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
The United Nations Convention on Contracts for the International Sale of Goods (CISG) 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.
Anticipatory breach Article 71 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
Anticipatory breach Article 71 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)
Anticipatory breach Article 71 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
Anticipatory breach Article 72 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
Anticipatory breach Article 71 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.
Anticipatory breach Instalment contracts Article 71 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
Anticipatory breach Instalment contracts Article 71 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.
Damages General principle Article 74 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
Damages General principle Article 74 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
Damages General principle Article 74 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
Damages General principle Article 74 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
Damages General principle Article 74 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 onefourth 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
Damages Mitigation of loss Articles 77 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
Damages Mitigation of loss Articles 77 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)
Part VI: Effects of Avoidance and Preservation of Goods 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 Avoidance Notion of fundamental breach Articles 25 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)
Part VI: Effects of Avoidance and Preservation of Goods Avoidance Notion of fundamental breach Articles 25 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
Part VI: Effects of Avoidance and Preservation of Goods Avoidance Notion of fundamental breach Articles 25 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
Part VI: Effects of Avoidance and Preservation of Goods 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.
Part VI: Effects of Avoidance and Preservation of Goods 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)
Part VI: Effects of Avoidance and Preservation of Goods 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. [ ]
Part VI: Effects of Avoidance and Preservation of Goods 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))
The United Nations Convention on Contracts for the International Sale of Goods (CISG) 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)