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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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Avoidance and Restitution

Avoidance of the contract triggers an obligation by both parties to make restitution of whatever the other side "has supplied or paid under the contract." [129] This aspect of avoidance has previously been sketched,[130] but one question deserves further exploration: What are the parties' respective rights where both are entitled to restitution? The only guideline in CISG is the last sentence of Article 81(2): "If both parties are bound to make restitution, they must do so concurrently." This statement leaves many questions unanswered.

For example, suppose that the buyer, after paying the price, discovers non-conformities in the goods which constitute a fundamental breach and avoids the contract. Under Article 81(2), the buyer has a right to restitution of its payment and an obligation to return the goods to the seller. If the seller refuses to make restitution the buyer can, under the last sentence of Article 81(2), withhold the goods. What will happen if the seller continues to refuse restitution? An avoiding buyer that has received goods must take reasonable steps to preserve them, although it is entitled to reimbursement for its reasonable expenses.[131] Must the buyer continue to preserve the goods, incurring potentially-uncollectible preservation expenses, until the seller is forced (through judicial process or otherwise) to make restitution?

Because the seller's refusal to refund payments prevents the buyer from making restitution of the goods, the seller's actions may constitute "an unreasonable delay . . . in taking [the goods] back," which would give the buyer a right to sell the goods for the seller's account.[132] This would at least relieve the buyer of further expenses in preserving the goods. The buyer may run into trouble, however, if it attempts to deduct the amount of payments to which it has a right to restitution from the proceeds of the sale. The Convention contains nothing equivalent to the rule in U.C.C. sections 2-711(3) and 2-706(6) which permits a rejecting or revoking buyer to offset the amount of payments made to the seller from the proceeds of resale of the goods. Indeed, Article 88(3) of the Convention permits a buyer to retain only "an amount equal to the reasonable expense of preserving the goods and of selling them"; the buyer "must account to the other party for the balance." CISG's legislative history, however, suggests that parties selling goods under Article 88(3) retain offset rights that they have under applicable domestic law.[133] If U.S. law applies to the transaction under choice of law principles, therefore, an avoiding buyer may be able to invoke the offset rights given by Article 2 of the U.C.C.

Knotty problems concerning mutual restitution under Article 81(2) can also arise where one of the parties has entered bankruptcy or other insolvency proceedings. For instance, suppose a buyer prepays 10% of the price, the seller delivers the goods, and the buyer refuses further payment. If the seller avoids the contract because of the buyer's fundamental breach, the seller has a right to restitution of the goods,[134] a claim for the value of "all benefits which [the buyer] has derived from the goods or part of them," [135] and an obligation to make restitution of the buyer's prepayment.[136] What will happen if the avoiding seller files under U.S. bankruptcy law before restitution by both parties occurs? Under section 542(a) and (b) of the Bankruptcy Code,[137] the buyer must turn over to the seller's bankruptcy estate any property in which the estate has an interest (e.g., the delivered goods) and pay to the estate any debt that is property of the estate (e.g., the buyer's obligation to compensate the seller for benefits derived from the goods). If the buyer must make restitution before it receives a refund from the seller, however, it may be left with a mere unsecured claim for restitution of the prepayment -- a claim that will usually be worth little in bankruptcy.

The buyer can escape this scenario if it has a right to offset its restitutionary obligation against its claim for restitution from the seller.[138] The buyer, however, must look to nonbankruptcy law for a right to set-off because the Bankruptcy Code merely preserves -- it does not create -- set-off rights.[139] Although the Convention specifies mutual restitution should occur "concurrently," [140] it does not clearly give the buyer a right to set-off. Indeed, because set-off in this situation would effect the rights of third parties (creditors of the seller), a right to set-off would be beyond the scope of the Convention.[141] The buyer's right to set-off, therefore, is governed by the domestic law applicable under choice-of-law principles. This will not solve the buyer's problem if conflicts rules point to Article 2 of the U.C.C. Article 2 does not address the set-off rights of a breaching buyer because an Article 2 seller who has delivered will seldom have a right to reclaim the goods along with an obligation to make restitution of payments received.[142] Any attempt to deal with the set-off issue in the sales contract, furthermore, would presumably be ineffective against the seller's creditors and others not party to the agreement.

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[Presentation of the Goods]

If a buyer delays in taking delivery or, in a cash sale, fails to pay the price, CISG Article 85 requires the aggrieved seller to take reasonable steps to preserve goods within its possession or control. The seller is entitled to reimbursement for the reasonable expenses of preservation, and can retain the goods until reimbursed.[245] One method of preservation specifically sanctioned by Article 87 is storage in a third-party warehouse at the expense of the breaching buyer.

The Convention does not specify the consequences of a breach of the seller's duties under Article 85. Professor Honnold suggests that damage to goods which results from the seller's failure to take reasonable steps to preserve them is the seller's responsibility even if risk of loss had passed to the buyer.[246] A similar shifting of risk of loss from the buyer back onto the seller can occur under U.C.C. section 2-709(1)(a).[247] Beyond matters relating to risk of loss, the apparent purpose of Article 85 is to require the seller to preserve the goods where it intends to collect the price under Article 62.[248] An appropriate remedy for breach of the duty to preserve, therefore, would be loss of the right to the price if material deterioration in the goods results.[249]

A seller that must preserve goods under Article 85 of the Convention can protect itself if the buyer unreasonably delays in taking possession of the goods or in paying the price and the costs of preservation. In such circumstances, Article 88(1) authorizes the preserving seller to sell the goods by "appropriate means" after "reasonable notice of the intention to sell has been given" to the buyer. Where "the goods are subject to rapid deterioration or their preservation would involve unreasonable expense," furthermore, Article 88(2) requires the seller to "take reasonable measures to sell them" after giving notice "[t]o the extent possible." A nonavoiding seller who has exercised its option to sell under Article 88(1) or who has complied with its obligation to sell under Article 88(2) can sue for the price of the goods, but it must "account" to the buyer for proceeds of the sale which exceed the reasonable expenses of preserving and selling the goods.[250] If the seller's claim for the price and its obligation to account for proceeds from the sale of the goods are set off, the seller ends up in the position it would have been in had it avoided the contract and claimed resale damages under Article 75.

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FOOTNOTES

* Assistant Professor, University of Pittsburgh School of Law. A.B. 1973, Harvard College; A.M. 1975, Harvard University; J.D. 1981, Harvard University School of Law. . . .

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129. Id. art. 81(2).

130. See supra notes 37-76 and accompanying text.

131. See Sales Convention, supra note 1, art. 86(1). If goods "have been placed at his disposal at their destination and he exercises the right to reject them," furthermore, a Convention buyer must take possession of and preserve the goods. Id. art. 86(2). "A party who is bound to take steps to preserve the goods may deposit them in a warehouse of a third person at the expense of the other party provided that the expense incurred is not unreasonable." Id. art. 87. Article 2 of the U.C.C. gives a rejecting or revoking buyer similar rights and obligations. See U.C.C. §§ 2-602(2)(b), 2-603(1), 2-608(3) (1978).

132. See Sales Convention, supra note 1, art. 88(1). Compare U.C.C. § 2-604 (1978) (Rejecting buyer’s right to resell goods for seller’s account if seller fails to provide instructions as to goods "within a reasonable time after notification of rejection"). The buyer can resell under Article 88(1) of CISG, however, only after "reasonable notice of the intention to sell has been given to the other party." Furthermore, "[i]f the goods are subject to rapid deterioration or their preservation would involve unreasonable expense," the buyer is required to "take reasonable measures to sell them" and need give notice only "[t]o the extent possible." See Sales Convention, supra note 1, art. 88(2). Compare U.C.C. § 2-603(1) (1978) (Rejecting merchant buyer’s duty to "make reasonable efforts to sell [the goods] for seller’s account if they are perishable or threaten to decline in value speedily").

133. Draft Commentary, supra note 86, art. 77, ¶ 9, reprinted in Official Records, supra note 71, at 63.

134. See Sales Convention, supra note 1, art. 81(2).

135. Id. art. 84(2).

136. Id. art’s. 81(2), 84(1).

137. 11 U.S.C. § 542(a), (b) (1982).

138. For instance, under § 542(b) of the Bankruptcy Code, id. § 542(b), one indebted to the bankruptcy debtor need not pay the debt to the extent the obligation can be offset against a claim on the debtor. If a party must, under § 542(a) of the Bankruptcy Code, id. § 542(a), turn over to the estate property against which the party has a set-off right, the party will be treated as having a secured claim, and an interest in the property that must be "adequately protected" if the estate is to retain the property. See id. §§ 506(a), 362(d)(1), 363(e), 361 (1982 & Supp. IV 1986).

139. 11 U.S.C. § 553(a) (1982 & Supp. IV 1986); 4 Collier on Bankruptcy ¶ 553.02 at 553-9 (15th ed. 1987).

140. See Sales Convention, supra note 1, art. 81(2).

141. See id. art. 4.

142. As indicated at supra notes 69-70 and accompanying text, the Article 2 seller has a right to reclaim delivered goods only if (1) the buyer has received goods on credit, while insolvent, in the circumstances described in U.C.C. § 2-702 or (2) conditional payment (e.g., by check) has failed in a cash sale. In neither case is the seller likely to have received any payment, and the U.C.C. does not address the seller’s restitutionary obligations in the reclamation-of-goods situation. U.C.C. § 2-718(3), however, grants an aggrieved seller who has withheld delivery of the goods the right to set-off its damages against the restitution claim of a buyer who has prepaid.

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245. Sales Convention, supra note 1, art. 85.

246. Honnold, supra note 25, at 457-58. Compare Article 66 of the Convention, which provides that a buyer who bears risk of loss is not responsible for "loss or damage . . . due to an act or omission of the seller."

247. This provision permits the seller to recover the price for unaccepted goods which were lost or damaged after risk of loss passed to the buyer only if the casualty took place "within a commercially reasonable time" after the risk passed. Where a buyer who bears the risk of loss wrongfully refuses to accept goods, U.C.C. Article 2 shifts the risk back on the seller at the end of a commercially reasonable time.

248. See Honnold, supra note 25, at 458. The more limited availability of the price remedy under Article 2 of the U.C.C. may explain the absence in Article 2 of rules requiring the seller to preserve the goods. See id.

249. That approach is consistent with the mitigation of damages principle in Article 77 of the Convention. Article 77, however, provides only that a failure to mitigate will result in a reduction in "damages," and thus does not directly apply in an action for the price.

250. See Sales Convention, supra note 1, art. 88(3).

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