Rechtswissenschaftliche Fakultät - univie.ac.at...Anticipatory breach –Article 71Article 71 (1) A...

Rechtswissenschaftliche Fakultät

Institut für Zivilrecht

Wintersemester 2017

KU UN-Kaufrecht – Uniform Sales Law

The United Nations Convention on Contracts

for the International Sale of Goods (CISG)

José Angelo Estrella Faria

• Part V: Breach, Damages and Impediment

– Anticipatory breach

• Suspension of performance

• Anticipatory breach

• Instalment contracts

– Damages

• Compensable damages

• Replacement purchases

• Mitigation of losses

– Exemptions

• Notion of impediment

• Consequences of impediment

The United Nations Convention on Contracts for the

International Sale of Goods (CISG)

• Part VI: Effects of Avoidance and Preservation of Goods

– Right to avoid the contract

• Notion of fundamental breach

• Notice requirements

– Effects of avoidance

• Restitution duties

• Impossibility of restitution

– Preservation of goods

• Duty to preserve goods by terminating party

• Duty to preserve goods by party in breach



Anticipatory breach – Article 71

Article 71

(1) A party may suspend the performance of his obligations if, after the

conclusion of the contract, it becomes apparent that the other party will not

perform a substantial part of his obligations as a result of:

(a) a serious deficiency in his ability to perform or in his creditworthiness; or

(b) his conduct in preparing to perform or in performing the contract.

(2) If the seller has already dispatched the goods before the grounds

described in the preceding paragraph become evident, he may prevent the

handing over of the goods to the buyer even though the buyer holds a

document which entitles him to obtain them. The present paragraph relates

only to the rights in the goods as between the buyer and the seller.

(3) A party suspending performance, whether before or after dispatch of the

goods, must immediately give notice of the suspension to the other party and

must continue with performance if the other party provides adequate

assurance of his performance.

Part V: Breach, Damages and Impediment


– The suspending party it not liable for damages or

otherwise bear the consequences of breach the contract if

(but only if) the suspension is authorized by CISG

– The right to suspend exists until the time for performance

is due, but once the date for performance has passed the

aggrieved party must look to other remedies

– Unlike avoidance, the suspension of contractual

obligations does not terminate the contract, but

encourages mutual reassurance that both parties will

perform

– Where a party relies on the other party’s lack of

creditworthiness, it must not only prove it, but show that

the other party’s creditworthiness deteriorated after the

conclusion of the contract



– “Stoppage in transit” depends in practice on the carriage

terms used for delivery of goods and on who arrange for

carriage (e.g. may not possible in FOB, but remain

available in CIF)



– Examples of situations where courts and arbitrators found

party entitled to suspend its obligations:

• seller’s refusal to perform with respect to certain items

• seller’s inability to deliver goods free of restrictions

imposed by seller’s supplier

• seller’s delivery of non-conforming goods under an

instalment contract

• buyer’s failure to pay for the goods

• buyer’s non-payment or delayed payment of the price

under one or more earlier sales contracts

• buyer’s failure to open an effective bank guarantee



Article 72

(1) If prior to the date for performance of the contract it is clear that

one of the parties will commit a fundamental breach of contract, the

other party may declare the contract avoided.

(2) If time allows, the party intending to declare the contract avoided

must give reasonable notice to the other party in order to permit him

to provide adequate assurance of his performance.

(3) The requirements of the preceding paragraph do not apply if the

other party has declared that he will not perform his obligations



– A party’s declaration that it will not perform suffices

– Examples of situations where courts and arbitrators found party

entitled to avoid the contract:

• seller failed to reduce the price and to commit to deliver

fashion goods on time

• seller deliberately terminated delivery of the goods

• seller refused to give effect to a requirement that a whole ship

be chartered exclusively for the transport of the goods

• seller refused to commit to a date for delivery and advised the

buyer to purchase substitute goods

• seller declared that it was impossible to find the goods and

the possibility of finding replacement goods was low

• seller provided flawed sketches for the manufacturing of the

goods and no adequate assurance of improving them in time


Anticipatory breach – Instalment contracts – Article 71

Article 73

(1) In the case of a contract for delivery of goods by instalments, if the failure

of one party to perform any of his obligations in respect of any instalment

constitutes a fundamental breach of contract with respect to that instalment,

the other party may declare the contract avoided with respect to that

instalment.

(2) If one party’s failure to perform any of his obligations in respect of any

instalment gives the other party good grounds to conclude that a fundamental

breach of contract will occur with respect to future instalments, he may

declare the contract avoided for the future, provided that he does so within a

reasonable time.

(3) A buyer who declares the contract avoided in respect of any delivery may,

at the same time, declare it avoided in respect of deliveries already made or

of future deliveries if, by reason of their interdependence, those deliveries

could not be used for the purpose contemplated by the parties at the time of

the conclusion of the contract.



– An instalment contract is one that provides for delivery of goods

in separate lots, but goods need not be fungible, so that an

instalment contract may cover delivery of different kinds of

goods in each instalment

– Separate contracts between parties that have an ongoing

relationship may constitute an instalment contract

– Examples of situations where courts and arbitrators found party

entitled to avoid contract in respect of an instalment:

• seller failed to deliver the promised goods

• seller conditioned delivery of an instalment on satisfaction of

new demands

• goods of that specific instalment were found to be

fundamentally defective

• buyer failed to open a letter of credit for a specific instalment



– A buyer that accepts defective instalments does not lose the

right to avoid the contract as a whole if the seller again delivers

defective goods, constituting a fundamental breach

– Examples of situations where party was entitled to avoid contract

in respect of future instalments:

• seller made no delivery despite accepting payment

• seller failed to deliver first instalment

• seller declared that he would not make further deliveries

• seller refused to make further delivery of goods because of a

dramatic increase in the market price

• seller’s late delivery of three instalments caused disruption of

buyer’s production

• seller delivered poor quality goods

• buyer had good grounds to believe that the seller would be

unable to deliver peppers that satisfied food safety

regulations.


Damages – General principle – Article 74

Article 74

Damages for breach of contract by one party consist of a sum equal

to the loss, including loss of profit, suffered by the other party as a

consequence of the breach. Such damages may not exceed the loss

which the party in breach foresaw or ought to have foreseen at the

time of the conclusion of the contract, in the light of the facts and

matters of which he then knew or ought to have known, as a possible

consequence of the breach of contract.



– Principle of full compensation for actual loss and lost

profit, but limited by a foreseeability test

– Aggrieved party is entitled to recover damages without

regard to the “fault” of the breaching party, but domestic

procedural law may apply to the assessment of evidence

of loss.

– Applicable domestic law also determines whether a party

may assert a right to set off

– CISG does not cover personal injury caused by defective

goods, but covers claims by a buyer against its seller for

indemnification against claims by a sub-buyer for personal

injury



– First category of recoverable loss relates to promisee’s

primary or direct loss (non-performance loss), which may

include

• the difference between the objective value of defective

goods and the value they would have had, had they

been in conformity with contract

• if the defect is curable, loss will be calculated

according to the necessary expenses

• rental cost of a replacement object to fil the gap in case

of late delivery

• currency devaluation following late payment



– Expenses incurred by the aggrieved party (incidental loss) are

also recoverable, such as reasonable expenditures for the

following purposes

• shipping and customs costs incurred when returning the

goods

• expediting shipment of substitute goods under an existing

contract with a third party

• installing substitute goods

• sales and marketing costs

• banking fees for retransfer of payments

• wasted payment of value added tax

• hiring a third party to process goods

• delivering and taking back the non-conforming goods to and

from a sub-buyer or reimbursing sub-buyers on account of

non-conforming goods

• sub-chartering a ship that had been chartered to transport

goods under a contract that the seller properly avoided



– Aggrieved party is also entitled to damages for every gain that

was forfeited by the party’s breach (loss of profit)

• profit that the buyer could have made in a resale of the goods

• loss due to business interruption

• the difference between its unit costs for producing products

using the defective equipment delivered by the seller, and the

unit costs the buyer could have otherwise reasonably

expected

– The common profit margins of the buyer provide a basis for

determining the buyer’s claim for damages

– However claim for damages does not extend to recovering profit

made by the party in breach (disgorgement of profits), where the

claimant did not sustain any damage



– Additional loss beyond that those caused by non-performance as

such (consequential loss) not always recoverable for failure to

meet foreseeability test

• rental of machinery by buyer’s sub-buyer

• attorney’s fees in dispute with freight forwarder

– However, where consequential loss was foreseeable, it would be

recoverable

• seller of merchantable goods who fails to deliver to a

commercial trader should foresee the buyer’s loss resulting

from foregone profit in re-sale transaction

• a buyer could foresee that its failure to establish a letter of

credit as required by the sales contract would leave the seller

with a chartered vessel, intended to transport the goods, that

it could not use

• seller whose non-performance leads to buyer’s breaching

contracts with customers could foresee damage caused by

loss of reputation and loss of clientele


Damages – Replacement purchases – Articles 75 and 76

Article 75

If the contract is avoided and if, in a reasonable manner and within a reasonable time

after avoidance, the buyer has bought goods in replacement or the seller has resold the

goods, the party claiming damages may recover the difference between the contract

price and the price in the substitute transaction as well as any further damages

recoverable under article 74.

Article 76

(1) If the contract is avoided and there is a current price for the goods, the party

claiming damages may, if he has not made a purchase or resale under article 75,

recover the difference between the price fixed by the contract and the current price at

the time of avoidance as well as any further damages recoverable under article 74. If,

however, the party claiming damages has avoided the contract after taking over the

goods, the current price at the time of such taking over shall be applied instead of the

current price at the time of avoidance.

(2) For the purposes of the preceding paragraph, the current price is the price

prevailing at the place where delivery of the goods should have been made or, if there

is no current price at that place, the price at such other place as serves as a reasonable

substitute, making due allowance for differences in the cost of transporting the goods.


Damages – Replacement purchases – Articles 75 and 76

– Two alternative damage formulas applicable if the contract is avoided

(although both articles apply where the party concludes a substitute

transaction for less than the contract quantity):

• difference between the contract price and the price in a substitute

transaction (Art. 75)

• difference between the contract price and a current (market) price

when the aggrieved party does not enter into a substitute transaction

(Art. 76)

– Implied reasonableness requirement for the substitute transaction:

• where an aggrieved seller resold the goods for approximately one-

fourth of the contract price the resale was not a reasonable

substitute and the court calculated damages under Art. 76 rather than

Art. 75

• where the cover price paid by the aggrieved buyer was almost double

the original purchase price, the a cover purchase did not constitute a

reasonable substitute transaction

• If there is a significant difference between the contract price and the

price in the substitute transaction the damages recoverable under

Art. 75 may be reduced pursuant Art. 77 because of the aggrieved

party’s failure to mitigate damages


Damages – Mitigation of loss – Articles 77

Article 77

A party who relies on a breach of contract must take such measures

as are reasonable in the circumstances to mitigate the loss, including

loss of profit, resulting from the breach. If he fails to take such

measures, the party in breach may claim a reduction in the damages

in the amount by which the loss should have been mitigated



– Examples of loss mitigation measures taken by aggrieved buyers and

held by courts and arbitrators to be reasonable:

• concluding cover sales within a reasonable time and at reasonable

prices to replace goods that were not delivered

• paying another supplier to expedite delivery of already-ordered

compressors that could be substituted for defective compressors

• contracting with a third-party supplier because of the inability of the

breaching party to deliver goods in time

• contracting with a third party to treat leather goods when the seller

refused to return tanning machines that it had sold to the buyer and

then taken back for adjustments

• offering a discount on the goods delivered late by supplier

• selling perishable goods even though not required to do so by Arts.

85 to 88

• accepting a reduction in the purchase price instead of sending the

goods back

• requesting permission from the buyer to re-sell goods marked with

the buyer’s trademark, which permission was not given

• disassembling a unique machine and selling the parts where the

machine could not be used or readily resold



– Examples of failure by aggrieved buyers to reasonably mitigate loss:

• buyer failed to conclude reasonable cover purchases

• buyer failed to inspect goods properly and to give documents setting

out its claims of non-conformity

• buyer failed to stop the use of vine wax after discovering the wax to

be defective

• buyer failed to look for replacement goods in markets other than the

local region

• buyer failed to cancel its contract of sale with sub-buyer or to

conclude a substitute purchase

• buyer failed to provide evidence of the price it received on its sale of

non-conforming goods to a sub-buyer

• buyer failed to provide evidence as to whether the buyer could buy

the same product from the wholesaler newly-designated by the seller

• buyer failed to stop the processing of swimming suits for three days

after becoming aware of a faulty manufacturing process

• buyer chartered a vessel despite repeated notices that shipment

would not take place on time


Exemption – Article 79

Article 79

(1) A party is not liable for a failure to perform any of his obligations if he proves that the

failure was due to an impediment beyond his control and that he could not reasonably

be expected to have taken the impediment into account at the time of the conclusion of

the contract or to have avoided or overcome it, or its consequences.

(2) If the party’s failure is due to the failure by a third person whom he has engaged to

perform the whole or a part of the contract, that party is exempt from liability only if: (a)

he is exempt under the preceding paragraph; and (b) the person whom he has so

engaged would be so exempt if the provisions of that paragraph were applied to him.

(3) The exemption provided by this article has effect for the period during which the

impediment exists.

(4) The party who fails to perform must give notice to the other party of the impediment

and its effect on his ability to perform. If the notice is not received by the other party

within a reasonable time after the party who fails to perform knew or ought to have

known of the impediment, he is liable for damages resulting from such non-receipt.

(5) Nothing in this article prevents either party from exercising any right other than to

claim damages under this Convention.


Exemption – Article 79

– Parties not liable for failure to perform due to an impediment

beyond the party’s control provided that impediment must not

have been reasonably foreseeable at the time of the conclusion

of the contract or to have avoided or overcome it or its

consequences

– Examples of impediments admitted by courts and arbitrators

typically include

• Natural phenomena and catastrophes (epidemics, acts of war)

• State intervention (refusal by state officials to permit importation of the

goods into the buyer’s country exempts the buyer from liability for

damages for failure to take delivery)

• Acts of third parties and labour disputes (failure of a carrier to meet a

guarantee that the goods would be delivered on time may exempt seller

from damages for late delivery where the seller had completed its

performance by duly arranging for carriage and turning the goods over to

the carrier);

• Economic impossibility (extreme unforeseeable price fluctuation)


Avoidance – Notion of fundamental breach – Articles 25

Article 25

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.

Part VI: Effects of Avoidance and Preservation of Goods


– Central notion of the CISG – and a condition for the exercise of

various remedies, in particular avoidance of contract

– Breach must be of a certain nature and weight and nullify or

essentially depreciate the aggrieved party’s justified contract

expectations. What expectations are justified depends on the

specific contract and the risk allocation envisaged by the

contract provisions, on customary usages, and on the provisions

of the Convention

– Applies to breach of any obligation under the contract – whether

specifically contracted for between the parties or following from

CISG – if requirements for a fundamental breach are met

– Even the breach of a collateral duty can give rise to a

fundamental breach (e.g. a manufacturer who promises to

reserve goods with a particular trademark exclusively for the

buyer was found to be in a fundamental breach by displaying the

trademarked goods at a fair for sale despite a warning by the

buyer)



– Examples of fundamental breach recognized by courts and

arbitrators include

• complete failure to perform a basic contractual obligation

(final non-delivery as well as final non-payment) without

legitimate reason

• final and unjustified announcement of the intention not to

fulfil one’s own contractual obligations has been found to

constitute a fundamental breach

• where non-conforming goods cannot be used or resold with

reasonable effort

• when the goods had major defects and conforming goods

were needed for manufacturing other products

• the buyer’s insolvency and placement under administration

• buyer’s refusal to open a letter of credit as required by the

contract



– Conversely, courts and arbitrators normally would not regard the

following situations as fundamental breach

• late performance (whether late delivery of the goods or

necessary documents or late payment of the price), unless

the party in breach knew or ought to have known that timely

performance was of essence

• non-conformity concerning quality as long as the buyer can

use the goods or resell them (even at a discount) without

unreasonable inconvenience


Effects of avoidance – Articles 81 and 85

Article 81

(1) Avoidance of the contract releases both parties from their obligations under it,

subject to any damages which may be due. Avoidance does not affect any provision of

the contract for the settlement of disputes or any other provision of the contract

governing the rights and obligations of the parties consequent upon the avoidance of

the contract.

(2) A party who has performed the contract either wholly or in part may claim restitution

from the other party of whatever the first party has supplied or paid under the contract.

If both parties are bound to make restitution, they must do so concurrently.

Article 82

(1) The buyer loses the right to declare the contract avoided or to require the seller to

deliver substitute goods if it is impossible for him to make restitution of the goods

substantially in the condition in which he received them.

(2) The preceding paragraph does not apply:

(a) if the impossibility of making restitution of the goods or of making restitution of the

goods substantially in the condition in which the buyer received them is not due to his

act or omission; (b) if the goods or part of the goods have perished or deteriorated as a

result of the examination provided for in article 38; or (c) if the goods or part of the

goods have been sold in the normal course of business or have been consumed or

transformed by the buyer in the course of normal use before he discovered or ought to

have discovered the lack of conformity.


Effects of avoidance – Articles 81 and 82

– A “framework for reversal of the contract”: an avoided contract is

not entirely annulled by the avoidance, but rather it is changed

into a winding-up relationship

– Avoidance releases the parties from their executory obligations

under the contract

• Buyers are released from their obligation to pay the price

• Sellers are releases from the obligation to deliver the goods.

– CISG does not expressly establish the place for restitution, but

the CISG provision dealing with the place for seller’s delivery

(Art. 31) can be applied by analogy, including as regards transfer

of risk of loss where an avoiding buyer returns goods via third

party carrier (i.e. risk of loss passes to the seller when buyer

handed the goods over to the carrier for return shipment,

because under the contract risk had passed to buyer in the

original delivery when the manufacturer handed the goods over

to the carrier)


Preservation of goods – Articles 85 and 86

Article 85

If the buyer is in delay in taking delivery of the goods or, where payment of the price

and delivery of the goods are to be made concurrently, if he fails to pay the price, and

the seller is either in possession of the goods or otherwise able to control their

disposition, the seller must take such steps as are reasonable in the circumstances to

preserve them. He is entitled to retain them until he has been reimbursed his

reasonable expenses by the buyer.

Article 86

(1) If the buyer has received the goods and intends to exercise any right under the

contract or this Convention to reject them, he must take such steps to preserve them as

are reasonable in the circumstances. He is entitled to retain them until he has been

reimbursed his reasonable expenses by the seller.

[…]

Article 88

(1) A party who is bound to preserve the goods in accordance with article 85 or 86 may

sell them by any appropriate means if there has been an unreasonable delay by the

other party in taking possession of the goods or in taking them back or in paying the

price or the cost of preservation, provided that reasonable notice of the intention to sell

as been given to the other party.

[…]


Preservation of goods – Articles 85 and 86

– Duty to preserve goods reflects general principles of good

faith and mitigation of damages

– Party responsible for preserving goods always entitled to

compensation for reasonable expenditure incurred, with

the right to retain the goods as guarantee of payment

– Party responsible for preserving goods may sell them in

case of unreasonable delay by the other party in collecting

them and paying the cost of preservation measures

– Same party is obliged to sell goods, if perishable (Art.

88(2))


Further information on the CISG

• United Nations Convention on Contracts for the International

Sale of Goods (CISG), in force since 01/01/1988 (http://www.uncitral.org/pdf/english/texts/sales/cisg/V1056997-CISG-e-book.pdf)

• Current stage of ratification of the CISG (85 States)

(http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html)

• International case law on the CISG (http://www.uncitral.org/uncitral/en/case_law/abstracts.html)



Rechtswissenschaftliche Fakultät - univie.ac.at...Anticipatory breach –Article 71Article 71 (1) A...

Documents

Transcript of Rechtswissenschaftliche Fakultät - univie.ac.at...Anticipatory breach –Article 71Article 71 (1) A...