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2008 UNCITRAL Digest of case law on the United Nations Convention on the International Sale of Goods

Digest of Article 25 case law [reproduced with permission of UNCITRAL] [*]

[Text of article
Introduction
Definition of fundamental breach
Specific fundamental breach situations
Burden of proof]

Article 25

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.

INTRODUCTION

1. Article 25 defines the term "fundamental breach", which is used in various provisions of the Convention. A fundamental breach as here defined is a prerequisite for certain remedies under the Convention, including a party's right to avoid the contract under articles 49(1)(a) and 64(1)(a), and a buyer's right to require delivery of replacements for goods that failed to conform to the contract (article 46(2)). The phrase is also used in other provisions of the Convention in connection with avoidance of contract (see articles 51(2), 72(1), 73(1) and (2)). A fundamental breach also impacts the operation of the passage-of-risk provisions of the Convention -- see article 70 and paragraph 13 of the Digest for Part III, Section III, Chapter IV. In general article 25 defines the border between situations giving rise to "regular" remedies for breach of contract -- like damages and price reduction -- and those calling for more drastic remedies, such as avoidance of contract.

Definition of fundamental breach in general

2. A fundamental breach requires, first, that one party has committed a breach of contract. Breach of any obligation under the contract can suffice -- provided the other requirements for a fundamental breach are present -- irrespective of whether the duty was specifically contracted for between the parties or if, instead, it followed from the provisions of the Convention. Even the breach of a collateral duty can give rise to a fundamental breach. For example, where a manufacturer had a duty to reserve goods with a particular trademark exclusively for the buyer, and the manufacturer displayed the trademarked goods at a fair for sale (continuing to do so even after a warning by the buyer), the manufacturer was found to have committed a fundamental breach.[1]

3. In order to rank as fundamental, a breach must be of a certain nature and weight. The aggrieved party must have suffered such detriment as to substantially deprive it of what it was entitled to expect under the contract. The breach must therefore nullify or essentially depreciate the aggrieved party's justified contract expectations. What expectations are justified depends on the specific contract and the risk allocation envisaged by the contract provisions, on customary usages, and on the provisions of the Convention. For example, buyers cannot normally expect that delivered goods will comply with regulations and official standards in the buyer's country.[2] Therefore, e.g., the delivery of mussels with a cadmium content exceeding recommended levels in the buyer's country has not been regarded as a fundamental breach (or, indeed, as a breach at all) since the buyer could not have expected that the seller would meet those standards and since the consumption of the mussels in small portions as such did not endanger a consumer's health.[3]

4. Article 25 provides further that a breach is fundamental only if the substantial deprivation of expectations caused by the breach was reasonably foreseeable to the breaching party. However, the provision does not mention the time at which the consequences of the breach must have been foreseeable. One court has decided that the time of conclusion of contract is the relevant time.[4]

Specific fundamental breach situations

5. Courts have decided whether certain typical fact patterns constitute fundamental breaches. It has been determined on various occasions that complete failure to perform a basic contractual duty constitutes a fundamental breach of contract unless the party has a justifying reason to withhold its performance. This has been decided in the case of final non-delivery [5] as well as in the case of final non-payment.[6] However, if only a minor part of the contract is finally not performed (e.g., one delivery out of several deliveries is not made), the failure to perform is a simple, non-fundamental breach of contract.[7] On the other hand, a final and unjustified announcement of the intention not to fulfil one's own contractual obligations has been found to constitute a fundamental breach.[8] Likewise, the buyer's insolvency and placement under administration has been held to constitute a fundamental breach under article 64 since it deprives the unpaid seller of what it was entitled to expect under the contract, namely payment of the full price.[9] Similarly, a buyer's refusal to open a letter of credit as required by the contract has been held to constitute a fundamental breach.[10] It has also been determined that non-delivery of the first instalment in an instalment sale gives the buyer reason to believe that further instalments will not be delivered, and therefore a fundamental breach of contract was to be expected (article 73(2)).[11]

6. As a rule late performance whether late delivery of the goods or late payment of the price does not in itself constitute a fundamental breach of contract.[12] Only when the time for performance is of essential importance either because it is so contracted [13] or due to evident circumstances (e.g., seasonal goods) [14] does delay as such amount to a fundamental breach.[15] But even if a delay is not fundamental breach, the Convention allows the aggrieved party to fix an additional period of time for performance; if the party in breach fails to perform during that period, the aggrieved party may then declare the contract avoided (articles 49(1)(b) and 64(1)(b)).[16] Therefore in such a case, but only in that case, the lapse of the additional period turns a non-fundamental delay in performance into a sufficient reason for avoidance.

7. If defective goods are delivered, the buyer can avoid the contract when the non-conformity of the goods is properly regarded as a fundamental breach of contract (article 49(1)(a)). It therefore is essential to know under what conditions delivery of non-conforming goods constitutes a fundamental breach. Court decisions on this point have found that a non-conformity concerning quality remains a mere non-fundamental breach of contract as long as the buyer without unreasonable inconvenience can use the goods or resell them even at a discount.[17] For example, the delivery of frozen meat that was too fat and too moist, and that consequently was worth 25.5 per cent less than meat of the contracted quality (according to an expert opinion), was not regarded as a fundamental breach of contract since the buyer had the opportunity to resell the meat at a lower price or to otherwise process it.[18] On the other hand, if the non-conforming goods cannot be used or resold with reasonable effort this constitutes a fundamental breach and entitles the buyer to declare the contract avoided.[19] This has been held to be the case as well where the goods suffered from a serious and irreparable defect although they were still useable to some extent (e.g., flowers which were supposed to flourish the whole summer but did so only for part of it).[20] Courts have considered a breach to be fundamental without reference to possible alternative uses or resale by the buyer when the goods had major defects and conforming goods were needed for manufacturing other products.[21] The same conclusion has been reached where the non-conformity of the goods resulted from added substances the addition of which was illegal both in the country of the seller and the buyer.[22]

8. Special problems arise when the goods are defective but repairable. Some courts have held that easy repairability precludes finding a fundamental breach.[23] Courts are reluctant to consider a breach fundamental when the seller offers and effects speedy repair without any inconvenience to the buyer.[24]

9. The violation of other contractual obligations can also amount to a fundamental breach. It is, however, necessary that the breach deprive the aggrieved party of the main benefit of the contract and that this result could have been foreseen by the other party. Thus, a court stated that there is no fundamental breach in case of delivery of incorrect certificates pertaining to the goods if either the goods were nevertheless merchantable or if the buyer itself could -- at the seller's expense -- easily acquire the correct certificates.[25] The unjustified denial of contract rights of the other party -- e.g., a refusal to recognize the validity of a retention of title clause and the seller's right to possession of the goods,[26] or the unjustified denial of a valid contract after having taken possession of samples of the goods [27] -- can amount to a fundamental breach of contract. The same is true when resale restrictions have been substantially violated.[28]

10. A delay in accepting the goods will generally not constitute a fundamental breach, particularly when the delay is only for a few days.[29]

11. The cumulation of violations of several contractual obligations makes a fundamental breach more probable, but does not automatically constitute a fundamental breach.[30] In such cases, the existence of a fundamental breach depends on the circumstances of the case as well as on whether the breach resulted in the aggrieved party losing the main benefit of, and its interest in, the contract.[31]

Burden of proof

12. Article 25 regulates to some extent the burden of proving its elements. The burden with regard to the foreseeabiity element of article 25 lies with the party in breach:[32] this party must prove that it did not foresee the substantial detrimental effect of its breach, and that a reasonable person of the same kind in the same circumstances would not have foreseen such an effect. On the other hand, the aggrieved party has to prove that the breach substantially deprived it of what it was entitled to expect under the contract.[33]


NOTES

* This presentation of the UNCITRAL Digest is a slightly modified version of the original UNCITRAL text at <http://www.UNCITRAL.org/pdf/english/clout/CISG_second_edition.pdf>. The following modifications were made by the Institute of International Commercial Law of the Pace University School of Law:

   -    To enhance access to contents by computer search engines, we present in html rather than pdf;
 
   -    To facilitate direct focus on aspects of the Digests of most immediate interest, we inserted linked tables of contents at the outset of most presentations;
 
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   -    To enable researchers to themselves keep the case citations provided in the Digests constantly current, we have created a series of tandem documents, UNCITRAL Digest Cases + Added Cases. The new cases and other cases that are cited in these updates are coded in accordance with UNCITRAL's Thesaurus.

In addition, this presentation introduces each section of the UNCITRAL Digest with a Google search button. This is to help you access doctrine (relevant material from the over 1,200 commentaries, monographs and books on the CISG and related subjects that we present on this database) as well as the texts of the cases that UNCITRAL cites in its Digests and that we present in our updates to UNCITRAL's Digests.

1. [GERMANY Oberlandesgericht Frankfurt a.M. 17 September 1991 (Shoes case)]; see also [SWITZERLAND Handelsgericht des Kantons Aargau 26 September 1997 (Cutlery case)].

2. [GERMANY Bundesgerichtshof 8 March 1995 (New Zealand mussels case)]; see [UNITED STATES Federal District Court, Eastern District of Louisiana, 17 May 1999 (Medical Marketing v, Internationale Medico)] (in the same sense and relying on [GERMANY Bundesgerichtshof 8 March 1995 (New Zealand mussels case)]); [AUSTRIA Oberster Gerichtshof 13 April 2000 (Machines case)].

3. [GERMANY Bundesgerichtshof 8 March 1995 (New Zealand mussels case)].

4. [GERMANY Oberlandesgericht Düsseldorf 24 April 1997 (Shoes case)] (see full text of the decision).

5. [ITALY Pretura circondariale di Parma 24 November 1989 (Knapsacks, bags, wallets case)] (only partial and very late delivery); [GERMANY Oberlandesgericht Celle 24 May 1995] (see full text of the decision).

6. [GERMANY Oberlandesgericht Düsseldorf 14 January 1994 (Shoes case)].

7. [GERMANY Oberlandesgericht Düsseldorf 24 April 1997 (Shoes case)].

8. See [GERMANY Oberlandesgericht Celle 24 May 1995 (Used printing press case)]. In that case the seller gave notice that he had sold the specified good to another buyer. See also [GERMANY Oberlandesgericht München 15 September 2004 (Furniture leather case)] (seller's refusal to deliver on the assumption that the contract had been cancelled was a fundamental breach) (see full text of the decision); [RUSSIA Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce, Award 387/1995 of 4 April 1997 (Coal case)] (final refusal to pay the price).

9. [AUSTRALIA Federal Court of Adelaide 28 April 1995 (Roder v. Rosedown)].

10. [AUSTRALIA Supreme Court of Queensland 17 November 2000 (Downs Investment v. Perwaja Steel)], citing [UNITED STATES Federal District Court, Southern District of New York 21 July 1997 (Helen Kaminski v. Marketing Australian Products)] (see full text of the decision).

11. [SWITZERLAND Handelsgericht des Kantons Zürich 5 February 1997 (Sunflower oil case)].

12. [ITALY Corte di Appello di Milano 20 March 1998 (Knitwear case)] (late delivery); [GERMANY Oberlandesgericht Düsseldorf 24 April 1997 (Shoes case)] (late delivery); [ICC International Court of Arbitration, Award 7585 of 1992 (Foamed board machinery case)] (late payment).

13. [GERMANY Oberlandesgericht Hamburg 28 February 1997 (Iron molybdenum case)] (the late delivery under a CIF sale was held to be a fundamental breach of contract).

14. [ITALY Corte di Appello di Milano 20 March 1998 (Knitwear case)] (the buyer had ordered seasonal knitted goods and pointed to the essential importance of delivery at the fixed date, although only after conclusion of the contract); [ICC International Court of Arbitration, Award 8786 of January 1997 (Clothing case)].

15. [GERMANY Oberlandesgericht Düsseldorf 24 April 1997 (Shoes case)] (late delivery constitutes a fundamental breach when the buyer would prefer non-delivery instead and the seller could have been aware of this).

16. See, e.g. [ICC International Court of Arbitration, Award 7585 of 1992 (Foamed board machinery case)].

17. [GERMANY Bundesgerichtshof 3 April 1996 (Cobalt sulphate case)]; [SWITZERLAND Bundesgericht 28 October 1998 (Meat case)].

18. [SWITZERLAND Bundesgericht 28 October 1998 (Meat case)].

19. [FRANCE Cour de cassation 23 January 1996 (Wine case)] (artificially sugared wine); [ GERMANY Oberlandesgericht Frankfurt a.M. 18 January 1994 (Shoes case)] (shoes with splits in the leather) (see full text of the decision); [GERMANY Landgericht Landshut 5 April 1995 (Sport clothing case)] (T-shirts which shrink by two sizes after first washing).

20. [AUSTRIA Oberlandesgericht Innsbruck 1 July 1994 (Garden flowers case)].

21. See [UNITED STATES Federal Court of Appeals for the Second Circuit 6 December 1995 (Delchi Carrier, S.p.A. v. Rotorex Corp.)] (compressors with lower cooling capacity and higher power consumption than the goods contracted-for, which were required for the manufacture of air conditioners by the buyer); [FRANCE Cour de cassation 23 January 1996 (Wine case)] (artificially sugared wine) (see full text of the decision); [FRANCE Cour de cassation 26 May 1999 (Laminated sheet metal case)] (metal sheets absolutely unfit for the foreseen kind of manufacture by the buyer's customer) (see full text of the decision); see also [ITALY Tribunale di Busto Arsizio 13 December 2001 (Machinery case)] (delivery of a machine totally unfit for the particular use made known to the seller and that was incapable of reaching the promised production level represented a serious and fundamental breach of the contract, since the promised production level was an essential condition for the conclusion of the contract; the lack of conformity therefore was a basis for avoidance).

22. Compare [FRANCE Cour de cassation 23 January 1996 (Wine case)] (artificially sugared wine which is forbidden under EU-law and national laws) (see full text of the decision); [GERMANY Landgericht Trier 12 October 1995 (Wine case)] (watered wine) (see full text of the decision).

23. [SWITZERLAND Handelsgericht des Kantons Zürich 26 April 1995 (Saltwater isolation tank case)].

24. [FRANCE Cour d'appel, Grenoble 26 April 1995 (Marques Roque v. Manin Reviere) (Candy case)]; [GERMANY Oberlandesgericht Koblenz 31 January 1997].

25. [GERMANY Bundesgerichtshof 3 April 1996 (Cobalt sulphate case)].

26. [AUSTRALIA Federal Court of Adelaide 28 April 1995 (Roder v. Rosedown)].

27. [FRANCE Cour d'appel, Grenoble 21 October 1999 (Footwear case)] (see full text of the decision).

28. [GERMANY Oberlandesgericht Frankfurt a.M. 17 September 1991 (Shoes case)]; [FRANCE Cour d'appel Grenoble 22 February 1995 (Jeans case)]; [GERMANY Oberlandesgericht Düsseldorf 10 February 1994 (Fabrics case)], (see full text of the decision); [SWITZERLAND Handelsgericht des Kantons Aargau 26 September 1997 (Cutlery case)].

29. [FRANCE Cour d'appel, Grenoble 4 February 1999 (Orange juice case)].

30. [GERMANY Bundesgerichtshof 3 April 1996 (Cobalt sulphate case)] (see full text of the decision).

31. Id. (see full text of the decision).

32. Id. (see full text of the decision).

33. Id. (see full text of the decision).


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