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Published by Manz, Vienna: 1986. Reproduced with their permission.

excerpt from

Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods

Univ. Prof. Dr. Peter Schlechtriem [*]

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1. Fundamental Breach (Article 25)

The concept of a "fundamental breach" plays a central role in the CISG, as it did in ULIS. It is the prerequisite for the avoidance of a contract in certain cases,[196] and also for the right to demand substitute goods if the goods delivered do not conform to the contract.[197] "Fundamental breach" is also important for the transfer of risk.[198] Because the 1980 Convention considerably limits avoidance of contract by fixing an additional period of time (thereby clarifying whether or not a violation of the contract is fundamental), the importance of a "fundamental breach" is greater than in ULIS. Its definition caused substantial difficulties.[198a] ULIS Article 10 was heavily criticized in UNCITRAL publications and working committees.[199] From the very beginning, the "test" in ULIS Article 10 was considered too "subjective".[200] Thus, the UNCITRAL Working Group proposed [page 58] as early as 1975 [201] an "objective" test based on substantial detriment suffered by the injured party. This proposal was adopted as Article 23 of the 1978 Draft Convention and formed the basis for the discussions at the Vienna Conference, where it remained controversial until the plenary deliberations at the end of the conference.[202] Leaving aside the comments based on a misunderstanding of the provision's function, the differences can be traced to two basic viewpoints. One group of states wanted the extent of objective detriment to the injured party to be the determining factor, and therefore wished to keep the UNCITRAL formulation in order to establish an unmistakable criterion. The breaching party was to be protected from unforeseeable consequences by the second part of the provision, because the substantial detriment would have to be foreseeable.[203] A second group of states wanted to place more emphasis on the injured party's interest in the fulfillment of the obligation in question, independent of objectively measurable (and provable) damages. The Federal Republic of Germany also advocated that the criterion should be the injured party's expectations as reflected in the circumstances of the particular contract in question.[204] A working group [205] finally arrived at a compromise, which incorporates the German proposal: It provides that a breach of contract is fundamental if it leads to a detriment that substantially deprives the other party of what it is entitled to expect under the contract, i.e., under the actual individual obligations of the seller or buyer.[206]

This proposal was accepted. The Drafting Committee drafted the final version as Article 25.[207] 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 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 [page 59] interest to the buyer - such as in the case of an express warranty - or if the terms of the contract make this clear.[208] The late delivery of goods with a quoted market price is normally considered a fundamental breach.[209] 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.[210]

The foreseeability mentioned in the second part of the provision was also the subject of lengthy debates. The formulation that the detrimental result must have been foreseeable by a reasonable person of the same kind and in the same circumstances as the party in the breach was supposed to avoid the problem of proof which arises from the formulation of ULIS Article 10, in which only the party in breach, his knowledge, and his possibilities of knowledge are taken into account.

Article 25 does not expressly state the time when the party in breach had to foresee or should have foreseen the detrimental consequences to the other side. Because of the withdrawal of a United Kingdom proposal,[211] that would have made the conclusion of the contract the determining point in time, it might be claimed that information received by the breaching party about the other party's special expectations must be taken into consideration whether it is received before or after the conclusion of the contract.[212] However, the opposing viewpoints in the discussion were still based on the objective version of the 1978 Draft Convention, in which the extent of the detriment was the only determining factor. In my opinion, the present version, in which the decisive factor is the interest of the party concerned as fixed by the terms of the contract also fixes the conclusion of the contract as the relevant time for knowledge or foreseeability: a contract in which the delivery time is not binding cannot be turned into a transaction where time is of the essence merely because the seller later learns that the buyer has obligated himself to sell the goods at a particular time.[213] [page 60]

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FOOTNOTES

* The author of this book participated at the Conference as a member of the delegation from the Federal Republic of Germany. The views expressed here are personal to the author and do not necessarily represent the position of the F.R.G. or its delegation.

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196. See Articles 49(1)(a), 51(2), 64(1)(a), 72(1), 73(1), 73(2). As to the right to avoid a contract despite the existence of grounds for exemption, see Article 79(5).

197. Article 46(2).

198. Article 70.

198a. See Eörsi, A Propos at 336 et seq. (an ironic description of the endeavours to find the perfect formulation).

199. See 1 UNCITRAL Y.B. 47 (1970); 2 UNCITRAL Y.B. 169 (1971); 6 UNCITRAL Y.B. 53 (1975); 7 UNCITRAL Y.B. 90 (1976); Michida at 282 et seq. (contains the hypotheticals and motions which influenced the course of the UNCITRAL deliberations).

200. For the comparable discussions relating to the drafts of the Hague Convention, see Beinert at 56-57.

201. 6 UNCITRAL Y.B. 64 (1975).

202. For the development of Article 25 in the deliberations of the Vienna Conference, see Bericht der Bundesregierung 17 et seq. (not yet published). Also Eörsi supra note 198.

203. See A/Conf. 97/C.1/SR.12 (= O.R. 295 et seq.) (discussion). But even the formulation of the 1978 Draft Convention was, because of the foreseeability criterion, though by some delegates to be too subjective. See also A/Conf. 97/C.1/L.106(= O.R. 99) (Egyptian motion).

204. See A/Conf. 97/C.1/L.63 (= O.R. 99) (motion); A/Conf. 97/C.1/SR.12 at 11 § 68 (= O.R. 300) (discussion).

205. The working group consisted of representatives from Argentina, Czechoslovakia, the F.R.G., Ghana, Hungary, Norway, Pakistan, Rumania, and Spain.

206. See A/Conf. 97/C.1/SR.18 at 3 (= O.R. 328 et seq.); C.1/L.176 (= O.R. 99). See also Ziegel, Remedial Provisions at 9-15 (critical view); but see Gonzalez 86 (a more favourable analysis).

207. See A/Conf. 97/DC/L.1 at 4.

208. As long as the time for delivery is not of the essence in such cases, a non-conformity that can be cured by repair or substitute delivery can only be considered a breach of contract - as under ULIS Article 43 - if the seller cannot or will not provide this "later performance" promptly. Therefore, the seller has the right to tender a second time before the buyer can avoid, even if this right is not explicitly stated in the Convention.

209. See Huber at 464. ULIS Article 28 was dropped in the attempt to consolidate the remedies provisions. See 4 UNCITRAL Y.B. 40 § 28 (1973).

210. The consequences of a contract violation can be a decisive factor, but only in conjunction with the party's special interest in the performance of the violated duty. It is nevertheless possible to assert a fundamental breach without proving the detriment - the injured party need not expose its business arrangements. But see Beinert at 63. Of course a detriment must either have been produced or be expected to be produced. If there are no damages from the breach, there is no right of avoidance.

211. A/Conf. 97/C.1/L.104 (= O.R. 99).

212. Cf. A/Conf. 97/C.1.SR.12 at 2 (= O.R. 302).

213. See Huber at 463 (posing a hypothetical); but cf. Honnold, Commentary § 183; Feltham at 353.

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