CISG Article 25
PECL Article 8:103 [Fundamental Non-Performance]|
(complete and revised version 1998)
A non-performance of an obligation is fundamental to the contract if: (a) strict compliance with the obligation is of the essence of the contract; or (b) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result; or (c) the non-performance is intentional and gives the aggrieved party reason to believe that it cannot rely on the other party's future performance.
[The notes to PECL Article 8:103 state: "."[The rule that] the aggrieved party can terminate the contract or claim that a defective performance be replaced by a conforming tender only if the non-performance is substantial [is] . . . laid down in CISG arts. 45, 49 and 64. . . . CISG has no provision on intentional non-performance like the one provided in [PECL] Article 8:101(3) . . . It is the prevailing view that in sales governed by the CISG the remedies for fraud are to be found in national law . . ."]
For the PECL definition of "non-performance", go to PECL art. 1:301(4) and the comment and notes that accompany this definition. For the PECL definition of "reasonableness", go to PECL art. 1:302 and the comment and notes that accompany this provision.
EDITOR: Hossam El-Saghir [*]
-- Significance of a breach being fundamental
The CISG uses the term "fundamental breach" in various settings. The concept of "fundamental breach" is a milestone in its remedial provisions. Its most important role is that it constitutes the usual precondition for the contract to be avoided. (CISG Art. 49(1)(a); Art. 51; Art. 64(1)(a); Art. 72(1); Art. 73).
In addition, where the goods do not conform with the contract, A fundamental breach can give rise to a requirement to deliver substitute goods. (CISG Art. 46(2)). Furthermore, a fundamental breach of contract by the seller leaves the buyer with all of his remedies intact, despite the risk having passed to him  (CISG Art. 70).
-- Defining fundamental breach
Article 25 attempts to define "fundamental breach" in terms of (foreseeable) "substantial detriment". The present editorial remarks will focus on the meaning of (a) substantial detriment and (b) foreseeabilty, as understood by Article 25.
(a) Substantial detriment
Under the CISG, the basic criterion for a breach to be fundamental is that "it results in substantial detriment to the injured party". The substantial detriment test is one of the innovations of the Convention as compared with ULIS. The CISG does not define its term "detriment". It is the view of Van der Velden that "A paraphrase of detriment, acceptable for international use could . . . be the one given by the Corpus Juris Secundum, namely: ". . . in its technical use it has been said that the detriment need not be real and need not involve actual loss, [n]or does it necessarily refer to material disadvantage to the party suffering it, but means a legal detriment as distinguished from a detriment in fact and has been defined as giving up something which one had the right to keep, or doing something which he had the right not to do [C.J.S., Volume 26a, p. 984]." However, the international origin of the CISG and the fact that the "international legislator" attempted to find autonomous, original terms without using a single system of laws or legal terminology,  and the need to promote uniformity in its application,  make an autonomous method of interpretation necessary. This means, above all, not to proceed to interpret it from national juridical constructions and terms. Therefore, the term detriment should be autonomously interpreted in the light of the Convention's legislative history, as well as its intended purpose. The Secretariat Commentary to Article 23 (former draft of Article 25) might shed the light on the meaning of "substantial detriment". It states that "the determination whether the injury is substantial must be made in the light of the circumstances of each case, e.g., the monetary value of the contract, the monetary harm caused by the breach, or the extent to which the breach interferes with other activities of the injured party". From this comment it is possible to conclude that the drafters simply and naturally intended the word "detriment" to be synonymous with monetary injury or harm, or with a consequential harm, and that the determination of a fundamental breach was to be made on a case-by-case basis.
One must consider that the Secretariat Commentary was written prior to the introduction of the refined expectation interest of Article 25. For the breach to be fundamental under Article 25, the aggrieved party must suffer a detriment which must be such as to "substantially to deprive him of what he is entitled to expect under the contract." From the history of Article 25 it is clear that -- unlike the drafts -- it does not refer to the extent of the damage, but instead to the importance of the interests which the contract and its individual obligations actually create for the promisee.
To determine the degree of a given detriment, to draw the line between substantial and insubstantial, is no longer left to the judges' sole and sovereign appreciation, but tied to the expectation of the injured party, while those expectations, in turn, are not left to the party's inner feelings but instead tied to the terms of the existing contract. This means that there is a fundamental breach of contract, if the injured party has no further interest in the performance of the contract after the particular breach. This suggests not merely a substantial or material breach of contract, or one which substantially impairs the value of the contract to the injured party, but a breach which goes "to the root" of the contract.
In a judgment of a German court regarding a contract concluded for the sale of a stock of women shoes, the court applied the CISG and stated that the lack of conformity entitles the buyer to declare the contract avoided only when it amounts to a fundamental breach of the contract (Art. 49(1)(a) CISG). In the opinion of the court this requirement is not met, for instance, when the defects do not prevent the buyer from making reasonable use of the goods. In the case at hand, the buyer had only alleged that the shoes had "defects" and that they had been made with a material different from the material agreed upon by the parties; the buyer, however, had not proved that the shoes could not be reasonably used otherwise because of their defects. Therefore, the court decided that the buyer is not entitled to avoid the contract and granted the seller the right to payment of the balance of the price as well as interest.
In 1995 a Swiss court, ruling on the sale and installation of a fitness device (an isolation tank containing water with high salt concentration), applied the same strict standard for avoidance, and held that the leak of water did not amount to a fundamental breach as it could easily be repaired.
According to the second part of Article 25, a breach of contract causing material prejudice is not fundamental if 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 means that the party in breach must have foreseen the injury, as well as a reasonable person of the same kind in the same circumstances. Therefore, the fundamentality of a breach is made dependant not only on its consequences, but also on its foreseeability by the breaching party.
It is the responsibility of the aggrieved party to prove that he suffered a detriment that substantially deprived him of what he is entitled to expect under the contract. Where such detriment and substantial deprivation are established, the burden of proof is said to shift to the party in breach. To successfully invoke unforeseeability, the party in breach should prove two points: first, that he himself in no way anticipated the substantial detriment caused by the breach; and second, that a reasonable person in his place would not have done so. If the party in breach can prove that he did not foresee the substantial loss of expectation interest that the breach caused the non-breaching party, and can prove that a reasonable person similarly situated, facing the same market conditions, would not have foreseen that the breach would cause a substantial loss of expectation interests, there is no fundamental breach.
-- Comparison of PECL Article 8:103 with CISG Article 25
Unlike the CISG which is a uniform sales law adopted by countries that account for over two-thirds of all world trade in goods, the PECL are a set of principles whose objective is to provide general rules of contract law in the European Union, and will apply when the parties have agreed to incorporate them into their contract or that their contract is to be governed by them.
"Non-performance" is the PECL term analogous to "breach" as used in the CISG. The PECL, as well as the CISG distinguish between fundamental non-performance of the contract and non-performance which is not of a serious nature. The concept of fundamental non-performance referred to in PECL Article 8:103 corresponds generally to the concept of fundamental breach referred to in CISG Article 25. The main significance of the fundamental non-performance, in both systems, is to empower the aggrieved party to terminate the contract.
PECL Article 8:103(a), (b) and (c) identifies three situations in which non-performance of an obligation is fundamental to the contract.
Although CISG Article 25 has no express provision like PECL Article 8:103(a), the expectation interests in both Articles are tied entirely to the terms of the contract. Therefore, if a contract governed by the CISG requires strict compliance with an obligation of buyer or seller, for example, where the contract contains a clause providing that "time is of the essence", a minor deviation from the defined standard of performance would amount to a fundamental breach of contract.
The similarity between PECL Article 8:103(b) and CISG Article 25 is obvious. However, they have subtle differences. Under PECL Article 8:103(b) the basic criterion for a fundamental non-performance is that it substantially deprives the aggrieved party of what he is entitled to expect under the contract. The main difference between the language of this provision and CISG Article 25 is that on the part of the aggrieved party, under the CISG, there must be substantial detriment; whereas under PECL Article 8:103(b), a detriment is not a precondition of a fundamental non-performance of the contract. However, in both systems the fundamentality of a non-performance is made dependent on its consequences (substantial deprivation), as well as its foreseeability by the breaching party.
The CISG has no provision similar to PECL Article 8:103(c), which is confined to intentional non-performance. Under this provision even if the non-performance in itself is minor and its consequences do not substantially deprive the aggrieved party of what he is entitled to expect under the contract, it might be treated as fundamental if there is indication of intentionality that gives the aggrieved party reason to believe that he cannot rely on the other party's future performance. Unlike PECL, the CISG does not interfere with special rights and remedies that domestic law gives to persons who have been induced to enter into contract by fraud.
From the above, we notice that PECL Article 8:103 generally follows CISG Article 25, though the terms and content sometimes differ. Both Articles distinguish between fundamental breach /non-performance and breach / non-performance which is not of a serious nature. The distinction is of great importance, because the concept of fundamental breach/ non-performance plays a central role, in both systems, with regard to remedial provisions. It can, mainly, determine the life or death of the contract.
The need for uniformity and harmony in international trade can be expected to lead to growth of international transactions subject to the CISG, UNIDROIT Principles, and PECL. As a consequence, it is important that the Bar and bench are aware of their content, similarities and differences. It is hoped that the present editorial remarks will provide guidance to improve understanding between persons of different countries and cultures in this respect.
[See also commentary by the author on this subject in: John Felemegas ed., An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, Cambridge University Press (2006) 335-339.]
* Associate Professor of Law & Associate Dean for Higher Studies, Menoufia University Faculty of Law, Egypt.
1. Peter SCHLECHTRIEM, "Commentary on the UN Convention on the International Sale of Goods (CISG)", Clarendon Press, Oxford (1998) at 176.
2. Joseph LOOKOFSKY, "Understanding the CISG in the USA", Kluwer Law International (1995) at 70.
3. Commentary on the Draft Convention on Contracts for the International Sale of Goods, prepared by the UNCITRAL Secretariat (Doc. A/ CONF. 97/5), Official Records, 26
4. M. WILL, in Bianca-Bonell, "Commentary on the International Sales Law", Giuffrè:Milan (1987) at 210.
5. "The Law of International Sales: The Hague Conventions 1964 and UNCITRAL Uniform Sales Code 1980 - Some Main Items Compared", Hague-Zagreb Essays 4 on the Law of International Trade, Voskuil & Wades eds. (Nijoff: The Hague, 1983, pp. 64-65), as quoted by Albert KRITZER, in: "Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods, Vol. I, 211.
6. Frank DEIDRICH, "Maintaining Uniformity in International Uniform Law Via Autonomous Interpretation: Software Contracts and the CISG", 8 Pace International L. Rev. (1996) 303-308, "http://www.cisg.law.pace.edu/cisg/ biblio/Diedrich.html".
7. CISG Art. 7 (1).
8. Fritz ENDERLEIN & Dietrich MASKOW, "International Sales Law, United Nations Convention on Contracts for the International Sale of Goods", Oceana Publication (1992) at 55.
9. Will, supra note 4 at 211.
10. Official Records, supra note 3, 26.
11. Andrew BABIAK, "Defining "Fundamental Breach" under the United Nations Convention on Contracts for the International Sale of Goods," 6 Temple International and Comparative Law Journal, 120 (1992).
12. Schlechtriem, supra note 1 at 177.
13. Will, supra note 4, at 215.
14. Schlechtriem, "Uniform Sales Law: The UN-Convention on Contracts for the International Sale of Goods, 59 (1986).
15. Jacob S. ZIEGEL, "The Remedial Provisions in the Vienna Convention: Some Common Law Perspectives", in: Galson/ Smit (ed.), International Sales: The United Nations Convention on Contracts for the International Sale of Goods, (1984) ch.9 at 9-14.
16. Oberlandesgericht Frankfurt am Main of 18 January 1994 [5U 15/93], UNILEX, D. 1994-2 at 183.
17. Handelsgericht Zürich of 26 April 1995 [HG920670], UNILEX, D. 1995 - 15.1 at 280.1
18. Enderlein & Maskow, supra note 8, at.115.
19. Krtizer, supra note 5 at 210.
20. Will, supra note 4 at 216-217.
21. Babiak, supra note 11 at 123.
22. PECL Art. 1:101(1) and (2).
23. John HONNOLD, Uniform Law for International Sales under the 1980 United Nations Convention, third edition, (1999) at 67.
24. Will, supra note 4, at 205.
Like the commentaries to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the text. The PECL notes identify civil law and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, these comments and notes are presented below. The source of this material is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 372-377.
A non-performance of an obligation is fundamental to the contract if:
(a) strict compliance with the obligation is of the essence of the contract; or
(b) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result; or
(c) the non-performance is intentional and gives the aggrieved party reason to believe that it cannot rely on the other party's future performance.
A. Significance of a non-performance being fundamental
If a non-performance or prospective non-performance is fundamental the aggrieved party has a substantially wider range of rights than for other kinds of non-performance. In particular, it can: decline a late tender of performance (Article 8:104); demand adequate assurance of due performance (Article 8:105); terminate the contract (Articles 9:301, 9:302, 9:304).
B. Strict compliance with contractual obligations
Under Article 8:103(a) the relevant factor is not the actual gravity of the breach but the agreement between the parties that strict adherence to the contract is essential and that any deviation from the obligation goes to the root of the contract so as to entitle the other party to be discharged from its obligations under the contract. This agreement may derive either from express or from implied terms of the contract. Thus, the contract may provide in terms that in the event of any breach by a party the other party may terminate the contract. The effect of such a provision is that every failure in performance is to be regarded as fundamental. Even without such an express provision the law may imply that the obligation is to be strictly performed. For example, it is a rule in many systems of law that in a commercial sale the time of delivery of goods or of presentation of documents is of the essence of the contract. The duty of strict compliance may also be inferred from the language of the contract, its nature or the surrounding circumstances, and from custom or usage or a course of dealing between the parties. [page 364]
C. Gravity of the consequences of non-performance
Article 8:103(b) looks not at the strictness of the duty to perform but at the gravity of the consequences of non-performance. Where the effect of non-performance is substantially to deprive the aggrieved party of the benefit of its bargain, so that it loses its interest in performing the contract, then in general the non-performance is fundamental. This is not the case, however, where the non-performing party did not foresee and could not reasonably have foreseen those consequences. For this purpose the test is whether a person in the same situation as the non-performing party and using reasonable skill and diligence would have known or foreseen the consequences at the time of conclusion of the contract. The other party may properly expect more skill and knowledge from a highly paid specialist than from an unskilled, modestly paid employee.
Illustration 2: The facts are as in Illustration 1 except that the unpaved road is sufficiently smooth that the garages may be used by B's lorries in spite of the fact that the road is not yet paved, and A paves the road soon after October 1st. A's non-performance is not fundamental.
Illustration 3: A agrees to instal a temperature control system in B's wine cellar which will ensure that his fine wines are not adversely affected by substantial temperature fluctuations. Owing to a defect in the installation the control system proves ineffective, with the result that B's stock of fine wines is made undrinkable. A's non-performance is fundamental, since it was aware of the likely consequences of an inadequate system.
Illustration 4: A agrees to instal central heating in B's house with a temperature control system which will enable the temperature to be maintained at a constant temperature of 20 degrees centigrade. Unknown to A one room is required to develop and preserve certain rare species of plant which are extremely sensitive to changes in temperature and which have taken several years' intensive work to breed. As a result of a defect in one of the heating pipes in the room the temperature falls by two degrees centigrade and all the plants die, rendering abortive years of work. A's non-performance is not fundamental, as it could not reasonably have foreseen that such grave consequences would ensue from a slight temperature fluctuation in the room of a private house.
D. Intentional non-performance
Even where the contractual term broken is minor and the consequences of the non-performance do not substantially deprive the aggrieved party of the benefit of the bargain it may treat the non-performance as fundamental if it was intentional and [page 365] gave it reason to believe that it could not rely on the other party's future performance (see Article 8:103(c)).
Illustration 6: P's agent, A, who is entitled to reimbursement for his expenses, submits false vouchers to P. Although the amounts claimed are insignificant P may treat A's behaviour as a fundamental non-performance and terminate his agency.
But where no future performance is due from the non-performing party, other than the remedying of the non-performance itself, or where there is no reason to suppose that it will not properly perform its future obligations, the aggrieved party cannot invoke paragraph (c) of this Article.
Illustration 8: A contracts to build a supermarket for B; the specification calls for the building to be faced with an expensive type of brick. A's supervisor orders that a cheaper type of brick to be used to face a wall which is not easily visible but, as soon as B points out the discrepancy, A agrees to remove the cheaper bricks and to use the proper sort in future. A's non-performance does not give B reason to believe that it cannot rely on A's performance in future.
Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]
1. Common law and Unidroit
The concept of fundamental non-performance as set out in Article 8:103 corresponds very closely to ENGLISH law. In particular there is a direct correspondence to the three following cases: (i) where the term broken was a condition (e.g. Bunge Corp. v. Tradax S.A.  1 W.L.R. 711, H.L.); (ii) where the effect of the breach was to deprive the aggrieved party of the substance of what he was contracting for (see Hong Kong Fir Shipping Co Ltd. v. Kawasaki Kisen Kaisha Ltd.  2 Q.B. 26, C.A.) and (iii) where the breach evinces an intention not to perform the remainder of the contract (e.g. Sale of Goods Act 1979, s.31(2)). The only substantial difference between Art 8.103 and English law seems to be that Art. 8.103(3) is confined to intentional breaches, whereas it is established in English law that even an unintentional breach may give rise to an anticipatory repudiation of the rest of the contract (cf. Universal Cargo Carriers Corp. v. Citati  2 Q.B. 401, 438, Q.B.). IRISH law is similar and so is SCOTTISH law, though the latter uses the phrase "material breach" and does not use the concept of "condition".
Note that "fundamental non-performance" is not equivalent to the notion of "fundamental breach" in English law. The doctrine of "fundamental breach" was developed to declare certain exclusion clauses void. It has been overruled in Suisse Atlantique Societe d'Armement Maritime S.A. [page 366] v. N.V. Rotterdamsche Kolen Centrale  1 A.C. 361, H.L. In IRELAND caselaw still accepts the doctrine, Clayton Love v. B. & I. Line (1970) 104 I.L.T.R. 157, but writers favour the Suisse Atlantique approach, Clark 150.
Unidroit art. 7.3.1. also provides for termination for fundamental non-performance. Art 7.3.1(2) provides a list of factors relevant to deciding whether the non-performance was fundamental, including the situations mentioned in Article 8:103.
2. Nordic laws and CISG
In the laws of the NORDIC countries the aggrieved party can terminate the contract or claim that a defective performance be replaced by a conforming tender only if the non-performance is substantial. This rule is provided in the DANISH Sale of Goods Act §§ 21, 28, 42 and 43 and is applied to other contracts as well. The same rules are laid down in CISG arts. 45, 49 and 64. The corresponding sections of the Sale of Goods Acts in FINLAND and SWEDEN (§§ 25, 39, 54 and 55) are to similar effect as Article 8:103(1) and (2). CISG art. 25 provides that a "breach ... 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." CISG has no provision on intentional non-performance like the one provided in Article 8:101(3). Nor do the Nordic Acts, but it is generally held that the aggrieved party can terminate the contract if the defaulting party has committed fraud either when making or performing the contract, see DANISH Sale of Goods Act §§ 42 and 43. It is the prevailing view that in sales governed by CISG the remedies for fraud are to be found in national law, see e.g. Honnold, no. 65.
3. Other legal systems
Most of the other legal systems do not apply the doctrine of fundamental non-performance but approach it in various ways:
Those systems which like AUSTRIAN, GERMAN, GREEK and PORTUGUESE law have no unitary concept of non-performance have different rules for the various kinds of non-performance. For delay and impossibility German and Greek law make a distinction between non-performance of the "main" obligation and of a "subordinate" obligation; only the non-performance of the main obligation permits the aggrieved party to terminate the contract. Under these laws termination is possible in certain cases of "qualified delay", such as when the contract has provided for performance at a definite time which has not been met, or if the aggrieved party has lost any interest in performance, see AUSTRIAN, HGB § 376 and ABGB § 919; GERMAN HGB §§ 376 and 326(2); GREEK CC arts. 401 and 385(2); PORTUGUESE CC art. 808. On termination after a Nachfrist see notes to Article 8.106.
In a case of defects in goods sold, GERMAN law permits the buyer to reduce the price or to terminate unless the defect is trifling, see BGB §§ 459 and 462, or the termination would be contrary to good faith. See also GREEK CC arts. 534, 540. AUSTRIAN law is similar to GERMAN law but provides in addition a right to demand repair, ABGB § 932(1). PORTUGUESE law permits the buyer to terminate if repair is impossible or if the goods delivered are so different from the goods contracted for that the buyer cannot be fully satisfied (Telles 330; Varela II 127).
Under GERMAN law, if a positive breach of contract (see note 1 to Article 8.101) imperils the purpose of the contract and takes away the aggrieved party's trust in due performance in the future, he may terminate the contract.
DUTCH law does not apply the concept of fundamental non-performance. In principle any non-performance will entitle the aggrieved party to terminate the contract. However the law requires that, unless the contract provides for performance at a definite time, the aggrieved party must give the non-performing party a Nachfrist in case of delay, and provides that a non-performance of minor importance for the aggrieved party will not justify termination, see Dutch BW art. 6:82-83 and 6:265.
Under ITALIAN law the contract cannot be terminated when the non-performance has little importance for the other party, CC art. 1455.
In SPANISH law, termination is permitted if the non-performance is material even if it is less than total. The traditional view that only an intentional non-performance will justify termination has been rejected by recent case law, see Diez Picazo II, 716; Lacruz-Delgado II, 1 § 26, 200; Albaladejo II, 1, § 20.2. [page 367]
In FRENCH, BELGIAN and LUXEMBOURG law the question of termination is in principle left to the discretion of the trial judge. However it appears that the gravity of the non-performance is an important factor to be taken into account: see, e.g., Belgian Cass. 8 Dec. 1960, Pas 1, 382; Cass. 12 Nov. 1976, Arr. Cass. 1977, 293; Cass. 13 March 1981, R.W. 1982-83, 1049. Termination has also been granted when the non-performance in itself is slight if there is an indication of bad faith, on French law see Terré, No. 630; Nicholas 242 ff. The French Cour de Cassation has held that a buyer could not avail himself of a clause in a sales contract whereby he could terminate the contract without previous notice and without the court's intervention unless the time for delivery of the goods was a "condition essentielle et déterminante" (Cass. Com 13 Apr. 1964, Bull. 3 no. 180, p. 153).
See generally Treitel, Remedies §253 ff.; Honnold no. 181 ff.; Bianca & Bonell (-Will) 205; v. Caemmerer & Schlechtriem 207 ff.; Flessner. [page 368]
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