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Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 204-212. Reproduced with permission of the publisher, Kluwer Law International, The Hague.

Article 25

Definition of "Fundamental Breach"

A. Introduction
     (1) Domestic Usage: a "False Friend"
     (2) "Fundamental Breach" and Contract Avoidance
     (3) "Fundamental Breach" in the 1964 Convention
     (4) Changes Made by 1980 Convention
B. "Fundamental Breach" in Specific Situations
     (1) The Effect of an Offer to Cure
     (2) Refund and Price Adjustment
     (3) "Fundamental Breach" in Context

§181 A. Introduction

The breach of a sales contract by one party gives the other party a right to recover damages, but we are here concerned with more specialized remedies—the buyer’s right to reject goods and the seller’s right to refuse to deliver. In domestic law these remedies may be called "rejection," "revocation of acceptance," "avoidance," "termination" or "cancellation." In the Convention (Arts. 49 & 64) a party’s privilege not to perform the contract because of the other party’s breach is called "avoidance of the contract."

In the Convention, as in domestic legal systems, "avoidance" is not available for every breach. As we shall see in examining Articles 49(1)(a) and 64(a)(a), infra at §§304, 354, a party may avoid the contract when the other party commits a "fundamental breach"—a term that is defined in the present article.

Article 25 [1]

"A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result."[page 204]

§181.1 (1) Domestic usage: a "false friend"

In English law the concept of "fundamental breach" was developed to deal with a very different problem—the effect of a contract provision restricting the buyer’s rights when goods are defective. For a time English courts held that a "fundamental breach" of contract by the seller nullified such a contract provision. The rise and fall of this doctrine are described in Benjamin §§967–979, cf. §§982–1016. This doctrine was quite different in function and scope from "fundamental breach" in the Sales Convention. Domestic law was not employed in drafting Article 25; its provenance was the definition of "fundamental breach" in CISG. It would, of course, be a mistake to rely on this "false friend" from domestic law in construing the Convention. See, accord, Will in B-B Commentary 209.

§181.2 (2) "Fundamental breach" and Contract Avoidance

As we shall see (§186, infra), the Convention uses the term "fundamental breach" in various settings but it plays its most important roles in Articles 49(1)(a) and 64(1)(a) which state grounds on which the buyer or seller may "avoid" the contract and thereby become free from further contractual obligations—e.g., to receive and pay for the goods or to deliver them.

The diverse approaches to this problem in domestic law will be discussed more fully (§301) in connection with Article 49, which governs the circumstances in which the buyer may refuse to accept the goods when the seller’s delivery is delayed or when the goods fail in some respect to conform to the contract. The correlative right of the seller to avoid the contract when the buyer fails to perform one or more of his contractual obligations is set forth in Article 64 and is discussed at §§353356, infra.

"Avoidance" of the contract must be distinguished from a party’s right to suspend performance under Article 71 (§§385394, infra); avoidance terminates the right and duty of both parties to proceed further with performance, subject to a claim for damages for breach of contract. See Articles 45(1)(b), 61(1)(b) and especially Article 81(1): "Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due". Thus, in determining the grounds for "avoidance" the issue is not whether a party whose performance is defective [page 205] in some minor respect will escape liability. Every breach, no matter how trivial, calls for compensation in damages (Art. 74, §§403408, infra). Thus, a remedy by damages has a quality of justice lacking in avoidance since the cost to the one who pays and the benefit to the one who receives correspond to the harm caused by the breach.[2] In framing the scope of (e.g.) the buyer’s right to avoid the contract the relevant questions are these: Which party is normally in the better position to redispose of goods? Will the buyer’s retention of the goods jeopardize effective compensation for damages? Is there justification for reversing the contract’s allocation between the parties of rises or declines in market price?

In developing the Convention there was no significant support for extending avoidance to include insubstantial deviations from the contract. Stricter avoidance (or "rejection") rules in some domestic laws failed to take account of the special circumstances of international trade, such as the fact that claims that the goods are defective often are made only after expensive transport to the buyer’s place of business when avoidance for immaterial defects might needlessly lead to wasteful reshipment or redisposition of the goods in a foreign country. Moreover, the power to avoid the contract for immaterial defects in performance may tempt the seller (after a price rise) or the buyer (after a price decline) to avoid the contract and thus reverse the allocation of the effect of price changes which the contract contemplated.

Of course, these factors will not always be present and in many cases only avoidance will adequately protect the aggrieved party. In transactions where a party is concerned that Article 25 is too lax or too strict or that a tribunal might improperly apply the law, the contract can provide stricter (or looser) grounds for avoidance (Article 6).

These pragmatic considerations are mentioned because the definition of "fundamental breach" in Article 25 had to be drafted in general terms and could not specify all the circumstances that may be relevant in determining whether a breach will "substantially" deprive a party "of what [page 206] he is entitled to expect under the contract...". Some of these circumstances will be illustrated by concrete examples.

§182 (3) "Fundamental Breach" in the 1964 Convention

ULIS (§10) contained the following definition of "fundamental breach":

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

This definition approached the question of the materiality of the breach by a hypothetical question put to the party in breach at the time of the conclusion of the contract: Would the party in breach have predicted that the other party would have "entered into the contract if he had foreseen the breach and its effects." Analysis of this provision in UNCITRAL made it clear that "fundamental breach" must be redefined in terms of the materiality of the breach.[3]

§183 (4) Changes Made by 1980 Convention

The Convention’s definition in Article 25 turns on the degree of the detriment resulting from the breach: Is it such "as substantially to deprive him of what he is entitled to expect under the contract?" This emphasis on "detriment to the other party" is more precise than expressions such as "substantial performance" of the contract. Temporal or physical deviations ("one day", ".001 millimeter") have no significance apart from the extent of the loss or detriment they cause to the other party.

The definition of "fundamental breach" in Article 25 has two elements: (1) The detriment to the aggrieved party, A, must "substantially" deprive A of what he is entitled to expect from the contract, and (2) Since the detriment to A may be affected by a wide variety of circumstances peculiar to A, the relevant detriment is limited to what the party in breach, F, foresaw or should have foreseen.

Vantage-points for foreseeability. This second element is subject to an ambiguity that has generated a substantial literature: From what vantage [page 207] point in time should F view the possibility of detriment to A? Is the detriment limited to what F foresaw (or could have foreseen) when the contract was made, or may it include detriment that F foresaw (or could have foreseen) at a later time? This issue may not arise often, but the possibility may be illustrated as follows:

Example 25A. S agreed to ship 100 bags of rice to B. B’s order was on a printed form that specified "new bags". When B prepared to ship he had at hand sound, used bags that he believed were of the same quality as new bags and would be acceptable to B subject to a modest price allowance. However, before S bagged the rice B telexed to S, "Have obtained contract for resale of rice which emphasizes use of new bags. Although sound used bags would usually be acceptable subject to a price allowance, use of new bags for this shipment is very important". S replied, "Shipping in extra high quality used bags". B rejected the shipment and notified S that the contract was avoided because of the danger of rejection by the sub-purchaser.

On the assumption that at the time of contracting the seller could not have foreseen that the detriment to the buyer would be substantial, should the later information be taken into consideration?

The language of Article 25 does not answer this question. In setting forth the first of the two elements, as analyzed above, Article 25 refers to detriment that deprives the aggrieved party, A, of what A "is entitled to expect under the contract", but there is no reference to the time of the making of the contract in the second element that was based on the detriment that F, the party in breach, foresaw or could have foreseen.

In UNCITRAL and at the 1980 Conference some delegates proposed that this second element be amended to restrict consideration to those circumstances that the party in breach (F) could have foreseen when the contract was made. Both legislative bodies considered the issue and decided that this restriction should not be imposed. Extracts from this legislative history appear in a footnote.[4][page 208]

To return to Example 25A, we may conclude that the information the seller received subsequent to the contract but before shipment gave the seller reason to foresee that the breach of contract would "substantially" deprive the buyer of what he was entitled to expect under the contract, and that the buyer’s avoidance was justified under Articles 25 and 49(1)(a). However, information that a party receives too late to affect performance seems outside the scope of Article 25, since the foreseeability principle presumably is designed to give F an opportunity to give special attention to minor details of performance the importance of which he could not otherwise have anticipated.[5]

Burden of proof. The second element in Article 25, as analyzed above, has generated discussion of yet another refinement: Who has the burden of providing whether the detriment to the aggrieved party, A, was or was not foreseen or foreseeable by the other party, F? Any doubt from the text of the statute (or from practical considerations of allocating burdens of proof) is removed by the legislative history: In UNCITRAL’s 1977 review of the Working Group "Sales" draft, attention was drawn to the following language: "A breach...is fundamental..." if it results in substantial detriment and the party in breach foresaw or had reason to foresee such a result. The view was suggested that under this language "the burden of proof would be on the innocent party and this could not be the proper solution". To meet this objection the Commission, without objection, replaced the above language by the "unless..." clause that appears in Article 25.[6][page 209]

§184 B. "Fundamental Breach" in Specific Situations

(1) The Effect of an Offer to Cure

To help preserve transactions from technical mishaps, the Convention includes important provisions permitting the seller to "cure" a non-conforming delivery by replacing or repairing defective goods. See Art. 37 (cure until date for delivery—§244) and Art. 48 (cure after the date for delivery—§292). The relationship between these provisions and "fundamental breach" can be illustrated as follows.

Example 25B. On June 1, the date for delivery specified in the contract, Seller delivered to Buyer a large and expensive machine. On June 15, when Buyer put the machine into operation, one essential part of the machine did not function with the result that the machine did not operate. Buyer notified Seller who offered immediately to replace the defective part. Although the brief period required for making this replacement did not interfere with Buyer’s plans for using the machine, Buyer did not permit Seller to replace the defective part. Claiming that a defect that prevented the machine from operating was a "fundamental breach" under Article 25, Buyer declared that the contract was avoided (Art. 49(1)(a)) and stated that the seller must remove the machine and refund the price (Art. 81).

Buyer was correct in stating that, without the replacement of the defective part, the seller’s breach was clearly "fundamental" and that avoidance would be justified. On the other hand, a rapid replacement of the defective part, even after the agreed date of delivery, would prevent any "substantial" detriment to the buyer; on this assumption, the breach would not be "fundamental" and the contract could not be avoided. As we shall see, Article 48 authorized Seller to replace the defective part under the circumstances described in Example 25B. The question whether the breach was "fundamental" for the purpose of avoidance must be answered in the light of the effect of a rightful offer to cure, for otherwise Seller’s exercise of this right would be futile. When the applicable provisions (Arts. 25, 48, 49) are construed together, Buyer’s attempt to avoid the contract should be ineffective.[7][page 210]

Cure. FR. CA Grenoble, RG 93/4879, 26 April 1995. M. Roque v. HMR. S repaired damage to warehouse delivered to B; because of S’s cure, avoidance of contract was denied. UNILEX D. 1995-14, CLOUT 152.

§185 (2) Refund and Price Adjustment

Other situations call for evaluating the substantiality of the breach in the light of all of the facts. This point may be illustrated by comparing the two following cases:

Example 25C. A contract between Seller and Buyer called for the delivery of 1,000 bags of No. 1 quality sugar; the price was $20,000 ($20 per bag). On delivery, inspection showed that the sugar in 970 bags complied with the contract but that the sugar in 30 of the bags was so defective that it could not be used. Other sugar was available in Buyer’s market. When the defect in the delivery was discovered, Seller offered not to charge for the 30 bags. (In a documentary transaction, this could be effected by Seller’s drawing a draft for $19,400 instead of $20,000.)

Example 25D. The facts are the same as in Example 25C, except that Seller refused to permit the delivery of any sugar except for the full price of $20,000.

These examples suggest that the question of how "substantially" a party has been deprived of "what he is entitled to expect under the contract" (Art. 25) cannot be answered simply by looking at the goods. In Example 25C, buyer has been deprived of very little; the tender of the goods accompanied by the price adjustment would probably not constitute a "fundamental breach." In Example 25D, the tender of the same goods, without the price adjustment, should constitute a "fundamental breach." Recovery of money paid for the defective goods, at the very least, would involve the delays, expenses and uncertainties of pressing a claim. If Seller is far from Buyer and is of questionable financial responsibility, the test of "fundamental breach" in Article 25 is even more clearly established. The relevance of this approach is recognized by Article 48(1), infra at §293, by providing that the seller may not remedy (e.g., repair) a failure of performance if there is "uncertainty of reimbursement by the seller of expenses advanced by the buyer."[8][page 211]

§ 186 (3) "Fundamental Breach" in Context

There are other significant applications of Article 25 but these can be best be explored in connection with the articles that use "fundamental breach" as a basis for avoidance of the contract—Article 49 (avoidance by buyer) and Article 64) avoidance by the seller). (Avoidance under the Convention is compared with the approach of various systems of domestic law in the Commentary to Art. 49, infra at §301.) "Fundamental breach" is also used to deal with avoidance in special situations: in Art. 51(2) on avoidance of an entire contract based on defective performance of a part of the contract, in Art. 72 on anticipatory breach, and in Art. 73 on deliveries by installments. This concept is also used in Article 46(2) to limit the remedy of specific performance: the buyer "may require delivery" of goods to substitute for nonconforming goods "only if the lack of conformity constitutes a fundamental breach of contract." Avoidance for fundamental breach can also affect risk of loss—e.g. the responsibility for casualty during transit. See Art. 70, §§379383, infra. Applications of Article 25 are illustrated by the following decisions.

Strict Standards for Avoidance:  (1) GER. BGH (Sup.Ct.), VIII ZR 51/95, 3 April 1996: Avoidance a "last resort", breach must "substantially deprive party of what he was entitled to expect"; B could use defective goods or resell; avoidance denied. (S to be reimbursed by damages. See Arts. 45(1)(b) and 74, infra.) CLOUT 171, UNILEX D.1996.4.  (2) GER. OLG Frankfurt a. M. 5 U 15/93, 18 January 1994; goods must be unfit for use, B could readily resell, though at a discount. Avoidance denied. CLOUT 79, UNILEX D.4.  (3) SWITZ, HG Zürich, 920670, 26 April 1995; B could repair leaky tank. UNILEX D. 1995-15.1.

Avoidance Granted:  (1) AUSTRALIA, Fed. Ct. S.Aus. 57 FCR 216, 28 April 1995. Financial failure—B could not pay. For right to recover goods see CISG 81(2). Here, S’s claim to recover goods was supported by Romalpa clause in contract. UNILEX D.1995-15.1.1.  (2) IT. Pr. di Parma, 77/89, 24 November 1989; S’s delay in shipping supported avoidance. CLOUT 90, UNILEX D. 1989–7.

Violation of resale restrictions:  (1) GER. OLG Frankfurt a. M., 5 U 164/90, 17 September 1991 (wrongful use of S’s trade-mark), CLOUT 2, UNILEX D. 1991–9.  (2) FR. CA Grenoble, RG 3275, 22 February 1995 (sale in area prohibited by contract), CLOUT 154, UNILEX D. 1995–7.  (3) But cf. GER. OLG München, 7 U 4419/93, 2 March 1994. UNILEX D. 1994–7.

Comments: Bonnell/Ligouri, ULR (1996–2) 364–370 (includes cases of avoidance under CISG 49(1)(a) & 64(1)(a), infra); Schlechtriem, Com. (1998) 173–185.[page 212]

FOOTNOTES: Chapter on Article 25

1. This article is based, with drafting changes, on Art. 23. of the 1978 Draft. Cf. ULIS 10, quoted infra.

2. An early (1956) draft of the Hague (1964) uniform law for international sale provided that the buyer could avoid the contract with respect to goods that did not conform to the contract without regard to the degree of non-conformity (Art. 55). To reduce the harshness of this rule the definition of the seller’s basic obligation to supply conforming goods provided (Art. 40) that no "deficiency in quantity" or "absence of any quality...shall be taken into consideration where it is not material to the interests of buyer...". Records, 1964 Conference, Vol. II, pp. 13, 15. This lack of "proportionality", in which no compensation was provided for minor shortages of quantity or deviations as to quality but a drastic remedy was granted for the slightest deviation from this standard, was abandoned by the 1964 Conference; the approach of the 1964 Convention (ULIS 10, 43) is similar to that of the 1980 Convention.

3. Graveson, C & G. 55–57, Dölle, Kommentar 49–58 (Huber); Honnold, ULIS: The Hague Convention of 1964, 30 Law & Contempt, Prob. 326, 344 (1965); Sutton, The Draft Convention on the International Sale of Goods, 4 Austral. Bus. L. Rev. 269, 285–288 (1976).

4. In UNCITRAL’s final (1977) review of the "Sales" provisions, one delegate proposed to limit the time for foreseeability to "the conclusion of the contract". Under another view "it would be fairer to refer to the time at which the breach was committed". The decision was recorded as follows: "The Commission, after deliberation, did not consider it necessary to specify at what moment the party in breach should have foreseen or had reason to foresee the consequences of the breach". UNCITRAL, Report of Tenth (1977) Session, VIII Yearbook 31 at 31, para. 90, Docy. Hist. 324. See, accord, Secretariat Commentary, Art. 23, §5, O.R. 26, Docy. Hist. 416. Finally, at the 1980 Diplomatic Conference one delegate (U.K.) proposed a similar amendment. Other delegates spoke in opposition to the proposal and no delegate spoke in support; as a result, the proposal was withdrawn. O.R. 99, Docy. Hist. 671 (text of proposal); First Committee deliberations, O.R. 302, Docy. Hist. 523.

5. See Will, in B-B Commentary 221, for opposing views. For a conclusion contrary to that suggested above see Schlechtriem, 1986 Commentary 60.

6. VIII Yearbook 31, para. 89, Docy. Hist. 324. For fuller review of the discussion see Michida, 27 Am. J. Comp. L. 279, 285 (1979) and Will, B-B Commentary, 216, para. 2.2.1. In many legal systems, decisive effect as to burden of proof may be given to the syntax of the sentence. In other systems where syntax is given less weight the same interpretation should be given to this language of Article 25, for the legislative history shows that allocation of burden of proof was the premise for the amendment that produced the final language of the article. Moreover, in these systems the same result can be reached on pragmatic principles of proof-allocation since the party in breach is in a better position to prove what he could have foreseen.

7. At UNCITRAL’s 1977 review of the Draft Convention on Sales, there was discussion of whether the definition of fundamental breach (now Art. 25) should be amended to make clear that the definition called for consideration of "all the circumstances, including a reasonable offer to cure." The Commission decided that such an amendment was "unnecessary" and "superfluous." UNCITRAL X Annex I, paras. 93–95, VIII YB 31–32, Docy. Hist. 324–325. Michida, Cancellation of Contract, AJCL UNCITRAL Symposium 286–288 (1979). See also Art. 41, infra at §266.

8. Commercial practice and contractual patterns dealing with such problems were examined in Honnold, Buyer’s Right of Rejection,—A Study In the Impact of Codification Upon a Commercial Problem, 97 U. Pa. L. Rev. 457, 468-472 (1949).

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