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Reproduced with permission from 8 Journal of Law and Commerce (1988) 53-108

excerpt from

Remedies Under the New International Sales Convention: The Perspective from Article 2 of the U.C.C.

Harry M. Flechtner [*]


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Fundamental Breach

[T]he key to the Convention's system of remedies is avoidance/nonavoidance of contract and the key to the avoidance machinery is "fundamental breach." Article 25 of the Convention defines the latter as a breach that

"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."

This provision has already generated issues. One commentator argues that the definition of fundamental breach may require that the aggrieved party's loss be more than material.[100] If this argument is correct, a breach that satisfied the Article 2 material breach standard -- substantial impairment of value -- might not be "fundamental" within the meaning of the Convention. The Convention provisions dealing with anticipatory non-performance may support the argument. Articles 71 and 72 distinguish between a threat of a fundamental breach and a threatened failure to perform a "substantial part" of contractual obligations. The latter triggers only a right to suspend performance whereas the former gives the more radical power to avoid the contract, suggesting that a breach may be "substantial" without being "fundamental." [101]

The portion of Article 25 that requires serious consequences to be foreseeable in order for a breach to be fundamental has also raised questions. Article 25 fails to specify whether foreseeability should be measured at the time of contract formation or at the time of breach. The legislative history demonstrates that the omission was intentional, designed to permit courts to decide the issue on a case by case basis.[102] Professor Honnold has suggested, consistently with this history, that the willfulness of a default is a factor for the decision-maker to consider -- i.e., foreseeability should be measured at the time of a willful breach.[103] Where serious loss was unavoidable by the time it became foreseeable to the breaching party, on the other hand, Professor Honnold suggests that the breach should not be deemed "fundamental." [104]

Despite the legislative history indicating that courts should have discretion to determine when to measure foreseeability for purposes of fundamental breach analysis, some commentators have argued that foreseeability should always be measured as of the time of contract formation.[105] For example Professor Ziegel, who represented Canada at the Vienna diplomatic conference, notes that Article 74 of the Convention limits damages to losses foreseeable at the time of contracting. He said that it would be "anomalous" if a party could take the radical step of avoiding the contract on the basis of consequences for which it could not even recover damages.[106] Consequences foreseeable at the time of breach but not at the time of contract formation, he suggests, are too remote to justify avoidance.[107]

U.S. sales law, however, contains precedent for the "anomaly" feared by Professor Ziegel. Like the Convention, U.C.C. Article 2 limits consequential damages to losses foreseeable at the time of contracting.[108] U.C.C. section 2-608(1), nevertheless, permits the buyer to revoke acceptance of non-conforming goods -- an action equivalent to avoidance under the Convention -- if the non-conformity "substantially impairs [their] value to him." The official comments describe this standard as follows:

"[T]he test is not what the seller had reason to know at the time of contracting; the question is whether the non-conformity is such as will in fact cause a substantial impairment of value to the buyer though the seller had no advance knowledge as to the buyer's particular circumstances."[109]

Article 2, therefore, specifically rejects the notion that the substantial impairment required for revocation of acceptance must have been foreseeable at the time of contracting, and it does so even though the breaching party is liable in damages only for losses foreseeable at that time. Indeed, where Article 2 does require that serious consequence be foreseeable in order to justify avoidance-type remedies, it does not specify when foreseeability should be measured.[110]

Professor Ziegel's alleged "anomaly," furthermore, disappears upon examining the different purposes of the foreseeability requirements in Articles 25 and 74 of the Convention. The foreseeability limitation on damages is designed to limit the financial exposure of the parties to a contract for sale by excluding liability for remote consequences. The foreseeability requirement in the definition of fundamental breach, in contrast, is meant to limit avoidance to appropriate circumstances. It may make sense to provide that a party is not responsible in damages for losses that become foreseeable only after contract formation, when the terms of exchange cannot unilaterally be adjusted to account for a newly-discovered risk. This logic, however, does not require that an aggrieved party be forced to continue a contractual relationship where the other party should have known, at the time of a willful breach, that its actions would cause substantial hardship. The fact that those consequences were not foreseeable when the contract was formed has little relevance to the issue of avoidance.

Professor Ziegel argues that permitting avoidance on the basis of consequences foreseeable at the time of a willful breach reflects a parochial view of punitive remedies in contract actions.[111] It may be Professor Ziegel's approach, however, that is limited and outmoded. U.S. law no longer treats sales agreements as static relationships where the parties' rights are cast in stone at the moment of contract formation. The U.C.C. takes the more realistic view that contracts generally involve a continuing association between the parties in an evolving context.[112] Provisions such as the good faith requirement in U.C.C. section 1-203 offer the flexibility to account for facts that arise after contract formation. The Convention's general approach is consistent with that of the U.C.C.[113] There is, therefore, no reason to impose an interpretation of Article 25's foreseeability requirement that ignores post-formation developments, especially when the approach contradicts legislative history.[114]

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Go to entire text of Flechtner commentary


FOOTNOTES

* Assistant Professor, University of Pittsburgh School of Law . . . .

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100. See Ziegal, supra note 80, § 9.03[2][a], [b].

101. During the First Committee’s deliberations at the Vienna diplomatic conference, Professor Honnold opined that the difference between the "fundamental breach" language in Article 72 and the "substantial part" phrasing in Article 71 was intentional, and he described the Article 71 standard as "more flexible." Summary Records of the Thirty-fifth Meeting of the First Committee, U.N. Doc. A/CONF.97/C.1/SR.35 (1980), reprinted in Official Records, supra note 71, at 420, 421.

Other explanations for the different terminology in Articles 71 and 72 are possible. For instance, a party facing an excused failure of performance should be able to suspend its own performance under Article 71, which permits such suspension if "it becomes apparent that the other party will not perform a substantial part of his obligations as a result of . . . (a) a serious deficiency in his ability to perform. . . ." An excused default, of course, is not a breach, perhaps explaining why the drafters of Article 71 avoided the term "fundamental breach."

102. See Ziegel, supra note 80, § 9.03[d] at 9-19. The legislative history on this issue is recounted at length in Speidel, Book Review, 5 Nw. J. Int. Law & Bus. 432, 442-44 (1983) (reviewing Honnold, supra note 25).

103. Honnold, supra note 25, at 213; See Ziegel, supra note 80, § 9.03 at 9-19 n. 57; Spiedel, supra note 102, at 439-40.

104. Honnold, supra note 25, at 213.

105. See P. Schlechtriem, Einheitliches Un-Kaufrecht 46-49 (1981); Ziegel, supra note 80, § 9.03[d] at 9-19 to 9-20. An English-language account of Professor Schlechtriem’s argument is given id. at n.57 and in Speidel, supra note 102, at 444.

106. Ziegel, supra note 80, § 9.03[d] at 9-20.

107. Id.

108. U.C.C. § 2-715(2)(a) (1978).

109. Id. § 2-608 comment 2.

110. Thus U.C.C. § 2-612(2) conditions rejection of an installment delivery on a non-conformity that "substantially impairs the value of that installment," and comment 4 to that section explains this standard in terms of the Hadley v. Baxendale foreseeability criteria: "[s]ubstantial impairment . . . must be judged in terms of the normal or specifically known purposes of the contract." Although what is "normal or specifically known" may change between the time of contract formation and breach, the comment does not indicate which time frame should be used.

111. Ziegel, supra note 80, § 9.03[d] n. 57 at 9-20.

112. See U.C.C. § 1-201(3) (1978) ("agreement" defined as "the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance"); cf. id. § 2-208 (giving rules of "practical construction" that take into account not only express contractual terms but also course of performance, trade usage and course of dealing), § 2-209 (eliminating consideration requirement for contract modifications).

113. See Sales Convention, supra note 1, art. 7(1) (Convention to be interpreted to promote "the observance of good faith in international trade"); art. 8(3) (parties’ intent to be determined by considering "all relevant circumstances of the case including the negotiation, any practices which the parties have established between themselves, usage and any subsequent conduct of the parties"); and art. 9 (parties are bound by usages and practices established between themselves and, unless otherwise agreed, in the relevant trade).

114. Another argument for measuring foreseeability at the time of contract formation is based on the portion of Article 25 that defines the consequences relevant to a determination of fundamental breach in terms of what a party "is entitled to expect under the contract." Because contractual expectations are formed at the time of contracting, the argument runs, foreseeability should also be measured at that time. See Schlechtriem, supra note 105, at 46-49. Professor Speidel articulates, but does not necessarily endorse, a similar argument. Speidel, supra note 102, at 441, 444.

This argument also is unconvincing. First, it contradicts the legislative history that indicates the time for measuring foreseeability was purposefully left ambiguous in Article 25. Second, its logic fails to withstand scrutiny. A party may have a contractual expectation of a certain quality or feature of performance even though, at the time of contracting, it appeared that a failure to meet this expectation would not have serious consequences. If it later becomes clear that such a failure will cause substantial detriment, nothing in the text of Article 25 prevents a willful failure to perform up to this expectation from being a fundamental breach. Suppose a contract required goods in a particular color even though, at the time of contracting, the requirement reasonably appeared immaterial to the seller. If the seller later learns that there is no market for goods in a different color and nevertheless willfully breaches the color provision, surely the buyer has suffered "such detriment . . . as substantially to deprive him of what he is entitled to expect under the contract." It would be strange to preclude avoidance and require the buyer to take the worthless goods because the seller’s breach was not "fundamental." The buyer has no effective remedy except avoidance because, under Article 74, the seller is not responsible in damages for consequences unforeseeable at the time of contracting.


Pace Law School Institute of International Commercial Law - Last updated August 16, 1999
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