REMEDIES FOR BREACH OF CONTRACT
In the event of a breach of contract, the remedies available to a buyer or seller are set out in the CISG.
In principle, these remedies are drawn from both the common law and civil law systems. They are
intended to give the parties the benefit of their bargain and to put the parties into the economic
position they would have been in had the breach not occurred.
The remedies outlined in the CISG include:
a)
b)
c)
d)
e)
f)
Avoidance (cancellation) of the contract;
The right to remedy or cure;
The setting of an additional time, or extension, for performance;
Price reduction;
Money damages; and
Specific performance.
The right to a remedy depends on whether or not the failure of performance amounted to a
fundamental breach.
Fundamental Breach
The CISG distinguishes between a serious or fundamental breach of the contract and one that is minor
or less than fundamental. Article 25 defines a fundamental breach as a breach of contract committed
by one of the parties 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”.
Assume that the seller has promised to ship 25 tons of corn meal to the buyer, knowing that
the buyer will store this for gradual use over a period of several months. Both parties anticipate
reorders before the meal is completely used. If the seller ships only 20 tons, then it is safe to assume
that this is not a fundamental breach – there is no detriment to the buyer and it did not substantially
deprive the buyer of his benefit under the contract.
Now assume, in a different case, that a seller is under contract to deliver 400 specially
designed gear assemblies to a manufacturer of automotive axles. The seller is only able to ship 200.
The buyer has a good argument that is was reasonably foreseeable that the gear assemblies were
needed for the assembly of 400 axles and that partial shipment would deprive the buyer of its
fundamental benefit under the contract – the ability to resell the axles to an automotive
manufacturer. After all, anyone in the automotive industry would know that a breach of a delivery
contract could cause an expensive breakdown in the global supply chain feeding manufacturing plants.
Thus, it is a fundamental breach if the seller knew, or if it was reasonably foreseeable under the
circumstances, that the shipment of less than the full quantity of goods ordered by the buyer would
destroy the buyer’s fundamental benefit under the contract.
In addition, the seller’s shipment of seriously defective goods that cannot be repaired or
replaced on time, or that have no value to the buyer under the contract, is probably a fundamental
breach. So too would be the seller’s failure or refusal to ship at all.
Richard Schaffer, Filiberto Agusti, Beverley Earle, International Business Law and Its Environment, SouthWestern College/West; 9th. Edition (2014) ISBN-10:1285427042, ISBN-13:978-1285427041
Late shipments are more problematic, because this is so common in international shipping.
Most late shipments are not a fundamental breach, and under the CISG sellers are usually given
additional time to perform even when they are late. However, in German case, the court ruled that a
late delivery was a fundamental breach because it put the buyer in a position where he would have
preferred no delivery at all.
A partial shipment may also amount to a fundamental breach if it presents a serious problem
for the buyer and one that cannot quickly be remedied. If a buyer knows that the time for delivery is
critical, such as where he is awaiting just-in-time inventory deliveries, or that partial shipments are
unacceptable, then perhaps the buyer should state in the contract that these are deemed to be a
fundamental breach.
A buyer may also be in fundamental breach of a contract. This usually results from the buyer’s
refusal or inability to live up to its two primary responsibilities – to take delivery and to pay for the
goods. In international trade finance, many international sales contracts require buyers to produce
advance assurance of payment - in the form of a bank letter of credit. Typically, these are sent to the
seller well in advance of shipment. If the letter of credits is due on or before a certain date and it does
not arrive, most courts would consider that a fundamental breach.
a) Avoidance
When one party fails to perform, the contract does not automatically end. The contract, or certain
provisions of it, must be declared to be at an end, or “avoided” by one of the parties.
Buyer’s right to avoidance
A buyer may declare a contract avoided where the seller’s failure to perform any obligation
amounts to a fundamental breach (Article 49). It cannot be avoided for an insignificant breach. If the
seller requests additional time to cure a fundamental breach, the buyer need not grant it. If the seller
takes delivery of goods and learns they are so seriously defective as to amount to a fundamental
breach, he must declare avoidance within reasonable time after he became aware, or should have
become aware, of the breach. The buyer need not pay for the goods or find a substitute buyer to take
them. After notifying the seller of the avoidance, the buyer may simply return them (the goods) for a
full refund of money paid or institute an action for breach of contract. When the goods can rapidly
deteriorate or decay, such as with certain foods, the buyer may notify the seller and then take steps
to sell them. These rights are especially important to a buyer in an international transaction because
of the hardships associated with having to accept delivery and then reselling or disposing of imported
goods in a foreign (i.e.; the buyer’s) market.
In the case of non-delivery, the buyer may avoid the contract only at the end of the Nachfrist
period – at the end of additional time that the seller was given to perform. The buyer may bring an
action for damages against the seller at that time.
Seller’s right to avoidance
The seller also may avoid a contract. A seller may avoid a contract if a buyer fails to either take
delivery or pay the purchase price or otherwise commits a fundamental breach (Article 64). The effect
of avoidance is that the seller is released from the contract, need not deliver the goods still in the
seller’s possession, and may claim their return if they have already been delivered. The seller also may
bring a legal action for damages.
Richard Schaffer, Filiberto Agusti, Beverley Earle, International Business Law and Its Environment, SouthWestern College/West; 9th. Edition (2014) ISBN-10:1285427042, ISBN-13:978-1285427041
b) The Right to Remedy or Cure
The CISG attempts to encourage the parties to stay in their contract rather than to repudiate it in the
event of a dispute. The parties will be more likely to negotiate and, where commercially possible,
resolve their dispute in a manner that will keep the contract together and give each of them the
benefit of their bargain. It does this by giving the seller (and the buyer) additional time to perform.
Seller’s right to remedy
The CISG allows the seller to remedy, or cure, a nonconforming shipment if it can be done
within the time for performance called for in the contract. So, if the contract calls for the seller to
deliver goods to the buyer by 1st October, but defective goods arrive on 15th September, then the
seller may “cure” by delivering a second shipment of conforming goods by 1st October.
c) Nachfrist Period
Civil law systems traditionally grant an extension of time, beyond the date called for in the contract,
within which the parties may perform. This grace period is often referred to in French Civil Law as mise
en demeue and in German Law as nachfrist, meaning “the period after”.
The CISG adopts this Civil Law rule in Articles 47 – 49. In the event that the seller has failed to
deliver the goods, or has already delivered nonconforming goods, and the time for their shipment or
delivery has passed, the seller may request the buyer to grant a reasonable extension of time to
perform (or to “cure” the problem), at the seller’s own expense, if it can be done without causing the
buyer unreasonable inconvenience or the uncertainty or reimbursement of expenses incurred during
the extension.
If the breach is fundamental and, a “cure” seems impossible, the buyer need not grant the
extension. In the case of the delivery of nonconforming goods, resulting in a breach that is not
fundamental, or in the case of a non-delivery that can be cured by the seller within a reasonable time,
the buyer may not unreasonably refuse the extension. If the seller still does not perform within the
extension of time, the buyer is then released from the contract whether or not the breach was
fundamental.
Granting an extension can work to the advantage of the buyer as well as the seller. Assume
that a buyer receives nonconforming goods or that the delivery is late. The buyer may not know
whether the breach is fundamental - that could always be arguable. But if the buyer does not perform,
then the buyer is released from all contractual obligations and may sue for breach of contract
regardless of whether the seller’s breach was fundamental. The buyer may exercise its right of
“avoidance”.
d) Price Reduction
One of the solution for the buyer in the event that the seller ships defective or nonconforming goods
is that of price reduction (Article 50). A buyer who would like to retain goods, even though they are
perhaps not the quality or specifications called for, may adjust the amount paid by withholding a part
of the purchase price in order to offset the reduced value of the nonconforming goods.
Richard Schaffer, Filiberto Agusti, Beverley Earle, International Business Law and Its Environment, SouthWestern College/West; 9th. Edition (2014) ISBN-10:1285427042, ISBN-13:978-1285427041
If the buyer can repair the goods or bring them up to contract specifications, the buyer may
adjust the price accordingly. If the goods have already been paid for, the buyer may ask that the seller
return a portion of the amount paid. Obviously, the amount of price reduction is far easier to calculate
when the seller delivers less than the quantity promised than if the goods are damaged or are of
inferior quality.
The amount of reduction, then, is within the discretion of the buyer. A buyer who utilized price
reduction may still bring suit for damages. A seller who disputed the buyer’s calculation can only resort
to legal action.
The remedy of price reduction may be used by the buyer whether or not the seller’s breach
has been fundamental. In the case of fundamental breach, price reduction is an alternative to the
buyer’s other remedies. In the case of a minor breach (one not fundamental), price reduction is often
the buyer’s best remedy because the parties can more easily come to an amicable solution. Price
reduction is not available if the seller has already delivered substitute goods or if the buyer has refused
to accept the seller’s attempt to remedy or cure the breach.
e) Money Damages
In breach of contract cases, the usual remedy granted by common law courts is the awarding of money
damages. Damages for breach of contract are addressed in Articles 74 – 77. The CISG provides that a
breaching party, whether buyer or seller, shall be liable for damages in an amount sufficient to make
the injured party whole in the event of a breach. Article 74 states that damages to an injured party
shall consist of a sum “equal to the loss”.
In the event of a breach of contract by either buyer or seller, and the nonbreaching party has
exercised their right to avoidance of the contract, the method of measuring money damages depends
on whether the nonbreaching party has been able to enter into a substitute transaction. For example,
if the seller fails to deliver or delivers nonconforming or worthless goods, the buyer may claim
damages if the substitute goods cost more than the contract price. If the buyer has not purchased
substitute goods, damages are measured by the difference between the contract price and the current
market price or the price of a reasonable substitute. Similarly, if the buyer refuses delivery or fails to
pay and the seller has avoided the contract and resold the goods, the seller may recover damages in
the amount by which the contract price exceeded the price received in the substitute transaction.
Consequential Damages
The CISG also permits recovery of consequential damages. Consequential damages are those special
or indirect damages arising as a “reasonably foreseeable” consequence of the breach. They normally
result from some special circumstances involving one of the parties to the contract, where those
special circumstances were made known, or should have been known, by the other party. For
example, assume that the buyer is purchasing the goods in order to resell them at a higher price under
a separate contract to a third party. That fact is made known to the seller.
If the seller breaches, it may be liable for the buyer’s lost profits as well as other consequential
damages resulting from the buyer’s breach to the third party. Consequential damages are limited
under Article 74 to those that the parties “foresaw or ought to have foreseen at the time of the
conclusion of the contract”. A similar rule for consequential damages has been firmly recognized
under English Common Law since 1854.
Richard Schaffer, Filiberto Agusti, Beverley Earle, International Business Law and Its Environment, SouthWestern College/West; 9th. Edition (2014) ISBN-10:1285427042, ISBN-13:978-1285427041
In the following case, Delchi Carrier SpA v. Rotorex Corp., the buyer incurred many expenses
because of the seller’s delivery of nonconforming goods: repair expenses, storage expenses, assembly
line downtime, sourcing substitute merchandise, and lost profits. The Court decided to award
compensatory damages for those expenses incurred in repairing the nonconforming goods and
obtaining substitute goods, and for lost profits. Lost profits do not include profits that may arise from
anticipated sales that cannot be established by reasonable certainty.
The power to avoid a contract is even more important in a fluctuating market for the goods.
If the buyer chooses to accept the goods and sues for damages for the seller’s breach of contract, the
money damages the buyer could collect would be equal to the difference between the value of the
nonconforming goods and the contract price.
However, if a buyer avoids the contract under Article 49 and refuses to take delivery at all,
and the value of the good falls greatly in the marketplace, the buyer may be able to purchase the
goods for much less than the amount agreed to under the contract. Alternatively, if the value of goods
increases in the marketplace, the buyer may still sue for the difference between the contract price and
the higher market price at which it purchased substitute goods.
f) Specific Performance
Specific performance is used when a court requires a party to the contract to perform, or carry out its
part of the bargain.
Under Article 46, a court may grant specific performance only if all of the following conditions are met:
1) The buyer has not resorted to another remedy, such as avoidance or price reduction;
2) The seller failed to deliver or, in the case of nonconforming goods, the nonconformity was so
serious that it constituted a fundamental breach;
3) The buyer gave timely notice to the seller that the goods were nonconforming; and
4) The buyer made a timely request that the seller provide substitute goods.
Richard Schaffer, Filiberto Agusti, Beverley Earle, International Business Law and Its Environment, SouthWestern College/West; 9th. Edition (2014) ISBN-10:1285427042, ISBN-13:978-1285427041