CISG adopts the primacy of specific performance, which was nevertheless once regarded as one of the biggest obstacles to reaching a compromise on the final text of the Convention. This will be discussed in Chapter3. The CISG has certain provisions that even more clearly demonstrate the priority given to specific performance. This is confirmed through giving rise to an opportunity to save the contract from being avoided, on the one hand, by Arts. 47 and 63, where the aggrieved party is given the right to grant an additional period of time for performance -- the so-called Nachfrist procedure; on the other hand, by Art. 48, which provides the seller with the right to cure (by either remedying the non-conformity or delivering substitute goods) under certain conditions that secure the buyer's interests. These two means serving to preserve performance will be given more details in Chapter 4 and Chapter 5, respectively.

Indeed, the three means mentioned above can be grouped roughly under the aggrieved party's right to performance because the nature of these remedies requires the non-performing party to perform his contractual obligations as originally agreed. However, along with the aforementioned means, there is another remedy designed to preserve the bargain i.e. reduction of the price, provided by the traditional civil law doctrine action quanti minoris, where the aggrieved party is entitled to a proportional reduction in the contract price where the other party's performance is incomplete or otherwise fails to conform to the contract. This is expressly contained in CISG Art. 50 and will be dealt with in Chapter 6.

In sum, theses methods preserving performance illustrate that one of the main purposes of the CISG is to prevent termination of the contract by preserving the enforceability of the contract as concluded by the parties if it is feasible and to avoid economic waste in trade. This principle is also followed under the UNIDROIT Principles and the PECL. Furthermore, the examination in this PART will demonstrate that the two sets of Principles have taken a more modern and uniform way to handle these issues. Arguably, the primacy of preserving performance by mean of various remedies and the preference of specific performance over other remedies such as termination (PART III) or damages (PART IV), appear to be established under each of the three instruments and bear great significance in international commercial transactions.

PART III. TERMINATION

The third major remedy of the aggrieved party -- apart from specific performance and damages -- is termination of the contract. It should be mentioned here that the term "termination" in this context has a meaning resembling in effect the term "avoidance" in the CISG, the same as which is used in the UPICC and PECL in various provisions in the context of the invalidity. In the context of defects of consent resulting in invalidity, "avoidance" means under the UPICC/PECL and most legal systems that a contract becomes void ex tunc. In the context of the CISG "avoidance", by contrast, means that a contract is terminated ex nunc. To avoid being plunged into a battle of conceptual issues, both terms, i.e. "termination" and "avoidance" (as well as their various parts of speech or tenses) are used equally in this PART to mean that a contract is terminated ex nunc, unless specified otherwise.

It is said that the right to termination is 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. 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. A crucial challenge is therefore to identify the grounds on which the aggrieved party may be entitled to terminate the contract where the other party has failed to perform his obligations in accordance with the contract terms. In this respect, Chapter 7 carries on a general discussion on the major grounds for a party's right to terminate the contract as contained in the CISG, UNIDROIT Principles and PECL. To go on with the discussion, Chapter 8 focuses on the concept of fundamental non-performance; Chapter 9 examines the suspension & termination mechanism against anticipatory non-performance; Chapter 10 touches on the termination of breached installment or part.

As to be demonstrated through these examinations, the grounds for termination focus on the fundamentality of the non-performance, actual or anticipatory. An aggrieved party may terminate the contract only if the non-performance of the other party is "fundamental", i.e. material and not merely of minor importance. Read together with the remedial specific performance discussed in PART II, limiting the availability of the right to termination as to be discussed in this PART serves a further contribution to preserving the enforceability of the contract and arguably to promoting good faith and efficiency in commercial dealings.

After the identification of the grounds for termination, Chapter 11 reviews the declaration of termination. As a rule termination is effective only if notice thereof is given by the aggrieved party to the defaulting party. Other than this mere notice, by way of contrast with the approach of some civil law jurisdictions, there is no such procedural requirements restricting the exercise of termination as that the party avoiding the contract obtain judicial approval or confirmation. Termination may be effected by the act of the aggrieved party alone. Generally speaking, termination affects the legal life of the contract and the contractual relationship of the parties. Finally, the effects of termination are to be explored in Chapter 12.

There can be no doubt that it has been established as a general principle of law that in case of breach of contract, the aggrieved party is entitled to damages. Remedies other than damages which are available to an aggrieved party such as specific performance and termination have previously been discussed. To the extent these remedies do not fully protect the aggrieved party's expectations under the contract, a general rule of full compensation which is applied when a party is entitled to claim damages has been well established under each of the three instruments. Generally, damages have to be paid in money and are not to be recovered as restitution or restoration. They require a breach of an obligation regardless of whether the breach consists of non-performance, late performance or defective performance.

In this PART, the discussion in Chapter 13 will indicate that the right to damages is established under the three instruments as a controlling remedy almost invariably pursued either in and of itself or in conjunction with other remedies; and that the principle underpinning the general measure of damages is full compensation. Damages can be claimed no matter whether the breach of contract has been culpably committed intentionally or negligently or in any other way. The mere fact of a breach of contract is sufficient. Compensation for damages is, however, limited by the some methods such as foreseeability of loss, certainty of harm, contribution to harm or the duty to mitigation. These limiting methods will be given details in Chapter 14. Nonetheless, the aggrieved party is generally entitled to recover damages whenever it suffers loss from the other party's unjustified failure to perform. Thus, even in the case of termination of the contract, damages may be requested to compensate the loss arising from such termination. In such a situation, two methods of measuring damages are available. As to be demonstrated in Chapter 15, when the contract is avoided, damages generally amount to the difference between the contract price and the costs of a cover transaction, together with any further damages; where a cover transaction has not been undertaken with regard to the contract breached and a market price is available, the injured party can also measure his damages with the difference between the contract price and the market price.

All legal systems appear to recognize the validity and social utility of a clause which estimates future damages, especially where proof of actual damage would be difficult. Such a clause, sometimes referred to as a "liquidated damages clause" and sometimes as a "penalty clause", is dealt with in the two Principles as agreed payment for non-performance (although the CISG doesn't expressly make such clauses valid in all systems). Such clauses are to be discussed in Chapter 16. Another important aspect which may falls under the general heading of damages is the recovery of attorneys' fees. This issue is of particular significance in international commercial transactions where such fees usually amount to a large number, and therefore will be explored in Chapter 17. Finally, the damages recoverable may include interest upon the amount of the loss from the date at which the loss was incurred to the date of payment. However, the determination of interest is not an issue to be simply resolved after the establishment of liability, but a question that deserves the strictest scrutiny. Thus, Chapter 18 will focus on the payment of interest.

PART V. EXCUSES

The three main aspects of non-performance in a broad sense are the facts of the breach, i.e. failure to perform an obligation including defective performance and late performance, the responsibility of the non-performing party and the legal consequences of the breach, i.e. particular remedies such as specific performance (PART II), damages (PART III) or termination (PART IV). The matter to be discussed in this PART relates to the responsibility of the non-performing party. The main question addressed in this PART is: How can a party be excused from his primary and secondary obligations (performance and damages) under an originally agreed international commercial contract, or entitled to restoring its equilibrium in case of changed circumstances?

This PART begins with a general review of different approaches to the problem of changed circumstances, which excuses a party from performance of its obligations when a contract has become unexpectedly onerous or impossible to perform. It demonstrates that the concept of changed circumstances, also referred to as rebus sic stantibus, has in its basic form been incorporated into so many legal systems and has found a widely recognized expression in international instruments such as the Vienna Convention on the Law of Treaties, the CISG, UNIDROIT Principles and PECL, that it may be regarded as a general principle of law, albeit on different theoretical bases. This is confirmed by international arbitral practice that lots of awards have also admitted, albeit in exceptional cases and with care and prudence, the application of rebus sic stantibus, and regarded it as a general principle of law. (Chapter 19)

Then the discussion focuses on the two major legal concepts dealing with the problem of changed circumstances, which are exceptions to the basic rule pacta sunt servanda: force majeure (Chapter 20), which is at stake where the performance of the party concerned has, at least temporarily, become impossible, and primarily directed at settling the problems resulting from non-performance, either by suspension or by termination; and hardship (Chapter 21), which occurs where the performance of the disadvantaged party has become much more burdensome, but not impossible, and is mainly directed at the adaptation of the contract. Finally, the force majeure or hardship clauses which are frequently introduced into contracts in international trade are at hand (Chapter 22). It is to be noted that the doctrine of changed circumstances or rebus sic stantibus should only be applied with care and prudence and admitted in exceptional cases, especially if the intention of the parties has been clearly expressed in a contract. The standardized use of relevant clauses may help to define the criteria which may trigger excuses for non-performance and simplify an appropriate procedure for the suspension, termination or adaptation of agreed contracts, and are thus necessary to protect the interests of both parties in cases of unexpected changes in circumstances, in light of the observation of the good faith and equity principle.

Go to table of contents to full text of Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL.

FOOTNOTES: Chapter 2

1. See E. Allan Farnsworth in "Damages and Specific Relief": 27 American Journal of Comparative Law (1979); pp. 247-253. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/farns.html>.

2. See Jussi Koskinen in "CISG, Specific Performance and Finnish Law": Publication of the Faculty of Law of the University of Turku, Private law publication series B:47 (1999). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/koskinen1.html>.

3. See Maskow, Dietrich in "Hardship and Force Majeure": 40 Am.J.Comp.L. (1992); p. 657. Available online at <http://tldb.uni-koeln.de/TLDB.html>; TLDB Document ID: 126400.

4. See Survey of the International Sale of Goods 3, L. Lafili, et al. eds., (1986); p. 14.

5. For instance, German law and some legal systems inspired by it (such as Austrian and Swiss law) do not use a unitary approach. Instead they distinguish between the various causes of breach, especially between impossibility of performance, delay, and all other instances of breach; in addition, following Roman traditions, defects of individual goods are dealt with on a special basis. This system of splitting up breach of contract into several more or less separate institutions has proved to be quite inadequate in many respects because it gives rise to difficult problems of delimitation. However, under the impact of comparative law and the unification of sales law there is now a strong tendency in German academic writings to adopt the unitary approach.

6. See Ulrich Drobnig in "General Principles of European Contract Law": Petar Sarcevic & Paul Volken eds., International Sale of Goods: Dubrovnik Lectures, Oceana (1986); p. 318. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/drobnig.html>.

7. See Fritz Enderlein in "Rights and Obligations of the Seller Under the U.N. Convention on Contracts for the International Sales of Goods": Sarcevic & Volken eds., Dubrovinik Lectures (1986); p. 188. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein1.html>.

8. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 318, 320, 336. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

9. See Comment on Art. 7.1.1 UPICC.

10. See Comment and Notes to the PECL: Art. 8:101. Comment A. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp45.html>.

11. Supra. note 6.

12. Supra. note 2.

13. See Nayiri Boghossian in "A Comparative Study of Specific Performance Provisions in the United Nations Convention on Contracts for the International Sale of Goods": Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000); p. 15. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/boghossian.html>.

14. 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. 297. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/koch.html>.

15. Supra. note 13, p. 10. In general, the CISG has features that are familiar from both of the two major legal systems, i.e. civil and common law systems. However, on the other hand, the CISG is an international convention which reflects the compromise between civil law and common law aspects; and it has therefore not been possible to achieve a totally uniform scheme of remedies compared with different domestic legal systems. The range of remedies is more comprehensive than what is available under common law and some of these remedies are even foreign to common law.

16. Supra. note 2.

17. Ibid.

18. Under the Convention, apart from the damages remedy, avoidance and substitute delivery are only available when a fundamental breach occurs.

19. In a broad way, remedies for breach of contract in sales law can be broken into two main categories: one where the contract can be terminated or avoided by the parties, the other where the remedy is granted while the contract remains in force. Since parties will typically expect their contracts to be performed or at least stay in effect, the primary emphasis should be on the remedies that operate without having to avoid the contract. (See Peter A. Piliounis in "The Remedies of Specific Performance, Price Reduction and Additional Time (Nachfrist) under the CISG: Are these worthwhile changes or additions to English Sales Law?"(1999). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/piliounis.html>.)

20. See Arthur Rosett in "UNIDROIT Principles and Harmonization of International Commercial Law: Focus on Chapter Seven". Available online at <http://www.unidroit.org/english/publications/review/articles/1997-3.htm>.

21. Supra. note 10, Comment B.

22. See Ole Lando in "Salient Features of the Principles of European Contract Law: A Comparison with the UCC": 13 Pace International Law Review (Fall 2001); p. 360. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/lando.html>.

23. Supra. note 2.

24. One such example would be if the parties operating under the CISG specifically agreed that the only available remedy was specific performance. Under English law, e.g., specific performance is a discretionary remedy. While it is unlikely that the parties would agree to such a remedy, there would be no conflict between the agreement for specific performance and Art. 46 of the CISG. On the other hand, an English court applying general legal principles would be unlikely to grant specific performance where the court did not consider that the situation merited the exercise of discretion in favour of specific performance. A more likely issue is the question of the quantum of damages agreed by the parties. Under the CISG, there is no limit on the amount of compensation that may be agreed to be paid upon breach of a contract. In contrast, English common law draws a distinction between genuine pre-estimates of damage (referred to as "liquidated damages") versus clauses viewed as punitive or penal. Penalty clauses are considered invalid and will not be enforced by an English court. So while the parties are generally free to choose their own remedies, English law will not enforce all of the remedies, at least not to the same degree. (Supra. note 19.)

25. This principle is subject to two exceptions under the CISG. First, substitute delivery and reduction in price are only available in case of the delivery of non-conforming goods. It is disputed whether goods, which are not free of third-party rights (in the sense of Arts. 41 and 42), can be considered non-conforming. Secondly, in cases of non-delivery and non-payment or failure to take delivery, the buyer’s or the seller’s right of avoidance, respectively, is subject to a "Nachfrist-type procedure," which allows avoidance only after having fixed a reasonable length of time for the defaulting party to remedy his non-performance (Art. 49(1)(b) / 64(1)(b)). (Supra. note 14, p. 298.)

26. Supra. note 21.

CHAPTER 3. SPECIFIC PERFORMANCE

     The general purpose of all contract remedies is to place the aggrieved party in as good a position as he would have enjoyed had the other party performed his obligations under the contract. This means that all contract remedies must seek to protect one's contractual rights. Specific performance is one such remedy available to the aggrieved party. The purpose of specific performance is to help the creditor obtain, to the fullest extent possible, the actual subject matter of his bargain. In general terms, specific performance means the execution of a contract according to the precise terms agreed upon. But granting specific performance is not free of restrictions in all legal systems.[1]

3.1 COMPRISED APPROACH UNDER THE CISG

3.1.1 Introduction

Most contracts contain a promise of performance. One party undertakes to provide goods, rights or services, and the other side undertakes to pay a sum of money in return. If one party reneges on his promise, however, the problem arises as to whether that party can be sued for specific performance or only for damages arising from non-performance.[2]

Common law and civil law have different approaches to this matter, which causes difficulty in compromising on the definition of specific performance rules within the CISG.[3] Generally, in civil law, specific performance is the primary remedy while in common law the primary remedy is damages. Under the common law where the primary remedy is damages, a court may only grant specific performance when damages would be inadequate compensation. The court also has discretionary power in granting specific performance. It is not a right of the plaintiff, but instead, is left to the court to decide whether or not to grant it. Contrary to common law, damages are only a secondary remedy in civil law where the primary remedy is specific performance. A court in civil law does not have the discretionary power to grant specific performance but must do so unless the circumstances give rise to certain exceptions.

Nonetheless, the CISG, which is the result of decades of work, serves again as an example of unifying divergent rules regulating international transactions through international conventions in order to eliminate, or at least reduce the potential conflicts when an international transaction is concluded. It is also to be noted that although the Convention has attained its purpose to a certain extent, it did not fully achieve unification because differences among legal systems are so deeply rooted, they are sometimes very difficult to eliminate. It is the case with regard to the aggrieved party's right to require specific performance, which is finally attended to under the CISG in Arts. 46, 62 and 28. "Article 46/62 has civilian overtones. Article 28 is a compromise provision. It reads rules of the forum into a court's obligation to compel specific performance."[4]

3.1.2 Primacy of Specific Performance under Arts. 46/62

Familiar to the civil law theory regarding the promisee's right to claim specific performance as an obvious and a simple consequence of the principle of pacta sunt servanda, the CISG adopts the primacy of specific performance as a rule. The CISG provides an aggrieved party, both the buyer and the seller (the seller's right to require performance under the CISG is, however, slightly stronger than that in many domestic legal systems), a clear right to require performance of obligations under the contract. Art. 46 lays down the general rule under certain limitations that the buyer may "require performance" by the seller. Similarly, Art. 62 provides that "the seller may require the buyer to pay the price, take delivery or perform his other obligations".

A clear indication from the CISG is that specific performance is the primary remedy available both to the buyer and to the seller. This remedy appears to be broad for several reasons. Above all, the Convention gives an aggrieved party the right to choose between specific performance and damages. This approach takes on added importance because, in many cases, particularly in international trade, an award of damages will not fully compensate for an aggrieved party's losses. In order to cover, for example, a buyer will incur the costs of finding an alternative supplier and negotiating a new deal. Although the Convention entitles a buyer to recover foreseeable incidental damages, these costs often involve the expenditure of time rather than cash, and it is difficult to establish an accurate monetary value for time and effort. Similarly, resale by a seller may entail costs in time and effort that may not be compensated in a damage award. In addition, a court may err in its estimate of compensatory damages, that is, the additional cost to the buyer of substitute goods, the difference in value between the contract goods and the available substitutes, and any other losses caused by the breach. The risk of error is particularly acute in cases involving international sales, because identical products are not common in the international market. If a seller has breached, for example, and the buyer is unable to find an exact substitute, then the court must estimate any difference in value to the buyer between the original contract item and the closest substitute. Numerous types of product differentiation are likely. Purchases from alternative suppliers may come with reduced warranties, less brand name recognition, or diminished quality. The diminution in value caused by these differences is difficult to prove with certainty and difficult for a court to evaluate.[5]

Also, the style in which Art. 46/62 is drafted should be noted at this point. The style conforms to the view in many legal systems that a legislative text on the law of sales governs the rights and obligations between the parties and does not consist of directives addressed to a tribunal. In other legal systems the remedies available to one party on the other party's failure to perform are stated in terms of the injured party's right to the judgement of a court granting the requested relief. However, these two different styles of legislative drafting are intended to achieve the same result. Therefore, when Art. 46(1) provides that "the buyer may require performance by the seller", or when Art. 62 provides that the "seller may require the buyer to pay the price, take delivery or perform his other obligations", it anticipates that, if the seller or the buyer does not perform, a court will order such performance and will enforce that order by the means available to it under its procedural law.[6] Under the CISG, if the court would give a judgement for specific performance under its own law in respect of similar contracts of sale not governed by this Convention (according to Art. 28), it would be required to do so if the criteria of Arts. 42/62 are met. In this respect, a court lacks the discretion to refuse an injured party's request for a decree of specific performance under Art. 46/62, which is said to "have the effect of changing the remedy of obtaining an order by a court that a party perform the contract from a limited remedy, which in many circumstances is available only at the discretion of the court, to a remedy available at the discretion of the other party."[7]

Another respect worthy noting is what is not required under Arts. 46 and 62. On the one hand, identification of the goods to the contract is not a prerequisite to a claim for specific performance. By way of contrast with Arts. 67(2) (risk of loss does not pass to the buyer until the goods are identified to the contract) and 69(3) (if the goods are not identified to the contract, they are not considered placed at the buyer's disposal until identification occurs), Arts. 46 and 62 contain no express requirement that the goods be identified to the contract. Nor can such a requirement be inferred from the terms of Arts. 46 and 62. Indeed, there are cases where a court order be sought to require the goods to be identified with the remedy of specific performance under ArtS. 46/62.[8] On the other hand, as shown in light of the legislative history, the aggrieved party, unlike in common law, is not required to show the court that damages are an inadequate remedy; nor are injured buyers or sellers required to demonstrate that they cannot reasonably purchase or resell the goods under contract prior to obtaining specific performance.[9] Neither Art. 46 nor Art. 62 requires the unavailability of cover or resale as a prerequisite for ordering specific relief.[10]

Finally, this remedial right is broad in the fact that the remedy to specific performance under the CISG is broad in scope. The aggrieved party can require the breaching party to perform the full range of his contractual obligations. For instance, as far as Art. 46 goes, no distinction is made between different sorts of breaches. The buyer can require the seller to perform all "his obligations" under the contract. The buyer may be entitled, subject to the restrictions provided by the Convention, to this remedy when the seller fails to procure or produce the goods or to deliver them, hand over any documents relating to them at the right place or date fixed in the contract (Arts. 31, 33 and 34). He may also apply to the court for this remedy where the seller refuses to deliver goods, hand over any documents relating to them (Art. 30), or where part of the purchased goods are missing or does not conform to the contract (Art. 51) and do all other acts necessary to fulfil the contract as originally agreed. Similarly, the Convention gives the seller the right to apply to the court to enter a judgement ordering the buyer to "pay the price, take delivery or perform his other obligations".

In short, the aggrieved party may require performance by the non-performing party in regard to any obligation of the latter. The form that specific performance takes depends on the circumstances surrounding the sale.[11]

3.1.3 Forum's Rule under Art. 28

As discussed above, the civil law approach prevails in Art. 46/62, thus making specific performance the primary remedy without the pre-condition of the inadequacy of damages and without the courts having any discretion in granting it. In order to preserve the tradition of common law countries and not force them to make a major change in their position toward specific performance, a compromised solution was adopted in Art. 28. Similar to ULIS Art. 16, Art. 28 provides a procedural exception primarily tailored to suit the peculiarities of Anglo-American law, which does not generally provide the remedy of specific performance in the context of most sales contracts. But unlike ULIS, CISG does not require a reservation regarding a state's right to refuse to enter decrees of specific performance.[12] Art. 28 reads: "If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention."

However, the wording in Art. 28 is slightly ambiguous. Phrases like "its own law", "similar contract of sale not governed by this Convention" and "specific performance", are terms that have different connotations depending on whether they are read by a common law or a civil law jurist. For example, the phrase "its own law" raises the question of whether the law is the substantive law of the forum or its entire law, including rules of conflicts of law. Nonetheless, when one seeks to determine the meaning of a legal term in an international convention such as the CISG, one should bear in mind that the terms are not necessarily derived from the meaning they have in certain legal systems, but instead reflect the intentions of the CISG's drafters. Therefore, in clarifying the meaning of specific performance, one must reject the connotations of the term in domestic law and try to reveal the meaning as it was intended within the context of the CISG. Briefly, the examination of the purpose of Art. 28 makes it evident that what is meant is the substantive law of the forum. The meaning of the phrase "similar contracts" embraces all sale contracts that are outside the scope of the CISG. This includes domestic contracts of sale and contracts between parties from countries that do not subscribe to the CISG, but excludes the contracts listed in Art. 2 of the CISG. And "specific performance" in the CISG includes any order compelling either party to perform contractual obligations, especially the seller's right to require the price being a claim for specific performance even though the term specific performance is not used in Art. 62.[13]

Although the language of Art. 28 is not entirely clear, this Article expressly contains a conflict of law provision referring to the rules of the forum on specific performance and giving them priority over the Convention. It follows that, "the right to require performance of obligations under the CISG is effectuated through the forum's own domestic law so as to give the forum a right not to enter a judgment for specific performance unless that forum would do so under its own law. This provision thus limits the availability of specific performance as provided by the CISG because the domestic rules on requiring performance vary from jurisdiction to jurisdiction, and most importantly differ from the provisions of the CISG. The primary difference as regards such domestic laws is between civil law and common law systems, which take a totally different approach to specific performance. Even if the differences in civil law countries concerning their approach to specific performance are not that fundamental, there are still variations. Consequently, one must be aware of the forum's domestic laws regarding specific performance to be in a position to give a certain answer whether that forum grants performance under the general principle of the CISG."[14]

While Art. 28 is useful from the perspective of a common law party and may make the specific performance flexible to some extent, it is inconsistent with the aim of the CISG because it allows the application of different rules depending on the law of the forum, thus, impeding unification. For instance, Schlechtriem states: "Although meant only as a concession to Common Law countries, this provision may be misused as a door-opener for provisions of domestic law allowing the denial of or derogation from obligations, for example in cases of impossibility or clausula rebus sic stantibus. This would, of course, destroy the uniformity."[15] Besides detracting from the uniformity and international character of CISG, a parochial or variable application of the specific performance provisions will lead to uncertainty in international commercial transactions. Parties will be unsure whether specific performance will be available in a given transaction if a suit can be brought in two or more places, one of which disfavors specific performance.

Seemingly, the parties to a contract governed by the CISG, may want to specify in the contract that specific performance will or will not be an available remedy for a breach of contract, in order to avoid possible uncertainty caused by the affect of Art. 28. Such a contractual exclusion of the availability of specific performance would seem to be justifiable in light of the fact that freedom of contract pursuant to Art. 6 of the CISG is the main principle throughout the CISG. It is, however, proposed by many commentators that such exclusion would not always be possible. It seems, pursuant to the views of Bonell and Lando, that Art. 28 is to be regarded as "mandatory law" and thus parties to a contract cannot exclude its application.[16] "Such interpretation will not cause any problems if the main principle of courts discretion, as provided by Article 28, is remembered: 'the court is not bound to enter' A forum court is thus faced with two aspects: First, its domestic rules regarding freedom of contract and the question whether it allows an agreement of the parties deviating its domestic rules regarding specific performance. Secondly, it is the choice of the forum court whether it will apply Article 28 and not enter a judgment for specific performance. Consequently, after evaluation on such aspects it is up to the court whether it will give effect to a contract provision regarding specific performance and enter a judgment for specific performance, even if it would not do so under its own legal principles."[17]

Also, a choice of forum clause will add certainty to the transaction by eliminating the Art. 28 problem. Another solution is for the party who is uncertain about the availability of specific performance to sue for damages instead. These solutions are certainly practical, but not without their own problems. International agreements are hard enough to conclude when the parties concentrate only on substantive performance and ignore the possibility of breach. Damages may not be what the aggrieved party wants.[18] Arguably, the problems of specific performance under CISG are not easily solvable. In particular, the impediment that Art. 28 imposes on achieving a uniform and international interpretation of CISG is quite real. Instead of allowing a broader approach to specific performance, the regime introduced by the CISG allows the common law courts to continue to apply the traditional restrictive regime while sacrificing the potential benefits of uniformity of remedies.

In sum, while this approach was a useful compromise to allow the international delegates to approve the CISG, it is an unsatisfactory solution that is unlikely to be adopted in future legal unification or harmonisation efforts. "The problems of specific performance under CISG are not easily solvable. Most importantly, the impediment that Article 28 imposes on achieving a uniform and international interpretation of CISG is quite real. Despite the fact that Article 28 grew out of a compromise between the common law and civil law, its special status as a compromise should not be allowed to jeopardize the future uniform and international interpretation of the convention. All these assertions are a matter of theory, and are justified or at least justifiable on that level."[19] What practice reveals, however, is that there is little danger in letting a forum's substantive law govern the availability of specific performance. In recent years, there have been several calls for the increased availability of specific performance in all contracts. In the area of international sales, particularly, the realities may counsel more toward specific performance than in other situations.[20]

In any event, reality and theoretical counter arguments weaken the case for the restricted availability of specific performance. This assertion is somewhat supported by the examples of the UNIDROIT Principles and the European Principles as to be discussed separately below. That two Principles appear to be: let reality govern. It appears that forum law need not work a great injustice in either granting specific performance or in denying it.

3.2 BUYER'S RIGHT TO SPECIFIC PERFORMANCE: CISG ART. 46

3.2.1 Introduction

The CISG establishes for the buyer a clear right under Art. 46 to require the seller to perform as originally agreed. Art. 46 reads as follows:

1. "The buyer may require performance by the seller of his obligation unless the buyer has resorted to a remedy which is inconsistent with this requirement.
2. If the goods do not conform with the contract the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereafter.
3. If the goods do not conform with the contract, the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. A request for repair must be made either in conjunction with notice given under article 39 or within a reasonable time thereafter."

The Secretariat Commentary on Art. 42 of the 1978 Draft [draft counterpart of CISG Art. 46][21] states that, Art. 46 describes the buyer's right to require the seller to perform the contract after the seller has in some manner failed to perform as agreed.[22] Art. 46 is divided into three subparts. Art. 46(1) sets out the buyer's general right to specific performance of the seller's obligations, provided that the buyer has not pursued a remedy inconsistent with requiring performance. Art. 46(2) grants the buyer the right to require delivery of substitute goods in the case of non-conforming goods and under certain circumstances. Art. 46(3) provides that the buyer may require the seller to repair non-conforming goods under circumstances similar to those in Article 46(2). All three subparts can be grouped under the buyer's right to specific performance because the nature of the remedy in all the subparts requires the seller to deliver conforming goods or perform other obligations.[23] It is "an expression of the maxim pacta sunt servanda".[24]

One should note, however, the three different categories of specific performance under Art. 46 each provide limits to the granting of specific performance under the said paragraph: Para. (1) states that the buyer may require specific performance unless he has resorted to a remedy which is inconsistent with such requirements; para. (2) delivery of substitute goods may be required only if the breach constitutes a fundamental breach; para. (3) allows the right to require repair of non-conforming goods only if such requirement is not unreasonable having regard to all circumstances. Nonetheless, the buyer does not lose in seeking specific performance his right to recover any damages he may have suffered thereby. Art. 45(2) ensures by providing that: "The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies". "The right to claim damages ensures that the buyer is put into as good a position as if he would have been had the contract been performed. Therefore, the right to claim damages essentially supplements the buyer's right to require performance."[25]

3.2.2 General Rule: Art. 46(1)

3.2.2.1 Right to require performance

The buyer's general right to demand the seller to perform his obligations under the contract derives from Art. 46(1): "The buyer may require performance by the seller of his obligations...". "The obligations that the buyer may require the seller to perform are covered under Articles 30 through 34, and under Articles 41 and 42. Those obligations include the obligation to produce, procure, or deliver goods at a place or time required by the contract and the obligation to deliver the goods free from third-party claims."[26]

Thus, the right to require performance includes the delivery of the goods, or of any missing part thereof, the handing over of documents, the curing of defects or the performance of all other acts necessary to fulfill the contract as originally agreed. Its purpose can be understood as seeing to it that the obligations of the seller are performed as laid down in the contract and the CISG: "Paragraph (1) recognizes that after a breach of an obligation by the seller, the buyer's principal concern is often that the seller perform the contract as he originally promised. Legal actions for damages cost money and may take a considerable period of time. Moreover, if the buyer needs the goods in the quantities and with the qualities ordered, he may not be able to make substitute purchases in the time necessary. This is particularly true if alternative sources of supply are in other countries, as will often be the case when the contract was an international contract of sale."[27]

As for the application of Art. 46(1), Koskinen states: "The buyer's right to require performance under Article 46(1) is at hand in situations where the seller has totally failed to perform, i.e. non-delivery. It is thus distinguished from the buyer's right to require delivery of substitute goods or right to demand repair. What is a total failure to perform? It is clear that if the seller refuses to deliver the goods, he is in breach, as addressed by Article 46(1). But if the seller delivers goods that are totally different from what has been agreed upon, i.e. apples instead of pineapples, the answer is a bit more complicated. Should the matter be then considered as a non-delivery? The problem lies in the right to avoid. Will states that 'If the answer were positive the buyer might find it difficult to avoid the contract. For the mere delay in performance caused by the delivery of apples instead of pineapples does not necessarily amount to a fundamental breach.' Therefore, Will concludes that the delivery of goods other than those agreed upon between the parties, should not be regarded as non-delivery, but as a non-conformity of goods, covered by paragraph (2) of Article 46."[28]

In short, the buyer's right to require performance under Art. 46(1) is at hand in cases of non-delivery. "If he has delivered, but the goods do not conform with the contract, paras. 2 and 3 provide remedies for specific claims for performance."[29]

3.2.2.2 Non-resorting to inconsistent remedies

As mentioned above, despite the broad language of Art. 46, the buyer's remedies under this article are subject to a number of restrictions, one of which is expressed by Art. 46(1), by virtue of which the buyer will be entitled to apply for specific performance only when he has not "resorted to a remedy which is inconsistent with this requirement". Despite the express language of this provision, it is not quite clear which remedies are incompatible with the remedy of requiring performance.

Inconsistency is clearly at hand if the buyer avoids the contract: If the buyer effectively avoids the contract, the exclusion of his right to require performance follows automatically from Art. 81(1) which provides: "Avoidance of the contract releases both parties from their obligations under it ...". Consequently, the buyer may not compel performance if he has chosen to put an end to the contract by avoiding it. "The same is true in the case where the buyer has claimed price reduction in the case of non-conforming delivery pursuant to Art. 50, since it would re-establish equivalence."[30] It is obvious that if the delivered goods are defective and the buyer demands a price reduction or refund for repair costs as compensation, he may not at the same time require repair or delivery of substitute goods, as provided by paras. (2) and (3) of Art. 46, by the seller; in such a case the right to require performance and claim for a price reduction are inconsistent remedies, because they aim to compensate the same interest. Thus, the buyer may not require performance if he has chosen to reduce the price or avoid the contract.[31]

The question whether a claim for damages would be an inconsistent remedy, depriving the buyer of the right to require performance gives rise to some doubt. What is certain is that, under the Convention, the buyer is not deprived of his right to claim damages by exercising his right to claim performance (Art. 45(2)); as mentioned above, the right to claim damages essentially supplements the buyer's right to require performance. But is the converse necessarily true, i.e. is the buyer not deprived of his right to require performance by claiming damages? The Convention does not make the position clear.

Koskinen submits in this respect that claiming damages is not generally inconsistent with the remedy of specific performance, due to the provision of Art. 45(2). However, the buyer may lose his right to require performance if he has, without avoiding the contract, claimed damages for failure to perform or defective performance of some other obligation. Of the essence is the point of time when the buyer becomes bound by his damages claim. Such point of time must be decided in conformity with general principles of good faith. If the buyer has only claimed for damages and the seller has expressly or impliedly indicated his agreement to the buyer's damages claim, the buyer may lose his right to subsequently require the seller to perform his obligations, because such a further requirement to perform could constitute an inconsistent requirement especially if the seller has had reason to rely on the buyer's notification of a damages claim. On the other hand the buyer may, in addition to a requirement of specific performance, claim for damages by the seller, provided that the buyer makes it clear to the seller that such requirements are made simultaneously.[32] Jafarzadeh notes from another perspective that "a distinction must be drawn between the case of a claim for damages for late delivery and that of non-delivery. Where the buyer has claimed damages for delay in delivery he would not be pursuing a remedy 'inconsistent' with that of requiring performance, while a claim for damages for non-delivery would be inconsistent with requiring performance, since such a claim for damages can only be brought 'If the contract is avoided'."[33]

In sum, "inconsistent remedies include: (1) avoidance of the contract under articles 26, 49, or 81; (2) reduction of the contract price under article 50; and (3) a claim for damages based on the market-contract price differential under article 74."[34] Absent resort to such remedies, Art. 46(1) imposes no limits on the buyer's right to specific performance within its text. The reason is apparently to impress upon the seller the importance of his or her obligations. The seller must rely on the buyer's actions. It is expressly mentioned in the Secretariat Commentary: "Subject to the rule in paragraph (2) relating to the delivery of substitute goods, [and the rules on repair contained in paragraph (3) that was added to article 46 of the Official Text], this article does not allow the seller to refuse to perform on the grounds that the non-conformity was not substantial or that performance of the contract would cost the seller more than it would benefit the buyer. The choice is that of the buyer."[35]

3.2.3 Right to Demand Cure: Arts. 46(2) and 46(3)

3.2.3.1 In general

The general right to specific performance is augmented in Art. 46 by two more specific provisions which deal with the right to require substitute goods or repair of the goods. Both of these instances deal with situations where there has been performance in fact, but where the performance does not conform with the provisions and requirements of the contract.[36] Thus, Arts. 46(2) and 46(3) contemplate seller's delivery of non-conforming goods and the buyer requiring substitute goods, or repair of defective goods.

The delivery of substitute goods under Art. 46(2) and the right to demand repair under Art. 46(3) are, of course, significant above all in regard to non-conforming or defective goods. Evaluation of the non-conformity is to be made pursuant to Art. 35.[37] As for the scope of the term non-conformity, Enderlein & Maskow state: "Non-conformity of goods not only comprises defective quality and deficiencies in quantity but also wrong deliveries (c. Article 35). Goods do not conform with the contract when they are not free from third party rights or claims (c. Articles 41 and 42; [...])."[38] Thus, even cases of defects in title seem to be covered under Arts. 46(2) and Art. 46(3). However, neither Art. 46(2) nor Art. 46(3) is entirely clear at this point. Also, it is said that the nature of the goods plays here an important role: "If the goods, which are burdened with a third party claim, are generic, the buyer has generally a right to require the seller to re-deliver substitute goods. And, accordingly, if the goods are specific and the seller cannot 'buy himself out' of such a third party right, a right to require specific performance would anyway seem to be impossible."[39]

As indicated above, the right of the buyer to demand that the seller cure the non-conforming delivery may be exercised in the form of requiring him to tender substitute goods (Art. 46(2)) or to repair the defect in the goods (Art. 46(3)). It is to be noted that although the language of Arts. 46(2) and (3) shows that the remedies provided under these two sub-paragraphs are separate remedies, they are not to be regarded as alternatives but can both be resorted to in the same case. Thus, it is possible for a buyer to request both substitute goods and the repair of goods depending on the circumstances. For instance, the seller may only be able to supply a portion of replacement goods but be in a position to repair the remainder of the defective goods.[40]

However, as to be demonstrated below, when the non-conformity of goods does not amount to fundamental breach and repair is not reasonable, the buyer has the right to damages or price reduction, but has no right for performance at the expense of the debtor under Art. 46.

3.2.3.2 Delivery of substitute goods: Art. 46(2)

According to para. (2) of Art. 46, the buyer can require delivery of substitute goods, if the seller delivers goods that do not conform with the contract and the non-conformity constitutes a fundamental breach.

As for the application and purpose of Art. 46(2), Koskinen states: "The said paragraph governs therefore the scope of specific performance when the seller has delivered goods but they do not conform to the contract made between the parties. By delivery of substitute goods is meant that defective goods have been delivered and due to the defectiveness a second delivery is made to replace the first delivery. The situation where buyer rejects defective goods before delivery and demands a new conforming delivery is governed, as a matter of fact, by Article 46(1) and not by Article 46(2). Such a situation shall, consequently, be evaluated under Article 46(1). The buyer's right to demand re-delivery of substitute goods reflects further the CISG's aim to respect the pacta sunt servanda principle. The buyer is given the possibility to rely on the seller's promise and require him to re-deliver substitute goods and consequently perform as originally agreed between the parties."[41]

However, one particular situation is to be noted here: Whether can the buyer of specific goods require the seller to deliver substitute goods on the basis of para. (2) of Art. 46? Since under a contract for specific goods the seller has not undertaken any duty other than to deliver the particular goods, it seems that requiring him to deliver substitute goods would be contrary to the mutual agreement of the contracting parties. Koskinen confirms: "When applying Article 46(2), as regards conformity of goods, it is important to separate generic and specific goods. If the contract made between the parties consists of generic goods, it follows directly from Article 46(1) that the buyer is entitled to require the seller to perform as agreed in case of non-conformity, and accordingly require re-delivery of substitute goods under Article 46(2). Therefore, the precondition of an absence of resorting to an inconsistent remedy must also exist. When, on the other hand, the contract consists of specific goods, a requirement of re-delivery of substitute goods seems to be irrelevant as the nature of the goods makes such re-delivery impossible, de facto. Consequently, the buyer would only have a right to require repair under paragraph (3) of Article 46 or claim damages."[42]

Clearly, Art. 46(2) governs the scope of specific performance when the seller has delivered goods but they do not conform to the contract made between the parties. However, the right to require re-delivery of substitute goods under Art. 46(2) is expressly limited by two provisions, one of which is that the non-conformity must amount to a fundamental breach (for criteria in determining what constitutes a fundamental breach, see Chapter 8). Jafarzadeh submits that "since it could be expected that the cost of shipping a second lot of goods to the buyer and of disposing of the non-conforming goods already delivered might be considerably greater than the buyer's loss from having non-conforming goods, the Convention adopts the approach that a buyer will be entitled to resort to require the seller to deliver replacement goods only where the non-conformity is serious enough to constitute a 'fundamental breach'. Accordingly, relatively trivial defects do not justify a claim for substitute delivery, though in appropriate cases they may entitle the buyer to require the seller to remedy the lack of conformity by repair (Art. 46(3))."[43]

In this respect, Enderlein & Maskow confirm as: "Under the CISG, substitute goods can be requested by the buyer only when the non-conformity of the goods constitutes a fundamental breach of contract; hence not in the case of minor defects as was the case under ULIS. This is in line with Article 49 according to which avoidance of a contract (at first) can only be requested if a fundamental breach of contract is committed, for the economic consequences of a delivery of substitute goods may be the same for the seller as in the case of an avoided contract (O.R. 337). [...] The economic consequences could even surpass those of an avoidance of contract because the additional expenses incurred and the risks involved in transporting substitute goods are to be born by the seller [...]."[44]

In sum, "[p]aragraph (2) of Article 46 gives the buyer the right to require the delivery of substitute goods when the goods delivered are not in conformity with the contract, and this non-conformity constitutes a fundamental breach. Requiring delivery of substitute goods is one form of specific performance. This remedy is limited by the conditions of the breach. [...] When the breach is not fundamental, the buyer has recourse to repair, price reduction or damages."[45]Of course, even in the case of a fundamental breach of contract, the buyer can decide in favour of repair at his option.[46] On the other hand, since the right to avoid is similarly preconditioned with the requirement of fundamental breach. Therefore, the buyer has a possibility to choose between avoidance of the contract or requirement of re-delivery of substitute goods.[47] In any event, if the buyer does require the seller to deliver substitute goods, he must be prepared to return the unsatisfactory goods to the seller.[48]

3.2.3.3 Right to repair: Art. 46(3)

The third aspect of the buyer's right to specific performance under the CISG, is his right to require repair under Art. 46(3) of delivered but defective goods. Unlike the right to require re-delivery of substitute goods, it generally applies as well to specific as to generic goods. "Naturally, if specific goods are burdened with a third party right, there is, however, no right to require repair in case the seller cannot buy the third party out."[49]

However, like the buyer's right to re-delivery of substitute goods under Art. 46(2) the right to demand repair is also subject to Art. 35, defining non-conformity of goods. "When determining non-conformity of goods pursuant to Article 35, and as regards any third-party rights to the delivered goods, it is of importance to decide whether the breach occured is fundamental. If the breach is one of a fundamental nature, the buyer has naturally a right to avoid the contract or to require delivery of substitute goods. If, however, the requirements of a fundamental breach are not met, the buyer would nevertheless have a right to require repair."[50] Clearly, the remedy to require repair is not restricted by a requirement of fundamental breach. As stated above, the reason delivery of substitute goods is available only in cases of fundamental breach is to avoid hardship to the seller, since the delivery of certain goods, and especially heavy machinery, is very costly. The seller must bear the cost of transporting the conforming goods to the buyer and the cost of transporting the non-conforming goods back to his place of business. Alternatively, he may resell the non-conforming goods, which will likely be difficult if he does not have the necessary network in a foreign market. Another burden may arise when the delivered goods have perished as result of improper storage. For all these reasons, it is unfair to put such a heavy burden on the seller when the non-conformity is negligible. Repair in such cases will satisfy the buyer without causing unnecessary hardship to the seller.

According to the wide language of the provision the buyer will have a general right to require the seller to cure any form of lack of conformity by way of repair except in cases where it is unreasonable, having regard to all the circumstances. "The flexible language of the provision is designed to encourage a reasonable and flexible approach to cases where the buyer can readily make repair, particularly when the seller's facilities for repair are in a distant country. Accordingly, a buyer will not be entitled to require the seller to make good minor defects which can readily be repaired by him."[51]

Although the right to require repair can be regarded as a more lenient right than the right to demand substitute goods, it is also limited by a provision recited in the Article itself, as follows: "... unless this is unreasonable having regard to all the circumstances." Thus, the right to repair is limited to situations where it is reasonable to repair under the circumstances. In this point, it reflects the same concern for not causing hardship to the seller is the underpinning of the provision that governs the right to repair. In any event, the buyer can require repair only if it is reasonable to do so. The reasonableness of the demand is judged according to the circumstances surrounding the contract and the conflicting interests of the parties. Unreasonable in this context means unreasonable to the seller and it does not depend on the character of the breach, but rather on the nature of the goods delivered and all the other circumstances. The nature of some goods is such as to exclude repair at all, e.g. in the case of agricultural products. More generally, a claim for repair may be unreasonable if there is no reasonable ratio between the costs involved and the price of the goods or if the seller is a dealer who does not have the means for repair[ 52] Specifically speaking, of particular importance are the extra costs that the seller would have to suffer as a result of the repair. If such cost would be unreasonably high especially compared to a delivery of substitute goods, the precondition of Art. 46(3) is likely to be fulfilled.[53] This means that when repair by the seller is very onerous, the buyer cannot claim repair.

When judging what is unreasonable, all circumstances have to be taken into account. When it comes to all the other circumstances, regard must be given to both the seller's and the buyer's interests. Under Art. 46(3) it should also be noted that some minor defects in the goods could be repaired more readily by the buyer, especially when the seller's facilities for repair are in a distant country. At that, the availability of qualified repair locally is an important point to be evaluated. Where qualified personnel are particularly scarce, as may be the case in some developing countries, the seller's inconvenience may have to give way to the interests of the buyer. On the other hand, it is doubtful whether the (little) interest of the buyer in performance in conformity with the contract must be considered. As a matter of fact, there can be no doubt. The requirement of repair is a right and not an obligation of the buyer. When the buyer is not interested in having goods repaired, he will not require it. The little interest of the buyer could, however, constitute a problem of Art. 48 when the seller of his own accord offers repair.[54] Furthermore, whether the repair is unreasonable may also depend on technical difficulties. Repair could even be impossible due to technical reasons (this could, however, constitute a fundamental breach of contract).

In any event, the costs as a consequence of repair must be born by the seller, as is the case with delivery of substitute goods. When the repair is not reasonable, the buyer will be entitled to damages or a reduction in price. "It can be concluded that the buyer's right to require the seller to repair non-conformities, not amounting to a fundamental breach, in delivered goods supplements the CISG's basic principle to respect the contract made between the parties. Consequently, the pacta sunt servanda principle and the thinking that the most natural remedy for a breach of contract is to require the seller to perform as originally agreed upon between the parties, is supported. Such right is limited in exceptional circumstances and to 'avoid economic waste where the seller has substantionally performed or where the cost of repair exceeds the benefit to be gained.'"[55]

3.2.3.4 Time limit restriction

As discussed above, when applying for replacement goods, what the buyer is required to prove is that the seller's non-conforming delivery is serious enough to constitute a "fundamental breach" (Art. 46(2)). In contrast, when he applies for an order requiring the seller to repair the lack of conformity he should only show that his request is not "unreasonable having regard to all the circumstances" (Art. 46(3)). Nonetheless, another limitation of the same is both found in Arts. 46(2) and 46(3). As provided in paras. (2) and (3) of Art. 46, the request for substitute goods or repair must be made "either in conjunction with notice given under article 39 or within a reasonable time thereafter".

Thus, the Convention provides a further restriction which is applicable to the remedies prescribed both under Arts. 46(2) and (3). Under this requirement the buyer must request supply of substitute goods or repair from the seller in conjunction with notice he has to give under Art. 39 so as to inform the seller of the lack of conformity. If the buyer does not request cure at the very moment of giving notice, he has to do so within a reasonable time after he has given notice to the seller that the goods delivered do not correspond to the contract. Failure to request the remedy either in conjunction with the notice given under Art. 39 or within a reasonable time thereafter would deprive him of the right to require the seller to deliver substitute goods or repair the defects. "The time limitation serves the interests of both parties. It is important for the buyer to receive the goods within a certain period of time, otherwise the receipt of the goods will have no meaning for him. As for the seller, he is protected from the constant threat of claims."[56]

Although reasonable time, as provided by Art. 46(2)/46(3), is not defined further, most of the commentators believe that necessities of international trade seem to set a maximum limit of two years, as defined in Art. 39(2). For instance, Jafarzadeh states: "On this provision, in the case of latent defects the buyer may be entitled to demand that the seller cure the lack of conformity up to two years from the date in which the goods are actually handed over to him."[57] Enderlein & Maskow also believe that: "What is appropriate here is therefore to fix a short time and by no means another two-year period as allowed for under Article 39, paragraph 2."[58]

3.2.3.5 A summary

Having accepted that the buyer has a right to require the seller to perform what he has undertaken under the contract, it is suggested that the Convention provisions giving the buyer a right to require the seller to cure his non-conforming delivery by delivery of substitute goods and/or repair are consistent with general principles and the authorities authorising the buyer to obtain specific performance.[59]

However, it was suggested that in giving the buyer a right to demand cure, a distinction should be made between the right to demand replacement goods and to demand cure by repair. The right to demand substitute goods should be given only where the lack of conformity results in sufficiently serious consequences. But the right to demand cure by repair is to be available unless it is unreasonable having regard to all the circumstances. Nonetheless, the concern for these two express restrictions is of the same and they are both designed to avoid causing unnecessary hardship to the seller. However, it is submitted from the practical perspective that the buyer should not be given a right to demand delivery of replacement goods where the contract was for sale of specific goods, although he may be entitled to demand cure by repair. Demanding delivery of substitute goods should be available only where the contract is for the sale of unascertained goods.

Strangely, neither Art. 46(2) nor 46(3) refers to inconsistent remedies. However, it appears that the choice of an inconsistent remedy does preclude the buyer from later demanding repair or substitute goods. Art. 81 dictates this result by providing that avoidance of the contract releases both the buyer and the seller from their obligations under the contract. Essentially, the avoiding buyer releases the seller from the obligation to provide repair or substitute goods.[60] Furthermore, both provisions expressly require that the request for repair or substitute goods be given within the time limit. "If the buyer does not through immediate notice request a delivery of substitute goods or repair, he has to do so within a reasonable time. The CISG is based on the assumption that this rule serves the interests of both parties. Usually the buyer is interested in receiving conform[ing] goods as quickly as possible, and the seller wants to know the claims of the buyer. It should be avoided in any case that the buyer can speculate on rising market prices."[61]

After all above, although according to the wide language of Art. 46 the buyer will have a general right to performance for non-delivery and specific rights to require the seller to cure any form of lack of conformity by way of substitute goods or repair, the buyer who contemplates resorting to these remedies obviously takes the risk that, if the matter comes to litigation, the court may hold that inconsistent remedies exist or to require repair is unreasonable or that the lack of conformity is not sufficiently serious to constitute a fundamental breach. Accordingly, although specific performance under the Convention may be regarded as the logically prior remedy, in practice the buyer would likely prefer the certainty and simplicity of damages, unless repair or replacement other forms of performance is very easy and economical for the buyer to obtain otherwise.

3.3 SELLER'S RIGHT TO SPECIFIC PERFORMANCE: CISG ART. 62

3.3.1 Rationale of Art. 62

Much of what was said above of the buyer's right to compel performance applies to the seller's right to compel performance under Art. 62. Because there are fewer buyer's obligations, Art. 62 is conceptually simpler than Art. 46.[62] Art. 62 sets forth in broad terms: "The seller may require the buyer to pay the price, take delivery or perform his other obligations, unless the seller has resorted to a remedy which is inconsistent with this requirement."

Like Art. 46, Art. 62 recognizes that the seller's primary concern is to obtain performance, it thus also represents the pacta sunt servanda principle. "The rationale behind Article 62 is the same as Article 46: to promote respect for the agreement and to ensure there is adequate compensation. Damages may take time to be assessed and may be inadequate because they do not compensate for certain expenses suffered by the innocent party. Another rationale behind Article 62 is the difficult task of the seller to dispose of goods when the buyer refuses to take delivery. [...] The right of the seller to enforce performance eliminates the expense and delay of seeking another buyer or negotiating a substitute transaction. This is an especially important right in cases where the goods have reached the destination port and the buyer refuses to take delivery. In such a situation the seller may not be able to resell the goods in that market because it may be a foreign market, unknown to the seller. In this way, specific performance provides a more appropriate form of compensation than damages because it gives a seller exactly what he expected from the contract. "[63]

3.3.2 General Application

It follows from the plain language of Art. 62 that the seller may require the performance by the buyer of any obligation such as payment of price, taking delivery or any other obligation that arises from the contract. However, it is said that this is simply what may be demanded of the buyer, "the addition of a provision allowing specific performance in favour of the seller is unlikely to have a significant practical effect except in exceptional circumstances."[64]

Knapp states that the seller's right to performance "contrasts with other remedies provided in Article 61 because it does not create any new right to the seller or a new obligation of the buyer. It is simply a pursuance of their initial rights and obligations under the contract. Hence, the intention of Article 62 is to emphasize that the mere non-performance by the buyer of his obligations does not cause an ipso facto avoidance of the contract and that the contractual obligations continue in force even if not performed in due time."[65] Nonetheless, Treitel combined several of the unclear points to illustrate a situation where it would be appropriate for a seller to seek specific performance. A seller could have contracted to supply all of the requirements of the buyer's manufacturing business over an extended period of time (therefore the goods are neither specific nor necessarily ascertained) for a contracted price. The seller may have made a significant initial investment and the market price might vary in such a way as to make any damage award speculative. Under these circumstances, the seller has some justification to seek specific performance.[66]

Art. 62 is limited, similarly as in Art. 46(1), to situations where the seller has not resorted to an inconsistent remedy with the right to require performance. Consequently, if the seller declares the contract avoided under Art. 64 he loses the right to require performance of the buyer's obligations.[67] In this respect, it is to be noted that the ground for declaring the contract avoided is irrelevant: It is the remedy, not the reason for resorting to it, that is inconsistent with a requirement for, e.g., taking delivery.[68] Knapp further notes that the seller's election of Nachfrist avoidance procedure (Article 63) is inconsistent only so long as the Nachfrist period lasts.[69] On the other hand, the exercise of the right to obtain performance does not exclude transition to other rights which are also inconsistent with it when the right to require performance does not lead to the intended result.[70] In particular, claiming damages is not excluded by requiring performance as it is expressly provided in Art. 61(2) that "[t]he seller is not deprived of any right he may have to claim damages by exercising his right to other remedies."

3.3.3 Potential Problems

The biggest potential problem with Art. 62 is what happens when a seller tries to force a buyer to accept goods he or she does not want, or to pay for goods that have been delivered but not accepted. It is clear that if the buyer has received conforming goods he is under an obligation to perform his obligations under the contract and pay the price for the goods. But can the seller require the buyer to pay the price where the buyer has not received the goods or has not accepted them and does not even wish to receive the goods? Art. 62 does not give a clear answer to this question.

In this respect, Sevón submits: "If payment is not made in time, the seller may require the buyer to pay the price. Such a requirement may be presented irrespective of an extension of the delay. Even if the delay amounts to a fundamental breach of contract, the seller may choose to require payment. He may do so even if he has the right to sell the goods under the provisions on preservation of the goods in Article 88. If he chooses to sell the goods or is under an obligation to do so, thereafter he may claim the balance between the price and the proceeds from the sale."[71] This indicates strongly an interpretation that the seller may require the buyer to pay the price even where the seller has not received the goods. On the other hand, as Art. 62 expressly provides that the seller may require the buyer to take delivery, it is obvious that a buyer who is unwilling to receive the goods is still obliged to perform and take the delivery. "If the buyer has neither paid the price nor taken delivery, the remedy may be used together with, or separately from, a requirement for payment. Situations can be envisaged where the seller is more anxious to receive payment than to force the buyer to take delivery of the goods. He may therefore present these requirements simultaneously or separately."[72]

However, the right of the seller to require performance by the buyer is limited by Art. 28, as is discussed above. Thus, the domestic rules in this question may be decisive and lead to another solution, which follows from the relation between Arts. 62 and 28 on specific performance. "In considering the CISG provisions that govern the right to compel payment of price as one type of specific performance, the CISG is markedly different from some domestic laws. In certain domestic systems, the right to compel payment of the price when the buyer has accepted the goods is presented as a right to collect a debt. This right to collect, however, does not fall under the rules regulating specific performance. Another difference between domestic systems and the CISG is that certain domestic legal systems provide that the seller cannot force the buyer to accept the goods unless he is unable to resell them after reasonable effort. The CISG gives the seller the right to compel acceptance without the aforementioned condition."[73]

A further point, as regards the seller's right to require performance by the buyer, is of relevance. According to Art. 85, if the buyer is in delay in taking delivery of the goods the seller must take such steps as are reasonable in the circumstances to preserve them. Consequently, if the seller is in possession of the goods and the buyer has failed to take the delivery, Art. 85 sets forth an obligation to the seller to preserve the goods. Furthermore, Art. 85 leads to another important provision, i.e. the provision in Art. 88(2), which states that: "If the goods are subject to rapid deterioration or their preservation would involve unreasonable expense, a party who is bound to preserve the goods in accordance with article 85 or 86 must take reasonable measures to sell them." Therefore, although Art. 62 does not directly obligate the seller to sell the goods in case the buyer is in breach, such obligation may still arise on the seller.[74] It is said that that Arts. 85 and 88 will eventually force a seller into resale when the buyer is especially reluctant to take the goods.[75]

Given the potential problems concerning the seller's right to specific performance under Art. 62, it is recommended by Enderlein & Maskow: "When the buyer neither pays nor takes delivery of the goods, the seller will, just to mention the most important options, do the following [...]: Where he is still in possession of the goods he may, to the extent that the relevant conditions are given, resell them by way of self-help or emergency sale and require the buyer to pay the costs and damages (lower sales price) (Articles 85, 87 and above all Article 88; Article 74 fol). He can also, without setting a Nachfrist -- however, a Nachfrist is more effective so as not to have to prove the fundamentality of the breach of contract -- make the contract void (Article 63 fol) and claim damages, typically after a substitute sale."[76]

3.4 UNIFORM REMEDY IN UNIDROIT PRINCIPLES / PECL

3.4.1 Introduction

While some may argue that parties to a CISG contract do not generally seek specific performance due to the problems and difficulties in execution, and as a commercial solution rather claims damages, the specific performance rule is an important rule, particularly in international trade. The most natural remedy for a breach of contract is the right to require performance, reflecting the importance of the contract made between the parties.[77]

However, it must be remembered that, in situations, where the CISG will be the applicable law of the dispute, Art. 28 may cause significant problems concerning the possibilities to predict whether the court or arbitral tribunal will enter a judgment for specific performance if the remedy is sought. It follows from the discussion above that specific performance under the CISC scheme leads to disparate results in different forum courts. The reasoning to this is mainly Art. 28, which makes the remedial uniformity uncertain by providing the court the possibility to effectuate specific performance through its own domestic law. It has also been stated that the effect of Art. 28 leads to a risk of forum shopping by the parties and sacrifices the potential benefits of uniformity of remedies. The main reasoning for this is also clear: the basic difference of the common law and civil law systems to approach specific performance.

Therefore, in recent years, there have been several calls for the increased availability of specific performance in all contracts. This assertion is somewhat supported by the examples of the UNIDROIT Principles and the European Principles. As to be demonstrated below, the UPICC/PECL has been more successful in introducing a more coherent and certain scheme regarding specific performance than that in the CISG, by characterizing the specific performance as a remedy not falling in court's discretionary. Both the UNIDROIT Principles and the PECL establish a clear right to specific performance, respectively in Arts. 7.2.1 through 7.2.5 UPICC and in Arts. 9:101 through 9:103 PECL. The two Principles take generally the same approach and make furthermore a clear distinction between monetary obligations and non-monetary obligations, providing, however, that the right to perform for both is the starting point.

3.4.2 Performance of Monetary Obligation

3.4.2.1 Money due generally recoverable

In accordance with the general principle of pacta sunt servanda, Continental Law allows a creditor to require performance of a contractual obligation to pay money. Also according to Common Law an action for an agreed sum is often available, although it is limited in certain respects: it may be brought only when the price has been "earned" by performance, e.g. the performance of a service or the passing of property in the goods.[78] This is followed under Art. 7.2.1 UPICC, which reads under the heading "Performance of Monetary Obligation": "Where a party who is obliged to pay money does not do so, the other party may require payment." It is also the main rule in the PECL, which stipulates in Art. 9:101(1): "The creditor is entitled to recover money which is due."

As a rule it is always possible to enforce monetary obligations. This is the basis of the rule in PECL Art. 9:101(1). A monetary obligation for the purposes of this rule is every obligation to make a payment of money, regardless of the form of payment or the currency. This includes even a secondary obligation, such as the payment of interest or of a fixed sum of money as damages. But in each case, the monetary obligation must have been earned by the creditor, i.e. it must be due.[79]

Also, Art. 7.2.1 UPICC reflects the generally accepted principle that payment of money which is due under a contractual obligation can always be demanded and, if the demand is not met, enforced by legal action before a court. The term "require" is used in Art. 7.2.1 UPICC to cover both the demand addressed to the other party and the enforcement, whenever necessary, of such a demand by a court. The article applies irrespective of the currency in which payment is due or may be made. In other words, the right of the obligee to require payment extends also to cases of payment in a foreign currency.[80]

3.4.2.2 Money not yet due

Most continental systems do not recognise restrictions upon a claim for payment of the price. However, the principle that monetary obligations always can be enforced is not quite so certain where the monetary obligation has not yet been earned by the creditor's own performance and it is clear that the debtor will refuse to receive the creditor's future performance.[81]

This is the situation regulated by Art. 9:101(2) PECL (no similar rule is found in the UNIDROIT Principles), which reads correspondingly: "Where the creditor has not yet performed its obligation and it is clear that the debtor will be unwilling to receive performance, the creditor may nonetheless proceed with its performance and may recover any sum due under the contract unless: (a) it could have made a reasonable substitute transaction without significant effort or expense; or (b) performance would be unreasonable in the circumstances." The basic approach underlying the rules of PECL Art. 9:101(2) is obvious. Under the principle of pacta sunt servanda the creditor is entitled to make its performance and thereby to earn the price for it. The debtor's unwillingness to receive the creditor's performance is therefore, as a rule, irrelevant. However, according to sub-paras. (a) and (b) of PECL Art. 9:101(2) there are two situations where the above principle does not apply:[82]

(a) Resale possible

The restriction in Art. 9:101(2)(a) has a precursor in ULIS Art. 61(2), which restricts the seller's right to require payment of the price where a resale was in conformity with usage and reasonably possible. In that case the seller may only claim damages. The CISG however, has not imposed this restriction on the seller's right to perform and claim the price. Under the CISG, it follows from the fact that Art. 62 has dropped this restriction, that the seller is bound to the contract; it is therefore obliged to tender performance to the buyer even if the latter is unwilling to receive performance, and may claim the purchase price.[83]

It is now reintroduced in the PECL. The underlying consideration is that a debtor should not have to pay for a performance which he does not want in cases where the creditor can easily make a cover transaction or in other cases where it would be unreasonable to oblige the debtor to pay the price. It is clarified in the Official Comment on PECL Art. 9:101(2) that: A creditor which can make a reasonable cover transaction without involving itself in significant trouble or expense is not entitled to continue with performance against the debtor's wishes and cannot demand payment of the price for it. The creditor should terminate the contract and either make a cover transaction, thus becoming entitled to invoke Art. 9:506, or simply claim damages without making any cover transaction (see Art. 9:507 and Comment thereon). The debtor cannot invoke sub-paragraph (a) of paragraph (2) unless two conditions are satisfied. The first is that the creditor can make a cover transaction on reasonable terms because there is a market for its performance or some other way of arranging a substitute transaction. The second is that the cover transaction does not substantially burden the creditor with effort or expense. In certain situations the creditor may even be bound by commercial usage to effect a cover transaction.[84] Such situations are noted in the Official Comment on Art. 7.2.1 UPICC, which states: "Exceptionally, the right to require payment of the price of the goods or services to be delivered or rendered may be excluded. This is in particular the case where a usage requires a seller to resell goods which are neither accepted nor paid for by the buyer."[85]

One should note, also, whenever the creditor makes, or would have been obliged to make, a cover transaction, the creditor may claim from the debtor the difference between the contract price and the cover price as damages under PECL Art. 9:506 or UPICC Art. 7.4.5.

(b) Performance unreasonable

A very different situation is dealt with in PECL Art. 9:101(2)(b): Here performance by the creditor would be unreasonable. A typical example is where, before performance has begun, the debtor makes it clear that it no longer wants it. This situation can arise, for example, in construction contracts, other contracts for work and especially long term contracts. An instance which would not involve unreasonable expenditure is where the creditor must continue to employ its workforce.[86]

It is said that Art. 9:101(2)(b) is based on considerations to be found in experience gained from ENGLISH, IRISH and SCOTTISH practice. Once an action for the price was available there was no requirement that it must be reasonable to pursue it rather than to enter a cover transaction. This gave rise to difficulties when a party had announced in advance that it no longer required a service but the other performed it nonetheless and then sued for the price: see White & Carter (Councils) Ltd. v. McGregor [1962] A.C. 413 (H.L.). The rule in contracts other than sale of goods now appears to be that if at the date of the repudiation the innocent party has not yet performed his part of the contract, he may complete his performance and claim the price only if he has a legitimate interest in doing so: see Attica Sea Carriers Corp. v. Ferrostaal Poseidon Bulk Reederei GmbH [1976] 1 Lloyds' Rep. 250 (C.A.). If he has no legitimate interest in performing he is confined to an action for damages, and his recovery will be limited by the principle of mitigation. SCOTTISH law is the same - White & Carter (above) is a Scottish case. The guilty party has the onus to show that the innocent party has no legitimate interest in performing (Scotland: Salaried Staff London Loan Co. Ltd. v. Swears & Wells Ltd. 1985 S.L.T. 326, I.H.).[87]

As demonstrated above, the feature common to the two cases dealt with in PECL Art. 9:101(2) is that the debtor is at risk of having forced upon it a performance which it no longer wants. The burden of proving that the existence of one of the exceptions applies is on the debtor. However, none of the two exceptions laid down in PECL Art. 9:101(2) affects the right of a beneficiary under a letter of credit to claim payment from the bank. This is because letters of credit are treated as independent of the underlying contract.[88] One of the consequences that arise if either one of the exceptions applies, is spelt out in Art. 9:101(2): the creditor may not demand the money owed under the contract for the counter-performance, in particular the price. However, damages for non-performance may be claimed.[89]

3.4.3 Performance of Non-monetary Obligation: In General

In accordance with the general principle of the binding character of the contract, each party should as a rule be entitled to require performance by the other party not only of monetary, but also of non-monetary obligations, assumed by that party. While this is not controversial in civil law countries, common law systems allow enforcement of non-monetary obligations only in special circumstances.[90]

With respect to non-monetary obligations, traditionally there are important differences between the common law and civil law, at least in theory. In the common law specific performance is a discretionary remedy that will only be granted if damages are inadequate. In the civil law countries the aggrieved party's right to performance is generally recognized. In the German legal family this is "axiomatic".[91] However, one should note that the basic differences between common law and civil law are of theoretical rather than practical importance.[92] As stated by Lando: "However, civil law makes exceptions too. On the Continent specific performance is not available when performance has become impossible or unlawful. In several civil- and common-law countries, specific performance will also be refused if it would be unreasonable to grant it, if, for instance, the cost of raising a ship which has sunk after it was sold would considerably exceed the value of the ship. Nor is performance available for contracts which consist in the provision of services or work of a personal character, and in several countries a performance which depends upon a personal relationship such as an agreement to establish or continue a partnership; in such a case, the defaulting partner cannot be legally compelled to play an active role in the partnership. These exceptions show that the difference between civil and common law is ultimately far smaller than might appear at first sight. Furthermore, even in the civil-law countries an aggrieved party will generally pursue an action for specific performance only if he has a particular interest in performance which damages would not satisfy."[93]

With regard to the performance of non-monetary obligations, it is recalled that CISG Art. 46 gives the buyer generally a right to performance. Following the basic approach of CISG Art. 46, UPICC Art. 7.2.2, subject to certain qualifications included in sub-paras. (a)-(e), adopts the principle of specific performance: "Where a party who owes an obligation other than one to pay money does not perform, the other party may require performance". It is said that the principle is particularly important with respect to contracts other than sales contracts. Unlike the obligation to deliver something, contractual obligations to do something or to abstain from doing something can often be performed only by the other contracting party itself. In such cases the only way of obtaining performance from a party who is unwilling to perform is by enforcement.[94] Similarly, PECL Art. 9:102(1) generally stipulates that: "The aggrieved party is entitled to specific performance of an obligation other than one to pay money, including the remedying of a defective performance."

Due to lack of a better, generally understood term, the common law phrase "specific performance" is used in PECL Art. 9:102(1). It is said that PECL Art. 9:102 covers all obligations which are not covered by Art. 9:101, e.g. to do or not to do an act, to make a declaration or to deliver something. In some cases a court order itself will act as a substitute for performance by the non-performing party. Specifically speaking, it applies to three situations: first, if no performance at all is tendered by the non-performing party; second, where tender of a non-conforming performance has been made but has been validly rejected by the aggrieved party; third, where the performance is defective but has not been rejected.Furthermore, the Official Comment on PECL Art. 9:102(1) states that the aggrieved party has not only a substantive right to demand the other party's performance as spelt out in the contract. The aggrieved party has also a remedy to enforce this right, e.g. by applying for an order or decision of the court.[95] In this point, the Official Comment on UNIDROIT Principles also clearly states: The term "require" is used in Art. 7.2.1 [as well as in Art. 7.2.2] to cover both the demand addressed to the other party and the enforcement whenever necessary, of such a demand by a court.[96]

However, the right to performance of non-monetary obligations under UPICC Art. 7.2.2 or under PECL Art. 9:102 is subject to several exceptions, which will focused on in the following discussions.

3.4.4 Exceptions to Performance of Non-monetary Obligation

3.4.4.1 The principle and exceptions

Whether an aggrieved party should be entitled to require performance of a non-monetary obligation, is very controversial. The common law treats specific performance as an exceptional remedy whilst the civil law regards it as an ordinary remedy.[97]

As stated previously, in common law countries specific performance is a discretionary remedy. Even under the uniform sales laws such as the CISG, the remedy of specific performance is at the discretionary of the courts, because CISG Art. 28 provides that courts are not bound to decree performance if they would not do so according to their national law. To the contrary, under the UNIDROIT Principles specific performance is not a discretionary remedy, i.e. a court must order performance, unless one of the exceptions laid down in Art. 7.2.2 applies.[98] Similarly, by contrast with the CISG, under the PECL the aggrieved party also has a substantive right to demand and to enforce performance of a non-monetary obligation. Granting an order for performance thus is not in the discretion of the court; the court is bound to grant the remedy, unless the exceptions of para. (2) or (3) of Art. 9:102 apply. National courts should grant performance even in cases where they are not accustomed to do so under their national law.[99]

Nonetheless, each of the two Principles has sought a compromise under UPICC Art. 7.2.2 or PECL Art. 9:102: a claim for performance is admitted in general but excluded in several special situations. A general right to performance has several advantages. Firstly, through specific relief the creditor obtains as far as possible what is due to it under the contract; secondly, difficulties in assessing damages are avoided; thirdly, the binding force of contractual obligations is stressed. A right to performance is particularly useful in cases of unique objects and in times of scarcity. On the other hand, comparative research of the laws and especially commercial practices demonstrate that even in the Civil Law countries the principle of performance must be limited. Generally, the limitations on the principle of performance are variously based upon natural, legal and commercial considerations. In all these cases other remedies, especially damages and, in appropriate cases, termination, are more adequate remedies for the aggrieved party.[100]

This compromise forms the basis of the formula adopted in UPICC Art. 7.2.2 or PECL Art. 9:102. It is said that the civil-law countries could have allowed the possibility of restricting specific performance to the situations for which this remedy is needed in practice. The common-law countries could have conceded that in these situations specific performance as a genuine right, rather than a discretionary remedy, is the appropriate solution.[101] One of the consequences that arise from these exceptions provided for in UPICC Art. 7.2.2(a)-(e) or in PECL Art. 9:102(2) and (3) is expressly set out in these rules: performance cannot be demanded by the aggrieved party.

3.4.4.2 Performance impossible

The first exception is impossibility of performance. Specific performance can't be obtained where: under UPICC Art. 7.2.2(a): "performance is impossible in law or in fact"; similarly, under PECL Art. 9:102(2)(a): "performance would be unlawful or impossible". It expresses the rule impossibilium nulla est obligatio. If restricted to the right to performance as such (as distinct from subsidiary remedies), the rule seems to be common to the laws of most legal systems, while CISG Art. 79 (5) appears to be to the contrary (but this is controversial, see the discussion in Chapter 20).

For obvious reasons, there is no right to require performance if it is impossible. This is particularly true in case of factual impossibility, i.e. if some act in fact cannot be done. The same is true if an act is prohibited by law.[102] However, even if the performance itself may be illegal, impossibility does not nullify a contract: other remedies may be available to the aggrieved party.[103] Similarly, specific performance is not available where a third person has acquired priority over the plaintiff to the subject matter of the contract. Nonetheless, if an impossibility is only temporary, enforcement of performance is excluded during that time. Whether or not the impossibility makes the non-performing party liable in damages is irrelevant in this context.[104]

It is to be noted, under the UNIDROIT Principles, that the refusal of a public permission which is required under the applicable domestic law and which affects the validity of the contract renders the contract void (see Art. 6.1.17(1)), with the consequence that the problem of enforceability of the performance cannot arise. When however the refusal merely renders the performance impossible without affecting the validity of the contract (see Art. 6.1.17(2)), sub-para. (a) of UPICC Art. 7.2.2 applies and performance cannot be required.[105]

3.4.4.3 Unreasonable burden

Specific performance will not be ordered if the performance would be quite different to the original obligation, e.g. a lessee which has carelessly burned down the leased premises will not be ordered to re-build them.[106] It is expressly stated that, performance cannot be required if: under UPICC Art. 7.2.2(b): "performance or, where relevant, enforcement is unreasonably burdensome or expensive"; similarly, under PECL Art. 9:102(2)(b): "performance would cause the debtor unreasonable effort or expense".

No precise rule can be stated on when effort or expense is unreasonable. However, considerations as to the reasonableness of the transaction or of the appropriateness of the counter-performance are irrelevant in this context.[107] In exceptional cases, particularly when there has been a drastic change of circumstances after the conclusion of a contract, performance, although still possible, may have become so onerous that it would run counter to the general principle of good faith and fair dealing to require it.[108] However, it is to be noted that this exception is not limited to the kind of drastic changes of circumstances amounting to a case of hardship, which may cause other possible consequences such as renegotiation other than excluding performance (see the discussion in Chapter 21).

It is also to be noted, under UPICC Art. 7.2.2(b), that the words "where relevant, enforcement" take account of the fact that in common law systems it is the courts and not the obligees who supervise the execution of orders for specific performance. As a consequence, in certain cases, especially those involving performances extended in time, courts in those countries refuse specific performance if supervision would impose undue burdens upon courts.[109]

3.4.4.4 Performance from another source available

Many goods and services are of a standard kind, i.e. the same goods or services are offered by many suppliers. If a contract for such staple goods or standard services is not performed, most customers will not wish to waste time and effort extracting the contractual performance from the other party. Instead, they will go into the market, obtain substitute goods or services and claim damages for non-performance.[110] In view of this economic reality specific performance is excluded whenever: under UPICC Art. 7.2.2(c): "the party entitled to performance may reasonably obtain performance from another source"; similarly, under PECL Art. 9:102(2)(d): "the aggrieved party may reasonably obtain performance from another source".

It is said that this exception is a compromise between different basic attitudes of the common law and the civil law. It does not directly copy any national legal order. But it links up with ULIS Arts. 25, 42(1)(c). Under the common law the possibility of a cover transaction is an important consideration for denying specific performance. In continental laws, cover is merely an option for the buyer, but he is not obliged to use it, unless there is a usage to that effect.[111] Under the two Principles, this exception does not introduce any kind of a test of adequacy of damages in the sense that performance could only be required if damages were an inadequate remedy. Rather, this rule should encourage the aggrieved party to choose from among the remedies which would fully compensate it the one which can most simply be obtained. If the aggrieved party chooses to require performance, this will generally create a presumption that this remedy optimally satisfies its needs. Consequently, the non-performing party will have to prove that the aggrieved party can obtain performance from other sources without any prejudice and that therefore it may reasonably be expected to make a cover transaction.[112]

In fact, once the party entitled to performance may reasonably obtain performance from another source, that party may terminate the contract and conclude a replacement transaction. According to practical experience, termination and damages will often satisfy its requirements faster and more easily than enforcement of performance.[113] However, the word "reasonably" indicates that the mere fact that the same performance can be obtained from another source is not in itself sufficient, since the aggrieved party could not in certain circumstances reasonably be expected to have recourse to an alternative supplier.[114] Nonetheless, an aggrieved party may reasonably be expected to obtain performance from other sources, even if the cost is higher than the contract price, but only if the defaulting party is in a position to pay the damages for the difference.[115] If this is not so, a request for performance is not excluded.

3.4.4.5 Performance of an exclusively personal character

With regard to the fourth exception, PECL Art. 9:102(2)(c) excludes enforcement of performance where "the performance consists in the provision of services or work of a personal character or depends upon a personal relationship". It seems that this Article covers two different situations: (1) it excludes a right to require performance of services or work of a personal character; and (2) excludes specific performance where the parties would be forced to enter or to continue a personal relationship.

As for the first alternative, it is said that this rule is based on three considerations: firstly, a judgment ordering performance of personal services or work would be a severe interference with the non-performing party's personal liberty; secondly, services or work which are rendered under pressure will often not be satisfactory for the aggrieved party; and thirdly, it is difficult for a court to control the proper enforcement of its order. The scope of the first alternative depends on the meaning of the term "services or work of a personal character", which does not cover services or work which may be delegated. A provision in the contract that work may not be delegated does not necessarily make the work of a personal character. If the contract does not need the personal attention of the contracting party but could be performed by its employees, the clause prohibiting delegation may be interpreted as preventing only delegation to another enterprise, e.g. a sub-contractor. Services requiring individual scholars of an artistic or scientific nature and services to be rendered in the scope of a confidential and personal relationship are personal services. The signing of a document would not usually constitute service or work within the meaning of this provision. Such an obligation can mostly be enforced since the non-performing party's declaration can be replaced by a court decree. Secondly, PECL Art. 9:102(2)(c) excludes specific performance where the parties would be forced to enter or to continue a personal relationship. It is said that in case of agreements to enter into a partnership, the second alternative applies if and insofar as the partnership presupposes a close personal contact. But as in case of a contract to form a public company, the specific personal element is sometimes lacking; in this case this rule does not prevent the promise being enforced.[116]

While under the UNIDROIT Principles, Art. 7.2.2(d) deals with the fourth exception in a succinct manner, that is to exclude enforcement of performance where "performance is of an exclusively personal character". Indeed, UPICC Art. 7.2.2(d) is based on the same considerations as PECL Art. 9:102(c): Where a performance has an exclusively personal character, enforcement would interfere with the personal freedom of the obligor. Moreover, enforcement of a performance often impairs its quality. The supervision of a very personal performance may also give rise to insuperable practical difficulties, as is shown by the experience of countries which have saddled their courts with this kind of responsibility. Furthermore, UPICC Art. 7.2.2(d) seems to be enough to cover the two alternatives in PECL Art. 9:102(c). Its Official Comment confirms this: The precise scope of this exception depends essentially upon the meaning of the phrase "exclusively personal character". The modern tendency is to confine this concept to performances of a unique character. The exception does not apply to obligations undertaken by a company. Nor are ordinary activities of a lawyer, a surgeon or an engineer covered by the phrase for they can be performed by other persons with the same training and experience. A performance is of an exclusively personal character if it is not delegable and requires individual skills of an artistic or scientific nature or if it involves a confidential and personal relationship.[117]

Finally, it is to be noted that both UPICC Art. 7.2.2(d) and PECL Art. 9:102(c) speak only of positive acts. It is possible to require performance of a negative obligation, e.g. to forebear from rendering services for someone else or from entering into a partnership with someone else. In this respect, it is said that the performance of obligations to abstain from doing something does not fall under this exception.[118] If, however, enforcement of a negative obligation concerning services, work or a personal relationship would result in indirect enforcement of a positive act to provide or maintain the same, it applies.[119]

3.4.4.6 Unreasonable delay in requiring performance

The final exception both contained in the two Principles is the time limit. UPICC Art. 7.2.2(e) excludes the right to performance if: "the party entitled to performance does not require performance within a reasonable time after it has, or ought to have, become aware of the non-performance"; similarly, PECL Art. 9:102(3) does so where: "The aggrieved party will lose the right to specific performance if it fails to seek it within a reasonable time after it has or ought to have become aware of the non-performance." This exception takes up the COMMON LAW view that an aggrieved party who delays unreasonably in requiring performance in natura may lose his claim.[120] A similar rule is found in CISG, too, but it is limited to cases where the buyer claims delivery of substitute goods and repair of non-conforming goods (Arts. 46 (2) and (3)).

It is said that UPICC Art. 7.2.2(e) is based on the following reasons: Performance of a contract often requires special preparation and efforts by the obligor. If the time for performance has passed but the obligee has failed to demand performance within a reasonable time, the obligor may be entitled to assume that the obligee will not insist upon performance. If the obligee were to be allowed to leave the obligor in a state of uncertainty as to whether performance will be required, the risk might arise of the obligee's speculating unfairly, to the detriment of the obligor, upon a favourable development of the market.[121] The Official Comment on PECL Art. 9:102(3) also clarifies this issue: This provision is supplementary to provisions on limitation and is intended to protect the non-performing party from hardship that could arise in consequence of a delayed request for performance by the aggrieved party. The latter party's interests are not seriously affected by this limitation because it may still choose another remedy. The length of the reasonable period of time is to be determined in view of the rule's purpose. In certain cases, it may be very short, e.g. if delivery can be made out of the non-performing party's stock in trade, in other cases it may be longer. It is the non-performing party which has to show that the delay in requesting performance was unreasonably long.[122]

3.4.5 Right to Require Remedying of Defective Performance

It is remembered that under PECL Art. 9:102(1), the right of the aggrieved party to specific performance includes "the remedying of a defective performance". More generally, UPICC Art. 7.2.3 stipulates under the heading "Repair and Replacement of Defective Performance": "The right to performance includes in appropriate cases the right to require repair, replacement, or other cure of defective performance. The provisions of Articles 7.2.1 and 7.2.2 apply accordingly."

It is said that UPICC Art. 7.2.3 applies the general principles of Arts. 7.2.1 and 7.2.2 to a special, yet very frequent, case of non-performance, i.e. defective performance. For the sake of clarity the article specifies that the right to require performance includes the right of the party who has received a defective performance to require cure of the defect.[123] In fact, the Official Comment on PECL Art. 9:102 also makes it clear that if the non-performing party performs, but its performance does not conform to the contract, the aggrieved party may choose to insist upon a conforming performance.[124] It is also recalled that CISG Art. 46 grants a right to performance in natura in case of "non-conforming". However, the right to require delivery of substitute goods in CISG Art. 46(2) is limited to cases of fundamental breach of contract.

Cure (Under this PART cure denotes the right both of the non-performing party to correct its performance, see the discussion in Chapter 5; and of the aggrieved party to require such correction by the non-performing party. The present Chapter deals with the latter right.) may be advantageous for both parties. The aggrieved party obtains what it has originally contracted for and the non-performing party eventually obtains the full price. A conforming performance may be achieved in a variety of ways: for example, repair; delivery of missing parts; or delivery of a replacement.[125] UPICC Art. 7.2.3 expressly mentions two specific examples of cure, namely repair and replacement. Repairing defective goods (or making good an insufficient service) is the most common case and replacement of a defective performance is also frequent. Unlike the rule under PECL Art. 9:102(1), which generally deals with performance of non-monetary obligation, under UPICC Art. 7.2.3, the right to require repair or replacement may also exist with respect to the payment of money, for instance in case of an insufficient payment or of a payment in the wrong currency or to an account different from that agreed upon by the parties. Apart from repair and replacement there are other forms of cure, such as the removal of the rights of third persons over goods or the obtaining of a necessary public permission.[126]

The right to require a conforming performance is, of course, subject to the same exceptions as the general right to performance. Thus a non-performing party cannot be forced by court order to accomplish a performance conforming to the contract if the aggrieved party has failed to demand performance within a reasonable time or if the latter may reasonably be expected to make someone else effect repair of the performance.[127] Most of the exceptions to the right to require performance that are discussed supra. § 3.4.4 are easily applicable to the various forms of cure of a defective performance. Only the application of supra. § 3.4.4.3 calls for specific comment. In many cases involving small, insignificant defects, both replacement and repair may involve "unreasonable effort or expense" and are therefore excluded.[128]

3.4.6 Other Issues

PECL Art. 9:103 expressly states under the heading "Damages not Precluded": "The fact that a right to performance is excluded under this Section does not preclude a claim for damages." This rule may also be implied in CISG Arts. 45(2) and Art. 61(2), as well as in UPICC Art. 7.4.1 and Comment thereon. These rules make it clear that even in the exceptional cases discussed supra. § 3.4.4 where an aggrieved party cannot require performance the party may recover damages. Damages are always available according to the rules (see the discussion in PART IV) unless the non-performance is excused under force majeure (see the discussion in Chapter 20).

Another issue, which isn't expressly dealt with either in the CISG or in the PECL, is found in UPICC Art. 7.2.5 under the heading "Change of Remedy" as follows: "(1) An aggrieved party who has required performance of a non-monetary obligation and who has not received performance within a period fixed or otherwise within a reasonable period of time may invoke any other remedy. (2) Where the decision of a court for performance of a non-monetary obligation cannot be enforced, the aggrieved party may invoke any other remedy." This Article addresses a problem which is peculiar to the right to require performance. The aggrieved party may abandon the remedy of requiring performance of a non-monetary obligation and opt instead for another remedy or remedies. This choice is permitted on account of the difficulties usually involved in the enforcement of non-monetary obligations. Even if the aggrieved party first decides to invoke its right to require performance, it would not be fair to confine that party to this single option. The non-performing party may subsequently become unable to perform, or its inability may only become evident during the proceedings.[129] On the other hand, performance may have become useless for the aggrieved party. In such cases it may then be vexatious to force the non-performing party to stick to its promise.[130]

In this respect, two situations must be addressed. In the first case, the aggrieved party has required performance but changes its mind before execution of a judgment in its favour, perhaps because it has discovered the non-performing party's inability to perform. The aggrieved party now wishes to invoke one or more other remedies. Such a voluntary change of remedy can only be admitted if the interests of the non-performing party are duly protected. It may have prepared for performance, invested effort and incurred expense. For this reason UPICC Art. 7.2.5(1) makes it clear that the aggrieved party is entitled to invoke another remedy only if it has not received performance within a fixed period or otherwise within a reasonable period of time. How much additional time must be made available to the non-performing party for performance depends upon the difficulty which the performance involves. The non-performing party has the right to perform provided it does so before the expiry of the additional period.[131] UPICC Art. 7.2.5(2) addresses the second and less difficult case in which the aggrieved party has attempted without success to enforce a judicial decision or arbitral award directing the non-performing party to perform. In this situation it is obvious that the aggrieved party may immediately pursue other remedies.[132]

As for the time limit, in the event of a subsequent change of remedy the time limit provided for a notice of termination under UPICC Art. 7.3.2(2) must, of course, be extended accordingly. The reasonable time for giving notice begins to run, in the case of a voluntary change of remedy, after the aggrieved party has or ought to have become aware of the non-performance at the expiry of the additional period of time available to the non-performing party to perform; and in the case of UPICC Art. 7.2.5(2), it will begin to run after the aggrieved party has or ought to have become aware of the unenforceability of the decision or award requiring performance.[133]

Finally, a unique provision is set out in UPICC Art. 7.2.4 under the heading "Judicial Penalty": "(1) Where the court orders a party to perform, it may also direct that this party pay a penalty if it does not comply with the order. (2) The penalty shall be paid to the aggrieved party unless mandatory provisions of the law of the forum provide otherwise. Payment of the penalty to the aggrieved party does not exclude any claim for damages." No corresponding provisions is found either in the CISG or in the PECL. In view that the discussion of this contribution focuses on the rights and obligations between the parties and does not involve the specific discretion of a tribunal, this issue will be given no further details.[134]

Go to table of contents to full text of Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL.

FOOTNOTES: Chapter 3

1. See Nayiri Boghossian in "A Comparative Study of Specific Performance Provisions in the United Nations Convention on Contracts for the International Sale of Goods": Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000); p. 6. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/boghossian.html>.

2. See Ole Lando in "Salient features of European contract law": Study of the systems of private law in the EU with regard to discrimination and the creation of a European Civil Code; European Parliament, Directorate General for Research, Working Paper, Legal Affairs Series, JURI 103 EN (June 1999); p. 6. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/lando1.html>.

3. Supra. note 1.

4. See Vivian Grosswald Curran in "CROSS REFERENCTE AND EDITORIAL ANALYSIS: Article 46". Available online at <http://www.cisg.law.pace.edu/cisg/text/cross/cross-46.html>.

5. See Amy H. Kastely in "The Right to Require Performance in International Sales: Towards an International Interpretation of the Vienna Convention": 63 Washington Law Review (1988); pp. 614-616. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/kastely1.html>.

6. See Secretariat Commentary on Art. 42 of the 1978 Draft [draft counterpart of CISG Art. 46], Comment 8. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-46.html>; Secretariat Commentary on Art. 58 of the 1978 Draft [draft counterpart of CISG Art. 62], Comment 5. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-62.html>.

7. See Secretariat Commentary on Art. 26 of the 1978 Draft [draft counterpart of CISG Art. 28], Comment 4. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-28.html>. One should note, however, that the Secretariat Commentary on 1978 Draft Art. 26 is of limited utility as an aid to the interpretation of CISG Art. 28. (See the match-up, available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-28.html>.)

8. For instance, according to Art. 32(2) (If the seller is bound to arrange for carriage of the goods, he must make such contracts as are necessary for carriage to the place fixed by means of transportation appropriate in the circumstances and according to the usual terms for such transportation), if the contract calls for the seller to arrange for shipment, the seller would breach by failing to do so. Failure to arrange for shipment could result in the goods not being marked or otherwise identified. Not arranging for shipment is presumably a breach of one of the seller's obligations under the contract. Since the seller has breached one of "his obligations", the buyer may be awarded specific relief according to Art. 46(1) in the form of an order for the seller to arrange for carriage. The order could be issued without the goods being marked for shipment or otherwise identified to the contract. In fact, the order would require the goods to be identified.

9. The drafting history clearly supports this conclusion. The UNCITRAL Working Group began drafting the CISG's provisions by consulting the 1964 Hague Conventions: ULIS and the ULF. Art. 25 of the ULIS precluded an injured buyer from requiring performance of the seller "if it is in conformity with usage and reasonably possible for the buyer to purchase goods to replace those to which the contract relates." A UNCITRAL Special Working Group's proposed version of what is now Art. 46 retained this language. However, the UNCITRAL Committee rejected this version of the article. The Committee noted that the proposal would "unjustifiably restrict" the buyer's right to require contract performance. In response to the 1978 draft of the CISG, the United States delegate proposed that the pertinent language be reincorporated into what is now Art. 46. The suggestion was repeated by the same delegate at the 1980 Vienna Diplomatic Conference. This proposal was also rejected. Hence, neither Art. 46 nor Art. 62 requires the unavailability of cover or resale as a prerequisite for ordering specific relief. (Infra. note 10, p. 215.)

10. See Steven Walt in "For Specific Performance Under the United Nations Sales Convention": 26 Tex. Int'l L. J. (1991); p. 216. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/walt.html>.

11. Ibid., p. 217.

12. See Peter Schlechtriem, Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods, Manz, Vienna (1986); p. 62. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-28.html>.

13. Supra. note 1, pp. 27-37.

14. See Jussi Koskinen in "CISG, Specific Performance and Finnish Law": Publication of the Faculty of Law of the University of Turku, Private law publication series B:47 (1999). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/koskinen1.html>.

15. 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/schlechtriem28.html>.

16. In this respect, Bonell states: "Article 28 by its very nature does not seem capable of being derogated from by the parties" (See Bonell, Commentary on the International Sales Law: The 1980 Vienna Sale Convention, Cesare Massimo Bianca & Michael Joachim Bonell eds. (1987); p. 62. [hereinafter Bianca & Bonell]) Lando states as follows: "Even if the parties have expressly agreed that the contract must be performed specifically, a court may refuse to order specific performance of the contract. In this respect Article 28 is inconsistent with Article 6 which permits the parties to derogate from or vary the effect of any of the provision of the Convention." (See Lando in Bianca & Bonell, p. 239)

17. Supra. note 14.

18. See John Fitzgerald in " CISG, Specific Performance, and the Civil Law of Louisiana and Quebec": 16 Journal of Law and Commerce (1997); pp. 291-313. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/1fitz.html>.

19. Ibid.

20. For instance, an international sale where the goods are locally scarce is a convincing case for specific performance. A seller would have a strong argument for specific performance when the goods have been shipped to a foreign port where the seller is not likely to have any facilities set up for reselling the goods. The expectation of the parties may be that specific performance would be granted because of the prevalence of specific performance in several legal systems worldwide.

21. The match-up indicates that paras. (1) and (2) of Art. 42 of the 1978 Draft and CISG Art. 46 are substantively identical. A para. (3) was added to the Official Text at the 1980 Vienna Diplomatic Conference. To the extent it is relevant to the Official Text, the Secretariat Commentary on the 1978 Draft is perhaps the most authoritative source one can cite. It is the closest counterpart to an Official Commentary on the CISG. (See the match-up, available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-46.html>.)

22. Supra. note 6, Comment 1 on Art. 42 of the 1978 Draft.

23. Supra. note 18.

24. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 177. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

25. Supra. note 14.

26. Supra. note 18.

27. Supra. note 6, Comment 2 on Art. 42 of the 1978 Draft.

28. Supra. note 14.

29. Supra. note 24, p. 178.

30. See Mirghasem Jafarzadeh in "Buyer's Right to Specific Performance: A Comparative Study Under English Law, the 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/jafarzadeh.html>.

31. However, it is also said that a requirement of price reduction does not necessarily have to be an inconsistent remedy with a requirement to perform, pursuant to some, a price reduction could be seen as a compensation (damages) for a failure in delivery.

32. Supra. note 14.

33. Supra. note 29.

34. Supra. note 10, p. 214. One should note, however, although the requirement is expressly provided under para. (1) of Art. 46, it seems that the buyer's right to resort to the remedies under paras. (2) and (3) of this Article should also be subject to the same requirement; the buyer will not be entitled to require the seller to deliver replacement goods or repair defects in the goods where he has already resorted to an inconsistent remedy. (Supra. note 30)

35. Supra. note 6, Comment 11 on Art. 42 of the 1978 Draft.

36. See Siegfried Eiselen in "A Comparison of the Remedies for Breach of Contract under the CISG and South African Law": Basedow et al. eds, Aufbruch nach Europa - 75 jahre Max-Planck-Institut für Privatrecht, Mohr Siebeck: Tübingen (2001). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/eiselen2.html>.

37. Art. 35 CISG reads as follows:

38. Supra. note 29.

39. Supra. note 14.

40. Supra. note 30.

41. Supra. note 14.

42. Ibid.

43. Supra. note 30.

44. Supra. note 24, p. 179.

45. Supra. note 1, p. 20.

46. Equally, even if the buyer is not allowed to require delivery of substitute goods, the seller may deliver such goods if this is more favourable to him unless such substitution of goods is an unreasonable inconvenience to the buyer.

47. Supra. note 14.

48. Art. 82(1) CISG provides that, subject to three exceptions set forth in Art. 82(2), "the buyer loses his right . . . to require the seller to deliver substitute goods if it is impossible for him to make restitution of the goods substantially in the condition in which he received them".

49. Supra. note 14.

50. Ibid.

51. Supra. note 30.

52. Supra. note 24, pp. 180-181.

53. Supra. note 14.

54. Supra. note 24, p. 181.

55. Supra. note 14.

56. Supra. note 1, pp. 21-22.

57. Supra. note 30.

58. Supra. note 24, p. 180.

59. Supra. note 30.

60. Supra. note 18. Also, the requirement in Art. 46(3) that repair be reasonable in the circumstances may operate to prevent inconsistent remedies; if the buyer declares the contract avoided, it would seem more unreasonable for the seller who relied on the avoidance to be expected to repair after taking the usual steps attending avoidance (such as resale or taking back the goods). Despite this, the reference to reasonableness in Art. 46(3) recognizes mainly practical difficulty in repair, i.e., expense.

61. Supra. note 58.

62. Supra. note 18.

63. Supra. note 1, p. 24, 25.

64. See Peter A. Piliounis in "The Remedies of Specific Performance, Price Reduction and Additional Time (Nachfrist) under the CISG: Are these worthwhile changes or additions to English Sales Law? ": 12 Pace International Law Review (Spring 2000); pp. 1-46. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/piliounis.html>.

65. See Knapp in Bianca & Bonell, supra. note 16, p. 453.

66. See G.H. Treitel in "Specific Performance in the Sale of Goods": J.B.L. 211(1966); p. 230.

67. Fitzgerald even believes that the only inconsistent remedy available to the seller is avoidance under Art. 64. (Supra. note 18.)

68. See Leif Sevón in "Obligations of the Buyer under the UN Convention on Contracts for the International Sale of Goods": Petar Sarcevic & Paul Volken eds. International Sale of Goods: Dubrovnik Lectures, Oceana (1986); p. 233. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/sevon1.html>.

69. Supra. note 65, p. 451, 454.

70. Supra. note 24, p. 236.

71. Supra. note 68, p. 223.

72. Supra. note 68.

73. Supra. note 1, p. 25.

74. In this point Knapp states that: "... the seller, whether or not he has declared the contract avoided, is under no obligation to try to resell the goods before resorting to remedies for failure to perform the contract by the buyer" and elaborates further that the seller is "... not authorized to resell the goods before declaring the contract avoided." (Supra. note 65, p. 452)

75. See John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (2d ed. 1991); p. 439.

76. Supra. note 24, pp. 235-236.

77. Koskinen states in this point: "A buyer and a seller must have the right to rely upon the contract and that the other party keeps his word. Therefore, if specific performance is the primary remedy for breach of contract, there are strong reasons for believing that more mutually beneficial exchanges of promises will be concluded in the future and that they will be exchanged at a lower cost than under any other contractual remedy. Furthermore, under specific performance post breach adjustments to all contracts will be resolved in a manner most likely to lead to the promise being concluded in favor of the party who puts the highest value on the completed performance and at a lower cost than under any alternative. The existence of a specific performance rule tends to have the effect that the parties to a contract perform their obligations under the contract, rather than start to speculate on any alternatives." (Supra. note 14)

78. See Comment and Notes to the PECL: Art. 9:101. Note 1. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp62.html>.

79. Ibid., Comment A.

80. See Comment on Art. 7.2.1 UPICC.

81. Supra. note 78, Comment B.

82. Supra. note 78, Comment B(i).

83. Supra. note 78, Note 2.

84. Supra. note 78, Comment B(ii).

85. Supra. note 80.

86. Supra. note 78, Comment B(iii).

87. Supra. note 78, Note 3.

88. Supra. note 78, Comment B(iv).

89. Supra. note 78, Comment B(v).

90. See Comment 1 on Art. 7.2.2 UPICC.

91. See Comment and Notes to the PECL: Art. 9:102. Note 1. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp62.html>.

92. Ibid., Note 2.

93. Supra. note 2, p. 7.

94. Supra. note 90.

95. Supra. note 91, Comment A.

96. Supra. note 80.

97. Supra. note 91, Comment B.

98. See Comment 2 on Art. 7.2.2 UPICC.

99. Supra. note 91, Comment D. However, rules on the means and the procedure of enforcement of a judgment for performance must be left to the national legal systems. (Supra. note 95.)

100. Supra. note 97.

101. Supra. note 93.

102. Supra. note 91, Comment E.

103. See Comment 3(a) on Art. 7.2.2 UPICC.

104. Supra. note 102.

105. Supra. note 103.

106. Supra. note 91, Note 3(c).

107. Supra. note 91, Comment F.

108. See Comment 3(b) on Art. 7.2.2 UPICC.

109. Ibid.

110. See Comment 3(c) on Art. 7.2.2 UPICC.

111. Supra. note 91, Note 3(e).

112. Supra. note 91, Comment H.

113. Ibid.

114. Supra. note 110.

115. Supra. note 112.

116. Supra. note 91, Comment G.

117. See Comment 3(d) on Art. 7.2.2 UPICC.

118. Ibid.

119. Supra. note 116.

120. Supra. note 91, Note 4.

121. See Comment 3(e) on Art. 7.2.2 UPICC.

122. Supra. note 91, Comment I.

123. See Comment 1 on Art. 7.2.3 UPICC.

124. Supra. note 91, Comment C.

125. Ibid.

126. See Comment 2 on Art. 7.2.3 UPICC.

127. Supra. note 124.

128. See Comment 3 on Art. 7.2.3 UPICC.

129. See Comment 1 on Art. 7.2.5 UPICC.

130. Supra. note 107.

131. See Comment 2 on Art. 7.2.5 UPICC. See also the discussion attached to supra. note 32.

132. See Comment 3 on Art. 7.2.5 UPICC.

133. See Comment 4 on Art. 7.2.5 UPICC.

134. It is recommended to refer to the Official Comments on Art. 7.2.4 UPICC.

CHAPTER 4. NACHFRIST FOR LATE PERFORMANCE

     This [...] [Chapter] deals with the situation where one party performs late and the other party is willing to give extra time for performance. It is inspired by the German concept of Nachfrist although similar results are obtained by different conceptual means in other legal systems.[1] The purpose behind the flexible remedy of Nachfrist is [...] to keep the contract afoot as long as there is a possibility to perform contractual obligations. This is in line with the attempt to overcome some of the problems of distance, expense and time in having an international contract terminated where, operating under another general principle [...], namely good faith, remedial action could have been possible, resulting in a win-win situation.[2]

4.1 GENERAL CONSIDERATIONS

When the non-performance arises, a practical occasion arises for the aggrieved party to relate to it. He can do so by abstractly insisting on his right to performance as discussed in Chapter 3. The aggrieved party can, however, ascertain his right to obtain performance also with an option of serving a notice on the non-performing party which sets an extra time of reasonable length for the performance of his obligations. This concept is commonly known as a Nachfrist (literally translated "prolonged deadline") because of its similarity to the German remedy of the same name.[3]

Similar legal concepts exist in other national commercial laws of civil law countries. Of similar intent and consequence to the German concept of Nachfrist are the French Civil Code's mise en demeure and kindred provisions to those of Germany and France in other national civil and commercial codes. On the other hand, Common Law attorneys may find the concept of Nachfrist foreign as this term has no direct common-law counterpart. Common law in general holds parties strictly to their time commitments. Nonetheless, it is said that the doctrine of Nachfrist resembles the doctrines of waiver and estoppel in common law. The fact that the aggrieved party may not resort to any other remedy during the period of the Nachfrist is equivalent to the aggrieved party being estopped from relying on his strict contractual rights as the result of a representation made to the non-performing party. In addition, both the remedy of Nachfrist and the doctrine of promissory estoppel have the effect of suspending performance as opposed to extinguishing contractual rights.[4]

Nachfrist is also a concept incorporated in many instruments applicable to the international commercial contracts. Under the CISG, for instance, Arts. 47 and 49(1)(b) / Arts. 63 and 64(1)(b) are provisions which span both remedies of termination and damages, through the principle of Nachfrist which is the granting of additional time for late performance. "The principle has been mainly borrowed from German domestic law as well as from the French procedure of mise en demeure. However there are significant differences between the German and French treatment of Nachfrist and the one accorded to in the CISG. This is a good point to remind ourselves of the mandate of article 7(1) where uniformity of application demands the autonomous interpretation of the CISG, that is, without relying on principles founded in domestic law. In other words, German and French treatment of Nachfrist and mise en demeure must be ignored and cannot be used to explain the principle within the CISG despite significant similarities in doctrine and jurisprudence."[5]

Even, the actual legal import of the same term Nachfrist from German law under descriptions of the various international rules such as the CISG, UPICC and PECL differs -- to a lesser degree -- among themselves. Generally, the UPICC and the PECL also contain such a Nachfrist procedure respectively in Art. 7.1.5 and Art. 8:106, which both fairly closely mirror the CISG in effect. The provisions in both the CISG and the PECL can be viewed as operating on a similar basis, subject to two main exceptions which are to be given more details below. First, unlike the CISG, the innocent party under the PECL is not limited to cases of non-delivery or failure to pay the price or take delivery before it can rescind the contract. Second, instead of having a separate provision dealing with avoidance (Arts. 49(1)(b) and 64(1)(b) in the CISG), the PECL includes the avoidance provisions within the Nachfrist article. Likewise, Art. 7.1.5 of the UNIDROIT Principles contains a very similar provision to the PECL with some variance.

Anyway, despite of these slight differences among international rules themselves, in a case of non-performance of international commercial contracts the aggrieved party may generally by notice to the other party allow an additional period of time for performance. The fact that the concept of Nachfrist has been included in various international laws indicates that certainty now has a brother, namely flexibility. Globalization requires that legal rules must be flexible in order to be applicable to changing circumstances and avoid costly disputes in circumstances, which could have been solved by an instrument like Nachfrist.[6] However, it is to be borne in mind the significant differences between the German and French treatment of Nachfrist and the one accorded to in the three instruments, one of such differences is the different approach adopted, namely by contrast with the autonomic extension in domestic laws an optional approach is adopted under each of the three instruments

4.2 RATIONALE UNDERLYING THE OPTIONAL APPROACH

4.2.1 Optional Approach under the Studied Instruments

The CISG deals with the Nachfrist remedy separately under Arts. 47 and 63. Art. 47(1), tying in with Art. 33 which fixes the time when the seller must deliver the goods, deals specifically with the buyer's options and states: "The buyer may fix an additional period of time of reasonable length for performance by the seller of his obligations." A similar remedy in favour of the seller is set forth in Art. 63, which is connected with timing obligations of the buyer in such provisions as Art. 38(1) (examination) and Art. 59 (payment of the price). Art. 63(1) is concerned with the options of the seller and provides: "The seller may fix an additional period of time of reasonable length for performance by the buyer of his obligations."

As stated above, the CISG incorporated, among other elements, the notion of Nachfrist from German law. However, unlike German law, the CISG does not require a party to offer an additional period of time under which a prospectively defaulting party may perform under the contract. The substantive difference between the two approaches is both obvious and important. Under German law, for instance, if the buyer requests a Nachfrist, the seller is obligated to respond to the request. Failure to do so results in an automatic grant of additional time.[7] To the contrary, Knapp submits when discussing Art. 63 CISG that: "Fixing an additional period of time under Article 63(1) is the seller's right, but not his obligation . . . the seller may sue for enforcement of his right without granting the buyer any additional term for performance. Similarly, if the failure by the buyer to perform his obligation amounts to a fundamental breach of contract, the seller is authorized to declare the contract avoided under Article 64(1)(a) without having any obligation to fix first an additional term of performance for the buyer. In this respect the procedure envisaged by Article 63(1) differs from the Nachfrist of the law of the Federal Republic of Germany and the mise en demeure under French law."[8]

In fact, the wording "may" used both in CISG Arts. 47(1) and 63(1) shows that the procedure envisaged under the CISG is not mandatory. It merely permits a party to offer such an additional period of time. Both provide identical obligations for the buyer and the seller with regards adherence, notice, and reasonable length of time. In other words, Arts. 47 and 63 each creates the possibility that a buyer or seller may -- but need not -- set a Nachfrist with the main consequence being that the buyer or seller, during that period, must generally adhere to its contractual obligations while retaining its rights to subsequently claim damages. This optional approach is adopted both in UPICC and PECL. Art. 7.1.5(1) UPICC reads: "In a case of non-performance the aggrieved party may by notice to the other party allow an additional period of time for performance." Art. 8:106(1) PECL reads: "In any case of non-performance the aggrieved party may by notice to the other party allow an additional period of time for performance." Under these provisions, it is for the aggrieved party among their options, not obligated to allow an additional period for performance.

In other words, none of the three instruments requires, as under the German law, an automatic extension of time for performance and delegate such option to the discretion of the parties involved. As a result, the procedural device of granting additional time does not have the same function under German and international commercial law, respectively. In this point, different function actually derives from the particular rationale of Nachfrist in the context of international commercial law.

4.2.2 Underlying Rationale

The idea behind Nachfrist in the three instruments is that the aggrieved party should not be able to avoid the contract merely because the obligations are not performed on time. While details of the question of termination are not dealt with in this Chapter, it is to be shown (with the detailed discussion in PART III) that each of the three instruments specifically rejects the idea that in an international commercial contract the aggrieved party may, as a general rule, avoid the contract once the contract date for performance has passed and the other party has not yet performed one or more of his obligations. In these circumstances termination of a contract is primarily to be justified on the basis of the doctrine of "fundamental breach/non-performance".

Under this requirement, termination can be a thorny problem, for in any case the aggrieved party must be sure that the breach is fundamental. Under certain circumstances, such as when time is of the essence, late performance may become a fundamental non-performance. But it is not necessarily always the case when time is not clearly of essence. In this respect, Nachfrist clarifies a situation which otherwise would be unclear. It means that Nachfrist in the three instruments in itself is not a remedy, or is not really a stand-alone remedy in the traditional sense. It fits very closely with other remedies, particularly those allowing the parties to terminate the contract when it is meant to fit into the concept of fundamental non-performance. Thus, if the aggrieved party is in a situation where there is uncertainty as to the existence of a reason to avoid the contract, he can overcome this by fixing a Nachfrist.

On the one hand, as discussed previously in Chapter 3, the right of the aggrieved party to require specific performance by the other party anticipates the aid of a court or arbitral tribunal in enforcing that right. However, in case of delayed performance, the use of judicial procedures for enforcement may not seem feasible or may require more time than the aggrieved party can afford to wait. It may consequently be to the aggrieved party's advantage to avoid the contract and make a substitute purchase from a different supplier.[9] On the other hand, however, at that time the aggrieved party may not be certain that the breaching party's delay constitutes a fundamental breach of contract justifying the avoidance of the contract. This is particularly because of the special characteristics of late performance, which is significantly different from other forms of defective performance: "Late performance can never be remedied since once the date for performance has passed it will not occur again, but nevertheless in many cases the party who is entitled to performance will much prefer even a late performance to no performance at all. Secondly, at the moment when a party fails to perform on time it is often unclear how late performance will in fact be. The commercial interest of the party receiving performance may often therefore be that a reasonably speedy completion, although late, will be perfectly acceptable but that a long delayed completion will not."[10]

One way to circumvent the above problems is by use of the Nachfrist procedure. It appears that the primary purpose of a Nachfrist procedure is to protect the aggrieved party who is waiting for a delayed performance. While waiting, the aggrieved party might have to determine at what point the delay constitutes such a fundamental breach that he becomes entitled to terminate the contract. In any event, unlike in the case of fixed-term contracts,[11] a delay in performance is not automatically a fundamental breach of contract. Hence, the Nachfrist procedure is established where it is not clear from the contract itself or the surrounding circumstances whether failure to make timely performance amounts to a fundamental breach, and thus "enables that party to give the performing party a second chance without prejudicing its other remedies".[12] Indeed, the procedure would apply regardless of whether the breach would otherwise have been considered fundamental. In other words, failure of the other to meet such a reasonable deadline is then grounds for termination whether the breach is fundamental or not.

In short, the granting of additional time can be advantageous since, in case of delayed performance, the innocent party may, inter alia, employ this device in order to relieve himself of the risk of wrongful termination, which results from a peculiarity of the three instruments, namely the fact that it can be difficult to determine when the failure to promptly perform amounts to a fundamental non-performance.[13]

4.2.3 Granting Additional Period in Two Situations

Following the optional approach and its underlying idea under the three instruments, when there has been a non-performance by one party (the debtor), the other (the aggrieved party) may always fix an additional period of time for performance.

The Nachfrist procedure under CISG Arts. 47 and 49(1)(b)/Arts. 63 and 64(1)(b), UPICC Art. 7.1.5 or PECL Art. 8:106 in effect contains two rules: (a) Even where the aggrieved party has an immediate right to terminate because of the other's non-performance, if the aggrieved party has indicated that it is still prepared to accept performance, it may not change its mind without warning.[14] (b) Where there has been a delay in performance but the delay is not fundamental (because time was not of the essence and the delay has not yet had serious consequences for the aggrieved party) the aggrieved party may terminate the contract after having given the non-performing party reasonable notice. In this point, two preliminary points need to be borne in mind: (a) Under the three instruments there is no need for the aggrieved party to serve a notice on the non-performing party in order to put the latter into breach; (b) Under the three instruments termination is an act of the aggrieved party, not an act of a court or arbitrator. Provided there has been a fundamental non-performance or the other conditions for termination are met the aggrieved party may terminate by giving notice of termination to the non-performing party.[15]

As stated above, not every delay in performance will constitute a fundamental non-performance and thus the aggrieved party will not necessarily have the right to terminate immediately merely because the date for performance has passed. It will only have this right if time was "of the essence". In cases of non-fundamental delay, however, the Nachfrist procedure allows the creditor to fix an additional period of time of reasonable length for performance by the debtor. If upon expiry of that period of time performance has not been made, the aggrieved party may terminate the contract. This case is probably the one in which the notice procedure will be used most frequently. The notice procedure can also be used when it is the aggrieved party who is to perform a service but the other party has refused to accept or to allow performance. It should be noted that the Nachfrist procedure applies even if the non-performance is excused because of a temporary impediment (see Chapter 20).[16]

In other cases the notice procedure does not give the aggrieved party any additional rights but is nonetheless useful. Even where the delay or other non-performance is fundamental, and thus the aggrieved party has the right to terminate immediately, it may not wish to do so: it may be prepared to accept a proper performance by the debtor provided it is rendered within a certain period. The procedure permits it to give the debtor a final chance to perform (or to correct a defective performance), without the aggrieved party losing the right to seek specific performance or to terminate if by the end of the period of notice the debtor has still not performed in accordance with the contract. At the same time, however, the rule that the aggrieved party may not seek specific performance or terminate during the period of notice protects the debtor from a sudden change of mind by the aggrieved party. The debtor may have relied on having the period set in the notice in which to perform.[17]

The notice procedure may also be used when a performance is prompt but defective in a way which is not fundamental. In such a case the aggrieved party will not have the right to terminate and serving a notice fixing an additional time for performance will not give it that right, because the Nachfrist procedure applies only to delayed performance, not to defective performance. Nonetheless, serving a notice may still perform the useful functions of informing the debtor that the aggrieved party still wants proper performance and of giving the debtor a last chance before the aggrieved party seeks specific performance. In these respects the notice serves the same function as a mise en demeure in French law or Mahnung in German law, though under the CISG, UPICC or PECL the aggrieved party is not required to serve a notice before exercising a remedy except in the case of termination for non-fundamental delay.[18]

In sum, the aggrieved party may serve a Nachfrist notice informing the other party to continue performing in case of non-fundamental delay or where he is in doubt whether the other party has committed a fundamental breach. After the expiry of this period the aggrieved party can consider a fundamental breach to have occurred and avoid the contract. Thus the breach is "upgraded" by the expiration of the Nachfrist. On the other hand, even in the case of a fundamental breach where the aggrieved party is entitled to avoid the contract immediately, termination may not be necessarily the best solution for him. The aggrieved party may be prepared to accept a proper performance by the debtor provided it is rendered within a certain period. The Nachfrist procedure permits it to give the debtor a final chance to perform. Clearly, the Nachfrist procedure under the three instruments has advantages for both parties, although its principal purpose is to provide additional latitude and protection to the innocent party in case of uncertainty. The advantage for the non-performing party in this situation, apart from the fact that he now has more time to perform (although he may still be subject to a claim for damages in respect of any delay), is that he can rely on the fact that the aggrieved party is bound by that period, during which the latter may not resort to termination or specific performance.

4.3 SETTING OF A NACHFRIST NOTICE

4.3.1 Transmission of the Intention

The aggrieved party must set an additional period, i.e. inform the non-performing party accordingly with an appropriate notice to make his intention clear, once he makes decision to invoke the Nachfrist procedure so as to give the non-performing party a second chance. In this respect, two issues should be examined: form of the notice; risk in communication (see also the discussion in Chapter 11 on the notice of a declaration of termination).

4.3.1.1 Form of the notice

As for the form of the notice, the CISG is silent on whether the notice must be in writing or can be presented orally. However, a broad interpretation of CISG Art. 11 (A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.) will lead to the conclusion that the notice granting an additional period for performance under Art. 47/63 need not be made in writing and that it may be transmitted by any means.

Under the UNIDROIT Principles, the Official Comment to Art. 1.9(1) (Where notice is required it may be given by any means appropriate to the circumstances.) clearly states: "This article first lays down the principle that notice or any other kind of communication of intention (declarations, demands, requests, etc.) required by individual provisions of the Principles are not subject to any particular requirement as to form, but may be given by any means appropriate in the circumstances. Which means are appropriate will depend on the actual circumstances of the case, in particular on the availability and the reliability of the various modes of communication, and the importance and/or urgency of the message to be delivered."[19] Under the European Principles, the Official Comment to Art. 1:303(1) (Any notice may be given by any means, whether in writing or otherwise, appropriate to the circumstances.) similarly indicates that "notices may be made in any form - orally, in writing, by telex, by fax or by electronic mail, for example - provided that the form of notice used is appropriate to the circumstances. It would not be consistent with good faith and fair dealing (see Article 1:201) for a party to rely on, for instance, a purely casual remark made to the other party. For notices of major importance written form may be appropriate."[20]

It can therefore be concluded that no form is prescribed for the notice; it can be oral or in writing but, according to its character of the Nachfrist notice and as to be supported by the discussion infra. 4.3.2, it cannot be given by other conduct, i.e. conduct implying an intent. Given this, there will be no lengthy discussion here as to the type or form of the notice that must be furnished by the aggrieved party to invoke the Nachfrist procedure.

4.3.1.2 Risk in transmission

As to the communication to the non-performing party, under the CISG the general rule of Art. 27 reflects the "dispatch principle", it is expressly stated that: "Unless otherwise expressly provided in this Part of the Convention, if any notice, request or other communication is given or made by a party in accordance with this Part and by means appropriate in the circumstances, a delay or error in the transmission of the communication or its failure to arrive does not deprive that party of the right to rely on the communication." Following this rule, the risk in transmission of a Nachfrist notice is fairly burdened on the side of the non-performing party. However, it seems unpractical that a Nachfrist notice will be effective once it is dispatched because only if such intention is transmitted to the non-performing party it brings fruits.

By contrast, both the UNIDROIT Principles and the PECL adopt the receipt principle as a general rule. Art. 1.9(2) UPICC stipulates that "[a] notice is effective when it reaches the person to whom it is given", whose purpose is to "indicate that the same will also be true in the absence of an express statement to this effect: see Arts. 2.9, 2.11, 3.13, 3.14, 6.1.16, 6.2.3, 7.1.5, 7.1.7, 7.2.1, 7.2.2, 7.3.2 and 7.3.4."[21] Similarly, Art. 1:303(2) PECL states that "any notice becomes effective when it reaches the addressee." It is important in relation to the receipt principle to determine precisely when the communications in question "reach" the addressee. In an attempt to define the concept, Art. 1.9(3) UPICC draws a distinction between oral and other communications: "For the purpose of paragraph (2) a notice "reaches" a person when given to that person orally or delivered at that person's place of business or mailing address." The former "reaches" the addressee if they are made personally to it or to another person authorised by it to receive them. The latter "reaches" the addressee as soon as they are delivered either to the addressee personally or to its place of business or mailing address. The particular communication in question need not come into the hands of the addressee. It is sufficient that it be handed over to an employee of the addressee authorised to accept it, or that it be placed in the addressee's mailbox, or received by the addressee's fax, telex or computer.[22]

A plain understanding of the receipt principle is that a party cannot rely on a notice sent to the other party unless and until the notice reaches that party. Although it is not necessary that the notice should actually have come to the addressee's attention provided that it has been delivered to him in the normal way, the risk of errors in the communication is normally placed upon the sender under the receipt principle. However, many of the situations in which one party giving a notice to the other are situations in which the party to be notified is in default, or it appears that a default is likely. Here it seems appropriate to put the risk of loss, mistake or delay in the transmission of the message on the defaulting party rather than on the aggrieved party.[23] While under the UNIDROIT Principles, no appropriate solution could be found as to this concern either in Art. 1.9 or Art. 7.1.5; a persuasive solution has been found in the PECL in conjunction with the reference of "Subject to paragraphs (4) and (5)" at the outset of Art. 1:303(2) PECL. Under the PECL, Art. 1:303 adopts the receipt principle as a general rule, at the same time it links this general rule to two qualifications for the operative effect of communications, one of which is set out in PECL Art. 1:303(4) reading pertinently: "If one party gives notice to the other because of the other's non-performance or because such non-performance is reasonably anticipated by the first party, and the notice is properly dispatched or given, a delay or inaccuracy in the transmission of the notice or its failure to arrive does not prevent it from having effect. The notice shall have effect from the time at which it would have arrived in normal circumstances."

In sum, on the one hand, the so-called "receipt principle" seems appropriately applicable to the Nachfrist notice since decisive is that the notice reaches the addressee so that the non-performing party would be well aware of his situation; on the other hand, the rule following from the dispatch principle that the risk of loss, mistake or delay in the transmission of the message should be put on the defaulting party rather than on the aggrieved party, suits for the case of a Nachfrist notice. Therefore, the solution found in PECL Art. 1:303(4) best accords with the case of a Nachfrist notice: Generally, the Nachfrist notice is effective when it reaches the non-performing party. In a case of the risk in transmission, a delay or inaccuracy in the transmission of the Nachfrist notice or its failure to arrive does not prevent it from having effect; the notice shall have effect from the time at which it would have arrived in normal circumstances. The idea underlying the principle and the exceptions is that the risk for transmitting a message should be carried by the one who, as a result of his deviation from normal performance, caused the statement to be sent.

4.3.2 Fixing of the Time-limit

As discussed above, the CISG, UPICC and PECL recognize, on the one hand, the difference between non-performance which amounts to a fundamental breach and non-performance which is not serious enough to constitute a fundamental breach; and each allows, on the other hand, the aggrieved party who is not sure whether the non-performance amounts to a fundamental breach the ability to avoid the contract by allowing him to set an additional period of time to perform the contract. Therefore, they all require that two conditions must be met: Firstly, the period must be fixed. Secondly, the period so fixed must be reasonable. In other words, when a notice fixing an additional period for performance is served after a non-fundamental delay, it will only give the aggrieved party the right to terminate if, first, it is for a fixed period of time, and secondly, if the period is a reasonable one.

4.3.2.1 Fixed period

With regard to the first condition, it is to be noted that an effective Nachfrist notice should make clear that the additional period sets a fixed limit on the date for performance. It must be clear from the communication that it is an additional period of time for performance, i.e. fulfilment after expiration of that period is rejected.

This period may be fixed either by specifying the date by which performance must be made (e.g. 30 September) or by specifying a time period (e.g. "within one month from today"). A general demand by the entitled party that the other party perform or that he perform "promptly" or the like is not a "fixing" of a period of time.[24] In other words, this time will have to be fixed or be fixable according to the calendar (O.R., 49). The mere invitation to perform "as soon as possible", "promptly", "immediately" or within a similarly vaguely defined period of time is not sufficient because that would merely have to be considered as abstract reliance on the right to obtain performance. It is confirmed by the Official Comment on PECL Art. 8:106 which states: "If the notice is not for a fixed period of time it may give the defaulting party the impression that it is free to postpone performance indefinitely. It will not suffice to ask for performance 'as soon as possible'. It must be a request for performance 'within a week' or 'not later than July 1'. The request must not be couched in ambiguous terms; it is not sufficient to say that 'we hope very much that performance can be made by July 1'."[25]

However, a questionable issue arising from the fixing of the time-limit is whether a Nachfrist notice should be considered as final and/or the non-performing party be warned by the entitled party that he will declare the contract avoided. Honnold submits that an effective Nachfrist notice should make clear that the additional period sets a fixed and final limit on the date for performance; e.g., "The last date when we can accept delivery will be July 1." To the contrary, Enderlein & Maskow hold that the Nachfrist must not be considered as final and/or the non-performing party must not be warned by the entitled party that he will declare the contract avoided. A formulation like "We set an additional period of time for payment on your part until May 31 ..." is sufficient. The setting of a Nachfrist for performance gives the entitled party an option to either stick to the contract, e.g. when non-payment is caused by foreseeable temporary difficulties of transfer, or make it subject to avoidance. The aggrieved party would be forced into too strict a scheme if in setting a Nachfrist he had to threaten the other party with avoidance of the contract.[26] However, the authors in favour of this left open what would happen if the non-performing party does not carry out his threat. One should not get too near to the scheme of the ipso facto avoidance. Of course, on the other hand, the entitled party in setting the Nachfrist may declare the contract at the same time avoided in case it is not kept to by the non-performing party (see the discussion infra. 4.4.2 on automatic termination).

In my opinion, Zeller stands more persuasively in submitting that, as far as the non-performing party is concerned the additional period is a final period, however, the entitled party is not barred from fixing additional periods if he so wishes or if he wants to respond to the non-performing party's request for additional time.[27] In setting an additional period of time, the entitled party expresses his continuing interest in contract performance and offers the non-performing party a chance to fulfil the contract nonetheless. If the non-performing party does not perform within the additional period, the entitled party may set another (or more) additional period(s) of time, or avoid the contract. Neither does the contract end automatically upon the expiration of the additional period (unless it is expressly stated in the notice, see the discussion infra. 4.4.2) nor has the entitled party an obligation to avoid the contract.[28]

4.3.2.2 Reasonable length

In considering the Nachfrist procedure would have the danger turning an inconsequential delay which would not justify declaring the contract avoided for fundamental breach into a basis for declaring the contract avoided, which means in cases of non-fundamental delay the notice procedure is conferring an additional right on the aggrieved party, the period of notice must be reasonable. Determining the additional period of "reasonable length" one should fix in the notice perhaps is perhaps the most significant issue in drafting a Nachfrist notice

What is reasonable can only be decided with regard to specific cases. Enderlein & Maskow suggest the following, non-exhaustive, list of factors for determining a reasonable length: "In calculating the additional period, factors have to be taken into account which concern both parties. On the seller's part, these are: possibilities and costs for storage of the goods (compare also Article 88, paragraph 2) and price developments, e.g. the Nachfrist will be shortened in the event of a rapid decline in prices because the proceeds from a substitute transaction under Article 75, which presupposes an avoidance of the contract, would be reduced as a result. On the buyer's part, it is the difficulties which he is confronted with during performance that are of relevance, e.g. when he needs more time than expected for complying with the so-called formalities in preparing the payment (Article 54) or also in importing the goods. The seller can take such factors into consideration only when the buyer informs him thereof. In the setting of a Nachfrist, the postal handling time needed for the information to reach the buyer has to be considered because the latter must have time to undertake the relevant activities during that Nachfrist."[29]

In other words, the question of what exactly should be considered a reasonable length of time, depends on the particular circumstances for each case. Among the elements to be taken into account are the nature, extent and consequences of the delay, the non-performing party's possibilities of and time needed for performance, and the aggrieved party's special interest in speedy performance. In the light of the fact that there is a breach of contract by a party (the debtor), the interests of the other party (the aggrieved party) should be decisive. Within this leeway the choice is given to the innocent party who faces breach by the other. Indeed, respect must be given to the aggrieved party's discretion in setting the "reasonable" period if the notice-avoidance procedure is to serve its purpose -- reducing uncertainty concerning the right to avoid the contract.

However, it follows from the flexible reasonableness that different periods of time could be reasonable: "The vague term of reasonableness leaves some room to act at one's own discretion which can be used by the party who is entitled to set the Nachfrist, i.e. in this case the seller. If he fixes too short a period, the competent deciding body could determine the minimum Nachfrist."[30] PECL in its Comment therefore states as follows:[31]

In a word, the question to what amounts to a reasonable time is a question of fact and is left to the courts to decide.[32] While the setting of a reasonable time under the European Principles is handled much as it is under German law by designating the courts as the final word on a reasonable time, the CISG presents a more ambiguous dilemma than under German law. As far as the CISG is concerned, no jurisprudence has solved this issue. Under the UNIDROIT Principles, Art. 7.14(3) provides for the allowance of a reasonable amount of time in which to complete performance of the contract. If the additional amount of time is not of a reasonable length, the UNIDROIT Principles provide for an additional extension in order to comply with the mandate in the Article. However, the UNIDROIT Principles and its Official Comment do not specifically address the method to be incorporated in determining what is a reasonable amount of time and who decides when and if an additional extension of time is warranted. Nonetheless, it can be argued that a court would invoke good faith, which is a principle in the CISG or the UPICC, and could set a date which fulfills the requirements of the principle of reasonableness. In any event, the Nachfrist must not serve the aggrieved party as a pretext upon its expiration to declare the contract avoided.

Finally, one should recall that it is because in cases of non-fundamental delay the notice procedure is conferring an additional right on the aggrieved party, that the period of notice must be reasonable. "In cases other than non-fundamental delay the aggrieved party is granting a concession to the debtor. Here the aggrieved party can give the debtor as long or as short a period as it chooses, though having done so it will not be able to resort to termination or specific performance within that period. It may serve a notice which fixes an ambiguous deadline for example, 'Please perform as soon as possible'. In this case it may not terminate or seek specific performance unless the non-performance has continued for long enough that it would be consistent with good faith for the aggrieved party to terminate despite its earlier notice."[33]

4.4 EFFECTS OF SERVING A NACHFRIST NOTICE

Generally, the serving of a Nachfrist notice which grants additional time has two kinds of effects. First of all, during the fixed period, limited remedies are available but the others are suspended. Hence the other party gets another chance at performance. Secondly, if the other party does not make use of this opportunity prior to the expiring of the additional period, the party serving the notice is entitled to declare the contract avoided upon the expiry. In other words, a Nachfrist notice has the main consequences that the aggrieved party, during the additional period specified in the notice, in general has to stick to the contract while retaining his limited rights. After that Nachfrist has elapsed fruitlessly, he has the right to avoid the contract.

4.4.1 Remedies Available/Suspended during the Period

Understandably, in order to protect the non-performing party who may be preparing to perform the contract as requested by the aggrieved party who has sent a Nachfrist notice, perhaps at considerable expense, during the additional period specified in the notice the latter may not resort to some remedies for breach of contract, unless he has received notice from the former that he will not comply with the notice.

In this respect, a point well worth noting is the different wording used in the three instruments. Under the CISG, Art. 47(2) reads pertinently that "the buyer may not, during that period, resort to any remedy for breach of contract. However, the buyer is not deprived thereby of any right he may have to claim damages for delay in performance." Similarly, Art. 63(2) stipulates in part that "the seller may not, during that period, resort to any remedy for breach of contract. However, the seller is not deprived thereby of any right he may have to claim damages for delay in performance." By contrast, under the UNIDROIT Principles, the first sentence of Art. 7.1.5(2) reads: "During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages but may not resort to any other remedy." An identical rule is found in the first sentence of PECL Art. 8:106(2): "During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages, but it may not resort to any other remedy." According to the three texts, the right to recover damages arising from late performance is in any event, even when the non-performing party has performed within the Nachfrist, not affected. However, one area of uncertainty within the CISG has been removed under UPICC Art. 7.1.5(2) or under PECL Art. 8:106(2) by clearly stating that the aggrieved party "may withhold performance of its own reciprocal obligations" while an additional period of time is fixed. With these remedies unaffected, the party who grants the extension of time, on the other hand, cannot terminate or seek specific performance during the extension time.[34]

On the one hand, the setting of an additional period of time for performance at first has a disadvantageous effect on the party who set such an extension. Firstly, among the rights granted by the three instruments this refers to the right to early termination of the contract and/or such which practically amount to it. Even if the non-performance was a priori a fundamental breach of contract, the aggrieved party is not in a position to declare the contract avoided; he has to wait until the period of time has expired. He cannot require performance and at the same time avoid the contract. This does not have to be expressly laid down here; it would follow from the general principles, like waiver or estoppel.[35] Secondly, the aggrieved party can within the additional period of time not seek specific performance. This is acceptable because the right to require performance and the right to set an additional period of time for performance are basically variants of the right to obtain performance between which the aggrieved party can choose from the outset.[36]

The wording of the rule, on the other hand, is not completely exact. It is nevertheless indeed problematic when the aggrieved party must not exercise other rights ensuing from a breach of contract either, but rather has to wait and see whether the buyer performs within the Nachfrist. For example, under the CISG, if the seller delivers within the Nachfrist and a lack in quality becomes apparent the buyer may well invoke his rights under non-conforming delivery before the period set has expired. However, if the buyer has required repair within a fixed period of time, he cannot request delivery of substitute goods before that period has expired, even if there was originally the possibility to do so.[37]

In short, as stated in the Official Comment to PECL: "During the period fixed the aggrieved party may not take further action against the debtor; it may withhold its own performance and it may claim damages for the delay in performance or other losses caused by the non-performance, but it may not seek specific performance or terminate the contract during the period of notice."[38]

4.4.2 Early End of the Existing Uncertainty upon Rejecting Notice

The aggrieved party does not need to wait until the Nachfrist has expired, only when the non-performing party has declared that he will not perform within the additional period of time because such a declaration on the non-performing party's part will mean "an early end of the existing uncertainty".[39]

In this respect, under the CISG, the aforementioned Art. 47(2) is clearly limited at the outset to the situation "[u]nless the buyer has received notice from the seller that he will not perform within the period so fixed, [...]"; similarly, Art 63(2) reads that "[u]nless the seller has received notice from the buyer that he will not perform within the period so fixed, [...]". In more general terms, the second sentence of UPICC Art. 7.1.5(2) provides in part: "If it receives notice from the other party that the latter will not perform within that period, [...], the aggrieved party may resort to any of the remedies that maybe available under this Chapter." Similarly, the second sentence of PECL Art. 8:106(2) reads in part: "If it receives notice from the other party that the latter will not perform within that period, [...], the aggrieved party may resort to any of the remedies that may be available under chapter 9."

Since the rejecting notice has to refer to that there will be no performance also during the Nachfrist it can only be given after the Nachfrist has been set and the non-performing party has received the respective information. When the non-performing party has named before a date of performance later than the expiry of the Nachfrist, the aggrieved party cannot rely on it because it is very well possible that the setting of an additional period of time inspires the non-performing party to make exceptional efforts to keep to the period granted. The situation is different when performance is rejected definitely and once and for all. It is not sufficient in this case (by contrast to anticipatory non-performance, see the discussion in Chapter 9) that it becomes apparent or is clear that the non-performing party will not keep to the Nachfrist. If, however, the notice is given, the contract can be avoided at once (according to, e.g., CISG ArtS. 49(1)(b) / 64(1)(b)), even when the delay does not yet constitute a fundamental breach of contract.[40]

4.4.3 Termination upon Expiry of the Extension

4.4.3.1 In general

Once the additional period specified in the Nachfrist notice is expired, the second sentence of UPICC Art. 7.1.5(2) provides in part that "if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that maybe available under this Chapter." Similarly, the second sentence of PECL Art. 8:106(2) stipulates that "if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that may be available under chapter 9." In this respect, although no counterpart rule is found in the CISG, the Secretariat Commentary makes it clear that once the additional period of time has expired without performance by the seller/buyer, the buyer/seller may not only avoid the contract under Art.49(1)(b)/64(1)(b) but may resort to any other remedy he may have. In particular, the buyer/seller may claim any damages he may have suffered because of the delay in performance. Such damages may arise even though the seller/buyer has performed his obligations within the additional period of time fixed by the buyer/seller.[41]

Nonetheless, it is to be recalled that the most advantageous aspect of a Nachfrist procedure is that, in contrast to the general rule of termination, the requirements of fundamental non-performance need not be fulfilled, because "[t]he 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."[42] By granting an additional period of time, that party can therefore relieve himself of the risk that, eventually, the breach might be held not to have been fundamental. Therefore, the most frequently occurring consequence upon the expiry is perhaps the termination of the contracts. In this respect, different (nevertheless similar in substance) approaches are found in the three instruments.

4.4.3.2 CISG approach

As stated earlier, unlike the including of the avoidance provisions within the Nachfrist article under UPICC 7.1.5 or PECL Art. 8:106, the CISG provides for a separate provision dealing with avoidance by the side of the Nachfrist procedure envisaged elsewhere. In this respect, the buyer's ability to avoid the contract after the serving of a Nachfrist notice is outlined in Art. 49(1)(b), and the seller's in Art. 64(1)(b).

Another point well worth noting is that the CISG in its jurisprudence indicates that only in the context of seller's non-delivery or buyer's failure to pay the price or take delivery of the goods does the expiration of a Nachfrist give rise to a right to avoid the contract. In this respect, the wording of Art. 47(1) appears to cover the whole range of obligations arising under the contract and the Convention, such as delivery of all or part of the goods, the remedy of any lack of conformity by repair of the goods or by delivery of substitute goods or performance of any other act which would constitute performance of the seller's obligations. However, Art. 49(1)(b) only authorizes the buyer to declare the contract avoided: "in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed." Thus, only in the event of non-delivery does the expiry without performance of the Nachfrist entail the right of the buyer to avoid the contract.[43] In any other situation, the setting of a nachfrist does not provide a basis for avoidance for the buyer.[44] Similarly, Art. 64(1)(b) authorizes the seller to declare the contract avoided: "if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of Article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so within the period so fixed." Unlike the general term in Art. 62, Art. 64(1)(b) also presumes a restricted case through being limited to the event of failure to pay the price or take delivery.

Flechtner analyses the underlying considerations behind such limitations envisaged in CISG ArtS. 49(1)(b) / 64(1)(b) as follows: "Despite the drafters' failure to provide clear guidance, the Nachfrist provisions of the Convention can and should be interpreted in a manner that does not undermine the fundamental breach standard for avoidance. Under Article 7(2), questions not expressly settled in the Convention must be answered 'in conformity with the general principles upon which it is based.' One such principle is that avoidance of the contract is proper only where the other side has committed a serious breach. Article 7(1), furthermore, requires that the Convention be interpreted 'to promote ... observance of good faith in international trade.' In light of these considerations, Articles 49(1)(b) and 64(1)(b) should be construed to permit avoidance only where there has been a failure to perform a material portion of the specified obligations within the time fixed in a Nachfrist notice."[45]

Despite these limitations, neither the limitation to non-delivery in Art. 49(1)(b) nor the limitation to failure to pay the price or take delivery in Art. 64(1)(b) does in any way preclude that a breach of other obligations, whose non-performance does not yet constitute a fundamental breach of contract at the time for performance, becomes such as more time passes. This may be emphasized by fixing a Nachfrist as well. However, in this event, it will not suffice to prove that a Nachfrist of reasonable length was fixed and performance was not made nevertheless, but it must be proved that the conditions for the existence of a fundamental breach of contract are given. This is true, for instance, of the fixing of a Nachfrist for the performance of the obligation to participate in the manufacture of the goods, which is not to be considered as part of the obligation to take delivery.[46] By contrast, non-performances during the Nachfrist of those most essential obligations such as seller's delivering the goods or buyer's paying the price or taking delivery, constitute according to Arts. 49(1)(b) and 64(1)(b) immediately, after the expiry of the Nachfrist, a fundamental breach of contract, without having to prove that the conditions for the existence of a fundamental breach of contract are given.[47]

Finally, it is to be noted that the buyer's obligation to pay the price, pursuant to Art. 54 CISG, includes taking such steps and complying with such formalities which may be required by the contract and by any relevant laws and regulations to enable payment to be made, such as registering the contract with a government office or with a bank, procuring the necessary foreign exchange, as well as applying for a letter of credit or a bank guarantee to facilitate the payment of the price. Therefore, the Secretariat Commentary states that the buyer's failure to take any of these steps within an additional period of time fixed by the seller in accordance with Art. 63 CISG would authorize the seller to declare the contract avoided under Art. 64(1)(b).[48] However, Enderlein & Maskow have their reservations here because the buyer insofar is granted several options and he cannot be forced by the seller to choose one. Furthermore, not even a general date is fixed in regard to most of these steps vis-à-vis the seller so that there is neither a connecting point for the setting of a Nachfrist. To put it briefly, the relevant obligations of the buyer are not feasible enough so that such a far-reaching interpretation of the obligation to pay the price could lead to abuse by the seller.[49]

4.4.3.3 UNIDROIT Principles / PECL approach

Art. 7.3.1(3) UPICC follows the approach adopted under the CISG and provides: "In the case of delay the aggrieved party may also terminate the contract if the other party fails to perform before the time allowed it under Article 7.1.5 has expired." Similarly, PECL Art. 9:301(2) also provides as: "In the case of delay the aggrieved party may also terminate the contract under Article 8.106 (3)." Thus, the two Principles contain a very similar termination situation through the Nachfrist procedure, but with some variance due to the delicate difference over the Nachfrist procedure itself between them.

As mentioned above, the two Principles also include the avoidance provisions within the Nachfrist article under UPICC 7.1.5 and PECL Art. 8:106, respectively. In this respect, UPICC 7.1.5(3) reads: "Where in a case of delay in performance which is not fundamental the aggrieved party has given notice allowing an additional period of time of reasonable length, it may terminate the contract at the end of that period. If the additional period allowed is not of reasonable length it shall be extended to a reasonable length. The aggrieved party may in its notice provide that if the other party fails to perform within the period allowed by the notice the contract shall automatically terminate." PECL Art. 8:106 provides similarly: "If in a case of delay in performance which is not fundamental the aggrieved party has given a notice fixing an additional period of time of reasonable length, it may terminate the contract at the end of the period of notice. The aggrieved party may in its notice provide that if the other party does not perform within the period fixed by the notice the contract shall terminate automatically. If the period stated is too short, the aggrieved party may terminate, or, as the case may be, the contract shall terminate automatically, only after a reasonable period from the time of the notice."

As indicated in the aforementioned two texts, the position at the end of the period of extension depends on whether the late performance was already fundamental at the time when the extension was granted. In this situation, if the contract is not completely performed during the extension, the right to terminate for fundamental non-performance simply springs into life again as soon as the extension period expires. On the other hand, if the late performance was not yet fundamental, termination would only be possible at the end of extension if the extension was reasonable in length.[50] One should note, however, if the aggrieved party serves a notice of less than a reasonable period it need not serve a second notice; it may terminate after a reasonable time has elapsed from the date of the notice.[51]

On the other hand, both texts indicate that the aggrieved party may provide for automatic termination. It may say in its notice that the contract shall terminate without further notice if the defaulting party fails to perform within the period of the notice. Although no similar rule is found under the CISG, such an automatic termination may be included in a CISG Nachfrist notice under the general party autonomy doctrine. Once such an automatic termination is expressly provided for in the notice, if the defaulting party in fact tenders performance after the date set in the notice, the aggrieved party may simply refuse to accept it. However, if the aggrieved party actually knows that the defaulter is still attempting to perform after the date, good faith requires it to warn the defaulter that the performance will not be accepted. If the defaulting party asks the aggrieved party whether it will accept performance after the date set, good faith requires the aggrieved party to give an answer within a reasonable time.[52] One should note, however, PECL Art. 8:106(3) expressly states that: "If the period stated is too short, [...] as the case may be, the contract shall terminate automatically, only after a reasonable period from the time of the notice." Although no similar rule is found in UPICC 7.1.5(3), it appears that such a slight distinction bears technical manner rather than a substantial difference.

Finally, it is to be noted that an additional paragraph which is not found in the PECL is added to UPICC Art. 7.1.5(3), which reads: "Paragraph (3) does not apply where the obligation which has not been performed is only a minor part of the contractual obligation of the non-performing party." (Art. 7.1.5(4)) In this respect, it is said that the UNIDROIT Principles include a de minimus threshold such that a Nachfrist notice does not allow avoidance of the contract where the unperformed obligation is minor. In this regard, the UNIDROIT Principles mirror more closely the CISG. As with the threshold under the UNIDROIT Principles, the CISG's limitation of avoidance to, for instance, cases of non-delivery can also be viewed as a de minimus threshold, since the rest of the seller's obligations can be viewed as less important (or more compensable by damages) than the delivery obligation.[53]

Go to table of contents to full text of Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL.

FOOTNOTES: Chapter 4

1. See Comment on Art. 7.1.5 UPICC.

2. See Bruno Zeller in "Buyer’s notice fixing additional final period for performance: Remarks on the manner in which the Principles of European Contract Law may be used to interpret or supplement Articles 47 and 49(1)(b) CISG". (2001) Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp47.html#er>; also in "Seller’s notice fixing additional final period for performance: Remarks on the manner in which the Principles of European Contract Law may be used to interpret or supplement Articles 63 and 64(1)(b) CISG". (2001) Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp63.html#er>.

3. 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>.

4. Ibid.

5. Supra. note 2.

6. Ibid.

7. Providing an automatic extension of time for the parties to a commercial contract to fulfill their obligations is mandated under German law. Such automatic extension, and its mechanics, is known in German as Nachfrist. The Nachfrist obligation is articulated in Section 326 of the German Civil Code (Bürgerliches Gesetzbuch ("BGB")) Loosely translated, the Section reads in English as, "The Creditor must, as a general rule, reasonably extend the original term for performance unless such contractual performance is of no further interest to the Creditor due to delay or unless the final deadline is apparently, for some other reason, superfluous. When the grace period has elapsed without completion of the contractual obligation, the Creditor may choose between damages for non-performance and avoidance of the contract. A claim for performance is, however, excluded." (See Maryellen DiPalma in "Nachfrist under National Law, the CISG, and the UNIDROIT and European Principles: A Comparison": International Contract Adviser (Kluwer), Vol. 5, No. 1 (Winter 1999); pp. 28-38. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/DiPalma.html>.) In view of the significant differences as regards the function of the Nachfrist, it is therefore submitted that Section 326 of the BGB may, at the very most, have served as an inspiration not a model provision for the international rules. (See Anette Gärtner in "Britain and the CISG: The Case for Ratification - A Comparative Analysis with Special Reference to German Law": Pace Review of the Convention on Contracts for the International Sale of Goods (CISG), Kluwer Law International (2000-2001); pp. 59-81. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/gartner.html>.)

8. See Knapp , Commentary on the International Sales Law: The 1980 Vienna Sale Convention, Cesare Massimo Bianca & Michael Joachim Bonell eds. (1987) [hereinafter Bianca & Bonell]; p. 460.

9. See Secretariat Commentary on Art. 43 of the 1978 Draft [draft counterpart of CISG Art. 47], Comment 2. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-47.html>; Secretariat Commentary on Art. 59 of the 1978 Draft [draft counterpart of CISG Art. 63], Comment 2. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-63.html>. (The match-ups indicate: CISG Art. 47 is identical to 1978 Draft Art. 43 except for a reference to "delay in performance" rather than "delay in the performance": see the match-up available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-47.html>; CISG Art. 63 is identical to 1978 Draft Art. 59 except for the concluding reference to "delay in performance" rather than "delay in the performance": see the match-up available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-63.html>. The Secretariat Commentary on 1978 Draft Arts. 43, 59 should therefore be relevant to the interpretation of CISG Arts. 47, 63.)

10. See Comment 1 on Art. 7.1.5 UPICC.

11. In the case of fixed-time contracts, the date of delivery may be so essential to the buyer that non-compliance with it may constitute a fundamental breach of contract. (See Enderlein & Maskow, infra. note 26, p. 137.)

12. Supra. note 10.

13. By contrast, Section 326 of the BGB does not have anything to do with reducing the risk of wrongful termination or securing the right to avoidance. Partly, this is due to the fact that, unlike the three instruments, the BGB does not differentiate between simple and fundamental breaches of contract. More importantly, according to German law, the right to terminate a contract only arises in a rather limited number of situations. Whereas the three instruments allow the creditor to avoid the contract for any fundamental breach, the BGB starts from the notion that, in principle, a contract may only be unilaterally terminated if the agreement provides for a contractual right to avoidance. As one of the exceptions to this general rule, this provision under German law, instead, in many cases, enables the aggrieved party to declare the contract avoided.

14. The first situation, the case of the aggrieved party who indicates that he will still accept tender of performance or the cure of a defective performance but then changes his mind, gives rise to little problem in systems such as the FRENCH or SPANISH where a court order is needed for termination (French CC art. 1184(3); Spanish CC art. 1124(3)): instead of terminating the contract at once the court can simply grant a further delay for performance. Systems such as the COMMON LAW which allow termination by simple notice without prior warning have often developed rules to prevent a sudden change of mind by the aggrieved party; e.g. the Common law rule that if the aggrieved party has "waived" his right to terminate for the time being he can only withdraw the waiver by giving reasonable notice: Charles Rickards Ltd v. Oppenhaim [1950] 1 K.B. 616 (C.A.). CIVIL LAW systems also recognise that the aggrieved party should not be allowed to terminate during the period in which he indicated that he would still accept performance: e.g. AUSTRIAN law, e.g. OGH 21 December 1987, SZ 60/287; 12.3.1991 JBI 1992, 318; FINNISH and SWEDISH Sale of Goods Acts, 25(3), 54(3) and 55(3); GREEK law (Michaelides Nouaros Erm.AK vol.II/1 art. 383 nos. 17-18 (1949). The aggrieved party may also be barred from seeking performance in natura, as, for example, in ITALIAN law (cc art. 1454(3)). It is often recognised that the aggrieved party may resort to termination immediately, however, if the other party indicates that he will not perform within the time allowed. (Infra. note 15, Note 1.)

15. See Comment and Notes to the PECL: Art. 8:106. Comment A. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp47.html>.

16. Ibid., Comment B.

17. Supra. note 15, Comment C.

18. Ibid.

19. See Comment 1 on Art. 1.9 UPICC.

20. See Comment and Notes to the PECL: Art. 1:303. Comment B. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp27.html>.

21. See Comment 2 on Art. 1.9 UPICC.

22. See Comment 4 on Art. 1.9 UPICC.

23. Supra. note 20, Comment D.

24. Supra. note 9, Comments 7 on Draft Art. 43 and 59.

25. Supra. note 15, Comment D.

26. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 238. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

27. Supra. note 2.

28. Supra. note 26, p. 182.

29. Supra. note 26, pp. 238-239.

30. Supra. note 26.

31. Supra. note 15, Comment E.

32. In this point, since it is usually advised an inclusion of an arbitration clause in international commercial contracts and it is expressly provided that the "court" "includes an arbitral tribunal" under UPICC Art. 1.10 or PECL Art. 1:301, one can assume that the appropriate length of time can be determined by an arbitrator as well.

33. Supra. note 25.

34. See Comment 2 on Art. 7.1.5 UPICC.

35. Supra. note 26, p. 183.

36. Supra. note 26, p. 240.

37. Supra. note 26, pp. 183-184.

38. Supra. note 15.

39. Supra. note 26, p. 184.

40. Supra. note 26, pp. 241-242.

41. Supra. note 9, Comments 9, 10 on Draft 43 and 59.

42. 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>.

43. Supra. note 26, p. 193. Enderlein & Maskow note that it would seem reasonable to apply this rule analogously to the expiry of a Nachfrist where there was no performance, in the case of curing a non-conformity. But this was rejected repeatedly and for good reasons at the diplomatic conference.

44. For example, in the case of defective goods, if the contract is breached, the Buyer may compel performance and set an additional time for performance. On the expiration of that period, the Buyer must again decide whether to avoid the contract or not, and this decision will still depend on whether the breach is fundamental. The only change in the situation is that the Buyer once again has the possibility of giving a notice of avoidance within a "reasonable time" to the Seller. (Supra. note 3.)

45. Supra. note 42.

46. Supra. note 26, p. 245.

47. In this point, Schlechtriem submits it is a consequence of the expiry of time limits and not of the setting of a Nachfrist, that a delay during the Nachfrist can turn the original delay into a fundamental breach. Enderlein & Maskow submit differently: We believe that it is an academic dispute to find out whether it is the setting of a Nachfrist in itself during which there is no performance of obligations, or the expiry of the time limit which turns the breach of contract into a fundamental one. (Supra. note 43.)

48. See Secretariat Commentary on Art. 60 of the 1978 Draft [draft counterpart of CISG article 64], Comment 7. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-64.html>.

49. Supra. note 46.

50. See Comment 2 on Art. 7.1.5 UPICC.

51. Supra. note 25.

52. Supra. note 15, Comment F.

53. See Peter A. Piliounis in "The Remedies of Specific Performance, Price Reduction and Additional Time (Nachfrist) under the CISG: Are these worthwhile changes or additions to English Sales Law?"(1999). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/piliounis.html>.

CHAPTER 5. CURE BY NON-PERFORMING PARTY

     CISG Art. 48, UPICC Art. 7.1.4 or PECL Art. 8:106 provides that, if certain conditions are met, the non-performing party may "cure" a defect in his performance by way of replacing or repairing defective performance even in the case where the contract time for performance has expired. In effect, by meeting these conditions, the non-performing party is able to extend the time for performance for a brief period beyond that stipulated in the contract, unless timely performance is required by the agreement or the circumstances. This [remedy] thus favours the preservation of the contract. It also reflects the policy of minimising economic waste [involved in termination of the contract for international commercial transactions], [...], and the basic principle of good faith [...].[1]

5.1 INTRODUCTION

In many cases of defective performance the breach may easily be redressed, for example by delivering a missing part. Therefore, some domestic laws governing contracts and sales often contained so-called cure provisions. Even many of those legal systems that do not have a rule permitting cure would normally take a reasonable offer of cure into account in assessing damages.[2]

Under the CISG, for the purpose of minimising the hardship and economic waste involved in termination of the contract for international sales, appropriate rules are provided permitting the defaulting seller to "cure" a defect in his performance by way of replacing or repairing defective documents and goods. For this purpose, Art. 34 enables the seller who handed over documents before the contract date to cure any lack of conformity in the documents before the time for performance is expired. The same power is given to him by Art. 37 when he has delivered goods which do not conform to the contract. The right to cure is also extended by Art. 48 to the case where the contract time for performance has expired. In short, in accordance with commercial practice, Arts. 34, 37 and 48 of the CISG therefore allow the vendor to remedy defects both before and after the stipulated date for delivery. Thus, where a breach has occurred, the CISG encourages the seller to keep his contractual promises by offering him the express right to cure his own mistakes.[3]

Art. 37 CISG concerns the cure of defects before the date for delivery and is similar in substance to Art. 34 concerning documents.[4] "With regard to Article 37 of the CISG, it is submitted that this regulation should neither be unfamiliar for common nor civil lawyers, as most legal systems recognise the principle of liberty to cure prior to the set date for performance. It may well be that only a few codes, such as the UCC, expressly provide for this right. Nevertheless, under both English and German law for example, the seller is unquestionably entitled to cure a defective tender by substituting it with a tender of conforming goods within the time limit fixed by the contract."[5] This should be quite natural, "the date for delivery may be at the very beginning or within a period of time. If the seller has chosen a date for delivery at the beginning of the period, he may cure any non-conformity up to the end of the period. It seems that the seller has the same right even if the buyer has chosen a date within the agreed period. The buyer's choice of a specific date does not change the originally agreed period of time for delivery by the seller."[6]

The seller may cure non-conformities not only up to the date of delivery. According to Art. 48, which reads in pertinent part: "the seller may, even after the date for delivery, remedy at his own expense any failure to perform his obligations", even after the deadline for delivery has passed - the seller can generally still "cure". In this respect, Art. 48 of the CISG follows the American rule of section 2-508(2) of the UCC. However, Art. 48 does not confer a right to cure as extensive as the right conferred under UCC 2-508(2). Art. 48 was the subject of controversy in Vienna.[7] As a rule, however, under certain circumstances which will be discussed below, the present version confers on the seller a limited right to cure a breach after the date for delivery has elapsed, serving a companion with the more powerful right to cure under Arts. 34 and 37. The CISG approach to cure is followed by Art. 7.1.4 of the UNIDROIT Principles, which generally provides that: "The non-performing party may, at its own expense, cure any non-performance, provided that..." However, unlike CISG 48, Art. 7.1.4 UPICC extends the right to cure to any non-performing party instead of limiting it to the seller, and seems to be in tune with commercial reality. PECL Art. 8:104 also expresses the rule but in rather general terms: "A party whose tender of performance is not accepted by the other party because it does not conform to the contract may make a new and conforming tender where the time for performance has not yet arrived or the delay would not be such as to constitute a fundamental non-performance." For this purpose the party making the non-conforming tender will still be in time to cure the defect if he makes a new tender either before the due date for performance or where the delay is not such as to constitute a fundamental non-performance.[8]

Clearly, the right of the seller or the non-performing party to cure is established under the three instruments. However, the existence of such a right to cure may, generally speaking, give rise to uncertainty. Especially if such a right can be exercised outside the period designated for performance, which is the focused situation in the following discussion, the innocent party may, at first, wonder whether and when the vendor will resort to it.

5.2 CONDITIONS FOR INVOKING CURE

5.2.1 In General

As mentioned above, Art. 8:104 PECL states the right to cure a non-confirming tender by making a new and conforming tender if there is still time to do so. The Official Comment thereon indicates that this will depend on "whether time is of the essence or has become of the essence, e.g. by the giving and expiry of a notice under Article 8:106. In either of these cases there is no right to cure under this Article."[9] Also, the seller's liberty to cure under CISG is "[s]ubject to article 49" so that, in case of a fundamental breach, he cannot deprive the buyer of his right to avoid the contract by curing the defect. However, this limitation is to some extent complex and therefore will be discussed separately infra. 5.3. On the other hand, "[w]here the failure to meet a deadline in itself does not constitute a fundamental breach - in other words, when time is not of the essence - the seller's cure within a reasonable time after the due date will normally prevent the delay from constituting a 'fundamental breach of contract' such as to permit the buyer to avoid the contract."[10]

In addition, Art. 48 CISG provides seller's right to cure only "if he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer". In other words, the vendor must be able to remedy the breach without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement of his expenses. Thus, the seller's right to cure under CISG Art. 48(1) is subject to two additional conditions: (a) without unreasonable delay; (b) without causing unreasonable inconvenience or uncertainty. The approach is followed under the UNIDROIT Principles, in which according to Art. 7.1.4(1), the right of the non-performing party to cure is subject to four conditions: "(a) without undue delay, it gives notice indicating the proposed manner and timing of the cure; (b) cure is appropriate in the circumstances; (c) the aggrieved party has no legitimate interest in refusing cure; and (d) cure is effected promptly."

Anyway, these conditions (among which the two conditions as may be roughly categorized under the heading: (a) reasonableness of notice; and (b) appropriateness of cure will be given further details below) safeguarding the non-performing party's right to cure makes clear that, although with the right accommodating the non-performing party's interests by permitting cure outside the contract period, the non-performing party's liberty to cure may give rise to an element of uncertainty, the three instruments generally take the policy that the vendor cannot rely on this unique right to the detriment of the innocent party. Hence, it is concluded that, the remedy and its exceptions balances the interests of both parties. Apart from the fact that it does not unduly tilt the balance in favour of the vendor, it may, on a more general note, also be submitted that the right to cure is probably in tune with commercial reality. When the non-performance arises, a practical occasion arises for the aggrieved party to relate to it, where he relatively seldom immediately upon the obligations becoming due resort to the deciding organs. For instance, as discussed in Chapter 3, where defective goods are tendered, the "typical buyer" will reject the supplied goods and, at the same time, tell the seller to repair or replace them, thereby holding the contract open for performance. From this it can be inferred that, in general, buyers appear to be willing to give the seller a second chance.[11]

5.2.2 Reasonableness of Notice

The Secretariat Commentary on Art. 44 of the 1978 Draft [draft counterpart of CISG Art. 48] [12] indicates that if the seller intends to cure the non-conformity he will normally so notify the buyer. He will also often inquire whether the buyer intends to exercise his remedies of avoiding the contract or declaring the price to be reduced or whether he wishes, or will accept, cure by the seller.[13] The Official Comment on Art. 7.1.4 UPICC also states that cure may be effected only after the non-performing party gives notice of cure. The notice must be reasonable with regard to its timing and content as well as to the manner in which it is communicated.[14]

As for the timing of notice, both CISG Art. 48(1) and UPICC Art. 7.1.4(1)(a) clearly provide that the seller or the non-performing party may remedy his failure to perform only if he can do so without unreasonable delay. The Official Comment on UPICC Art. 7.1.4 further states that notice of cure must be given without undue delay after the non-performing party learns of the non-performance.[15] The Secretariat Commentary also indicates that the seller no longer has the right to remedy the failure to perform after the delay amounts to a fundamental breach even if the buyer has not as yet declared the contract avoided.[16] Of course, even if the seller no longer has the right to remedy his failure to perform under this article, the parties can agree to his doing so.[17] In other words, particularly because of the avoidance's prevailing over the right to cure under the CISG, "[i]t is generally assumed that a delay is unreasonable when it amounts to a fundamental breach of contract. In this case the seller cannot assert his right to cure against the will of the buyer; he needs the buyer's agreement."[18]

On the other hand, it does not suffice that the seller or the non-performing party states his readiness to cure only in general terms. To the extent information is then available, the notice must indicate how cure is to be effected and when.[19 ]In this respect, Art. 7.1.4(1)(b) clearly requires that the notice must indicate the proposed manner and timing of the cure. The first sentence of Art. 48(2) CISG also "makes it clear that the seller must indicate the time period within which the proposed cure will be effected. If there is no indication of this period but merely an offer to cure, the seller can draw no conclusions nor derive any rights from a failure by the buyer to respond."[20] The underlying idea is that the right to cure may well be doubtful and, in particular, the period of time which the non-performing party offers for performance may reinforce that doubt. Therefore, the notice must be reasonable with regard to its content, so as to indicate how cure is to be effected and when.

Finally, notice must also be communicated to the aggrieved party in a manner that is reasonable in the circumstances.[21] In this point, it is to be noted that according to CISG Art. 48(4), a request or notice by the seller under Art. 48(2) or (3) is not effective unless received by the buyer. Hence, it is not the general dispatch rule presumed under CISG Art. 27, but the general receipt rule established under UPICC Art. 1.9 (under the CISG, Art. 24, even if expressly conceived for Part II of the CISG, is applied analogously) that applies to the notice of cure. Here the general principle obviously is to place the risk of transmission always on the party which has committed a breach of contract.[22]

5.2.3 Appropriateness of Cure

It does not suffice that the notice of cure is reasonable, the cure in itself must be appropriate. In this point, it seems appropriate to examine the following aspects in determining the appropriateness of cure:

Firstly, cure is appropriate in the circumstances (Art. 7.1.4(b) UPICC). It depends on whether it is reasonable, given the nature of the contract, to permit the non-performing party to make another attempt at performance. Unlike the CISG, as indicated in UPICC Art. 7.1.4(2), cure is not precluded under the UNIDROIT Principles merely because the failure to perform amounts to a fundamental non-performance. The factors to be considered in determining the appropriateness of cure include whether the proposed cure promises to be successful in resolving the problem and whether the necessary or probable delay in effecting cure would be unreasonable or would itself constitute a fundamental non-performance. However, the right to cure is not defeated by the fact that the aggrieved party subsequently changes its position. If the non-performing party gives effective notice of cure, the aggrieved party's right to change position is suspended. Nonetheless, the situation may be different if the aggrieved party has changed position before receiving notice of cure (since the notice of cure is governed under the receipt principle).[23]

Secondly, an appropriate cure surly should not cause the buyer or the aggrieved party "unreasonable inconvenience" or "uncertainty of reimbursement" of expenses advanced by the aggrieved party (Art. 48(1) CISG). It cannot generally be said what unreasonable inconvenience means; this can only be decided on a case-by-case basis. On the other hand, at first it seems quite natural that the seller or the non-performing party must bear the costs involved in remedying a failure to perform. However, the aggrieved may incur expenses, for instance when the buyer has to send back exchanged goods. What matters is not the amount of the expenses, but irrespective of that, the uncertainty of reimbursement, e.g. the risk that the seller is insolvent or not willing to reimburse expenses incurred by the buyer.

Thirdly, cure is effected promptly (Art. 7.1.4(1)(d) UPICC). Even the lack of inconvenience on the part of the aggrieved party does not justify the non-performing party in delaying cure. Cure must be effected promptly after notice of cure is given. Time is of the essence in the exercise of the right to cure. The non-performing party is not permitted to lock the aggrieved party into an extended waiting period.[24]

Fourthly, forms of cure are proper. Cure may include repair and replacement as well as any other activities that remedy the non-performance and give to the aggrieved party all that it is entitled to expect under the contract. However, repairs constitute cure only when they leave no evidence of the prior non-performance and do not threaten the value or the quality of the product as a whole.[25] In any case, it depends on the circumstances of each and every case and is left to the courts to determine which forms of cure will prevail; but the aggrieved party's obligation to mitigate losses (see Chapter 14) has to be taken into account.

Finally, the aggrieved party has no legitimate interest in refusing cure (Art. 7.1.4(1)(c) UPICC). The non-performing party may not cure if the aggrieved party can demonstrate a legitimate interest in refusing cure. However, if notice of cure is properly given and if cure is appropriate in the circumstances, it is presumed that the non-performing party should be permitted to cure. A legitimate interest may arise, for example, if it is likely that, when attempting cure, the non-performing party will cause damage to person or property. On the other hand, a legitimate interest is not present if, on the basis of the non-performance, the aggrieved party has simply decided that it does not wish to continue contractual relations.[26]

In sum, the non-performing party has the right to cure only if there are no circumstances which could be summed up under the notion inappropriateness. In any case, we have to keep in mind that curing non-performance should never cause the aggrieved party inconveniences that are unreasonable or expenses that are uncertainty of reimbursement. As for the reasonability or the appropriateness, in general each case is different and can be decided only in the light of the individual circumstances. There is, however, a difference between inconvenience and expense. Whereas it does not permit unreasonable inconvenience and unreasonable expense for the innocent party, consistently using the notion "unreasonable" in both cases, the inconvenience rests with the aggrieved party but the expenses, even the reasonable ones, may be claimed from the non-performing party as damages.

5.3 SELLER'S RIGHT TO CURE AND BUYER'S RIGHT TO TERMINATION

CISG Art. 48(1) clearly states: "Subject to article 49, ..." Thus, the right to cure under Art. 48(1) theoretically could be cancelled by the buyer's avoidance of the contract. This Article by its language in expressly reserving Art. 49, appears to underline the priority of the buyer's remedy of termination over the seller's right to cure. Is this appearance true? Things are not as simple as that.

It seems that a precise answer to the question requires one to examine the issue in light of the legislative history of the provision. The interplay between termination and cure was a highly controversial issue throughout the UNCITRAL Working Group's sessions.[27] The issue again became the subject of considerable debate at the Vienna Conference. Three alternative proposals were considered by State delegations and the Conference finally adopted the second alternative as Art. 48(1) which opens with the words "'Subject to Art. 49, the seller may ... remedy ...."[28] It is said that the legislative history of the provision clearly shows that the majority of delegations at the Conference were opposed to the approach which sought to give absolute priority to the seller's right to cure over the buyer's right to avoid the contract under Art. 49(1)(a). The opening words of Art. 48 were adopted upon this general understanding.[29]

Accordingly, where the fundamental breach test is satisfied, the buyer would be entitled to terminate the contract. The buyer is not required to accept the seller's offer to cure and give him an opportunity to cure the defect under Art. 48. This is because the language of para. (1) of Art. 48 subjects the exercise of the right of cure to the buyer's right to avoid the contract under Art. 49. In addition, there is no provision under the Convention to require the buyer to give the seller in breach an opportunity to cure before exercising his right of avoidance. Moreover, para. (2) of Art. 48 implicitly permits the buyer to reject the seller's request to remedy the defect within a reasonable time. Under this provision, the buyer is deprived of the right to resort to remedies which are inconsistent with the seller's performance only when he accepts the seller's request or remains silent. There is no express provision in the Convention to deprive the buyer of his right of avoidance in accordance with Art. 49(1)(a) for the seller's mere offer to cure his default after the contract date. The only thing provided by the Convention is the last phrase of Art. 50 under which the buyer who rejects the seller's offer to cure under Art. 48 is deprived of his right to claim price reduction.[30]

Although it is said that the "subject to" reference in Art. 48(1) to Art. 49 is less than clear, Lookofsky believes where time is not of the essence, the seller should have the chance to cure even a seriously non-conforming delivery; in this situation, most commentators therefore agree that the seller's right to cure is not defeatable by a buyer's exercise of his right to avoid for a fundamental breach.[31] For example, Jafarzadeh confirms this view as follows: "Under Art. 48(1) the seller is empowered to cure at his own expense 'any failure to perform his obligations'. Therefore, this is a general provision, which covers fundamental and non-fundamental breaches. On the other hand, by virtue of Art. 49(1) the buyer is given an option to avoid the contract where the seller's failure amounts to a fundamental breach, whether the seller offers to cure or not. On this interpretation, giving priority to the buyer's right to avoid does not make the seller's right to cure futile, since the seller can exercise his right under Art. 48(1) where his breach does not amount to fundamental breach for the purpose of precluding the buyer from exercising his right to reduce the price under Art. 50. The buyer would be able to exercise his right under Art. 49(1) where the seller does not show his ability and willingness to cure the breach, since the buyer should not be deprived of his right for the mere possibility of curing the breach by the seller. This is because the buyer, as indicated before, is not under any duty under the Convention to discover the possibility of cure by the seller and to give him an opportunity to cure."[32]

Therefore, with regard to the availability of the right to terminate the contract on the one hand, and the liberty to cure on the other, it may furthermore be added that the balancing of interests according to the Convention also leads to economically sensible results. Nonetheless, the right of the buyer to avoid the contract according to Art. 49 has priority under the CISG. Therefore, the seller has no right to remedy his failure to perform if the buyer avoids the contract. On the other hand, the seller may remedy his failure to perform as long as the buyer did not declare the contract avoided.[33] However, if priority were decisive, one would provoke a competition between buyer and seller and produce purely arbitrary results. Ignoring that such competition in exercising a remedy should not be a consideration under law, it would also leave the seller in limbo as long as he does not know of the defect.[34] On the other hand, an aggrieved party must act reasonably to mitigate damages. The injured party's duty to minimize loss may require it to accept new offers from the breaching party, possibly even after a "fundamental" breach.[35] Therefore, it may come into one's concern that the "subject to" reference in Art. 48(1) to Art. 49 may encumber the seller invoking his right to cure if the buyer hastily declared the contract avoided before the seller has an opportunity to cure the defect.

The only way to avoid such consequences (and to protect the seller's interests) would be either to impose on the buyer the duty to notify the seller of the breach and to give the seller the opportunity to invalidate the declaration of avoidance retroactively through an offer to cure, or to not treat his right to cure as precluded by the notice of avoidance. The latter way has been adopted by the UNIDROIT Principles but, at least as a general rule as stated above, there is no room for it under the Convention.

Unlike the CISG, under the UNIDROIT Principles the buyer's right to terminate is suspended provided that the seller's offer to cure is reasonable and appropriate and the buyer has no "legitimate interest" in refusing an offer to cure, since it is said that notice of cure is considered to be "effective" when the requirements of para. (l)(a) - (c) of Art. 7.1.4 have been met.[36] Moreover, the seller's right to cure is not precluded by notice of termination. Art. 7.1.4(2) UPICC expressly states: "The right to cure is not precluded by notice of termination." The Official Comment thereon makes clear that: "If the aggrieved party has rightfully terminated the contract pursuant to Arts. 7.3.1(1) and 7.3.2(1), the effects of termination (Art.7.3.5) are also suspended by an effective notice of cure. If the non-performance is cured, the notice of termination is inoperative. On the other hand, termination takes effect if the time for cure has expired and any fundamental non-performance has not been cured."[37] In other words, under the UNIDROIT Principles the buyer cannot exercise his right of termination for the purpose of denying the seller an opportunity to cure.

5.4 EFFECTS OF EFFECTIVE NOTICE

5.4.1 Right to Inquire vs. Duty to Accept Cure

As discussed above, the right to cure under CISG Art. 48(1) theoretically could be cancelled by the buyer's avoidance of the contract. The language of Arts. 48(1), 49(2)(b)(iii) and 50 as well as the legislative history of the provision demonstrates that, even in such a situation where the buyer has not declared the contract terminated and the seller, after becoming aware of the defect, informs the buyer of his readiness to cure, the buyer is entitled to disregard the seller's offer to cure and terminate the contract on account of seller's fundamental breach. Thus, under the CISG when the buyer has the right to avoid a contract but does not exercise it, the seller is left with uncertainty.[38]

Therefore, Art. 48(2) provides that: "If the seller requests the buyer to make known whether he will accept performance and the buyer does not comply with the request within a reasonable time, the seller may perform within the time indicated in his request". Thus the seller intending to cure may end the uncertainty by sending a request (which is effective upon receipt) to the buyer to ask for clarification as to whether the buyer will accept the cure. Furthermore, Art. 48(3) CISG stipulates: "A notice by the seller that he will perform within a specified period of time is assumed to include a request, under the preceding paragraph, that the buyer make known his decision." Thus, the assumed interest of the seller also serves to retain the contract. The buyer has to respond to the communication of the seller, even if no request in accordance with Art. 48(2) was added to it.[39 ]If the buyer does not answer within a reasonable time, the seller has the right to perform and the buyer has an obligation to accept performance within the time indicated in the seller's request.[40]

By contrast, the UNIDROIT Principles doesn't require the non-performing party to inquire the aggrieved party whether the latter will accept the cure. Insofar as the non-performing party has the right to cure there should be no need to request information as to whether the aggrieved party will accept performance. The aggrieved party is in that case obliged to accept the cure. This is especially confirmed by the fact that the non-performing party's right to cure is not precluded by notice of termination under the UNIDROIT Principles. Under the UNIDROIT Principles, the decision to invoke Art. 7.1.4 rests on the non-performing party. Once the aggrieved party receives effective notice of cure, it must permit cure and, as provided in Art. 5.3, cooperate with the non-performing party. For example, the aggrieved party must permit any inspection that is reasonably necessary for the non-performing party to effect cure. If the aggrieved party refuses to permit cure when required to do so, any notice of termination is ineffective. Moreover, the aggrieved party may not seek remedies for any non-performance that could have been cured.[41]

5.4.2 Suspension of Inconsistent Remedies

The second sentence of Art. 48(2) CISG requires: "The buyer may not, during that period of time, resort to any remedy which is inconsistent with performance by the seller." Similarly, Art. 7.1.4(3) UPICC stipulates: "Upon effective notice of cure, rights of the aggrieved party that are inconsistent with the non-performing party's performance are suspended until the time for cure has expired."

Thus, when a notice of cure (or request as to whether the buyer will accept the cure) from the non-performing party has been given and gets effective upon its reaching the other party (if he is a party to a CISG contract, only if he has not declared avoidance or remains silent on the former's request), the aggrieved party may not exercise any remedies inconsistent with the non-performing party's right to cure during the period indicated in the request or notice until it becomes clear that a timely and proper cure has not been or will not be effected. Inconsistent remedies include giving notice of termination, entering into replacement transactions and seeking damages or restitution.[42]

In this way the aggrieved party is, at least temporarily, deprived of his right to invoke certain remedies such as termination. He cannot declare the contract avoided during the period of time offered by the non-performing party. This rule clearly shows the underlying idea of the right of the non-performing party, i.e. to keep to the contract, if possible and thus balance interests of both parties and avoid unnecessary waste.

5.4.3 Retained Rights of the Aggrieved Party

The second sentence of Art. 48(1) CISG stipulates that "the buyer retains any right to claim damages as provided for in this Convention". Thus, the right to claim damages, e.g. as a result of delay, does not lapse on the ground that the seller has performed in the end. But the curing of a failure to perform may have an influence on the amount of the damage claimed. Also in the case of a cure, damage may be claimed to compensate for a possible stoppage in production.[43]

Similarly, Art. 7.1.4(5) UPICC reads: "Notwithstanding cure, the aggrieved party retains the right to claim damages for delay as well as for any harm caused or not prevented by the cure." Under this provision, even a non-performing party who successfully cures is liable for any harm that, before cure, was occasioned by the non-performance, as well as for any additional harm caused by the cure itself or by the delay or for any harm which the cure does not prevent.[44]

Finally, in accordance with Art. 7.1.4(4) UPICC, the aggrieved party may "withhold performance pending cure". Although the CISG is silent on this issue, it is logically inferred that the buyer may withhold his own performance during the time for the seller's cure.

Go to table of contents to full text of Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL.

FOOTNOTES: Chapter 5

1. See Comment 1 on Art. 7.1.4 UPICC.

2. Ibid.

3. 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>.

4. Art. 34 CISG reads: "If the seller is bound to hand over documents relating to the goods, he must hand them over at the time and place and in the form required by the contract. If the seller has handed over documents before that time, he may, up to that time, cure any lack of conformity in the documents, if the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention." Art. 37 reads: "If the seller has delivered goods before the date for delivery, he may, up to that date, deliver any missing part or make up any deficiency in the quantity of the goods delivered, or deliver goods in replacement of any non-conforming goods delivered or remedy any lack of conformity in the goods delivered, provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention."

5. See Anette Gärtner in "Britain and the CISG: The Case for Ratification - A Comparative Analysis with Special Reference to German Law": Pace Review of the Convention on Contracts for the International Sale of Goods (CISG), Kluwer Law International (2000-2001); pp. 59-81. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/gartner.html>.

6. See Fritz Enderlein in "Rights and Obligations of the Seller under the UN Convention on Contracts for the International Sale of Goods": Petar Sarcevic & Paul Volken eds., International Sale of Goods: Dubrovnik Lectures, Oceana (1996); pp. 163-164. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein1.html>.

7. See A/Conf. 97/C.1/L.140 (= O.R. 114) (the motion); A/Conf. 97/C.1/L.160 (= O.R. 114) (Bulgarian motion to the same effect); A/Conf. 97/C.1/SR.20 at 6 et seq. (= O.R. 340 et seq.).

8. See Comment and Notes to the PECL: Art. 8:104. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp48.html>.

9. Ibid.

10. See Peter Schlechtriem, Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods, Manz, Vienna (1986); p. 78. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-48.html>.

11. Supra. note 5.

12. The match-up with Art. 48 CISG indicates that paras. (2) and (4) of CISG Art. 48 and 1978 Draft Art. 44 are identical; para. (3) is substantively identical (the only difference being a substitution of "under the preceding paragraph" for "under paragraph (2) of this article"). The Secretariat Commentary on 1978 Draft Art. 44(2), (3) and (4) should therefore be relevant to the interpretation of CISG Art. 48(2), (3) and (4). Para. (1) was modified at the 1980 Vienna Diplomatic Conference. See the match-up, available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-48.html>.

13. See Secretariat Commentary on Art. 44 of the 1978 Draft [draft counterpart of CISG Art. 48], Comment 13. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-48.html>.

14. See Comment 2 on Art. 7.1.4 UPICC.

15. Ibid.

16. Supra. note 13, Comment 6.

17. Supra. note 13, Comment 7.

18. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 186. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

19. Supra. note 14.

20. Supra. note 13, Comment 14.

21. Supra. note 14.

22. See Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 2d ed, Kluwer (1991); p. 314.

23. See Comment 3 on Art. 7.1.4 UPICC.

24. See Comment 5 on Art. 7.1.4 UPICC.

25. See Comment 6 on Art. 7.1.4 UPICC.

26. See Comment 4 on Art. 7.1.4 UPICC.

27. Initially, the UNCITRAL Working Group, in examining the provision which is now Art. 48, took into consideration the relationship of the seller's right to cure with the buyer's right to terminate the contract and the remedy of reduction of price. Several proposals were considered. The central issue in discussion of those proposals was whether the buyer may preclude the seller from curing any failure to perform his obligations where the cure can be effected without such delay as would amount to a fundamental breach and without causing the buyer unreasonable inconvenience or unreasonable expense. This issue was discussed in the context of a defect in the goods which, in the absence of repair, was so serious as to constitute a fundamental breach but where the delay in remedying that defect would not constitute a fundamental breach and would not even cause the buyer unreasonable inconvenience or unreasonable expense. Different views were rendered by the members of the Committee. However, there was considerable opposition in the Committee to the idea that the buyer's right to declare the contract avoided could be affected by an offer to cure the defect after the time for performance. The seller was in breach and a possibility to cure was a privilege which depended upon the consent of the buyer who had the right to declare the contract avoided. There was, on the other hand, substantial support for the proposition that the buyer's right to declare a reduction in the price was subject to the seller's right to cure, provided that the seller bore all expenses of such cure. As a result, the Committee accepted the majority's view and reworded para. (1) of the Draft Art. 30, which was renumbered as Art. 44(1) of the Draft Convention 1978, as follows: "[U]nless the buyer has declared the contract avoided in accordance with Art. 31, the seller may ... remedy ...." The Secretariat Commentary on Art. 44 of the 1978 Draft in line with this general understanding notes that "the seller would have the right to remedy the non-conformity in the goods by repairing or replacing them, unless the buyer terminated the seller's right by declaring the contract avoided." (Infra. note 29.)

28. Supra. note 12. Para. (1) of the 1978 Draft was modified at the 1980 Vienna Diplomatic Conference. With respect to paragraph (1), one of the two changes is: The substitution of "Subject to article 49" for "Unless the buyer has declared the contract avoided in accordance with article 45 [1978 Draft counterpart to CISG article 49]". In this respect, three alternatives were proposed: Alternative I: Delete the words "Unless the buyer has declared the contract avoided in accordance with [CISG article 49]." Alternative II: Delete these words and substitute the words "Subject to [CISG article 49]". Alternative III: Qualify seller's right to avoid by adding to [CISG article 49(1)(a)] the words "... and the seller does not remedy the failure in accordance with [CISG article 48]" (said to be a clarification of alternative I and that, in fact, the two constitute a single proposal). Alternatives I and III were rejected. Alternative II was accepted with minimal discussion (O. R. p. 352).

Conference comments on alternatives I and III included the following: "Mr. KLINGSPORN (Federal Republic of Germany) said that ... his delegation had submitted [a proposal identical to alternative I]. The existing text created a situation which was neither satisfactory nor logical. If for example, the seller delivered a machine on the date fixed and the machine, once it was installed, failed to work in a satisfactory manner, that should not be regarded as a fundamental breach of contract and the buyer should not be able to declare the contract avoided if the seller was prepared to remedy the fault within a reasonable time. The seller's right to remedy his failure to perform should prevail over the buyer's rights. The situation should also be clarified in respect of [CISG article 49]" (O. R., p. 341) "Mr. FELTHAM (United Kingdom)said that he shared the view of those who felt unable to accept the amendment proposed by ... the Federal Republic of Germany. In support of its amendment, the latter delegation had mentioned the example of a machine which had been delivered but did not work. If the machine could be repaired within a few days, there was no fundamental breach, which was what [CISG article 48] was concerned with. Conversely, the case should be considered where the seller had delivered a machine which in no way fulfilled the buyer's explanations, whereupon the latter lost confidence and did not even wish the seller to attempt to repair it. The buyer should be able to declare the contract avoided at that point without having to listen to the seller's arguments. Hence, the first phrase of [CISG article 48(1)] should be kept" (O. R., pp. 341-342)

29. 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>.

30. Ibid.

31. See Lookofsky, in "The 1980 United Nations Conventionon Contracts for the International Sale of Goods": International Encyclopaedia of Laws, Blanpain, gen. ed., Kluwer (1993); p. 94.

32. Supra. note 29.

33. Supra. note 6, p. 194.

34. 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 ed., Review of the Convention on Contracts for the International Sale of Goods (CISG) 1998, Kluwer Law International (1999); p. 324. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/koch-48.html>.

35. See Robert A. Hillman in "Applying the United Nations Convention on Contracts for the International Sale of Goods: The Elusive Goal of Uniformity": Cornell Review of the Convention on Contracts for the International Sale of Goods (1995); pp. 21-49. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/hillman1.html>.

36. Supra. note 14

37. See Comment 8 on Art. 7.1.4 UPICC.

38. Supra. note 18, p. 187.

39. Supra. note 18, p. 189.

40. Supra. note 3.

41. See Comment 10 on Art. 7.1.4 UPICC.

42. See Comment 7 on Art. 7.1.4 UPICC.

43. Supra. note 38.

44. See Comment 9 on Art. 7.1.4 UPICC.

CHAPTER 6. PRICE REDUCTION FOR NON-CONFORMITY

     A remedy allowing the buyer to pay a reduced price for defective goods delivered by the seller has been recognised since Roman times, under the Roman law remedy of actio quanti minoris. As originally framed, where there was a latent or hidden defect in the goods purchased which reduced their value, the buyer could sustain an action against the seller to reduce the purchase price payable. The purpose of the remedy is to allow the buyer to keep defective goods and pay the price it otherwise would have paid had it been aware of the hidden defects in the goods.[1] The goal of this formula is to enable the buyer to preserve the bargain.[2]

6.1 GENERAL CONSIDERATIONS

Where the goods do not conform to the contract, Art. 50 CISG, like ULIS Art. 46, grants the buyer the right to reduce the price. Art. 50 reads: "If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price."

The remedy of price reduction reflects the CISG's focus on preserving the contract even though a breach may have occurred. In nature, price reduction is a remedy. The drafters of the CISG have consistently referred to price reduction as a remedy. The organization of the CISG also supports characterizing price reduction as a buyer's remedy, since it is found in the section entitled "Obligations of the Seller", which spans from CISG Arts. 45 to 52. While ambivalence surrounds the debate over whether to classify price reduction as a claim or defense, the prevailing view among most scholars that price reduction is a remedy provides a solid starting point.[3] However, price reduction under CISG Art. 50 is by no means an easy concept to master. To date, for instance, English-language commentaries on Art. 50 have focused on the provision's Civil Law origins; methods for calculating the amount of the price reduction; the distinction between damages governed by CISG Art.s 74-77 and proportional price reduction under Art. 50; and the tendency of common law lawyers to misperceive the price reduction remedy as a mere setoff provision. One of the more striking observations on Art. 50, made by several commentators, is that in some circumstances the provision yields results inconsistent with a fundamental principle of common law remedies: protection of the expectation interest.[4]

This chapter strives to advance the uniform application of the CISG by engaging in a thorough analysis of CISG Art. 50 and the problems that have arisen with respect to interpreting and applying price reduction. Clearly, both civil and common legal communities can benefit from a detailed exploration of the CISG remedy of price reduction. Also, this Chapter explores the manner in which the PECL counterpart, i.e. Art. 9:401(Right to Reduce Price), could be used to help interpret CISG Art. 50. However, before taking such a detailed exploration, a full understanding of Art. 50 CISG requires a brief review of its background and ratio legis. It is said the remedy of price reduction is a traditional civil law remedy, which has been recognised since Roman times under the remedy of actio quanti minoris in Roman law.[5]

Briefly, the actio quanti minoris is an action for the reduction of the price in a sales transaction. In Roman Law, and in countries following the Roman Law tradition, it is also known as the actio æstimatoria (estimatory action): "The actio quanti minoris can be found in Roman Law through the Justinianean Compilations. It arose out of the edicts of the ædiles curules, a type of judge with jurisdiction over certain commercial matters; hence it is an actio ædilitia."[6] As reviewed by Bergsten & Miller: "The remedy of reduction of price for the purchaser of defective goods derives from the actio quanti minoris in Roman Law. At the risk of considerable over-simplification, this action originated from an Edict of the Aediles which sought to 'repress the sharp practices of sellers of slaves and cattle in the City markets.' If a buyer became aware, after delivery, of certain specified defects which the vendor did not declare and which, had the buyer been aware of them at the time of sale would have led him to pay a lesser price, he could bring an action for reduction of price or for recission of contract. Defects which were evident at the time of conclusion of the contract were excluded from this remedy since the buyer should have taken them into account when calculating the price he was willing to pay."[7]

The Roman law origins of the remedy, which provides monetary relief to buyers who have received non-conforming goods, has since been carried forward into several of the main civil law codes.[8] Under these codes, the remedy is particularly useful, since, an advantage of price reduction as opposed to contractual damages is that the buyer can obtain the remedy without having to prove that the seller is at fault.[9] By contrast, while the CISG incorporates many elements of the traditional Roman law remedy, the CISG Art. 50 price reduction does vary significantly from civil forms of price reduction. Therefore, we will focus first on the features of CISG Art. 50.

6.2 FEATURES OF CISG ART. 50

6.2.1 Unique Role and Justification

While CISG Art. 50 and other civil law versions of price reduction both originate from actio quanti minoris, it is important to be cognizant of the distinctions embodied in the CISG remedy of price reduction.

Despite the background of Art. 50 of the CISG, the price-reduction remedy does not play the same role within the context of the Convention as in some civil law system: "It has been pointed out that in the Civil law, rescission and reduction of price are the normal remedies for a buyer who has been delivered non-conforming goods, and damages are, in principle, the exception. In large measure this is because damages can be recovered in the Civil law only if the non-performing party was at fault. Contractual fault can, of course, be understood in ways that lead to a blurring of the distinction between fault and no-fault liability. However, to the extent that contractual fault requires more than the mere showing that the goods delivered were non-conforming, reduction of price provides a remedy by way of monetary relief even though damages are not available for that non-conformity."[10] However, "[t]he damages provisions of the United Nations Convention on the International Sale of Goods undermine the need of the reduction of the price remedy contained in its article 50 because, unlike the Civil Law system, the CISG, following the Common Law approach, does not require fault of the seller in order to make him liable for damages."[11]

Thus, it may be inferred that reduction of price does not have the same justification in the Convention as it does in some Civil law systems. Under the CISG, the justification for a reduction of price for non-conforming performance is a reformation of the original contract which retains the relative balance of the bargain made by the parties: "If the buyer made a bad bargain, in that he contracted to pay more than the value of the goods or the price went down between the conclusion of the contract and the delivery date the buyer has just as bad a bargain in percentage terms after the price has been reduced. If the buyer made a good bargain, after reduction of the price he has just as good a bargain in percentage terms as at the time of the original contract. Where the buyer made a good bargain and therefore would recover more in damages than by reducing the price, the Civil law allows him to claim the higher amount of damages, thereby breaking the original balance of bargain, only if he can show that the seller was at fault. However, since the buyer does not need to show any fault on the part of the seller in order to claim damages under the [...] Convention, reduction of price loses one of its primary theoretical justifications and becomes an alternative form of monetary relief to the buyer."[12]

Consequently, the buyer loses the advantages of a profitable purchase if, between the conclusion of the contract and the date of delivery, the price of the delivered but non-conforming goods increases more than the price of conforming goods.[13] And as to be demonstrated infra. 6.3.3, the remedy of price reduction under the CISG thus becomes an alternative form of monetary relief at the option of the buyer.

6.2.2 Self-help Remedy

Perhaps, the most straightforward feature of Art. 50 is the manner in which it operates: "While civilian legal systems require expert advice or the court to determine the difference in value between the contract price and the actual value, the CISG gives this power of determination solely to the buyer. On this basis, price reduction can be seen as a self-help remedy that can be implemented by the buyer without any requirement to have the determination upheld by a court, expert or other tribunal."[14]

Unlike a buyer's damage claim or his right to specific performance, which each relies on the seller or the tribunal's decision, a price reduction claim under Art. 50, which is drafted from the perspective of the buyer, gives the buyer the ability to unilaterally declare a price reduction, even before it has paid. Thus, it is the buyer that has the option and the power to reduce the price paid to the seller. Even the only other remedy under the Convention which is effectuated by the unilateral act of a party, i.e. declaration of avoidance of contract, is required to be made by notice to the other party, no such requirement is placed on the declaration of reduction of price. Presumably it must be done by means appropriate in the circumstances, but it may well be that one such means would be the statement of claim or defense in a law suit. Furthermore, unlike the buyer's other remedies of Art. 46 specific performance and Art. 49 avoidance, Art. 50 may not be subject to a "reasonable time" requirement.

In practice, however, this difference is largely illusory. Any price reduction by the buyer must certainly be reasonable, otherwise it would be disputed by the seller and subject to review by a court. During these proceedings, expert evidence would in all likelihood be adduced as to the value of the goods. Additionally, the burden of proof on the value of the goods (both the value of delivered goods and conforming goods) is squarely on the buyer. The self-help view of the remedy is further reduced where the buyer has already paid the purchase price. Art. 50 applies "whether or not the price has already been paid." If the buyer chooses to reduce the price before it has paid, it can merely deduct the difference in value from what it pays to the seller. Where the price has already been paid, the buyer must seek a refund from the seller for a portion of the purchase price. Most parties would prefer to be the defendant in any action rather than the plaintiff, and this situation illustrates this principle if the seller refuses to cooperate with the price reduction, the buyer will be required to commence legal proceedings to recover the price difference. This is a much more onerous remedy than the buyer unilaterally determining a price reduction and deducting it from the price it pays to the seller.[15]

Therefore, as stated by Williams: "Price reduction is said to be advantageous because it is a self help remedy. This supposed advantage is, however, unlikely to be of much use in the majority of international sales since, in most cases, the price will have already been paid. Thus, the Buyer would have to go to court to reclaim part of the price."[16] From the point of view of the final adjustment of the financial obligations of the parties, it is of no consequence that the price is reduced by the buyer's unilateral declaration. "On the other hand, some consequences may attach to the fact that the price is reduced by the unilateral act of the buyer. A declaration would probably constitute a binding election of remedies. It may affect the running of a period of limitation and it may have procedural consequences under the law of the forum. None of these matters, however, is governed by the [...] Convention itself."[17]

Interestingly, it was found that in practice Art. 50 was not used "offensively" by the buyer. Instead, it found use predominantly as a counterclaim or a defence to an action by the seller for the purchase price. Such a result is in some respects not surprising. Where there is no dispute between the parties as to the amount of the reduction, the matter would not come to court and the remedy would act in its intended manner: as a self-help remedy of the buyer. This way the remedy avoids the costs and uncertainty of litigation. Where there is a dispute over the price to be paid, then the matter could proceed to litigation. Once the matter proceeds to litigation, the buyer who has already paid the purchase price would in most cases seek the full level of damages for the breach rather than merely reducing the price. Price reduction would usually only come to light where the seller is making a claim against the buyer for the purchase price and the buyer is seeking to reduce or eliminate the obligation to pay the price.[18] Nevertheless, as to be demonstrated infra. 6.3.3, CISG Art. 50 retains certain important uses for commerce.

6.2.3 Seeming Advantages

It is said that an Art. 50 price reduction seems advantageous for the buyer especially as opposed to damages because it is not subject to the same limitations as damages. First of all, while a seller may escape liability from having to pay damages if he can successfully assert a foreseeability or force majeure defense, these exemptions are specifically not applicable to Art. 50. However, on the one hand, "[i]t may be doubted whether it is of great significance that the remedy of reduction of price is not subject to the test of foreseeability. It would always appear to be foreseeable that non-conformity in respect of quantity or quality would lead to a reduction in value of the goods, although the amount of that reduction might not be foreseeable. This assumption is so strong that under the UCC the requirement that the loss be foreseeable explicitly applies only to the buyer's consequential damages, but not to his direct or incidental damages."[19] Nevertheless, on the other hand, as to be demonstrated, the fact that "exemption" from damages in case of force majeure under Art. 79 is not applicable to reduction of price has real consequences in the overall remedy scheme of the Convention.

Also, it is said that Art. 50 may even provide further insulation to a buyer if the view is accepted that Art. 50 is not subject to Art. 77, which imposes a duty on the buyer to mitigate her losses. However, even the mitigation principle does not apply to reduction of price, the same result is achieved by Art. 50 itself. According to the second sentence of Art. 50, even if the buyer has already declared the price reduced, if the seller remedies any failure to perform his obligations in accordance with Art. 37 or Art. 48, e.g., by sending the missing goods, by repairing the defect or by sending replacement goods, or if the buyer refuses to accept performance by the seller in accordance with those articles, his declaration of reduction of price will be of no effect.

6.3 IN CONTRAST WITH DAMAGES

6.3.1 Introduction

As stated above, some seeming advantages of the right to reduce price become apparent when contrasted with the right to damages. However, at several stages of the drafting history of the provision, Common law participants saw the provision as a type of set-off whereby the buyer was authorized to deduct damages from the price. It became clear in the discussions that many representatives believed that price reduction constitutes a kind of damages. As stated above, Art. 50 represents one of several CISG provisions with a civil law background. Whereas the civil codes of, for example, France and Germany contain codified versions of the actio quanti minoris of Roman law, the right to reduce the price of defective goods is unknown in common law countries. As a result, during the deliberations of the Draft Convention some common law participants appear to have confused this remedy with the right to deduct damages from the price under, for example, section 2-717 UCC.[20]

Practically speaking, it is easy to confuse the remedies of reduction of price and of damages because they overlap to a great extent. On the one hand, the remedy of reduction of price is similar to the remedy of damages in that both grant relief to the buyer measured in money. On the other hand, they overlap to a greater extent under the Convention than they do in the Civil law because the Convention accepts the Common law rule that damages are available for any defective performance even if the non-performing party was not at fault. Nevertheless, reduction of the price is a remedy separate from that of damages and should not be confused with the right to set-off. For example, not only does set-off differ from a price reduction with respect to its capability of being asserted unilaterally, but a set-off also requires the parties to have reciprocal debts. This difference will be clarified in more details below.

6.3.2 Distinctions from Damages under the CISG

6.3.2.1 Diverse ratio legis

Generally, the ratio legis of damages is to place the injured party in the same economic position he would have been in if the other party had fulfilled his obligations. "Instead, Article 50 of the CISG has the same ratio legis as the provisions of [...] paragraphs 462 and 472 of the Bürgerliches Gesetzbuch (BGB). The buyer is given the opportunity to retain non-conforming goods and bring the contract in line with the changed circumstances through proportionate reduction of the purchase price."[21]

Assuming that the contract price is equal to the value of the goods at the time of conclusion of the contract and there is no price change between that time and the time of delivery, there would be no difference in the amount of monetary relief to the buyer whether he reduced the price or claimed damages. However, if there has been a change in the price of the goods, the amount of monetary relief would be different. As stated by Sondahl: "Article 50 is especially unique since it is not designed to protect a buyer's expectation, reliance, or restitution interests, and it may at times violate expectation principles. While Article 74 damages put the buyer in the position she would have been in had the seller properly performed the contract, Article 50 departs from the expectation damage calculation method. The amount of the price reduction under Article 50 is based on a principle unknown to the common law. Unlike expectation damages, which are designed to preserve the benefit of the bargain for the aggrieved party, price reduction attempts to preserve the proportion of the bargain. Assuming that the buyer would have made the same relative bargain, Article 50 treats the buyer as though she has purchased the non-conforming goods that were actually delivered. Price reduction is not as concerned with the actual economic efficiency of the promise as the damages remedy."[22]

Alternatively one could view the Art. 50 remedy as a modification of the sales contract. From this perspective a seller could be seen as offering such a modification by shipping non-conforming goods. The buyer accepts the offer by keeping the goods at an implied price proportional to the original contract price.[23] In other words, the principle underlying price reduction is that the buyer may keep non-conforming goods delivered by the seller in which case the contract is adjusted to the new situation. Price reduction should therefore be regarded as an adaptation of the contract not as an award of damages.

6.3.2.2 Different manner in calculation

The aforementioned diverse ratio legis indicates that, unlike damages-based remedies, the principle of the price reduction remedy is not dependent on actual loss being suffered by the buyer, but is solely dependent on the abstract relationship between the actual value of the goods delivered and the hypothetical value of conforming goods.[24] To phrase the matter in a fashion that echoes the traditional description of common law remedy principles, one could say that Art. 50 puts an aggrieved buyer in the position she would have been in had she purchased the goods actually delivered rather than the ones promised -- assuming she would have made the same relative bargain for the delivered goods.[25]

It follows that the two remedies differ in that the right for a buyer to reduce the price payable is generally not calculated in the same manner as contractual damages and is different from a right to set-off which is also tied into damages. Arguably, this point is the most important distinction between the two remedies. In other words, the decisive point in distinguishing the two remedies is that the date at which the buyer's monetary relief is calculated and the means by which it is calculated are different. In comparing this point, we are referring only to the direct damages which the buyer could recover for delivery of non-conforming goods. In this context, the differences in calculating the monetary compensation under the two remedies can be summarized as follows: damages are measured as of the time of delivery; reduction of price is measured as of the time of conclusion of the contract. Damages are calculated as the absolute sum of money necessary to reimburse the loss suffered by the buyer; reduction of price is calculated in terms of an amount proportional to the difference in value of the goods as contracted and the goods delivered.[26]

6.3.2.3 Other differences

Although the most obvious difference between damages and reduction of price is that the amount of them is measured in a different manner, there are a number of other differences between the two remedies.

For instance, as shown above, one difference (more formalistic than substantive) is that, under the Convention, the remedy of price reduction is effectuated by the unilateral declaration of the buyer. No further action by the seller, such as acquiescing to the reduction of price, or by a tribunal in confirming the reduction, is necessary. This can be compared with the remedy of damages in which the buyer may "claim" the damages from the seller but his claim is not liquidated until the seller or a tribunal has agreed to it. Another difference is that even if the seller is excused from paying damages for his failure to perform the contract by virtue of Art. 79, the buyer may still reduce the price if the goods do not conform with the contract. Third, the right to reduce the price is not affected by the limitation to which a claim for damages is subjected under Art. 74, i.e. that the amount of damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contracts a possible consequence of the breach of the contract.

Finally, in illustrating the differences between damages and reduction of price it is helpful to compare reduction of the price with the effect of a partial or complete avoidance of the contract. Art. 51 CISG provides that if the seller delivers only part of the goods or if only part of the goods is in conformity with the contract, all of the remedies of the buyer, including the right to declare the contract avoided, apply to the part which is missing or which does not conform.[27] As a result, in case of partial non-delivery of the goods, reduction of price under Art. 46 and partial avoidance of contract under Art. 47 would lead to the same measure of monetary relief for the buyer. This is confirmed by the Secretariat Commentary on Art. 46 of the 1978 Draft [draft counterpart of CISG article 50]:[28] "The remedy of reduction of the price also leads to results which are similar to those which would result from a partial avoidance of the contract under article 47 [draft counterpart of CISG article 51]."[29] The most important difference between Arts. 50 and 51 in this regard is that if the contract has been partially avoided under Art. 51, the seller loses his right to remedy the non-conformity whereas reduction of price under Art. 50 does not terminate the seller's right to remedy the non-conformity.

6.3.2.4 A summary

In sum, reduction of the price is a remedy separate from that of damages and in fact has becomes an alternative to damages for the buyer. The Secretariat Commentary makes it clear: "The remedy of reduction of the price is a remedy which is not known in some legal systems. In those legal systems it would be natural to see this remedy as a form of damages for non-performance of the contract. However, although the two remedies lead to the same result in some situations, they are two distinct remedies to be used at the buyer's choice."[30]

Nonetheless, it is also important to realize that assertion of a price reduction will not bar a buyer from also seeking damages, if the seller is liable for his fault. Under Art. 45(2) CISG, exercise of the right to reduce the price does not preclude the buyer from claiming any further damages he has suffered which would not be compensated by a reduction of price, such as extra expenses in preparing for the goods or losses caused by spoilage of other goods caused by delivery of the non-conforming goods. Thus, the buyer "may seek to combine a reduction in price under Article 50 with an action for damages."[31] In most circumstances before a court, seeking damages alone would give the buyer the largest recovery, since damages are calculated on the basis of the loss suffered by the buyer. Price reduction alone is calculated without reference to the loss suffered by the buyer, and so therefore would not include common costs incurred by the buyer, such as costs of mitigation, lost profit and so on. On the other hand, a claim in damages would typically include the loss in value suffered by the buyer in receiving non-conforming goods. A buyer would therefore be well advised to either seek damages alone or damages in conjunction with price reduction to maximise its remedy.[32]

6.3.3 An Alternative to Damages

6.3.3.1 Introduction

As stated above, the importance of the price-reduction remedy in international sales law is somewhat limited because, by virtue of CISG Art. 45, damages are, in principle, readily available for the buyers in every breach of contract on a no-fault basis. On top of that, under the CISG the remedy of damages often serves the buyer better since the amount recoverable under Arts. 45 and 74 is usually higher than the sum by which the price can be reduced according to Art. 50. Clearly, in the majority of situations it will still be more beneficial to rely on a claim for damages.

Nonetheless, from this it cannot be inferred that, concerning contracts which are governed by the Convention, the price-reduction remedy is superfluous because under certain circumstances it is advantageous or even necessary to rely on this right instead of damages. In certain circumstances, Art. 50 confers on the buyer a right to reduce the price of non-conforming goods in lieu of claiming damages (assuming there is a right to damages).[33] In fact, The remedy of price reduction is an alternative remedy to the claim for damages, especially in the following circumstances.

6.3.3.2 In conjunction with force majeure

First, the main application of Art. 50 in lieu of damages is in conjunction with Art. 79, which sets forth various measures whereby a party (in this case, the seller) is not liable for a failure to perform if that party can show that the failure was due to an impediment beyond its control (force majeure). In other words, Art. 50 has its principal significance when the buyer accepts defective goods under circumstances provided by Art. 79(1) of the CISG in which the seller is not liable for damages according to Art. 79(5).

Art. 79(5) makes it clear that this exemption only applies to claims for damages and that it does not prevent either party from exercising any other remedy under the Convention. Since the force majeure exemption does not affect the buyer's rights other than damages, he may reject the goods and declare the contract avoided if the seller's failure amounts to a fundamental breach in terms of Art. 25 of the CISG. However, in case he has a particular interest in the goods and thus decides to accept them, the buyer cannot claim damages under Art. 45(1)(b) because, according to Art. 79 of the CISG, the seller is free from that liability. Under these circumstances, the buyer can resort to the remedy of price reduction under Art. 50, because Art. 50 is separate from any claim for damages, the buyer can still claim a price reduction for defects under those circumstances.

6.3.3.3 In case of falling market

Secondly, perhaps the more frequently occurring situation is where the market price of the (conforming) goods has changed substantially between the time of contracting and the time of delivery. More directly, in the case of a falling market, where the market price of conforming goods has substantially decreased between the time of contracting and delivery, the buyer is well advised to opt for the reduction of the purchase price instead of damages. This results from the different methods, as shown above of calculating the price reduction and damages respectively. It may be inferred from a hypothetical illustration that whenever the market falls the price-reduction remedy represents an economically sensible alternative to damages.[34]

Of course, if there were a reduction in market price from the time of contracting, the buyer would most likely reject the goods, since it could obtain conforming replacement goods on the open market at less than the contract price. The application of Art. 50 appears to give the buyer the upper hand, since it can elect to pursue the remedy that offers it the highest return. One must note that Art. 50 is expressly made subject to the seller's right to cure any defect under Art. 48. This does serve to balance the position between buyer and seller so that the seller does have an opportunity to have some input into the resulting remedy pursued by the buyer. The combination of these two remedies can be viewed in light of the CISG's purpose to preserve the parties' bargain wherever possible.[35]

6.3.3.4 Upon difficulty in proving damages

Thirdly, price reduction is most advantageous to the buyer when establishing the liability of the seller is difficult. "In some circumstances, the buyer would prefer to rely on the price reduction remedy instead of damages. The most straightforward situation is where the buyer has difficulty in proving its loss, such as where it has purchased the goods for altruistic/non-commercial purposes. If, for example, the buyer has purchased foodstuffs to donate to charity, it has not necessarily suffered any loss from the diminution in value of the non-conforming goods. Without any loss or necessarily the ability to prove any damage, the buyer's preferred remedy would be a reduction in the price to be paid to the seller."[36]

Interestingly, an examination of German case law on Art. 50 CISG reveals that, so far, neither Art. 79(1) nor falling markets seem to have induced buyers to resort to this remedy. According to the facts of most cases, the buyers in question decided to reduce the price under circumstances where, theoretically speaking, claiming damages could have brought in greater monetary relief. From this it can be inferred that the price-reduction remedy does not only serve a useful purpose in the above mentioned situations. Instead, it may be presumed that merchants prefer to make use of this self-help remedy because it enables them to immediately restore the parity of performances without having to resort to a court.[37]

6.3.3.5 A summary

In sum, the main situation where price reduction remains a suitable alternative is in the situation where the seller can claim exemption from liability under Art. 79, where the buyer no longer has the right to claim damages nevertheless his other remedies, including the right to reduce price under CISG Art. 50, are not affected. The second situation where price reduction may benefit the buyer is where the price of the goods has fallen between the conclusion of the contract and delivery. In this case, the sum calculated under Art. 50 will be higher than the difference in value between the conforming and non-conforming goods at the time of delivery. Finally, where the buyer could have difficulty in calculating his damages, he may find price reduction a more practical and speedy option.

These situations show that Art. 50 is of narrow applicability. In most cases, as mentioned above, damages would be the preferred remedy. The narrow application of Art. 50 does throw some doubt on the necessity for such a provision. Despite these concerns, the worth of a provision should not be determined on the basis of its frequency of use. Apart from its use as a familiar tool to those comfortable with civil law systems, it does protect the buyer from certain inequitable situations that would otherwise not be properly remedied by damages alone.[38] Indeed, it appears sensible to assume that this advantage is also the reason why many international contracts for the sale of generic goods provide for price-reduction in cases of non-conforming goods. With regard to this particular problem, one can therefore draw the conclusion that, Art. 50 of the CISG reflects commercial practice which indicates that it provides for an economically sensible solution.[39] Accordingly, a price-reduction remedy, which was obviously modelled upon Art 50 of the CISG, has also been included in Art. 9:401 PECL (infra. 6.5.2).

6.4 ESSENTIALS OF CISG ART. 50

6.4.1 Scope of Application

6.4.1.1 General application in case of non-conformity

According to Art. 50, a reduction in price is available only when "the goods do not conform with the contract". In other words, the remedy operates only in cases of non-conformity. Generally, the question of whether the goods conform with the contract can be determined in reference to Art. 35, namely: whether the goods are of the quantity, quality and description required by the contract, and if they are contained or packaged in the manner required by the contract; and meet the four specific requirements set out in Art. 35(2)(a) to (d).[40]

Especially since CISG Art. 35(1) imposes an obligation on the seller to deliver "goods which are of the quantity, quality, and description required by the contract", it does not seem too far-fetched to allow a reduction of the price for a quantity deficiency. In fact, "[n]o distinction is drawn in Article 50 between different types of non-conformity. The same remedy applies regardless of the reason of non-conformity and there is no difference between the approach to defects of quantity and defects of quality."[41] Furthermore, decisions have stated that non-conformities include both quantity and quality,[42] although it still remains to be seen whether price reduction applies to defects that are solely quantitative. In short, on the basis of Art. 35(1) a failure of quantity constitutes a "non-conformity", and that reduction of price is therefore available when the goods are insufficient in either quality or quantity.

6.4.1.2 Ambiguity over defects in title

There is some uncertainty arising from the wording of Art. 50, as it is unclear whether it also covers other situations other than non-conformity, such as defects in title to the goods. It appears controversy whether price reduction under Art. 50 should also be applied to cases where goods are not free from rights or claims (including those based on industrial or other intellectual property rights) by third parties.

On the one hand, some suggest that price reduction should not be available in such situations. For example, Bergsten & Miller suggest that "the fact that the goods are subject to a right or claim of a third party, including a right or claim based on industrial or intellectual property, does not make them non-conforming goods as that term is used in the Draft Convention."[43] Similarly, Piliounis submits: "While by no means clear, it appears that Article 50 does not apply to defects in title. This interpretation is supported by the wording of Article 50 itself, which refers to goods not conforming to the contract. While arguably a defect in title does not 'conform to the contract', it is more properly characterised as an obligation of the seller rather than a particular character of the goods under the contract."[44]

Repeatedly speaking, the drafting history of the Convention is a legitimate and valuable aid in the interpretation of the Convention's provisions. In this respect, there were proposals during negotiations to broaden the scope of Art. 50 so as to apply it as remedy for defects of title. The proposal was criticized on several grounds, including lack of a formula to reduce the price in this situation, willingness to leave the third-party rights out of the Convention, and fear that other remedies would be displaced. Finally, the Norwegian representative withdrew the proposal after discussion in favour and against, saying that the matter should be left up to the courts.[45] Thus the dogmatic gap between non-conformity of goods, and third party rights or claims was not closed completely, and the right to reduction of the price was practically restricted to non-conformity.[46] Even the Secretariat Commentary believes: "Goods may conform with the contract even though they are subject to the right or claim of a third party under article 39 or 40 [draft counterpart of CISG article 41 or 42]."[47]

Although no decision was reached as to whether the price may be reduced for defects in title and there are many commentators who preclude the application of Art. 50 in such situation, there are also some commentators that consider that Art. 50 may be applicable to international sales where the goods are subject to third-party rights or claims. It would indeed be justifiable to grant a right to price reduction in the case of third party rights or claims. For example, Schlechtriem submits: "The general similarity of the prejudice caused by these defects with that caused by other defects justifies the availability of price reduction in these cases as well. But the formula for calculating the decrease in value due to such defects surely would have required thorough deliberations for which no time remained at the Conference."[48] Particularly, it cannot be overlooked that Art. 44 expressly refers to Art. 50: "Notwithstanding the provisions of paragraph (1) of article 39 and paragraph (1) of article 43, the buyer may reduce the price in accordance with article 50 or claim damages, except for loss of profit, if he has a reasonable excuse for his failure to give the required notice." In other words, a buyer who failed to give notice of the existence of third party rights or claims, but has a reasonable excuse, may nevertheless claim a price reduction. However, some considers that it is hardly understandable that a buyer should have the right to a reduction of the price only if he fails to give notice, but not if he gives notice in time, some obviously believes that the reference made in Art. 44 to Art. 50 only relates to the case described under Art. 39(1), but not to Art. 43(1).[49]

Anyway, it remains ambiguous whether price reduction will be applied in case of defects in title. It bears significance to recall that "Quanti Minoris was included in the CISG besides damages because there was a cultural controversy between the world's main legal traditions about how to remedy a non-conformity; there is not such a controversy about how to remedy third-party claims that disturb possession, the remedy is a claim for damages."[50] "The buyer's ability to claim damages for any loss suffered is by far a better remedy in such circumstances. These ambiguities in scope of Article 50 also highlight the limited application of the price reduction remedy under the CISG."[51] Sondahl seems to bring forward some guidance in submitting that:

"It was suggested that price reduction might be useful in its application toward a partial claim against a third party in order to determine the diminished value of the goods. Seeing no reason why 'a distinction should be made between remedies for goods that were defective in the physical sense and goods that were defective in other senses', another delegate voiced his support for the applicability of price reduction to third-party claims (and the inclusion of such claims in the conception of a non-conformity). While a number of other delegates registered support for the amendment allowing for the applicability of price reduction to third-party claims, ultimately the concerns of other representatives led to the withdrawal of this amendment. The withdrawal of the amendment demonstrates the 'open' status of this debate. The absence of a clear decision in the text of the Convention demonstrates the decision to apply or not to apply price reduction rests with the courts."[52]

6.4.2 Exercise of the Right to Price Reduction

Art. 50 of the CISG makes it clear that the buyer "may exercise unilaterally" this right. The language of ULIS that said "the buyer may declare the price to be reduced" was changed to "the buyer may reduce the price". "During the negotiation of the Convention it was felt that the Article had to be clear on this point. A statement by the UNCITRAL Secretary-General and repeated proposals of the UK to give the buyer a 'substantive right' to reduce the price, instead of a declaration of its reduction, eventually succeeded in convincing the drafting committee to clarify the article."[53]

As stated above, price reduction is a self-help remedy that can be implemented by the buyer unilaterally without any requirement to have the determination upheld by a court, expert or other tribunal. Furthermore, the CISG provides no time limit for the buyer to exercise his right to reduction of the price; provided that notice under Arts. 39 and 43 is given in time this right is subject to the general limitation rules only. Also, there is no need for the seller's agreement, although it is surely always more appropriate that the parties agree on the amount of the reduction. Compared to cure and avoidance, a reduction of the price of goods is the simplest remedy where the least additional expenses occur and should, therefore, be facilitated.[54]

In a word, the price is reduced by a simple declaration of the buyer, whether or not the price has been paid. A reduction, however, is not merely a facilitated claim for damages as it may sound from some commentators. While he can unilaterally declare a reduction and, provided he has not paid yet, force the seller to file suit if he does not agree. On the other hand, the declaration by the buyer is governed by Art. 27, i.e. it is directly effective, even if it does not reach the seller; it follows that the buyer, having declared a reduction, no longer has the right to performance by the seller.[55]

6.4.3 Calculation of Proportional Reduction

Under CISG Art. 50, the amount by which the buyer may reduce the price is a proportional reduction of the price of goods: in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time.

6.4.3.1 Decisive point: time of delivery

As for the time as to which to establish the value of the goods, what is decisive is the time of delivery and not the time of the conclusion of the contract, as laid down in Art. 46 ULIS or in 472(1) BGB, both for the value of the non-conforming goods and for conforming ones. The Convention makes it clear: at the time of the delivery bears to the value that conforming goods would have had at that time.

The calculation of a proportional reduction of the price was an issue of a real concern during the negotiations of the CISG. The present method of computing the price reduction is a new one introduced at the Diplomatic Conference, which differs from Art. 46 of the 1978 Draft. "Mr. ROGNLIEN (Norway), introducing his proposal ... said that its main purpose was to amend the time at which the value of non-conforming goods should be assessed.... His delegation considered that the time of delivery would be preferable to that of the conclusion of the contract partly because the value at the time of the delivery would be a more adequate substitute for damages." (O.R. p. 357) However, one should note that, in calculating that proportional reduction under the present CISG Art. 50, the value of the conforming goods is not just treated as equal to the price under the contract, the latter may well be below or above the former.[56] In general, the current value at the time of delivery is easier to establish, whereas the current value at the conclusion of the contract (except for stock market goods) always tends to be somewhat hypothetical.[57]

Clearly, under present CISG Art. 50: "The decisive time for the calculation of the price difference between proper goods and non-conforming ones is not, as in some national legal systems, the time of the conclusion of the contract but the time of the delivery of the goods."[58] And the time of delivery will be established on the basis of the contract and Art. 31.[59]

6.4.3.2 Place for comparing

The major difficulty surrounding price reduction, presumably, involves the geographical market value that should be considered when determining the value of the goods. Although the CISG clearly specifies that the goods should be valued when they are delivered, no mention is made with respect to what country's market shall control the valuation of the goods. 

As for the place to measure the market value in calculating the reduction, the representatives of Argentina, Portugal and Spain made a joint proposal to include language determining that the prevailing value would be that of the residence of the buyer. The representative of Norway, while expressing his preference to avoid such a complicated question, suggested the place of delivery was a better reference point. Consistently with this opinion, the representative from the Netherlands pointed that a buyer not necessarily would chose its place of residence for delivery and that, also, the matter could be complicated by resale while the goods are still in transit. The joint proposal was defeated.[60] Accordingly, the CISG leaves open where the value of the conforming and/or non-conforming goods will be assessed.

In this respect, Enderlein submits: "The Convention does not stipulate at which place or market the prices have to be compared; however, in view of the close relationship between date and place of delivery, this place should be decisive. It is not excluded, however, that buyers may consider the place of destination."[61] In another commentary, Enderlein & Maskow review as: "According to the sense and purpose of the price-reduction provision, the decisive place must be the place where the seller has to perform; in the case of sales involving carriage, it should be the place of destination [...]. Will [...] suggests a three-step solution: the place of destination, then the place of delivery, and finally the place of business of either the buyer or the seller, depending on where a market price can best be assessed. v. Hoffmann [...] also would like to take into account the current value in the buyer's country."[62]

6.4.4 Limited by the Cure

The second sentence of Art. 50 CISG stipulates: "However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price."

It follows that the buyer has no right to reduction if the seller cures the defective goods. Insofar as this is done according to Art. 37,[63] before the time of delivery, this should be quite natural. And if the seller remedies a defect under Art. 48 (see Chapter 5), there will be no need for a price reduction because equivalence will be re-established. What is of significance here is that the right to price reduction will be lost when the buyer refuses to have the defect cured by the seller. The reason for this rule lies, as Honnold believes, in the obligation to mitigate losses. It is of no importance here why the buyer refuses the cure, e.g. because of unreasonable inconvenience. In this case, the buyer might retain the right to claim damages taking account of the probable mitigation of losses under Art. 77.[64]

It is to be noted that the reference to Art. 37 in Art. 50 is a new one which was introduced at the Diplomatic Conference. "Mr. KLINGSPORN (Federal Republic of Germany)... said his delegation believed that the second sentence of [CISG article 50] should refer to [CISG article 37 as well as to [CISG article 48]. It seemed to him logical that a provision in regard to a buyer's declaration of reduction of price should apply not only to the case in which a seller remedied a failure to perform his obligations after the date for delivery [CISG article 48], but also that case in which such a failure was remedied before the date for delivery [CISG article 37]." (O.R. p. 360)

Thus, Art. 50 allows the seller, in the same way as in a damages situation, to cure the delivery. It seems very reasonable that the seller can opt to cure the defect rather than being obligated to receive less money. The courts have been quite clear on the seller's right to cure and the buyer's obligation to let the seller cure.[65]

6.5 STATUS OF THE PRICE REDUCTION UNDER UNIDROIT PRINCIPLES / PECL

6.5.1 Exclusion under the UNIDROIT Principles

Interestingly enough, the UNIDROIT Principles contain no equivalent remedy to Art. 50 of the CISG. There is no explanation within the UNIDROIT Principles for the reason for this exclusion, which might be due to the limited role the remedy plays when damages are readily available and not dependent on fault. Another possible explanation for the exclusion of a price reduction remedy in the UNIDROIT Principles is the scope of coverage of those Principles. The actio quanti minoris is one of the earliest consumer protection remedies and exemptions to the caveat emptor principle, originally designed to protect buyers from latent defects in goods (typically slaves). Since the UNIDROIT Principles only cover international commercial contracts, it could be argued that there would be a lesser need for such protection. If this were the sole basis, there would likewise be little reason to include such principles in the CISG.

However, the price reduction remedy has grown beyond its original scope of consumer protection and an examination of the situations where it is useful to the commercial buyer (such as those discussed supra. 6.3.3) indicates that there is a role for the remedy to play in modern commercial law.[66] While there is some potential for overlap with a claim for damages, price reduction is a useful element in the buyer's arsenal and helps protect the buyer with a remedy that can in principle be exercised by the buyer without having to resort to a court. The uncertainties introduced by Art. 50 are not significant and the provision should bears the potential of future application in private law harmonisations. This tendency is confirmed by the PECL.

6.5.2 Inclusion under the European Principles

Given the importance and familiarity of the remedy to civilian legal systems, in contrast to the UNIDROIT Principles, the unification efforts of the PECL adopts the reduction of price as a remedy under Art. 9:401, which is fairly similar to the CISG Art. 50 in approach, though the language differs.

PECL Art. 9:401 reads under the heading "Right to Reduce Price" as follow: "(1) A party who accepts a tender of performance not conforming to the contract may reduce the price. This reduction shall be proportionate to the decrease in the value of the performance at the time this was tendered compared to the value which a conforming tender would had at that time. (2) A party who is entitled to reduce the price under the preceding paragraph and who has already paid a sum exceeding the reduced price may recover the excess from the other party. (3) A party who reduces the price cannot also recover damages for reduction in the value of the performance but remains entitled to damages for any further loss it has suffered so far as these are recoverable under Section 5 of this Chapter."

The Official Comment on the PECL makes clear that this Article generalises the remedy provided by the action quanti minoris. In the conditions laid down in para. (1) the aggrieved party is entitled to a reduction in the contract price where the other party's performance is incomplete or otherwise fails to conform to the contract. The remedy is given whether the non-conformity relates to quantity, quality, time of delivery or otherwise. The remedy is designed both as an alternative to damages and for cases where the non-performing party is excused from liability for damages. The Article applies only where the aggrieved party accepts the non-conforming tender. If it does not, its remedy is either to pursue a restitutionary claim under PECL Art. 9:307 or to claim damages.[67]

As with the CISG, para. (1) above adopts the proportionality measure for the price reduction, measured at the time of delivery: "The amount of the price reduction is proportional to the reduction in the value of the promised performance. In some cases the value of the performance will be directly related to the proportion of the contract performed and the contract price may simply be reduced accordingly. In other cases the value of the performance may be reduced by a greater (or less) proportion."[68]

Likewise, para. (2) is intended to allow a party such as the buyer to recover the amount of the price reduction once it has been paid. This paragraph indicates at the same time a similar approach to the CISG in that it provides no time limit for the entitled party to exercise his right to reduction of the price, whether or not the price has been paid. The Official Comment confirms this: "The aggrieved party may obtain a price reduction under this Article either by withholding payment, if it has not already paid the price, or by recovering the amount of the price reduction if the price has already been paid."[69]

Finally, para. (3) makes it clear that the claimant cannot demand both the price reduction plus damages for the reduction in value. "Where the aggrieved party reduces the price under this Article it cannot also claim damages for reduction in the value of the performance as tendered compared with the value of a conforming tender [...]. The two remedies are incompatible so that there is no right to cumulate them under Article 8:102. However, other loss remains recoverable within the limits laid down by Section 5."[70] "It is in the nature of things that a party who reduces the price cannot also claim a sum equal to the reduction in value as damages. However, most laws allow the aggrieved party to recover damages for further loss."[71] While there is no express equivalent to para. (3) in Art. 50 of the CISG, the two provisions would likely have the same effect.[72]

To end, since the price reduction remedy is such a fundamental concept in civilian legal systems, it seems certain that any future efforts on the unification of contract or sale of goods law will contain some form of this remedy. The European context (with its predominance of civil law systems) outside of the PECL gives further support to the actio quanti minoris continuing to play a role in future legal developments. In its draft directive on Guarantees for Consumer Goods (COM (1998), p. 217, Art. 3.4), the European Commission has included as one of the remedies a price reduction remedy similar to Art. 50 of the CISG.[73]

Go to table of contents to full text of Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL.

FOOTNOTES: Chapter 6

1. See Peter A. Piliounis in "The Remedies of Specific Performance, Price Reduction and Additional Time (Nachfrist) under the CISG: Are these worthwhile changes or additions to English Sales Law?": 12 Pace Int'l L. Rev. 1 (2000). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/piliounis.html>.

2. See Arnau Muriá Tuñón in "The Actio Quanti Minoris and Sales of Goods Between Mexico and the U.S.: An Analysis of the Remedy of Reduction of the Price in the UN Sales Convention, CISG Article 50 and its Civil Law Antecedents" (1998). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/muria.html>.

3. See Albert H. Kritzer, Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods (1989); p. 375.

4. See Harry M. Flechtner in "More U.S. Decisions on the U.N. Sales Convention: Scope, Parol Evidence, 'Validity', and Reduction of Price Under Article 50": 14 J.L. Com. (1995); pp. 153-176. Available online at <http://cisgw3.law.pace.edu/cisg/biblio/flechtner.html>.

5. See R. Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition, Oxford: Clarendon Press (1996); p. 318.

6. Supra. note 2.

7. See Eric E. Bergsten & Anthony J. Miller in "The Remedy of Reduction of Price": 27 American Journal of Comparative Law (1979); pp. 255-277. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/bergsten.html>. [This is a commentary on the remedy of reduction of price under Art. 46 of the 1978 Draft Convention, from which the basic concept of price reduction under CISG Art. 50 remains unchanged nevertheless differs from the latter in several respects. For comparison of Art. 46 of the 1978 Draft with CISG Art. 50, see the match-up, available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-50.html>.]

8. See e.g., Swedish Sales Act §§ 42, 43; Art. 1644 of the French Civil Code; German Civil Code (BGB) §§ 459, 462, 472; See also Austrian ABGB § 932(1); Danish Sale of Goods Act §§ 42-43; Finnish and Swedish Sale of Goods Acts §§ 37-38; Greek CC Arts. 534, 535, 540; Italian CC Art. 1492(1); Portuguese CC Arts. 911, 913; Dutch BW Arts. 6:265, 6:270, etc.

9. See J.O. Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention, 2nd ed., Deventer: Kluwer (1991); p. 313.

10. See Bergsten & Mille, supra. note 7.

11. Supra. note 2.

12. See Bergsten & Mille, supra. note 7.

13. See Peter Schlechtriem, Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods, Manz, Vienna (1986); p. 79. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-50.html>. The Norwegian proposal (A/Conf. 97/C.1/L.167 (= O.R. 118)) to calculate the reduction with reference to the (lower) value of the goods at the time delivery was favorably received. Art. 50 thus differs both from the German Civil Code and from ULIS Art. 46.

14. Supra. note 1.

15. Ibid.

16. 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>. The same result would occur if the buyer were to make a claim for damages or specific performance. In either case, if the seller disagrees with the buyer as to the existence of a non-conformity in the goods -- or other failure of performance -- or as to the monetary consequences of that non-conformity, the issue must ultimately be settled in court.

17. See Bergsten & Mille, supra. note 7.

18. Supra. note 1.

19. See Bergsten & Mille, supra. note 7.

20. See Anette Gärtner in "Britain and the CISG: The Case for Ratification - A Comparative Analysis with Special Reference to German Law": Pace Review of the Convention on Contracts for the International Sale of Goods (CISG), Kluwer Law International (2000-2001); pp. 59-81. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/gartner.html>.

21. Ibid.

22. See Erika Sondahl in "Understanding the Remedy of Price Reduction - A Means to Fostering a More Uniform Application of the United Nations Convention on Contracts for the International Sale of Goods" (2003). Available online at <http://www.cisg.law.pace.edu/cisg/biblio/sondahl.html>.

23. Supra. note 4. The "modification" view, however, should be handled with care. There are important differences between the fictitious modification permitted by Art. 50 and an actual modification. For one thing, a buyer who accepts non-conforming goods and reduces the price under Art. 50 is entitled to recover damages beyond the amount of the price reduction -- although this could be rationalized as part of the implied price term of the modification. Additionally, the seller might be bound to a price reduction under Art. 50 even if she made it clear that she did not intend to be so bound. Thus suppose a seller shipped non-conforming goods accompanied by notice that, if the buyer was unwilling to pay full price despite the nonconformity, the goods should be returned to the seller. It is not clear whether this expedient would prevent the buyer from keeping the goods and reducing the price under Art. 50.

24. Supra. note 1.

25. Supra. note 4.

26. See Bergsten & Mille, supra. note 7.

27. Thus, if the seller fails to deliver 10% of the goods called for under the contract, the buyer could either declare the price reduced by 10% under Art. 50 or he could declare 10% of the contract avoided. Furthermore, if the partial non-delivery was so serious as to constitute a fundamental breach of the entire contract, the buyer could declare the whole contract avoided and, in effect, reduce the price by 100%. The same relationship exists between avoidance of contract and reduction of price where the non-conformity relates to the quality of the goods rather than quantity. If the non-conformity is so serious as to constitute a fundamental breach of the entire contract, the buyer can declare the contract avoided, and, in effect, reduce the price by 100%. If the non-conformity renders 10% of the goods worthless, the buyer could reduce the price by 10% or declare that portion of the contract avoided. Similarly, if the non-conformity as to quality existed in all the goods and reduced their value by 10%, the buyer could reduce the price by that amount.

28. 1978 Draft Art. 46 reads: "If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may declare the price to be reduced in the same proportion the value that the goods actually delivered would have had at the time of the conclusion of the contract bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 44 or if he is not allowed by the buyer to remedy that failure in accordance with that article, the buyer's declaration of reduction of the price is of no effect." Its match-up with CISG Art. 50 indicates that although the basic concept of price reduction remains unchanged, CISG Art. 50 differs from 1978 Draft article 48 in several respects: First, the method of computing the price reduction is different; Second, CISG Art. 50 contains a new reference: CISG Art. 50 is made inapplicable if the seller remedies any failure to perform his obligations in accordance with CISG Art. 37; Also, a new article has been added to the Official Text, CISG Art. 44, which should be read in conjunction with CISG Art. 50. Thus, the Secretariat Commentary on 1978 Draft Art. 46 is only of limited relevance to CISG Art. 50. (See the match-up, available online at <http://www.cisg.law.pace.edu/cisg/text/matchup/matchup-d-50.html>.)

29. See Secretariat Commentary on 1978 Draft Art. 46, Comment 4. Available online at <http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-50.html>.

30. Ibid. Comment 3.

31. Supra. note 3, p. 376.

32. Supra. note 1.

33. See Jacob S. Ziegel in "Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods"(1981). Available online at <http://www.cisg.law.pace.edu/cisg/text/ziegel50.html>.

34. See Anette Gärtner, supra. note 20, where he illustrates as: The contract price of a quantity of shirts is £ 100,000; however, the shirts supplied are non-conforming, so their value amounts to £40,000 as opposed to £ 80,000 for conforming goods; in addition, by the due delivery date, the market price has fallen to £ 60,000. Under the circumstances of this example, two remedies are available to a buyer who does not intend to declare the contract avoided because he wants to keep the goods. First of all, Art. 45(1)(b) of the CISG entitles the buyer to damages for breach of contract. These will be determined in accordance with Art. 74, under which he may recover "a sum equal to the loss . . . suffered . . . as a consequence of the breach." Since the ratio legis of this provision is to place the injured party in the same economic position he would have been in if the other party had fulfilled his obligations, in case of defective performance, this sum equals the difference between the value of the supplied goods and the market price. The damages a buyer could claim in the above sketched situation would therefore amount to £ 60,000 - £ 40,000 = £ 20,000. Hence, on the whole, he would have to pay £ 100,000 - 20,000 = £ 80,000 for the shirts. However, the buyer may also reduce the price according to the formula laid down in Article 50 of the CISG: reduced price / contract price = value of supplied goods / value of conforming goods. As a result, he would only incur expenses of £ 50,000.

35. Supra. note 1.

36. Ibid.

37. Supra. note 20.

38. Supra. note 1.

39. Supra. note 20.

40. Art. 35 CISG reads as follows:

41. Supra. note 1.

42. See Oberlandesgericht [Appellate Court] Koblenz, Germany, 31 January 1997, available online at <http://cisgw3.law.pace.edu/cases/970132g1.html>, where it is stated that lack of conformity includes lack of both quantity and quality.

43. Supra. note 7.

44. Supra. note 1.

45. See A/Conf. 97/C.1/SR.23 at 9-10 (= O.R. 359 et seq.) Available online at <http://www.cisg.law.pace.edu/cisg/firstcommittee/Meeting23.html>.

46. Supra. note 13, p. 56.

47. Supra. note 29, Comment 2.

48. Supra. note 13.

49. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 196. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

50. Supra. note 2.

51. Supra. note 1.

52. Supra. note 22.

53. Supra. note 2.

54. Supra. note 49.

55. Supra. note 49, p. 197.

56. Ibid. This approach produced some controversy. In fact, it was disputed to the very last minute. It was argued about both during the meeting in which it was discussed and during the final approval of the article. The controversy continues to exist.

57. Supra. note 49, p. 198.

58. See Fritz Enderlein in "Rights and Obligations of the Seller under the UN Convention on Contracts for the International Sale of Goods": Petar Sarcevic & Paul Volken eds., International Sale of Goods: Dubrovnik Lectures, Oceana (1996); p. 198. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein1.html>.

59. Supra. note 16.

60. Supra. note 2.

61. Supra. note 58.

62. Supra. note 55.

63. Art. 37 CISG reads: "If the seller has delivered goods before the date for delivery, he may, up to that date, deliver any missing part or make up any deficiency in the quantity of the goods delivered, or deliver goods in replacement of any non-conforming goods delivered or remedy any lack of conformity in the goods delivered, provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention."

64. Supra. note 57.

65. Supra. note 2.

66. Supra. note 1.

67. See Comment and Notes to the PECL: Art. 9:401. Comment A. Available online at <http://www.cisg.law.pace.edu/cisg/text/comparison50.html>.

68. Ibid.

69. Supra. note 67, Comment C.

70. Supra. note 67, Comment D.

71. Supra. note 67, Note 1.

72. Supra. note 1.

73. Ibid.

CHAPTER 7. RIGHT TO TERMINATION

     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.

Go to table of contents to full text of Remedies for Non-performance: Perspectives from CISG, UNIDROIT Principles & PECL.

FOOTNOTES: Chapter 7

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

     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 o