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Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 502-508. Reproduced with permission of the publisher, Kluwer Law International, The Hague.

Article 81

Effect of Avoidance on Obligations: Arbitration; Restitution

Text of Article
A. Obligations Terminated by Avoidance
      (1) Avoidance and Performance
      (2) Requiring Performance: Substitute Goods; Price Recovery
B. Obligations Not Terminated by Avoidance
      (1) Arbitration Clauses
      (2) Other Obligations Unaffected by Avoidance
C. Restitution of What Has Been Supplied or Paid
      (1) Reclamation based on Contract

§439 As we have just seen, Articles 81–84 assumes that a right of avoidance exists under provisions set forth in earlier parts of the Convention.  Article 81 states the basic consequences of avoidance.

Article 81 [1]

"(1) Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract.

"(2) A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract. If both parties are bound to make restitution, they must do so concurrently."

§440 A. Obligations Terminated by Avoidance

§ 440.1 (1) Avoidance and Performance

Article 81 applies to several types of situations but the most important can be illustrated by a series of four examples. The situations can become complex; we start with the simplest.

Example 81A. The time for performance by the seller and the buyer arrived and neither had performed when one of the parties (Party X) repudiated its contract with the other party (Party A). This gave the aggrieved party (A) the right to avoid the contract (Art. 72); party A declared avoidance. What are the legal consequences of A’s avoidance?

Article 81(1) states that avoidance "releases both parties" from their contractual obligations "subject to any damages that may be due". Consequently,[page 502] the aggrieved party (A) is released from its obligation to perform the contract and is also released from the obligation to accept performance from the other party (X). As we shall see more fully (§440.2, infra), A also loses the right (Art. 46, 62) to "require" X to perform, but A can recover damages from X for breach of contract (Arts. 74–76).

Example 81B.  One of the parties (A) has performed. (E.g., the seller has delivered or the buyer has paid.) The other party (X) repudiated the contract or committed a serious breach that empowered A to avoid (Arts. 49, 64); A declared avoidance. What are the legal consequences?

The effects of avoidance are the same is in Example 81A, with one added feature—X has received assets (goods or funds) from A. As we shall see (§§444-448, infra), under Articles 81(2) and 82, Party A may recover what X received and also any damages caused by X’s breach of contract. See: Schlechtriem, Com. (1998) 632–642 (Leser).

§440.2 (2) Requiring Performance: Substitute Goods; Price Recovery

Example 81C.  A seller (Party X) delivered goods to a buyer (Party A) that were so defective as to constitute a fundamental breach.  Buyer A demands that X accept return of the defective goods.  May A also require X to supply substitute goods?

Is A’s demand that X accept return of the defective goods an "avoidance"? If so, the statement in Article 81(1) that avoidance "releases both parties from their obligations" under the contract might suggest that A may not require X to deliver substitute goods. However, as we have seen, this specific situation is addressed by Article 46(2) (§283, supra) which provides that when non-conforming goods constitute a fundamental breach the buyer, "may require delivery of substitute goods". This narrow and specific provision excludes any inference that might be drawn from the general language of Article 81(1) that the buyer’s sole remedy is a claim for damages. (See the fuller discussion under Article 46 at §283, supra).

Example 81D.  Seller delivered goods that conformed to the contract. Buyer failed to pay for the goods, which Buyer promptly resold. Seller rightfully declared the contract avoided and under Article 81(2) (§444, infra) has the right to "claim restitution" of the goods, but reclamation is not possible since Buyer had resold the goods. What is the impact of avoidance on Seller’s rights?

Seller under Article 81(2) may "claim restitution...of whatever [Seller] has supplied" but, because of Buyer’s resale of the goods there is [page 503] no specific asset to which this remedy can be applied; consequently, Seller probably has no remedy (comparable to Article 46(2) or 62)) to compel (specific) performance.[2] However, under Article 81(1) avoidance releases both parties from their obligations "subject to any damages that may be due". In this setting damages would normally consist of the unpaid price plus interest (Arts. 74 and 78). This result seems comparable to an action under Article 62 to "require the buyer to pay the price" (§§345-349, supra) but the "damage" approach set forth in Article 81(1) seems to remit the seller to normal collection procedures by execution of a judgment, rather than the coercive measures available under some domestic systems. In any event, if a tribunal were to conclude that the seller could invoke Article 62 to "require the buyer to pay", domestic rules rejecting coercive enforcement would be applicable by virtue of Article 28 (§§191-199, supra).

§441 B. Obligations Not Terminated by Avoidance

The phrase "avoidance of the contract," standing alone, overstates the consequences of this remedy. As we have seen, avoidance does not release a party from the obligation to pay damages for breach of contract (Arts. 74–76, 81(1)).[3] The consequences of "avoidance" are narrowed further by the second sentence of Paragraph (1), as we shall now see.

§ 442 (1) Arbitration Clauses

The sales contract may contain an agreement to arbitrate any dispute that may arise under the contract. Assume that a party to the contract notifies the other party that the contract is avoided and a dispute arises over the justification for the avoidance, or the amount of damages resulting from breach. Does "avoidance of the contract" release either party from the arbitration clause?

In most situations the answer is No:  Article 81(1) states: "Avoidance of the contract does not affect any provision of the contract for the settlement [page 504] of disputes...". Avoidance (Arts. 49, 64) is a remedy based on breach of contract; agreements to arbitrate are designed to supply a way to resolve such disputes.

The UNCITRAL Arbitration Rules (1976) in Article 21(2) protect this basic function by providing that an arbitration clause, although included in the contract, "shall be treated as an agreement independent of the other terms of the contract"; the arbitrators "have the power to determine the existence or the validity of the contract of which an arbitration clause forms a part."[4] Complex questions may, however, be posed by claims that a sales contract containing an arbitration clause was executed as a result of fraud. The effect of such a claim on the authority of the arbitrators will depend, in the first instance, on the breadth of the parties’ agreement to arbitrate—e.g., by the incorporation of the UNCITRAL Arbitration Rules which includes Article 21, supra. A second factor in some jurisdictions is whether the alleged fraud is confined to the sales transaction (e.g., a fraudulent statement as to the quality of the goods or the buyer’s solvency) and thus is severable from the agreement to arbitrate.[5] Of course, the validity of the scope of the parties’ agreement to arbitrate may be controlled by domestic law (cf. CISG 4(a)).

A current approach to these questions is reflected in the UNCITRAL Model Law on International Commercial Arbitration (1985).[6]

§ 443 (2) Other Obligations Unaffected by Avoidance

Paragraph (1) of Article 81 states that avoidance does not affect any "provision of the contract governing the rights and obligations of the contract consequent upon the avoidance of the contract"—e.g., a contract provision governing the amount of damages or the handling of rejected goods. In addition, Articles 85–88, infra at §454-457, requiring a [page 505] party who rejects goods to take steps to preserve them, apply regardless of avoidance; as we shall see, these requirements have their most significant applications when a party avoids the contract.[7]

§444 C. Restitution of What Has Been Supplied or Paid

Paragraph (2) has implications that may be surprising to those schooled in the common law.

Example 81E.  A contract called for Seller to deliver goods on June 1; Buyer’s payment was due on July 1. The goods were delivered on schedule but Buyer failed to pay on July 1 or thereafter. Seller avoided the contract based on Buyer’s fundamental breach and brought an action to require Buyer to return the goods.

Paragraph (2) states that a seller who avoids a contract "may claim restitution...of whatever [the seller] has supplied...under the contract." The language calls for recovery of goods, and not merely an action for the price—a reading that can invoke the seller’s right under Article 62 to "require the buyer to...perform his...obligations".

Some legal systems similarly give effect to the principle of "avoidance" (résolution) by permitting a seller to recover the goods when the buyer fails to pay.[8] On the other hand, the common law and the (U.S.A.) Uniform Commercial Code do not carry the concept of "avoidance" or "rescission" this far. When goods have been delivered on credit the unpaid seller has only the general claim of a creditor; in general, recovery of the goods must be based on wrongful (e.g., fraudulent) conduct of the buyer in obtaining the goods, or on his signed agreement that the seller retains a property (or "security") interest in the goods.[9]

The seller’s right under the Convention to recover the goods is subject to practical limitations. This remedy is of special importance when the buyer is insolvent; in this setting the rights of creditors are likely to intervene [page 506] by levy of execution or by the designation of a receiver or trustee in bankruptcy. The Convention will not override the rights of creditors, purchasers and other third persons granted by domestic law; under Article 4, the Convention "governs only...the rights...of the seller and the buyer..."[10]

The Convention (unlike some domestic rules) does not confine the obligation to make restitution to the party in breach; under paragraph (2) each party is entitled to restitution. But if both parties are bound to make restitution "they must do so concurrently".[11]

§ 444.1 (1) Reclamation based on Contract

Interesting issues on the interplay between the uniform international rules and domestic law may be explored in the setting of the following case.

Example 81F.  The contract of sale provided that Buyer would pay the price within 30 days after delivery and added that if Buyer failed to pay the price at the agreed time Seller, without further notice, had the right to repossess the goods. Buyer failed to pay and Seller brought an action in Buyer’s jurisdiction to recover the goods.

Buyer might oppose reclamation on the ground that Seller’s rights are governed by Article 81 of the Convention, which provides for restitution based on avoidance of the contract; Seller had not declared avoidance by the notice as required by Article 26.

Seller may reply that its action to repossess is asserting a property right in the goods. Under Article 4(a) the Convention "is not concerned" with the effect of the contract on "property in the goods sold" and therefore the Convention’s rules on avoidance are not applicable. To support this argument Seller may be able to point to a provision in the contract (often found in sales contracts) that property in the goods is retained by the seller until the price is paid; even if the contract did not include this clause Seller could argue that the contract clause permitting reclamation in substance gives Seller a property interest in the goods.

This argument for excluding the Convention is subject to a strong objection: The Convention in Article 81 is "concerned with" reclamation of [page 507] goods when the buyer fails to pay. If the contract had contained no provision for reclamation Seller, with appropriate notice, would have the right under Article 81(2) to recover the goods. To meet the argument that under Article 81(2) recovery of the goods rests on avoidance, Seller could invoke the parties’ right under Article 6 to derogate from the Convention’s provisions, including the provision that reclamation must be based on a notice of avoidance. In short, the parties have exercised their right under Article 6 to reshape the Convention’s rules on remedies for breach. On the basis of this line of reasoning Seller should prevail.

One question remains: Does applicable domestic law invalidate (Art. 4(a)) a contractual provision allowing reclamation of the goods on non-payment? Such a rule of invalidity is conceivable but seems unlikely.[12] However, as we have seen, the Convention’s rules are limited (Art. 4) to the rights "of the seller and the buyer" and yield to the rights of third persons such as creditors and purchasers.

Decisions:  (1) AUSTRALIA, Fed. Ct., S. Aus., D. Adelaide, 28 April 1995, 57 Fed. Ct. Rep. (1995) 216–240, Roder Z. v Rosedown Pk.  S, a German manufacturer, sold and delivered aluminum tent material to B in Australia. B fell behind in payments, and was "placed in administration". The court concluded that the parties had agreed on a "retention of title" clause. In addition, the court concluded that, under Article 81(2), S was entitled to return of the goods to the extent that B had failed to pay.   UNILEX D.&E. 1995–15.1.1. [NOTE: Article 4 provides: the Convention "governs only... the rights and obligations of the seller and the buyer...". Consequently, CISG does not, e.g., intrude on rules of domestic law governing the rights of creditors.]

(2) RUSS. FED., ARB, Ch. of Comm. 1/93, 15 April 1994.  B paid in advance for goods, S failed to deliver. B avoided the contract and, pursuant to Art. 81(2), recovered the price B had paid. UNILEX D.1994-8.2.[page 508]

FOOTNOTES: Chapter on Article 81

1. This article is substantially the same as Art. 66 of the 1978 Draft Convention, and is similar to Art. 78 of ULIS except that the latter does not contain the provision on settlement of disputes in Art. 81(1) (second sentence).

2. If Buyer resold the goods for more than the price owed to Seller, Seller’s right to recover the goods may justify recovery of the larger sum that Buyer received. If the proceeds of the resale can be traced—i.e., if the price for the resale has not been paid,—Seller’s specific right to recover the goods might be transferred to a specific right to recover the asset that Buyer wrongfully obtained. Cf. Friedmann, 104 L.Q.R. 383, 388 (1988).

3. For domestic law approaches see Treitel, Remedies (1988) 392–396. In the United States, barriers to damages were removed by the UCC 2–711(1), 2–720.

4. For the text of the UNCITRAL Arbitration Rules see AJCL UNCITRAL Symposium, 27 Am.J.Comp.L. 489, 496; VII YB 22. Art. 21(1) of the Rules: "The arbitral tribunal shall have the power to rule on objections...with respect to the existence or validity of the arbitration clause or the separate arbitration agreement."

5. See Sanders, AJCL UNCITRAL Symposium, supra, at 462–463.

6. See H. Holtzmann & I. Neuhaus, Guide to the UNCITRAL Model Law on International Commercial Arbitration (Kluwer, 1989) 478–480. Art. 16(1) of the Model Law is similar to Art. 21(1) & (2) of the UNCITRAL Rules, supra. To permit a unified and uninterrupted arbitral proceeding the arbitrators may have jurisdiction to decide basic questions like the existence and validity of the agreement to arbitrate even though these questions, unlike the merits of the award, may be subject to judicial review. On CISG and Arbitration see Carbonneau & Firestone, I Emory J. Int’l. Dispute Res. 51 (1986).

7. See Secretariat Commentary Art. 66 para. 6, O.R. 57, Docy. Hist. 447.

8. See Houin, Sale of Goods in French law. Comp. Sales (I.C.I.Q.) 16, 28, Vaisse, Rights and Remedies available to an Unpaid Seller under French Law, 4 Int. Bus. Lawyer 379 (1976). Cf. Kjelstrup, The Unpaid Seller Under Norwegian Law id. at 375. Cf. Quebec Civ. Code Revn., Obligations p. 343, Art. 267 (restoration "in kind"): German (FRG) Civil Code 346.

9. Honnold, Sales 343–345. Cf. UCC 2–702 (recovery within 10 days when buyer "has received goods on credit while insolvent"); UCC 9–203(1)(a) (security interest against debtor in possession must be based on a "security agreement" signed by debtor). A similar approach is proposed in Hellner 22 Scan. Stud. 53.69. See also Hellner. Contracts and Sales, Intro. Swedish L. 201, 217.

10. For protection of third parties under French law see Houin, supra n. 8, at 29: Quebec Civ. Code Revn., Obligations p. 343, Art. 268.

11. Accord: (U.S.A.) UCC 2–711(3) (a buyer who rejects or revokes acceptance has a "security interest" in goods in his possession to protect his right to recover payments of the price and reimbursement for expenses); German (F.R.G.) Civil Code 348.

12. See, e.g., (U.S.A.) UCC 9–503: A "secured party has on default the right to take possession of the collateral". A seller’s interest in the goods after delivery is limited to a "security interest" (UCC 1–201(37)) and is not enforceable unless the debtor (here, the buyer) "has signed a security agreement".

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