Doctrine of Fundamental Breach: The CISG and The UCC

By Sonakshi Verma, National Law University Jodhpur

Editor’s Note: The doctrine of fundamental breach is chiefly predicated on the facts or assumption that a party to a contract or contract of sale has committed a misnomer in the contract that goes to the root of the contract, thereby knocking the bottom off its commercial relevance. The prerequisites which must be fulfilled before a buyer may avoid a contract under the CISG are very different from those which must be fulfilled to reject under the UCC. Moreover, case law interpreting the doctrine has only added to the ambiguity, thus making it nearly impossible for any interpreter to confidently answer the seemingly basic question of whether a contract for the international sale of goods has been fundamentally breached. It seems as though the goal of contract preservation has outweighed the desire for any bright line rules and maybe rightly so when considering the international context in which these cases are decided.

Introduction

Fundamental breach of a contract

The right to rescind a contract for breach depends on the gravity of the breach.[i] A party is entitled to rescind a contract where the breach is material and wilful, or vital. Similarly, a party to a contract is entitled to rescind where the other party has made a substantial breach, or a breach so substantial as to defeat the object of the contract, or a substantial and fundamental breach, so as to defeat the purpose or object of the contract.[ii] It is sometimes known as a Repudiatory Breach and is a breach so fundamental that it permits the distressed party to terminate performance of the contract, in addition to entitling that party to sue for damages.

The law of fundamental breach was historically treated as an extension of the doctrine of deviation.[iii] The development of this doctrine can be traced down to the first half of the 19th century, when Tindal C.J. stated in Davis v. Garett[iv] that deviation made by the carrier from the agreed voyage route brings the latter outside of contract and therefore outside of exceptions or limitation clauses provided by such a contract. This harsh attitude to deviation cases originated from the earlier marine insurance practice when cargo insurance policy was lost in case of deviation. Thereby strict obligations imposed to the carrier were designed to afford protection to the cargo owner.

The doctrine of fundamental breach[v] is chiefly predicated on the facts or assumption that a party to a contract or contract of sale has committed a misnomer in the contract that goes to the root of the contract, thereby knocking the bottom off its commercial relevance. There is hardly any better legal doctrine which anchors activities surrounding international sale of goods like the doctrine of fundamental breach of contract. It is an important legal instrument that rears its head up from time to time due to induced or sometimes supervening commercial non-performance.

The CISG

The origin of the 1980 Vienna Convention on the International Sale of Goods, of April 11, 1980 (hereinafter, the CISG) must be sought in the exponential growth of international trade in the twentieth century[vi], which showed that the various national legal systems needed to be adapted to enable them to resolve the particular problems arisen from the volume of international transactions, including the need to harmonize the various remedies of the parties in case of breach.

According to Article 1 through 6 of the CISG, the CISG only applies to contracts of sale of goods concluded between parties (typically, contracts of sale of goods among traders with the aim to resell) having their places of business in different States when those States are contracting States or when the rules of Private International Law lead to the application of the law of a Contracting State, regardless of the nationality of the parties or the civil or commercial character of the parties or of the contract.

In this context, the CISG, set up as a uniform instrument and inspired by the US Unifom Commercial Code, regulates the international sale of goods, dealing exclusively with: (i) the formation of the contract; and (ii) the rights and obligations of buyer and seller under the contract. As a result, unless expressly provided otherwise in the CISG itself, it is not concerned with the validity of contracts nor their clauses, nor with the ownership of the goods.

Fundamental breach under the CISG

It has to be taken into account that the CISG synthesizes different traditions of Common Law and Civil Law. This predominance has become apparent, among others, in a favourable orientation toward maintaining the contract and the resulting restrictive interpretation of “breach” to the “fundamental breach”.[vii]

According to the Article 25 of the CISG, a breach 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”.

A.    Substantial deprivation

In order for a breach to be fundamental under the CISG, it must cause a ‘detriment’ to the aggrieved party. When considering such a detriment, it is important to bear in mind that the preservation of the contract and ensuring that both parties receive what was promised to them under the contract are important incentives under the CISG. The Secretariat’s Commentary on the 1978 Draft states that ‘the determination whether the injury is substantial must be made in light of the circumstances of each case, for example, 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.’[viii] This is a criterion which looks to the harm suffered by the injured party. However, when compensation for damages can serve as a remedy for non-performance, this should be an indication of the fact that there is no detriment within the meaning of the CISG. What matters most in commercial relations are economic results and not the formal fulfilment of obligations.[ix]

To constitute a fundamental breach, the detriment must be substantial. For instance, the Oberlandesgericht (Appellate Court) in Frankfurt held that:

‘[a] breach of contract is fundamental when the purpose of the contract is endangered so seriously that, for the concerned party to the contract, the interest in the fulfilment of the contract ceases to exist as a consequence of the breach of the contract (and the party in breach of the contract was aware of this or should have been).’

And, according to the Zivilgericht (Civil Court) in Basel, what is decisive is the importance of the interest which is affected by the breached term of the contract.[x] In other words, there will be a fundamental breach of contract by the defaulting party if a party fails to receive the essence of what he was entitled to expect according to the contract. The focus is on the substantial deprivation of the contractual expectation of the aggrieved party.

B.     The contractual expectation

The concept of substantial deprivation is thus fused together with the concept of contractual expectation, since a detriment can be characterised as a fundamental breach only if the injured party has no further interest in accepting the performance of the contract. The expectations of the aggrieved party are qualified by such phrases as ‘what he is entitled to expect under the contract’ in Article 25 CISG, or ‘what it was entitled to expect under the contract’ under Article 7.3.1(2)(a) UNIDROIT Principles or Article 8:103(b) PECL. It must be stressed that the expectations of the aggrieved party have to be discernible from the contract. This element is quite evident in itself and is also contained in the element of foreseeability.[xi]

C.    Foreseeability

The criterion of foreseeability as set out in Article 25 CISG is meant to prevent parties from avoiding the contract because of a fundamental breach when the substantial detriment has occurred unforeseeably. Since it is unlikely that the party in breach will admit to foreseeing the detriment in question, the ‘reasonable person standard’ was introduced.[xii] In order to prevent the other party from avoiding the contract, the party in breach has to show that it did not foresee the negative — result, nor would a reasonable person of the same kind and under the same conditions have foreseen it.

The question arises as to the point in time at which the detrimental result should have been foreseeable; Article 25 CISG does not state whether foreseeability should be decided by the time the contract was formed, or when the breach took place. Some scholars argue that since the contractual terms establish the rights and obligations of the buyer and seller, the decisive time for when foreseeability is determined should be when the contract is entered into. If not, one party could provide the other with further information, thereby changing what was deemed to be a substantial interest and could now give rise to a fundamental breach.[xiii] Others disagree with this, arguing that if the notion of good faith is taken into account, consideration must be given to any information received by the party in breach after the contract was formed.[xiv]

In any event, where a contract expressly states that the performance of an obligation is of the essence, there will be little room for proving that the breach caused an unforeseeable detriment. Conversely, where a contract does not clearly state the importance of an obligation, the conduct of the party in breach may be interpreted with more tolerance.[xv]

Fundamental breach vs perfect tender

Under the CISG, the options available to a buyer, upon the tender of goods, do not include such terms as rejection, acceptance or revocation like the UCC. Under the CISG, if a buyer wishes to reject tendered goods, she must avoid the contract.[xvi] To accept the goods, he simply does not avoid the contract. With that being said, where a seller makes a non-conforming tender of goods, avoiding the contract under the CISG performs a function very similar to rejecting or revoking acceptance under the UCC, and failure to avoid has consequences resembling those for accepting‘ under the UCC.[xvii]

Although these two doctrines are undoubtedly similar, the prerequisites which enable a buyer to avoid under the CISG or reject under the UCC are not the same. Under the CISG, in order to avoid a contract for the international sale of goods, a buyer may show, inter alia, that the seller fundamentally breached the contract.[xviii] Under the UCC, Article 2 allows a buyer to reject the goods if what is tendered is not perfect the so called perfect tender rule[xix]. While the overall effect of these two approaches may be fundamentally similar, the route in which a buyer must take to get to this destination is far from the same.

The CISG approach

Under the CISG, a buyer is under a much heavier burden to avoid the contract than he would be under the UCC. Article 49 states that the buyer may declare the contract avoided if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of the contract . . . .[xx] to avoid the contract, he must provide notice of the avoidance to the other party. The notice must clearly express that the buyer now treats the contract as at an end. A mere announcement of future termination, a statement urging delivery or returning the goods without comment will not suffice. Thus, if a buyer wishes to avoid the contract because the seller has tendered non-conforming goods, not only must the non-conformity constitute a fundamental breach of the contract, but the buyer must also have given the seller notice of the non-conformity within a reasonable time after its discovery or when it should have been discovered. If the buyer fails to timely give such notice to the seller the buyer forfeits the right to rely on such non-conformity to avoid the contract.[xxi]

As stated in Article 49 § 1(a), a buyer may declare the contract avoided for any fundamental breach of the contract by the seller. A breach of contract under the CISG 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”.[xxii]

Thus, according to the CISG, in order for a buyer to properly avoid a contract for the international sale of goods, (1) the seller must have failed to perform an obligation under the contract which (2) substantially deprived the buyer of what he was entitled to expect under the contract. Also, as discussed, if the buyer is relying on a non-conforming tender as the fundamental breach, he must give the seller proper and timely notice of such non-conformity.[xxiii]

A fundamental breach requires that the seller . . . violate a duty, it was obliged to perform either under the contract, according to trade usages or practices established between the parties, or under the Convention.[xxiv] An example of contractual duty would be any duty agreed to by the parties beyond those mandated by the CISG. Examples of duties arising under the Convention include compliance with Articles 30 and 35 of the CISG. Article 30 states that the seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and this convention. Article 35 states that the seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.[xxv]

Such a violation of a duty is fundamental if it frustrates or essentially deprives the buyer of its justified contract expectations; what expectations are justified depends on the specific contract and the risk allocation envisaged by the contract provisions, on usages and established practices between the parties, and on additional provisions of the Convention.[xxvi]

For example, buyers are not normally justified in an expectation that delivered goods will comply with regulations and official standards in the buyer‘s county. It is generally the standards in the seller‘s country that determine whether goods are fit for their ordinary purpose. That being said, the contracting parties may always otherwise agree to different terms, expectations and duties than those provided by the CISG.[xxvii]

Guidelines as Determined by the Courts

Some guidelines have developed through case law which may assist a practicing lawyer in determining whether a breach would amount to the fundamental breach needed for a party to avoid a contract under the CISG. For example, a serious, definitive and unjustified refusal of the seller to fulfil its contractual obligations amounts to a fundamental breach.[xxviii] The helpfulness of such a holding remains questionable at best. Based on the plain language of the CISG‘s definition of fundamental, a situation where a seller seriously, definitively and unjustifiably refuses to fulfil one of its contractual obligations undoubtedly amounts to a fundamental breach since the buyer is substantially deprived of something he expects under the contract. Such a holding simply replaces vague language with more vague language, i.e., replacing fundamental and substantial deprivation of an expectation with a serious, definitive and unjustifiable refusal to fulfil a contractual obligation. Further case law has concluded that a non-conformity relating to the quality of the goods delivered is a non-fundamental breach if the buyer, without unreasonable inconvenience, can use or resell the non-conforming goods, even at a discounted price.[xxix] A contract for the sale of goods was entered into between a Dutch seller and German buyer.[xxx] The contract was for the sale of cobalt sulphate of British origin and required that the seller supply certificates of origin and of quality.[xxxi] Following delivery of the goods, the German buyer declared the contracts to be avoided since the cobalt sulphate was made in South Africa and the certificate of origin was wrong.[xxxii] The buyer also claimed that the quality of the goods was less than the quality agreed upon. Despite the non-conformity of such goods the Dutch seller demanded payment, and the German Supreme Court held that there were no grounds for avoidance of the contract, thus finding for the seller. In so holding the German court found that there was no fundamental breach with respect to the non-conforming goods since the buyer failed to show that the sale of the South African cobalt sulphate in Germany or abroad was not possible. Consequently the buyer failed to show that he was deprived of what he was entitled to expect under the contract. Corollary to these holdings, if the non-conforming good cannot be used or resold by the buyer using reasonable efforts, a fundamental breach will likely be found and a buyer may pronounce the contract avoided.[xxxiii]

In another case, a French buyer and Italian seller contracted for the sale of Italian wine.[xxxiv] Having learned that the seller delivered non-conforming adulterated wine, the buyer sought to avoid the contract. Finding the wine unfit for consumption, the French Cour de Cassation declared the contract avoided on the ground the seller did not honour its contractual obligation, and, therefore, fundamentally breached the contract.[xxxv]

When attempting to avoid a contract, the burden of proof is on the buyer to show that the seller‘s breach of the contract was fundamental and substantially deprived the buyer of what he was entitled to expect under the contract.[xxxvi] As the German Federal Supreme Court stated “the buyer—who is insofar burdened with the obligation to submit and prove the facts—did not substantially submit that it was substantially deprived of what it was entitled to expect under the contract as a result of the seller‘s breaches.” Once a contract is properly avoided, both parties are released from the obligations of the contract, subject to any damages which may be due.[xxxvii]

The UCC approach

Contrary to the CISG, the UCC contains no requirement of a fundamental breach before rejection of non-conforming goods. Under the UCC, delivered goods may be rejected if they are in any way non-conforming to the contract. According to § 2-601 of the UCC, and unless otherwise agreed, if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and reject the rest. This is the so-called “perfect tender rule”.

If a buyer chooses to reject the non-conforming goods, such rejection must be within a reasonable time after the tender, and the seller must be seasonably notified.[xxxviii] If the buyer fails to effectively reject the non-conforming goods, his failure will constitute an acceptance after the buyer has had a reasonable opportunity to inspect the goods.[xxxix]

If the buyer properly rejects the goods and the rejection is rightful (as opposed to wrongful rejection) because the seller has breached the contract in a fashion that justifies rejection (i.e., the goods do not conform to the contract[xl]), the buyer is relieved of the obligation to pay for the goods tendered.

While some scholars and courts have sought to ameliorate the harshness of the perfect tender rule and bring the law of sales of goods in closer harmony with the law of contracts, i.e. rescission only for material breaches, their efforts have been in vain.[xli] The chief objection against the perfect tender rule was that buyers in a declining market would reject goods for minor nonconformities and force the loss on surprised sellers.[xlii] Despite this objection, the UCC has retained the perfect tender rule. Section 2-106 states that goods conform to a contract when they are in accordance with the obligations under the contract. Section 2-601 authorizes a buyer to reject goods if they or the tender of delivery fail in any respect to conform to the contract.

CISG: disadvantages

A.    Legal uncertainty and unpredictability

The remedy of termination (avoidance) is considered to be the last resort in [the CISG‘s] scheme of remedies which include other less drastic remedies such as price reduction and the award of damages. As a general rule, the buyer is not allowed to terminate the contract unless the breach is fundamental. The strongest argument against the application of the CISG, especially with respect to non-conforming goods and fundamental breach, is its lack of legal certainty and predictability. The CISG rules do not provide a high degree of legal certainty and predictability largely because the rules rely upon ambiguous concepts such as ‘fundamental breach’.

Article 25 of the CISG defines a ‘fundamental breach’ as a breach of an international sale of goods contract which results in such detriment to the (non-breaching) 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. As can be seen by the definition, fundamental breach in turn relies upon nebulous concepts such as ‘substantial’ (substantially to deprive) and ‘reasonable’ (reasonable person). This is another instance in which the CISG defines an ambiguous concept with more ambiguity. The difference here, however, is that the CISG itself is supplying the ambiguity, rather than the courts.[xliii]

Because of this, it will likely be very difficult for any practicing attorney or counsel to confidently respond to the basic question of whether a contract is avoidable or not in a particular fact pattern; a question and answer which will undoubtedly have a significant mental and financial impact on both contracting parties.[xliv]

One scholar has taken a broad view in that the failure to present the documents required by the contract or relevant usage or practices, or the presentation of defective documents, must be regarded as a fundamental breach.

Indeed, the German Supreme Court has expressed sympathy for this view, acknowledging that the delivery of contractually stipulated documents can be an essential contractual obligation, which, if breached, may entitle the buyer to declare the contract avoided according Art. 49(1). Despite such sympathy, the German court still refused to avoid the contract, stating that the buyer‘s failure to show that it could not resell or use the non-conforming goods precluded a finding of fundamental breach. So, while the court expressly stated that a failure to deliver contractually obligated documents can constitute a fundamental breach, it seems as though such a situation will only arise when the contract is solely for the delivery of such documents and not the delivery of any actual tangible commodity a rare situation indeed. For, if any tangible commodity is delivered along with the contractual documents, and neither the good nor the documents conform to the contract, the buyer will always be required to, if reasonable, use or resell the non-conforming good; and if they fail to take such steps, and instead rely on the non-conformity of the good coupled with the non-conforming contractual documents, the buyer will still be liable to pay, despite this acknowledgment by the court.[xlv]

Thus, such dictum by the German Supreme Court seems largely inapplicable in any real-world situation, and simply adds to the legal uncertainty and unpredictability accompanying a fundamental breach analysis. One of the strictest, yet most clear and effective ways to restore certainty to the doctrine, would be through the use of a presumption that the failure to supply contractually required documents, or the delivery of defective documents, in-of-itself constitutes a fundamental breach of the contract, and therefore entitles the buyer to avoid the contract if they so choose.[xlvi]

Such suggestions will undoubtedly remedy one of the issues with respect to the ambiguity of the CISG‘s fundamental breach provisions. Such a remedy, however, is quite strict (like the perfect tender rule), and may not be necessary. For example, American domestic courts have dealt with vague concepts such as ―’substantial’ and ―’reasonable’ for hundreds of years. How successful such dealings have been may be debatable, yet the fact remains that such concepts remain a staple part of our legal system; what would a tort lawyer do without the omnipresent concept of reasonableness? That being said, one must not forget the context in which such terms are being applied. The CISG applies to contracts for the international sale of goods. While tort law benefits from the doctrine of stare decisis in each individual state, the same may not be said for the CISG. While the different articles of the Convention largely remain the same for the different contracting parties, they are interpreted and applied by courts of an individual contracting party not an international body or tribunal set up to adjudicate matters arising under the CISG. Thus, even if one nation were to establish such a presumption as outlined above, the applicability of such a presumption to another nation‘s court is lacking. The only way for this presumption to work, unlike domestic state‘s tort law, is to amend the CISG, and then have both contracting parties sign on to the amendment. Considerations must be taken into account in the international law context. Without an amendment to the CISG, it seems as though contracting parties will be left to their own devices in navigating the legal uncertainty and unpredictability created by the doctrine of fundamental breach.

B.     Structure and plain language

The structure and plain language of Article 25 leaves one grasping for air in its interpretation. As scholars have noted, the attempt of the CISG drafters to reconcile the dichotomy between common and civil law created some problems as to the drafting technique of the Convention, of which Article 25 is an example.[xlvii] Looking at the structure of Article 25, readers will quickly find themselves in a provision containing different conditions, exceptions and affirmative statements, all within the same sentence. As Professor Grebler has so succinctly stated:

The structure of the proviso contains an affirmative qualifying statement (A breach of contract committed by one of the parties is fundamental), followed by a condition (if it results in such detriment to the other party), which is subject to another condition of relative content (as substantially to deprive him), followed by an unspecified object (of what he is entitled to expect under the contract), followed by an exception (unless the party in breach did not foresee), finally accompanied by another negative exception (and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.).[xlviii]

Thus, as can be seen by Article 25‘s structure alone, the interpretation of the provision itself is a literary minefield. At first sight, this provision can be incredibly intimidating due to its relatively unique language and structure.[xlix] In addition to the structure of Article 25, the plain language of the provision is also very difficult to interpret. Courts of different countries have attempted to supply some legal certainty to the doctrine, but, as discussed, their attempts have largely led to even more ambiguity. Substantively, the concept of fundamental breach depends upon the concept of substantial deprivation, but the Convention does not provide a definition of the latter. Because of this, the reader is left without a benchmark as to the extent of deprivation required to constitute a fundamental breach.[l]

Moreover, the language of the section dealing with what (the party) is entitled to expect under the contract can also be confusing. Initially, this statement deals with the deprivation of what the party is entitled to, rather than what the breaching party promised to deliver under the contract. By doing this, the drafters of the CISG “shifted the focus of the dispute, as the interpreter must (now) decide on what the aggrieved party had the right to expect from the contract, instead of deciding on whether or not the contractual obligation was complied with by the party in breach.” Additionally, the last part of Article 25 subjects the doctrine of fundamental breach to the foreseeability of such breach. A breach will not be fundamental if the breaching party did not foresee, or a reasonable person of the same kind in the same circumstances would not have foreseen, the result of their breach.[li] So, a non-breaching party can be substantially deprived of what he or she was entitled to expect under the contract, yet it still may not be a fundamental breach if the party in breach shows that it did not foresee, and a reasonable person of the same kind in the same circumstances would not foresee, such a result.[lii]

CISG advantages

The CISG actively favours the performance of the contract as far as possible, and thus limits avoidance to exceptional cases of “fundamental breach”.[liii] It attempts to preserve the parties’ commitments and . . . favour the performance of their agreement and completion of the bargain, thus relying on a general principle of favor contractus.[liv] The reason for this treatment is undoubtedly financial; when dealing with an international transaction-especially one involving the sale of goods—costs of the transaction can easily skyrocket. Professor Grebler, “the rationale adopted by the Convention drafters was that the avoidance of a transaction between parties located in different countries is economically inefficient, given that the goods have to be re-exported from one country to the other.[lv]

The drafters of the CISG wanted to curtail these potential problems as best they could, and thus ended up with a doctrine that greatly favours keeping the contract intact. Limitations such as the fundamental breach rule ―help to contain the number of cases in which the damaged party may take advantage of the defaulting party‘s breach in order to revise an agreement based on a specific economic situation or to shift the risk of a change in the market conditions to the other party.[lvi] Accordingly, the CISG ―ensures the performance of the contract despite a (non-fundamental) breach to avoid considerable unnecessary and unproductive costs, such as those associated with the return or storage of the goods. And, as stated earlier, these unnecessary and unproductive costs, when considered in the context of an international sale of goods transaction, can be extremely high.

A quick comparison to the perfect tender rule will reveal why the UCC‘s approach would fail to effectuate the goals of the CISG. In its most basic form, if the perfect tender rule were to apply to contracts subject to the CISG, parties would be able to avoid the contract for relatively minor—when compared to what is needed for a fundamental breach—defects or non-conformities. Because the perfect tender rule lacks any emphasis on favor contractus, the CISG‘s intention of favouring the contract and preserving the parties’ commitments in all but the most exceptional cases is lost.

The UCC:

Disadvantages

The biggest disadvantage of the UCC‘s perfect tender rule is that it subjects the seller to the will of the buyer regarding any non-conforming tender. This, of course, is qualified by the obligation of good faith on the part of the buyer. Yet, any non-conformity of the goods, before acceptance, will permit the buyer to reject the goods tendered.[lvii] This is quite unlike the CISG rule which requires the much more stringent standard of fundamental breach before a buyer may avoid the contract.

As can be seen, the perfect tender rule does not place the same emphasis on preserving the contractual obligations of the parties as the fundamental breach rule. Many have commented on the strictness of this rule, yet it remains a fundamental piece of the Code. Indeed, in the course of the most recent revision of the UCC, there was great discussion as to whether the perfect tender rule should be replaced with a requirement that would permit rejection only if non-conformity substantially impairs the value of the performance to the buyer.[lviii] Such a suggestion would seem push the UCC in the direction of the CISG‘s emphasis on the preservation of the contract. However, ―ultimately, a majority of the Study Group recommended that the perfect tender rule remain the standard.[lix] Thus, the UCC is left with the perfect tender rule, and sellers are subject to the will of a buyer with respect to any non-conformity of the goods tendered.

Advantages

While some may view the strictness of the perfect tender rule as a detriment, it is really its greatest advantage. This strictness provides the legal certainty and predictability that the CISG‘s fundamental breach rule lacks. Now, to reject goods (or avoid the contract in CISG terms), a buyer must simply make a good faith showing that the goods tendered do not conform to the contract entered into; there is no need to get into all the ambiguity which accompanies a fundamental breach analysis. Furthermore, such a rule reduces the domestic costs associated with a transaction of goods and promotes efficiency.

Conclusion

The CISG‘s fundamental breach rule and the UCC‘s perfect tender rule are similar, yet different in many respects. Both doctrines deal with similar situations and will ultimately get a buyer to the same end result. That being said, the prerequisites which must be fulfilled before a buyer may avoid a contract under the CISG are very different from those which must be fulfilled to reject under the UCC. In comparison, the perfect tender rule is much stricter in its application than the fundamental breach rule. Whether a fundamental breach has occurred is subject to much interpretation, and one is hard pressed to give a confident answer when asked. The doctrine of fundamental breach is replete with legal uncertainty and unpredictability.

Moreover, case law interpreting the doctrine has only added to the ambiguity, thus making it nearly impossible for any interpreter to confidently answer the seemingly basic question of whether a contract for the international sale of goods has been fundamentally breached. Yet, despite these facially disastrous shortcomings, when one considers the context in which the CISG applies, it can be seen why such ambiguity exists.

One of the main goals of the CISG is the preservation of the contract and the parties’ obligations. Accordingly, the doctrine of fundamental breach makes it extraordinarily difficult to avoid the contract, and saves such a remedy for the most exceptional cases. Thus we are left with an incredibly unpredictable and uncertain doctrine by which the courts have done little to make any clearer. It seems as though the goal of contract preservation has outweighed the desire for any bright line rules, and maybe rightly so when considering the international context in which these cases are decided.

Edited by Kanchi Kaushik

[i] Corpus Juris Secundum, A Contemporary Statement of American Law As Derived From Reported Cases and Legislations, Vol. 17B, West

[ii] N.Y. Lenel Systems Intern., Inc. v Smith, 34 A.D. 3d 1284, 824 N.Y.S.2d 553 (4th Dep’t 2006)

[iii] Sarunas Basijokas, Is The Doctrine of Deviation Only a Historical Record Today?, available at www.heinonline.com

[iv] (1830) 6 Bing 716

[v] L. Graffi, ‘CsaeLaw on the Concept of “Fundamental Breach” in the Vienna Sales Convention’, (2003), International Business Law  Journal

[vi] Ingebord Schwenzer & Pascal Hachem, The CISG—Successes and Pitfalls, 57 AM. J. COMP. L. 457, 460 (2009)

[vii] Andrew Barbiak, Defining Fundamental Breach Under the United Nations Convention Under the Convention on Contracts for the International Sale of Goods, available at www.heinonline.com

[viii] Secretariat Commentary on 1978 Draft Art. 23 (draft counterpart of CISG Art. 25), Comment 3; available at: http://www.cisg.law.pace.edu

[ix] F. Enderlein and D. Maskow, International Sales Law, available at www.heinonline.com

[x] Zivilgericht (Civil Court) Basel-Stadt, Switzerland, 1 March 2002; No. p 1997/482; available at: http://cisgw3.law.pace.edu/cases

[xi] Supra Note at 6

[xii]A. Lorenz, ‘Fundamental Breach under the CISG’, 1998, available at: <http://cisgw3.law.pace.edu/cisg/biblio/lorenz.html

[xiii] Id

[xiv] Supra Note 3

[xv] Ibid

[xvi] The United Nations Convention on Contracts for the International Sale of Goods, art. 49, available at

http://www.cisg.law.pace.edu/cisg/text/treaty.html

[xvii] Christopher J. Konieczny, U.S. Domestic Contracts for the Sale of Goods: Should We Part Ways With The UCC’s Perfect Tender Rule and Adopt the CISG’s Doctrine of Fundamental Breach? International Business Transactions, 2011, available at www.jstor.com

[xviii] Supra Note 16

[xix] U.C.C. § 2-601 (2003).

[xx] CISG, Supra Note 16,art. 49, § 1(a).

[xxi] CISG, Supra note 16, art. 39 (The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.).

[xxii] Supra Note 16, art 25

[xxiii] CISG, Supra Note 13 art 30

[xxiv] UNCITRAL, Digest of Case Law on The United Nations Convention on The International Sale of Goods 161 (2008) [hereinafter UNCITRAL, DIGEST OF CASE LAW], available at www.uncitral.org

[xxv] CISG, Supra Note 16 art 35

[xxvi] UNCITRAL, DIGEST OF CASE LAW, supra note 21, at 161.

[xxvii] CISG, Supra note 16, art. 6 (The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.); id. art. 35, § 2 (Except where parties have agreed otherwise . . . .).

[xxviii] Supra Note 24

[xxix] Ibid. (citing CLOUT case No. 171 [Bundesgerichtshof, Germany, 3 April 1996]).

[xxx]CLOUT case No. 171 [Bundesgerichtshof, Germany, 3 April 1996], available at http://cisgw3.law.pace.edu/cases/960403g1.html.

[xxxi] Ibid

[xxxii] Ibid

[xxxiii] UNCITRAL, DIGEST OF CASE LAW, Supra Note 24, at 161.

[xxxiv] CLOUT case No. 150 [Cour de Cassation, France, 23 January 1996], available at http://cisgw3.law.pace.edu/cases/960123f1.html.

[xxxv] Ibid.; but see CLOUT case No. 79 [Oberlandesgericht Frankfurt a.M., Germany, 18 January 1994], available at

http://www.cisg.law.pace.edu/cases/940118g1.html

[xxxvi] UNCITRAL, DIGEST OF CASE LAW, Supra Note 21, at 162.

[xxxvii] CISG, Supra note 16, art. 81 (Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due.‖).

[xxxviii] U.C.C. § 2-602(1) (Rejection of goods must be within a reasonable time after their delivery or tender. It is

ineffective unless the buyer reasonably notifies the seller.).

[xxxix] Ibid. § 2-606(1)(b) (Acceptance of goods occurs when the buyer . . . fails to make an effective rejection (subsection (1) of Section 2-602), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them . . . .). This is very similar to the CISG‘s treatment of a buyer who fails to avoid a contract for the international sale of goods.

[xl] Ibid. § 2-601.

[xli] Ramirez v. Autosport, 88 N.J. 277, 284 (1982).

[xlii] Ibid.

[xliii] See Eduardo Grebler, Fundamental Breach of Contract under the CISG: A Controversial Rule, available at www.pace.law.edu

[xliv] Ibid.

[xlv] V. Susan Cooke, CISG: From The Perspective of The Practitioner, available at www.cisg.law.pace.edu

[xlvi] Ibid

[xlvii] Grebler, Supra Note 43, at 408.

[xlviii] Ibid

[xlix] See Ibid. (This provision has an unfamiliar look and may give rise to a certain perplexity in its interpretation.).

[l] Grebler, Supra Note 43, at 409.

[li] CISG, Supra note 16, art. 25.

[lii] Grebler, Supra Note 43, at 409.

[liii] Henry D. Gabriel, Primer on the United Nations Convention on the International Sale of Goods, From the Perspective of the Uniform Commercial Code, available at www.heinonline.com

[liv]

[lv] Grebler, Supra Note 43, at 410.

[lvi] Franco Ferrari, Fundamental Breach of Contract under the UN Sales Convention—25 Years of Article 25 CISG, available at www.heinonline.com

[lvii] Clemens Pauly, The Concept of Fundamental Breach as an Intrenational Concept to Create Uniformity of Commercial Law, available at www.heinonline.com

[lviii] Ibid

[lix] Ibid

One Reply to “Doctrine of Fundamental Breach: The CISG and The UCC”

  1. Dear Sonakshi,

    I must say a well written analysis. Loves the language and choice of words. Keep it up…

    Regards,

    Adv. Mirul Bhavsar

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