LUMSA – International Commercial Law
November 5, 2015
Prof. Avv. Roberto Pirozzi
Email: robertopirozzi13@hotmail.com
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
A breach of contract committed by one of the parties 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.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
Article 25 attempts to define «fundamental breach». This
concept is fundamental to the CISG’s remedy system.
It can lead to remedies, such as (i) substitution of nonconforming goods by the seller (Art.46(2)), (ii)avoidance of the
contract on the ground of non-performance by the other
party(Art.49(1)(a), 64(1)(a) and 73), (iii)avoidance of the
contract for partial delivery (Art.51)and (iv) transfer of risk
(Art.70).
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
The core elements constituting a fundamental breach must be
analyzed according to the terms of the convention, since
Art.7(1) provides an interpretative rule, which aims for the
protection of its uniformity of application in all jurisdictions
where it is applied. Hence, the terms of the convention itself,
the official commentary and the application of the article in
different jurisdictions may well assist to understand the
concept.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
Definition of Breach
Although there is no definition of the breach in the CISG, it is
understood that the breach is considered as any failure in the
performance of any obligation of any party, whether that
failure is excused or not. This unitary approach entails all
violations of any nature.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Definition of Fundamental
While determining whether the breach is a fundamental one,
the article provides an objective test to be done by the judge
or the arbitrator. The core element of a fundamental
breach is detriment. Although it can be argued that detriment
is a wider concept than damage, thus may include noneconomical loss, in international commercial transactions
there is almost always synallagmatic contract, in which one
party promises to provide good or commodity and the other
promises to pay the consideration.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Definition of Fundamental
Therefore, in practice detriment refers to economic loss of a
party. Given that a detriment is established, it must be as
substantial to deprive the other party of what she is “entitled
to expect‟. Thus, the party’s special interest in receiving
performance is a key element for establishing whether a
breach is substantial. This element belongs to the subjective
sphere of contractual expectation.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Definition of Fundamental
As far as the cases mentioned below concerns, one of the
most controversial points of the concept is identification of
the contractual expectation. Once the contractual expectation
is determined, it is argued that there is a fundamental breach
when the buyer’s intended use becomes impossible or when
the party her interest in receiving the performance.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Definition of Fundamental
There are two scenarios in which the contractual expectation
can be determined. First, the parties may have defined for
themselves what is and what is not fundamental in the
contract with express terms. Actually, the reference to the
expectations of the other party suggests this possibility.
In this case the court or the arbitral tribunal will first look at
the express terms of the contract.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Definition of Fundamental
If the obligation violated is one of the fundamental elements
of the contract, the breach will attain the level of
‘fundamental breach’. However, at this point the party proving
fundamental breach may not use the right to avoid the
contract. Good faith rule in Art.7(2) may supersede avoidance
in spite of such an express clause in the contract, depending
on the approach of the arbitral tribunal or the court to the
nature of good faith rule in the CISG.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Definition of Fundamental
In the case that good faith is considered as a positive duty,
which entails the prevention of abuse of rights, avoidance of
the contract may be prevented, even though she refers to the
breach of a fundamental obligation expressed in the contact.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Definition of Fundamental
Second, parties may have never expressly stated what is
fundamental and what is not in their contracts. In this case the
nature and the extent of default will determine whether it is a
fundamental breach. Although the tendency of courts has
been to refuse to allow avoidance unless the goods are so
defective that the buyer cannot use them for his original
purpose, the terms “entitled to expect” can be used in a
positive way to identify expectations of a party through
economic analysis and the nature of the contract.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Definition of Fundamental
In addition, it is argued that this term may lead to take
negotiations, trade usages or other facts subsequent to the
conclusion of the contract into account. Before analyzing the
relevant cases, it must be recalled that the article provides the
breaching party with a defense against the alleged breach. The
defense based on lack of foreseeability give that party to
escape from avoidance of the contract. In order to escape
from avoidance, the party must prove that she did not foresee
and the any business people of the same trade sector would
have foreseen the event. LOOK AT THE DOCUENTS
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
«Fundamental breach» in the Convention, to begin with,
calls for a warning: it has nothing to do with the English
doctrine of «fundamental breach», which certain common
law jurisdictions used to apply in a different context, namely
in order to determine whether disclaimer clauses survived a
particular breach of contract.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
The breach of any obligation under the contract suffices
irrespective whether the duty had been specifically contracted
for or followed from the provisions of the Convention.
Even the breach of any collateral duty can amount to a
fundamental breach.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
For example, a manufacturer’s duty to deliver goods under a
certain trademark exclusively to the buyer has been held to have
been fundamentally violated when the manufacturer displayed
those goods at a fair for sale and kept them there despite a
warning by the buyer. See CLOUT case No. 2 [GERMANY
Oberlandesgericht [Appellate Court] Frankfurt 17 September
1991, at <http://cisgw3.law.pace.edu/cases/910917g1.html>];
CLOUT=Case Law on UNCITRAL Texts
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
In order to rank as fundamental a breach must be of a certain
nature and weight. The aggrieved party must have suffered such
detriment as to substantially deprive it of what it was entitled to
expect under the contract.
The breach must therefore nullify or essentially depreciate the
aggrieved party’s justified contract expectations.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
What expectations are justified depends on the specific contract
and the risk allocation envisaged by the contract provisions, on
customary usages and on the additional provisions of the
Convention.
For example, buyers cannot normally expect that delivered
goods comply with regulations and official standards in the
buyer’s country.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
Therefore, e.g., the delivery of cadmium-contaminated mussels
has not been regarded as a fundamental breach since the buyer
could not have expected that the seller met the contaminationstandards in the buyer’s country and since the consumption of
the mussels in small portions as such did not endanger a
consumer’s health. See CLOUT case No. 123 [GERMANY
Bundesgerichtshof [Supreme Court] 8 March 1995, available
online at <http://cisgw3.law.pace.edu/cases/950308g3.html>].
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
Article 25 requires further that the violating party must have
foreseen the result of the breach of the contract. However, the
provision does not mention at which time the consequences of
the breach must have been foreseeable. One court has decided
that the time of conclusion of contract is the relevant time. See
CLOUT case No. 275 [GERMANY Oberlandesgericht [Appellate
Court] Düsseldorf 24 April 1997, available online at
<http://cisgw3.law.pace.edu/cases/970424g1.html>]
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
Courts have decided whether certain typical fact patterns
constitute fundamental breaches. It has been determined on
various occasions that the failure to perform a contractual duty
constitutes a fundamental breach of contract unless the party
has a justifying reason to withhold its performance. This has
been decided in the case of final non-delivery as well as in the
case of final non-payment. See CLOUT case No. 90 [ITALY Pretura
circondariale [Court of First Instance] Parma 24 November 1989,
online at <http://cisgw3.law.pace.edu/cases/891124i3.html>]
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
However, if only a minor part of the contract is finally not
performed, e.g., one delivery out of several deliveries is not
supplied, this remains a simple, non-fundamental breach of
contract. See CLOUT case No. 275 GERMANY Oberlandesgericht
[Appellate Court] Düsseldorf 24 April 1997, available online at
<http://cisgw3.law.pace.edu/cases/970424g1.html>]
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
On the other hand a final and unjustified announcement of the
intention not to fulfil one’s own contractual obligations has been
found to constitute a fundamental breach. See CLOUT case No.
136 [GERMANY Oberlandesgericht [Appellate Court] Celle 24
May 1995, at http://cisgw3.law.pace.edu/cases/950524g1.html].
In that case the seller had given notice that he had sold the
specified good to another buyer.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
Likewise, the insolvency and placement of the buyer under
administration has been held to constitute a fundamental breach
under article 64 since it deprives the unpaid seller of what it was
entitled to expect under the contract, namely payment of the full
price. See CLOUT case No. 308 [AUSTRALIA Roder v. Rosedown
[Federal Court] 28 April 1995, available online at
<http://cisgw3.law.pace.edu/cases/950428a2.html>]
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
It has also been determined that non-delivery of the first
instalment in an instalment sale gives the buyer reason to
believe that further instalments will not be delivered and
therefore a fundamental breach of contract was to be expected
(art. 73(2)). See CLOUT case No. 214 [SWITZERLAND
Handelsgericht [Commercial Court] Zürich 5 February 1997,
available at <http://cisgw3.law.pace.edu/cases/970205s1.html>].
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
As a rule late performance – be it late delivery of the goods or
late payment of the price – does not constitute in itself
fundamental breach of contract. Only when the time for
performance is of essential importance either if it is so
contracted or if it is due to evident circumstances (e.g., seasonal
goods) then delay as such can amount to a fundamental breach.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
But even if there is no fundamental breach, the Convention
allows the aggrieved party to fix an additional period of time for
performance.
If the party in breach fails to perform during that period, the
aggrieved party thereupon may declare the contract avoided
(arts. 49(1)(b) and 64(1)(b)). See, e.g. CLOUT case No. 301 [ICC
Court of Arbitration case No. 7585 of 1992, available online at
<http://cisgw3.law.pace.edu/cases/927585i1.html>]
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG
Therefore in case of a delay in the performance, but only in that
case, the lapse of that additional period turns a nonfundamental breach into a fundamental one.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – defective goods
If defective goods are delivered, the buyer can terminate the
contract when the non-conformity of the goods is to be regarded
as a fundamental breach (art. 49 par. 1 (a)).
It therefore becomes essential to know under what conditions
delivery of non-conforming goods constitutes a fundamental
breach of contract.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – defective goods
Court decisions on this point have found that any nonconformity concerning quality remains a mere, non-fundamental
breach of contract as long as the buyer – without unreasonable
inconvenience – can use the goods or resell them even with a
rebate (i.e. partial refund). See CLOUT case No. 171 [GERMANY
Bundesgerichtshof [Supreme Court] 3 April 1996, available
online at <http://cisgw3.law.pace.edu/cases/960403g1.html>]
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – defective goods
For example, the delivery of frozen meat which was too fat and
too wet and consequently worth 25.5% less than meat of the
contracted quality according to an expert opinion was not
regarded as a fundamental breach of contract since the buyer
had the opportunity to resell the meat at a lower price or to
otherwise process it. See CLOUT case No. 248 [SWITZERLAND
Bundesgericht [Supreme Court] 28 October 1998, available
online at <http://cisgw3.law.pace.edu/cases/981028s1.html>
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – defective goods
On the contrary, if the non-conforming goods cannot be used or
resold with reasonable effort this constitutes a fundamental
breach and entitles the buyer to declare the contract avoided.
This has been held to be the case as well where the goods
suffered from a serious and irreparable defect although they
were still useable to some extent (e.g. flowers which were
supposed to flourish the whole summer but did so only for part
of it).
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – defective goods
Courts have considered a breach to be fundamental without
reference to possible alternative uses or resale by the buyer
when the goods had major defects and the buyer needed the
goods for manufacture.
The same conclusion had been reached where the nonconformity of the goods resulted from added substances the
addition of which was illegal both in the country of the seller and
the buyer.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – defective goods
Special problems arise when the goods are defective but
repairable. Some courts have held that easy reparability excludes
any fundamentality of the breach.
Courts are reluctant to consider a breach to be fundamental
when the seller offers and effects speedy repair without any
inconvenience to the buyer.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – defective goods
The violation of other contractual obligations can also amount to
a fundamental breach. It is, however, necessary that the breach
deprives the aggrieved party of the main benefit of the contract
and that this result could have been foreseen by the other party.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – defective goods
Thus, a court stated that there is no fundamental breach in case
of delivery of the wrong certificates pertaining to the goods if
either the goods were nevertheless merchantable or if the buyer
itself could – at seller’s expense – easily get the correct
certificates.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – defective goods
A special case is the delayed acceptance of the goods. A delay in
accepting the goods will generally not constitute a fundamental
breach, particularly when there is only a few days of delay
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – defective goods
The cumulated violation of several contractual obligations makes
a fundamental breach more probable but does not automatically
constitute a fundamental breach. Whether a fundamental
breach exists depends on the circumstances of the case as well
as on whether the breach resulted in the aggrieved party losing
the main benefit of, and the interest in, the contract.
LUMSA – International Commercial Law
BREACH OF CONTRACT
Art. 25 CISG – burden of proof
Article 25 regulates also to some extent the burden of proof. As
far as foreseeability is concerned the burden lies on the party in
breach. This party has to prove that it did not foresee the
detrimental effect of its breach and that a reasonable person of
the same kind in the same circumstances would not have
foreseen such an effect. The aggrieved party on the other hand
has to prove that the breach deprived it substantially of what it
was entitled to expect under the contract.