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Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 418-424. Reproduced with permission of the publisher, Kluwer Law International, The Hague.

Article 70

Risk When Seller is in Breach

Text of Article
A. Effect of Non-Conformity of Goods on Risk in Transit
      (1) Fundamental Breach and Risk in Transit
            (a) Partial Avoidance
            (b) Damages Based on Transit Casualty
            (c) Requiring Delivery of Substitute Goods
B. Casualty to Non-Conforming Goods After Receipt by Buyer

§379 In Article 69(1) we saw that when the buyer "commits a breach of contract by failing to take delivery" this breach may transfer risk to the buyer. Article 70 addresses the question whether a breach of contract by the seller (e.g., by dispatching non-conforming goods) will prevent the risk from passing to the buyer.

Article 70 [1]

"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."

§380 A. Effect of Non-Conformity of Goods on Risk in Transit

Article 70 applies only when "the seller has committed a fundamental breach of contract." To see the significance of this provision we need to consider the effect of breach that is not "fundamental."

Example 70A. Seller and Buyer made a contract calling for Seller to ship to Buyer 1,000 bags of No. 1 quality soybeans. The contract did not require Seller to bear the risk during transit. (Hence, under the general rule of Article 67(1), supra at §363, risk would pass to Buyer "when the goods are handed over to the first carrier for transmission to the buyer.") Seller shipped 1,000 bags of soybeans; 999 bags conformed to the contract but one bag was graded "No. 2" rather than "No. 1." (Let us assume that this non-conformity was not a "fundamental breach" under Article 25. On this assumption, Buyer could not avoid the contract under Article 49(1)(a)). However, during the shipment to Buyer, 500 bags of beans were ruined by sea-water. May Buyer claim damages (or reduce the price) because of the failure of the 500 bags to grade No. 1 at arrival? May Buyer reject the shipment ("avoid the contract") on the ground that the 500 worthless bags constituted a "fundamental breach"?

In this case Article 70 is inapplicable because (by hypothesis) the breach with respect to the one bag was not "fundamental." It follows that [page 418] the general rule on risk in transit (Art. 67(1), supra at §363) governs the case, and transit risk passed to Buyer. Under Article 36(1), supra at §241, the seller is only responsible for a "lack of conformity which exists at the time when risk passes to the buyer." Consequently, Seller is not responsible for the poor quality of the 500 bags that resulted from the casualty in transit. Of course, Seller is responsible in damages for the bag that graded No. 2 rather than No. 1; since (by hypothesis) this deviation was not a "fundamental breach" Buyer may not avoid the contract (i.e., reject the shipment).

§381 (1) Fundamental Breach and Risk in Transit

Example 70B. This case is like Example 70A except that the beans shipped by Seller were seriously defective: 600 bags were worthless for any purpose other than cattle feed. (We may assume that this constituted a "fundamental breach" of the contract as a whole.) Of the 400 bags that conformed to the contract on shipment, 150 were seriously damaged in transit by sea-water. May Buyer claim damages (or reduce the price) based on the failure of this part of the shipment to grade No. 1? May Buyer reject all the goods ("avoid the contract") because of the fundamental breach at the time of delivery to the carrier? Or would the Buyer be barred from "avoidance" on the ground that, under the contract, loss in transit was his responsibility, and he cannot return the goods in substantially the same condition as when they were shipped? (Cf. Art. 82(2)(a), infra at §445.)

Again we start with the basic rule of Article 67(1) that, apart from breach, risk of loss would pass to the Buyer when the goods were handed over to the carrier. But here the serious nonconformity of the 600 bags constituted a "fundamental breach" of the contract as a whole; Buyer may avoid the contract under Art. 49(1)(a).

Do other provisions create barriers to avoidance? We may assume that the buyer notified the seller of avoidance promptly after the arrival of the goods and thereby complied with Article 49(2)(b). As we shall see, Article 82, infra at §445, establishes an additional barrier to avoidance: Under paragraph (1) A Buyer loses his "right to declare the contract avoided...if it is impossible for him to make restitution of the goods substantially in the condition [page 419] in which he received them." However, Buyer had not "received" the goods when they were damaged during transit. Cf. Arts. 21 & 60(b). In any event, the requirement of Article 82(1) that the goods be returned in the same condition as when received is subject to an exception in paragraph (2)(a) when the change in the condition of the goods was "not due to [the buyer’s] act or omission." In our case, the change in condition of the goods was not due to an "act or omission" of the buyer but resulted from a transit casualty.

In short, when a serious breach of contract by the seller gives the buyer the right to reject goods ("avoid the contract"), this right is not lost because of damage to the goods during transit.[2]

This same result protecting the buyer’s right to reject is embodied in the (U.S.A.) Uniform Commercial Code:

Section 2–510. Effect of Breach on Risk of Loss

"(1) Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of their loss remains on the seller until cure or acceptance..."

Under this language, a trivial breach that does not give a right of rejection ("avoidance")—as in Example 70A—does not overturn the risk provisions of the contract or the general statutory rules on risk. But when—as in Example 70B—the breach is so serious "as to give a right of rejection" ("avoidance") the defective delivery to the carrier is not effective to transfer transit risks to the buyer, and his right to reject because of the breach is preserved.[3]

(a) Partial avoidance

In Example 70B Buyer, if it chooses, need not avoid (reject) with respect to the entire shipment. Article 51(1), §304 supra, provides that if "only a part of the goods" conforms to the contract "articles 46 to 50 apply in respect of the part...which does not conform". Consequently, Buyer may effect a partial avoidance limited to the 600 bags that were seriously defective when they were shipped, and keep the 250 bags that arrived in good condition and the 150 bags that were seriously damaged during transit.

One might argue that although the language of Article 51 seems to limit partial avoidance to the goods that were defective when shipped (see also Articles 36(1) and 66), its overall purpose is to give an option to an aggrieved party to limit avoidance of the contract: When a buyer has the power to avoid the contract as a whole the theory that "the whole includes its parts" suggests that the buyer, instead of exercising its right to avoid as to the entire shipment of 1,000 bags, can elect to avoid as to only [page 420] 750 and keep only the 250 that arrived in good condition. The seller is not in a worse position than if the buyer had avoided as to the 1,000 bags; indeed, both parties probably are in a better position since the buyer can use the 250 good bags and the seller will be paid for them and its burden of redisposition, to this extent, will be lightened. It is difficult to predict a tribunal’s reaction to laying such a heavy hand on the language of Article 51; counsel for the buyer might be well advised to inform the seller of the buyer’s right to avoid the contract as a whole and suggest that it would be to the advantage of both parties to agree on a less drastic course.

§382 (b) Damages Based on Transit Casualty

We return to Example 70B—the shipment of seriously defective soybeans that were subject to damage in transit. Of the 1,000 bags, 600 were defective when the seller delivered the goods to the carrier. Of the remaining 400 bags, 150 were damaged in transit and 250 arrived in good condition. Let us assume that the buyer needed the soybeans and accepted the shipment, but immediately notified the seller of the poor condition of the goods (Art. 39). May the buyer recover damages not only for the 600 bags that were defective at the time of shipment but also for the poor condition of the 150 bags that resulted from damage in transit? (For the sake of completeness we here face a problem that will seldom arise. When the goods are subject to two serious difficulties—non-conformity at shipment that is "fundamental" plus damage in transit—the buyer would often exercise its right to avoid the contract.)

A buyer who accepts the goods probably may recover damages from the seller only for the non-conformity at the time of shipment; for the damage in transit the buyer must look to the carrier or the insurer. Article 70 merely provides that the seller’s fundamental breach does not "impair the remedies available to the buyer on account of the breach." This language (unlike U.C.C. 2–510(1), quoted supra) does not modify the Convention’s rules on passage of risk. Risk in this case passed to the buyer (Art. 67(1)) "when the goods were handed over to the first carrier"; Article 70 says merely that when the seller has committed a fundamental breach, the articles on risk of loss (Arts. 67, 68 and 69) do "not impair the remedies available to the buyer on account of the breach." Prior to the transit damage the buyer had the right to avoid the contract. Article 70 preserves the buyer’s right of avoidance with full recovery of the price, a remedy that the buyer, surprisingly, did not invoke. When a buyer chooses to accept a shipment that is doubly defective (seriously defective at shipment and damaged further during transit) it is difficult to conclude [page 421] that Article 70 enlarges the buyer’s damage claim to include the damage that resulted after risk passed to the buyer.

The result that flows from a literal reading of Article 70 may be unfortunate in encouraging the buyer to reject ("avoid") rather than to salvage the shipment and claim damages. However, as we noted above, the buyer will rarely choose to take responsibility for the goods when they are so seriously defective. If the buyer does choose to accept the goods, his responsibility for transit casualty may be justified since a buyer in possession of the goods at the end of an international shipment is usually in a better position than the seller to claim for transit damage against the carrier and insurer.[4]

§382.1 (c) Requiring Delivery of Substitute Goods

When the seller commits a fundamental breach Article 70 preserves not only the buyer’s right to avoid but also the right (Art. 46(2)) to require the delivery of substitute goods.

Example 70C. Seller contracted to ship 100 machines to Buyer. As in the preceding examples, under Article 67(1) risk passed to the buyer when the seller handed over the goods to the carrier. On arrival of the goods, inspection showed that in all the machines a vital component "X" was defective at shipment. (Let us assume that this defect was a fundamental breach.) In addition, sea-water had seriously damaged component "Y" in 30 of the machines. Only Seller made this type of machine and Buyer wanted to receive the machines despite the delay that would result from a second shipment. May Buyer require Seller to "deliver substitute goods" pursuant to Article 46(2) for all 100 of the machines in spite of the transit damage to 30 that occurred after risk passed to Buyer?

The answer is Yes. As we saw from Example 70B, Article 70 provides that "when the seller has committed a fundamental breach of contract" the Convention’s rules on risk (Arts. 67, 68, and 69) "do not impair the remedies available to the buyer on account of the breach". Avoidance calls for return of the goods to the seller which, in effect, transfers the loss from transit damage back to the seller. The same is true when a buyer exercises its right under Article 46(2) in the event of fundamental breach to "require delivery of substitute goods". See Art. 46 at §283, supra, and [page 422] Art. 82(1) §446, infra (both avoidance and requiring substitute goods calls for return of the defective goods).

The above example gives us an opportunity to bring into focus a wider range of principles dealing with risk of loss and remedies. If component "X" constituted only part of the machine and was readily replaceable, the defect in this component might not constitute a "fundamental breach" (Arts. 25 & 49(1)(a)); Buyer by avoidance could not make transit risk fall on Seller (Art. 70). In this situation, in normal commercial practice Seller would offer to replace component "X". (Sellers may have this right under the "cure" provisions of Articles 37 and 48; if, contrary to normal practice, Seller does not offer to repair Buyer probably could require this repair under Article 46(3).) If the defect in component "X" was not a "fundamental breach "Buyer would bear the cost of repairing the transit damage to component "Y". However, Seller might well agree to bear this cost as part of a settlement of Buyer’s claim based on the defect in component "X". (Seller might feel that a generous settlement, following a defective shipment, would help to maintain, or restore, good commercial relations with Buyer.)

§383 B. Casualty to Non-Conforming Goods After Receipt by Buyer

Example 70D. On June 1 Seller handed over goods to Buyer. Buyer’s inspection on June 2 disclosed that the goods were not in conformity with the contract. On June 3 a fire in Buyer’s warehouse damaged the goods. Buyer did not declare the contract avoided but claimed damages from Seller for the non-conformity at the time of delivery and also for the damage resulting from the fire.

Buyer, of course, may recover damages for the non-conformity at the time of delivery, but he has no claim for the damage to the goods resulting from the fire. Under Article 69, risk passed to Buyer when he "took over" the goods. Where the buyer does not declare the contract avoided, the risk of loss passes to him when he takes over the goods regardless of the seriousness of the nonconformity.

Example 70E. The facts are the same as in Example 70D, except that the non-conformity was so substantial as to constitute a "fundamental breach," and on June 4 Buyer declared the contract avoided.

The result here is like that in Example 70C, above, and Buyer may avoid the contract even though the goods returned to the seller will be subject to two types of defect: (i) the initial serious nonconformity; and [page 423] (ii) the damage caused by the fire. Article 70 provides that if the seller commits a fundamental breach of contract, Articles 67, 68 and 69 [on transfer of risk] "do not impair the remedies available to the buyer on account of the breach." One of these remedies, when the goods are seriously defective, is avoidance of the contract (Arts. 25 and 49(1)(a)). This result is consistent with Article 82(2)(a), discussed supra, at §381. See the further discussion of Art. 82, infra at §445.

Problems of policy are presented if the seller must bear the risk of loss while the buyer holds goods in his possession for extended periods of time.[5] But under Article 49(2), "where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so:...(b)...within a reasonable time: (i) after he knew or ought to have known of the breach."[6] Because of practical problems that result from divorcing risk from possession, the "reasonable" period should not be long.[7] See, in general, Schlechtriem, Com. (1998) 517–520 (Hager).[page 424]

FOOTNOTES: Chapter on Article 70

1. Article 70 is substantially the same as Article 82 of the 1978 Draft. Cf. ULIS 7(2).

2. See Rep. S-G, "Issues Presented by Chapters IV to VI of ULIS," paras. 89–105. V YB 93–94, Docy. Hist. 172–173. Huber, 43 Rabels Z 413, 457 (1979).

3. For the background of this provision see the writer’s analysis and proposal in I Report of the New York Law Revision Commission: Study of the Uniform Commercial Code 494–495 (1955).

4. At the Diplomatic Conference this writer proposed an amendment under which risk in transit would remain with the seller when the goods are so defective as to constitute a fundamental breach. The proposal was rejected; it is not clear whether this action was based on the substance of the proposal or on problems of implementation or drafting. O.R. 408, 128 (text of proposal), Docy. Hist. 629, 700. See supra at §91.

5. See the discussion under Art. 69, supra at §375, on policy reasons for placing casualty risk on the possessor. Of course, if the nonconformity of the goods caused the loss (e.g. defective wiring in a machine caused a fire that damaged the machine) this loss must be borne by the seller. (See Art. 74, infra at §403.)

6. Avoidance is not barred by Art. 82 for reasons developed in connection with Example 70C, supra at §381.

7. For criticism of the 1978 Draft with respect to risk of loss during cure and periods allowed for inspection, see Roth, The Passing of Risk, AJCL UNCITRAL Symposium 291, 303.

Pace Law School Institute of International Commercial Law - Last updated March 1, 2005
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