12. Contract Law II - Fundamental Breach.pptx

Course Name: Contract Law II Fundamental Breach Dr. Selma Mezetovic Medic, MJur (Oxon) [email protected] 2023/2024 Fundamental breach The avoidance of a contract by one party under the CISG is possible provided that the breach of the other party is considered a “fundamental breach” of the contra...

Course Name: Contract Law II Fundamental Breach Dr. Selma Mezetovic Medic, MJur (Oxon) [email protected] 2023/2024 Fundamental breach The avoidance of a contract by one party under the CISG is possible provided that the breach of the other party is considered a “fundamental breach” of the contractual obligations A declaration of avoidance releases the parties from their remaining contractual obligations – no unjust enrichment A fundamental breach can be committed by either the buyer or the seller 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. Task Write your understanding of Article 25. Fundamental Breach a) What constitutes the “fundamentality” of the breach? b) What significance “foreseeability” has in regard to a fundamental breach? Fundamentality The breach is significant if one party does not get substantially what he or she could have expected according to the contract It is not the objective weight of the breach of contract, and not the extent of the damage, that determines whether a breach is fundamental The side against which the breach was committed must suffer a disadvantage – no need to prove how much damage occurred or will occur as a result of the breach Foreseeability Debates around the interpretation of Article 25 CISG – it is not clear which timing is taken into account, i.e. is it the timing when the contract is formed, or when the actual breach of contract occurs? The party who avoids the contract has to prove that the particular duty was decisive in their decision to enter into the contract and whether the other party knew or ought to have known that It is desirable to explicitly regulate those duties in the contract Fundamental Breach in Case of Nonperformance A fundamental breach in terms of Article 25 CISG will generally exist if, subjectively or objectively, circumstances make it impossible for the delivery of the goods to be completed If performance is still possible and the performance is “just” delayed, then the importance of the agreed delivery date determines whether the breach is fundamental or not If the contract is a fixed-time transaction, or if the goods are seasonal goods, a delay will generally result in a fundamental breach so that the contract can immediately be avoided (without additional time for delivery) Fundamental Breach in Case of Nonperformance – example A German buyer had ordered clothes for the autumn season from an Italian seller. The delivery was supposed to occur in a number of part-deliveries between July to September. The seller failed to meet the deadline for the first delivery and only offered the last delivery on 10 November. The buyer refused to accept the late deliveries. What do you think the Court decided in this case? Fundamental Breach in Case of Nonperformance – example The Court found that the buyer specifically wanted fashion for the autumn season which the Italian seller knew. The seller should have known that the buyer would not have entered the contract if she or he knew at the time of contract formation that the clothes would only arrive near the end of the autumn season. The Court, therefore, found a fundamental breach and a valid declaration of avoidance. Example 2 A Swiss firm ordered a variety of bags, including backpacks and wallet carry-on bags, from an Italian manufacturer. The delivery was supposed to occur within 10–15 days. However, the delivery was delayed considerably. Two months after the goods had been paid for they had not been delivered and the buyer avoided the contract. The seller then made a partial delivery of one-third of the goods which the buyer refused to accept. What do you think the Court decided in this case? Example 2 The Court held that the parties’ agreement and their conduct made it clear that the prompt delivery was a fundamental aspect of the contract. Delivery of one-third of the goods two months after contract formation and payment of the full contract price was a fundamental breach which allowed the buyer to avoid the contract as provided for in Article 51 (part performance) and Article 73 CISG (instalment contracts of part performance). Defective performance / Non– conformity If the seller offered to remedy the defect within reasonable time, avoidance because of fundamental breach will rarely be a remedy available to the buyer In other cases buyer will have only the option of claiming damages Before the contract can be avoided, the defect has to be so severe that it cannot be rectified within a reasonable time nor can the goods be useable (or saleable) even if at a loss There is no unified approach – particular national legal systems and particular traditions lead to different approaches by different courts and tribunals (for example, German and the Swiss Supreme courts take a strict approach on fundamental breach whereas the French, Austrian, and United States courts are more flexible in finding a fundamental breach and allowing avoidance of the contract) Article 35 (1) 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. Article 35 (2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: (a) are fit for the purposes for which goods of the same description would ordinarily be used; (b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller’s skill and judgement; (c) possess the qualities of goods which the seller has held out to the buyer as a sample or model; (d) are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods. Article 35 (3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if, at the time of the conclusion of the contract, the buyer knew or could not have been unaware of such lack of conformity. Uniform Concept of Nonconformity under Art 35 CISG Non-conformity includes: a) b) c) d) e) Partial performance Impossibility Delay Quantity and quality Non-conformity with law and contract Non-conformity under Art 35 CISG a) the seller must deliver goods which are of the quantity, quality and description required by the contract b) otherwise, goods must be fit for the ordinary purposes of such goods, or c) fit for a particular purpose Example 3 A German buyer bought a large quantity of British cobalt sulphate of specific quality from a Dutch seller. The contract required the seller to supply certificates confirming the origin and quality of the cobalt sulphate with delivery of the goods. The seller, however, supplied cobalt sulphate originating from South Africa which was not of the agreed quality. The accompanying documents were partly falsified. What do you think the Court decided in this case? Example 3 The German Supreme Court (BGH) did not find a fundamental breach in this case despite the fact that delivery was different from what the parties had agreed on according to Article 35 CISG. The Court held the buyer had remedies in damages and reduction in value. The buyer could sell the non-conforming goods albeit at a loss. The Court found that “avoidance” and “restitution” were last resorts under the CISG. The Court pointed out that the buyer could have stipulated the particular characteristics of the goods as fundamental in the contract. Example 4 The Italian seller added sugar to wine delivered to the French buyer. According to French Wine Law that wine could not be sold as wine for human consumption but only as industrial alcohol. The French court allowed avoidance of the contract since wine was not in conformity with the contract according to Article 35 CISG. Example 5 A New York company delivered a portable air conditioning compressor to an Italian buyer. This compressor had a smaller cooling capacity and was using more electricity than agreed. The attempt to remedy the compressors’ defects was unsuccessful. What do you think the Court decided in this case? Example 5 The US courts held that the non-conformity of the goods meant the buyer did not get what she or he could have fundamentally expected under the contract according to Article 25 CISG. Therefore, the buyer could avoid the contract due to fundamental breach.