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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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Installment Contracts

The Convention's special rules on installment contracts appear in Article 73. Article 73(1) permits either party to avoid the contract "with respect to [an] instalment" if the other side has committed a "fundamental breach of contract with respect to that instalment."

The provision appears to be analogous to U.C.C. section 2-612(2), which provides that a buyer can reject a non-conforming delivery under an installment contract "if the non-conformity substantially impairs the value of that installment and cannot be cured. . . . "[169]

The purposes of Article 73(1) and U.C.C. section 2-612(2) are, however, entirely different. The U.C.C. provision creates an exception to the perfect tender rule in section 2-601 of Article 2 by imposing a material breach standard for rejecting a delivery under an installment contract. The purpose of Article 73(1), in contrast, is to permit a party to treat each installment of an installment contract as a severable contract for purposes of avoidance.[170] Thus if a buyer refuses to pay for an installment under a contract governed by CISG, the seller can avoid the contract "with respect to that instalment" [171] even if the refusal to pay would not constitute a fundamental breach of the entire contract. Article 73(1), therefore, is analogous to Article 51(1) -- the provision which permits the buyer to sever, for remedy purposes, the portion of a contract relating to a missing or non-conforming part of a single delivery.[172]

Thus a buyer that has received an installment delivery containing non-conforming goods or an insufficient quantity of goods may have three avoidance options. Under Article 51(1), the buyer can avoid the contract with respect to the missing or non-conforming goods provided the seller's breach is "fundamental" as to those goods. Under Article 73(1), the buyer can avoid as to the installment if the delay in full delivery or the non-conformity in the goods "results in such detriment . . . as substantially to deprive [the buyer] of what he is entitled to expect" [173] with respect to the installment. Finally, under Article 49(1) the buyer can avoid the entire contract if the seller's default constitutes a fundamental breach of the entire contract.

Article 73(2) of the Convention provides that, where default with respect to any installment gives the aggrieved party "good grounds to conclude that a fundamental breach of contract will occur with respect to future instalments," the aggrieved party "may declare the contract avoided for the future" if it does so "within a reasonable time." At first glance this provision appears similar in effect to U.C.C. section 2-612(3), which states that "[w]henever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole." The similarity is an illusion. The purpose of U.C.C. section 2-612(3) is to vary the perfect tender rule [174] by imposing a materiality standard for "entire" breaches of installment agreements. Such special treatment of installment agreements is unnecessary under the Convention, which applies the fundamental breach standard of avoidance to all contracts.[175] The purpose of Article 73(2) of CISG is to state a special rule of anticipatory repudiation applicable to future deliveries under an installment contract -- i.e., if defaults (material or otherwise) as to past installments give "good grounds" to anticipate a fundamental breach as to future deliveries, the aggrieved party can infer an anticipatory repudiation that justifies avoidance with respect to the future installments.[176] U.C.C. section 2-612(3), in contrast, has nothing to do with anticipatory repudiation, as the Official Comments make clear.[177]

The final clause of Article 73(2), which requires a party to avoid as to future installments "within a reasonable time," is curiously ambiguous. When is the reasonable time to begin running? A comment to a draft of the Convention suggested that the time runs from the breaching party's "failure to perform." [178] Where the faulty performance could not be detected immediately, however, it would be preferable to measure reasonableness from the time the aggrieved party discovered (or had reason to discover) the breach.[179] Neither of these approaches works well if the past defaults involved non-delivery [180] or if "good grounds" to anticipate a fundamental breach as to future installments arose only after a series of non-conforming installments.[181] The best solution is to measure reasonableness from the time the aggrieved party acquired "good grounds" to anticipate serious problems with future installments. Such a standard is very uncertain, but it offers the only hope for dealing with the variety of circumstances that will arise. Behind these issues are questions about the purpose of the "reasonable time" requirement in Article 73(2): is it designed to protect breaching parties who may be expending funds to prepare for future performance, to punish aggrieved parties who fail to assert their rights expeditiously, or to do both (with the emphasis depending on the circumstances of the case)?

A final point worth noting is that Article 73(2) deals only with avoidance as to future performance. It does not address avoidance of an entire installment contract.[182] If a default in a completed delivery constitutes a fundamental breach with respect to that delivery and gives the aggrieved party good grounds to anticipate a fundamental breach as to future installments, however, the past deliveries can be avoided under Article 73(1) and the future installments can be avoided under Article 73(2).[183] Except for this situation, a party who wishes to avoid an entire installment contract must show that defaults as to past deliveries constitute a fundamental breach of the entire contract,[184] or that the party can avoid under the general anticipatory breach provisions (Articles 71 and 72) to which we now turn.

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FOOTNOTES

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

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169. The remainder of U.C.C. § 2-612(2) provides that the buyer can also reject the installment if there "is a defect in the required documents," but that the buyer must in all events accept an installment where the non-conformity does not constitute a material breach of the entire contract "and the seller gives adequate assurance of its cure. . . ."

170. Honnold, supra note 25, at 405. Under the Convention, no exception to the perfect tender rule is necessary because Articles 49(1) and 64(1) establish a fundamental breach standard for avoidance that applies to all contracts.

171. This assumes, of course, that the refusal amounts to a "fundamental breach . . . with respect to that installment," as required by Article 73(1).

172. Honnold, supra note 25, at 405. For discussion of Article 51, see supra notes 158-68 and accompanying text.

Article 73(1) does not, by its terms, permit the buyer to use the Nachfrist procedure to create grounds for avoidance with respect to an installment if the seller is late in delivering the installment. Contrast Article 51(1), which makes the buyer’s remedies in Article 46-50 – including Nachfrist avoidance under Article 49(1)(b) – applicable to that portion of a contract which relates to goods missing from a single delivery. There is, however, no good reason to treat the analogous non-delivery situations covered by Articles 51(1) and 73(1) differently: a buyer who is awaiting a late installment delivery should be able to use the Nachfrist procedure to establish grounds for avoiding with respect to the installment. Honnold, supra note 25, at 406 n.3. The author believes that Nachfrist should also be available under Article 51(2) (avoidance of the entire contract following a partially nonconforming or insufficient delivery), although the text of Article 51(2) precludes this result. See supra notes 167-68 and accompanying text.

173. See Sales Convention, supra note 1, art. 25.

174. U.C.C. § 2-601 (1978).

175. See Sales Convention, supra note 1, art’s. 49(1), 64(1); supra notes 80-91 and accompanying text.

176. Draft Commentary, supra note 86, art. 64, ¶ 6, reprinted in Official Records, supra note 71, at 54. The rule of Article 73(2) represents a marked change from the substantive standards and procedures that the Convention applies to anticipatory breaches in other contexts. Honnold, supra note 25, at 406. For discussion of other anticipatory repudiation provisions of CISG, see infra notes 185-203 and accompanying text.

177. See U.C.C. § 2-612 comment 6 (1978).

178. Draft Commentary, supra note 86, art. 64, ¶ 5, reprinted in Official Records, supra note 71, at 54.

179. Compare Article 39(1) of the Convention ("The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice . . . within a reasonable after he has discovered it or ought to have discovered it").

180. If a seller fails to deliver an installment by the date required in the contract, for example, the buyer’s "good grounds" to anticipate a fundamental breach as to future installments may not arise until the seller’s delay becomes material. Both the seller’s failure to perform and the buyer’s awareness thereof, however, will occur on the date that the delivery is missed. Thus the buyer is in danger of violating the reasonable time requirement if it awaits the seller’s performance. Even if the buyer employs the Nachfrist procedure to establish the materiality of the delay as to the missed delivery, see Honnold, supra note 25, at 406 n.. 3, there is a risk that its power to avoid as to future deliveries would be lost.

181. Article 73(2) speaks of "one party’s failure to perform any of his obligations in respect of any instalment" (emphasis added). This language permits the aggrieved party to treat defaults in several installments as cumulative. Draft Commentary, supra note 86, art. 64, ¶ 6, reprinted in Official Records, supra note 71, at 54. Compare comment 6 to U.C.C. § 2-612 ("defects in prior installments are cumulative in effect, so that acceptance does not wash out the defect ‘waived’").

182. Article 73(2) does not mention avoidance by means of the Nachfrist procedure. Professor Honnold notes that Nachfrist avoidance is "intrinsically inapplicable" to the situation addressed in Article 73(2) – avoidance as to future performance. Honnold, supra note 25, at 406 n. 3. Nachfrist avoidance, in other words, is based on a failure to perform within a reasonable time beyond the contractual time for performance. See Sales Convention, supra note 1, art’s. 47, 49(1)(b), 63, 64(1)(b). It is not designed to deal with avoidance as to performance not yet due. When avoidance as to future performance is the issue and grounds for avoidance are uncertain, the relevant provision is Article 72 (dealing with avoidance for failure to provide adequate assurances). For discussion of Article 72, see infra notes 185-96 and accompanying text.

Professor Honnold suggests that the distinction between avoidance provisions that address future performance (such as Article 73(2)) and those that address performance already due justifies the unavailability of Nachfrist avoidance under Article 51(2) where the buyer has received partial delivery of goods. See Honnold, supra note 25, at 406 n. 3. The avoidance questions governed by Article 51(2), however, will not necessarily involve future performance (e.g., if the contract calls for a single delivery or the problem delivery is the final one under an installment contract). The analogy Professor Honnold draws between Articles 73(2) and 51(2) is, therefore, invalid. Concerns about using the Nachfrist avoidance procedure in connection with situations covered by Article 51(2) can be addressed by generally limiting avoidance to a material failure to perform within the time specified in a Nachfrist notice. See supra notes 85-91 and accompanying text. If this limitation were adopted, there would be no policy reason to deprive the buyer of Nachfrist avoidance where the seller has made a partial delivery. Article 51(2), however, does not permit the buyer to invoke Nachfrist avoidance in this situation.

183. A buyer’s options where the seller has defaulted with respect to some but not all installments may also be affected by Article 73(3). Under this provision, a party who avoids with respect to "any delivery" may also avoid as to other (past or future) deliveries "if, by reason of their interdependence, those deliveries could not be used for the purposes contemplated by the parties at the time of the conclusion of the contract." For an example illustrating the operation of this provision, see Honnold, supra note 25, at 406-07.

184. See Sales Convention, supra note 1, art’s. 49(1)(a), 64(1)(a).

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