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Reproduced with the permission of Oceana Publications

excerpt from

INTERNATIONAL SALES LAW

United Nations Convention on Contracts for the International Sale of Goods

Convention on the Limitation Period in the International Sale of Goods

Commentary by
Prof. Dr. jur. Dr. sc. oec. Fritz Enderlein
Prof. Dr. jur. Dr. sc. oec. Dietrich Maskow

Oceana Publications, 1992

Article 25 [Fundamental breach]

[TEXT OF THE UNIFORM LAW]

A breach of contract [1] committed by one of the parties is fundamental [2] 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 [3], unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen [4] such a result.

[WORDS AND PHRASES, CONCEPTS

1. breach of contract
2. fundamental breach of contract
3. detriment
4. foreseeability ]

[COMMENTARY]

[1] [breach of contract]

Concerning the term breach of contract as part of the regulation regarding responsibility under the CISG, compare clause 5 of the introductory remarks to Article 79.

[2] [fundamental breach of contract]

      [2.1] The CISG does not contain a specific term to complement "fundamental breach of contract" because "breach of contract" also functions as a generic term. We use the term "simple breach of contract" because the establishment of a complementary term by way of negation ("non-fundamental" - Huber, 461) is to be rejected for it could also serve to qualify a breach of contract which formally occurred [page 111] but is so irrelevant that it would not entail any legal consequences.

      [2.2] 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).

      [2.3] The distinction between fundamental breach and simple breach of contract is the basic criterion for the classification of breaches of contract. This criterion offers a wide scope of interpretation, all the more since it is linked, to a large degree, to assessments. The outcome of this situation are uncertainties which have to be reduced in the discussion at the international level. In this endeavour, one should cooperate with those institutions which take the decisions in practice. A new step cannot be renounced just because not all of its implications can be foreseen. The fact that the fundamentality of a breach of contract in many cases is the condition for an avoidance of contract is expression of the trend of the CISG to preserve contracts, which we consider as essential in international trade.

      [2.4] The certain awkwardness of the definition of fundamentality is the result of a compromise (in detail see Eörsi, Convention, 336 (fol). Basically, it refers to two essential criteria: to the party vis-a-vis to whom the breach was committed, the aggrieved party; (note 3) and, to the foreseeability of that breach (note 4). The elements which define a substantial detriment are extremely complex. In seeking a solution (as long as there is no experience) the legal consequence will not be deduced from the facts of the case, but rather will the facts be interpreted according to the legal consequence which is intuitively felt to be the just one. Article 10 ULIS also does not seem to be of great help considering the decisions given as examples by Schlechtriem/Magnus (171 fol).

[3] [detriment]

The detriment itself is characterized by three aspects: In the end, and that is the decisive element in our view, there has to be a relevant detriment to the aggrieved party (3.1.); it has to be fundamental (3.2.); and proportionate to the expectations justified under the contract (3.3.). This shall be made clear by citing some important examples [page 112] (3.4.). 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.

The parties may, from the outset, characterize as fundamental, certain categories of non-fulfilment of obligations; e.g. by determining that time is of the essence. This would correspond to the principle of contract autonomy. This can also be done by invoking established practices. The consequences will then follow from the Convention (not in agreement Huber/Dölle, 51).

      [3.1] The term "detriment" should be interpreted in a broad sense (accordingly Will/BB, 211 fol). 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 (Schlechtriem, 48). 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.

      [3.2] 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. Actually, we have taken account of the element of substantiality in discussing the term "detriment". It should be added that it is the circumstances of each individual case which are relevant.

      [3.3] Finally, the expectations of the aggrieved party have to be discernible from the contract. This element to which, in particular, the FRG had attached great importance (Huber, 464, and a relevant proposal, O.R., 99) is quite evident in itself and also contained in the element of foreseeability (note 4). It is to be stressed that a fundamental [page 113] breach of contract must constitute also a non-fulfilment of a contractual obligation. Nothing can be said against this opinion. Sometimes, however, one gets the impression that when interpreting (Schlechtriem, 47) the main emphasis is shifted from the substantial detriment to the non-fulfilment of the obligation. Such approach, in our view, does not meet the intention of the provision insofar as it concerns the consequences of a contract violation which is then characterized more in detail. We thus consider reference to the contract more as a restriction of cases of fundamental breach rather than an extension (not every ambitious expectation is protected).

      [3.4] A violation of the time for performance constitutes a fundamental breach of contract when, for instance, the other party cannot use the late delivery for the purpose envisaged in the contract. When the contract stipulates that time is of the essence or uses such customary terms as "fixed", "absolutely", "precisely", "at the latest", it could be considered as an agreement, where non-fulfilment of this condition will have to be regarded as a fundamental breach of contract. Proof that the legal prerequisites of such breach are not fulfilled is then inadmissible (not in agreement Huber, 462 fol on the draft convention) .

A violation of the qualitative requirements (non-conform[ing] delivery) is fundamental when the non-conformity considerably impedes the fitness for use of the goods and when it is irreparable. Whether or not a reparable lack of conformity is fundamental depends on the time element. Had the violation of the time for delivery been fundamental, much would speak in favour of considering a reparable fundamental lack of conformity as a fundamental breach of contract. If this is not the case, a non-conform[ing] delivery can then expand into a fundamental breach of contract when the lack is not removed.

We do not, however, consider the delivery of an aliud as a fundamental breach of contract. We hold that there are two approaches to this problem. Both proceed from the assumption that there is a fundamental breach from the very outset, of which notice is to be given (Art. 38 fol) and which entails the right to delivery of substitute goods (Art. 46, paragraph 2) or avoidance of contract (Art. 49, paragraph 1, subpara. (a)). The right to immediate avoidance in any case connected therewith cannot be justified. We, therefore, prefer an interpretation according to which there is non-delivery at first with the right of the other party to performance being retained, but the provisions governing the notice of a lack of conformity are applied by analogy. It would then have to be assessed whether a violation of the time for performance, which a further delivery (of now conform[ing] [page 114] good) mostly entails, would have to be characterized as a fundamental breach of contract.

To what extent a non-fulfilment of an obligation is fundamental depends on its relevance for the achievement of the purpose of the contract. In regard to the most important obligations (delivery, payment, acceptance) the possibility of avoidance can be achieved by using the mechanism of the Nachfrist (Art. 49, paragraph 1, subpara. (b); Art. 64, paragraph 1, subpara. (b)). In the event of a non-fulfilment of another obligation, avoidance is possible only when it is to be regarded as fundamental. That there is indeed a non-fulfilment will practically become obvious only after a period of waiting for fulfilment. Cases where there is, or will be, fundamentality include the non-delivery of certificates of analysis of chemical substances; operating manuals of technical consumer goods; the lack of agreed labels or, on the part of the buyer, non-supply of agreed drawings or of part of materials.

And, finally, the case should be mentioned where the seller has delivered goods which, contrary to his obligations, are not free from third party claims or rights (Art. 42) based on industrial or other intellectual property. If this lack is not removed, e.g. by way of licences, payment of compensation, satisfaction of claims, and the use of the goods according to the contract is at least substantially impeded, there will be a fundamental breach of contract. If these lacks can be removed, the decisive factor will be time required as in the event of non-conform[ing] delivery.

[4] [foreseeability]

      [4.1] 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 Article 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 (but 3.3.), 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. [page 115]

      [4.2] 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 (regarding the interpretation of the terms used here see Art. 8, note 5). If the party in question does, however, foresee more than average, this will be relevant (Will/BB, 220).

      [4.3] No time is fixed when this foreseeability or required foresight must exist. The interpretation is, therefore, different with the time of the conclusion of the contract or of the breach of contract playing a role (for a survey see Will/BB, 220 fol). While we hold that generally the time of the conclusion of the contract should be referred to, we consider it possible that in exceptional cases subsequent information should be taken into account as well. Such information could be given until the actual and/or required commencement of the preparation in view of performance so that the other party can still adapt itself to it. This seems justified to us because it can be doubted that the information available at the time of the conclusion of the contract has really made possible the foreseeability or required foresight of the consequences. This doubt may be removed when subsequent information is taken account of. When, for instance, in the case of a contract for delivery of consumer goods to be manufactured the buyer signals immediately after the conclusion of the contract that the imprint of agreed data on the packaging is of decisive importance because the goods otherwise could not be sold in the envisaged sales area, this will have to be regarded as sufficient for the violation of the respective obligation to be characterized as fundamental (agreeing Will/BB, 221). [page 116]

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Pace Law School Institute of International Commercial Law - Last updated August 9, 2002
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