Beiträge zum Internationalen Wirtschaftsrecht /Contributions on International Commercial Law 7
Fundamental Breach Considering Non-Conformity of the Goods
Bearbeitet von Benjamin K Leisinger
1. Auflage 2007. Buch. LVI, 162 S. Hardcover ISBN 978 3 86653 046 1 Format (B x L): 14,1 x 22,4 cm Gewicht: 380 g
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Fundamental Breach Considering Non-Conformity of the Goods
Benjamin K. Leisinger
Sellier. iEuropean Law Publishers
Dissertation zur Erlangung der Würde eines Doktors der Rechtswissen- schaft der Juristischen Fakultät der Universität Basel.
ISBN 978-3-86653-046-1 ISSN 1612-2294
Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliographie; detaillierte bibliografische Daten sind im Internet über http://dnb.d-nb.de abrufbar.
© 2007 Sellier. European Law Publishers GmbH, München.
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Gestaltung: Sandra Sellier. Herstellung: Karina Hack, München. Druck & Bindung: AZ Druck, Kempten (Allgäu). Gedruckt auf säurefreiem, alterungsbeständigem Papier. Printed in Germany. Introduction Introduction
Even relatively small countries export and import a remarkable number of goods. For example, in 2004, Switzerland exported merchandise valued at US$ 118 527 million and imported merchandise worth US$ 111 603 mil- lion.1 In the same year, the top 50 exporting countries together exported merchandise representing a total value of US$ 8 639.8 billion.2
Such transactions between merchants from different countries need a le- gal framework that guarantees the predictability of legal decisions and, thus, uniformly governs international sales contracts. The United Na- tions Convention on Contracts for the International Sale of Goods – CISG – has the precise aim of fulfilling this function and of guaranteeing this legal certainty.3
The CISG today4 has been ratified by 70 countries.5 Amongst them are 32 of the top 50 exporting countries. The CISG is said to theoretically gov- ern two-thirds of all contracts for the sale of goods in international trade.6
To actually achieve legal certainty in international trade, it is not suffi- cient to merely draft and ratify a uniform set of rules. With respect to the CISG, it is also important to consider that the Convention must be inter- preted autonomously;7 otherwise, the whole concept of unifying interna- tional sales law would have to be questioned. Some national judges, un-
1 See WTO, International Trade Statistics, Statistics Database, online at:
This problem becomes particularly apparent where so-called “blanket clauses” are concerned. Blanket clauses are clauses which cover a wide range of situations. Such clauses do not precisely set forth the require- ments to be met but allow taking the individual circumstances of the cases at hand into consideration. Hence, while providing for a maximal degree of flexibility and guaranteeing the best solution for each individual case, such clauses, at the same time, bear the risk of hindering legal cer- tainty.10
There are several examples of such clauses in the CISG, most notably all clauses containing the word “reasonable”. Art 39(1) CISG, for example, states that “[t]he buyer loses the right to rely on a lack of conformity of the goods if he does not give notice […] within a reasonable time […]”11. Another example is Art 77 CISG with its duty to “[…] take such measures as are reasonable in the circumstances” in order to mitigate the loss. However, probably the most prominent blanket clause – Art 25 CISG – defines the threshold to be met for the harshest remedy known to this Convention to apply: avoidance of a contract for fundamental breach according to Art 49(1)(a) or Art 64(1)(a) CISG, respectively. This article requires, firstly, that the other party fails to perform any of its obligations under the con- tract or the Convention. Secondly, that this failure amounts to a – and herein lies the problem – substantial deprivation of what the innocent party was entitled to expect under the contract. And thirdly, that this result could at least be foreseen by a reasonable person of the same kind in the same circumstances.
The term “fundamental breach” is one of the central terms in the CISG. It fulfills several functions. Other than the one just mentioned – avoid- ance of the contract –, a fundamental breach entitles the buyer to require goods in replacement, Art 46(1) CISG. Furthermore, pursuant to Art 70 CISG, a fundamental breach of contract leads to the consequence that Arts 67 to 69 CISG, articles that govern the passage of risk under the CISG, do not impair the remedies available to the buyer. In other words, if, for example, there was a fundamental breach of the contract by the seller, the buyer may still require delivery of substitute goods under
18 See SCHLECHTRIEM, Internationales UN-Kaufrecht, para 115. For a thorough discussion of this problem, see SCHWENZER, VUWLR 2005; GÖRITZ, p. 51. 19 See GERHART, p. 77. 10 Cf. V. CAEMMERER, SJZ 1981, p. 265. 11 Emphasis added. Introduction 3
Art 46(2) CISG, despite the fact that the goods had been destroyed by a fire at the buyer’s premises after the risk had passed.
Despite bearing the risk of hindering legal certainty, the broad – and sometimes even considered as being “extremely vague and ambiguous”12 – wording of Art 25 CISG also provides judges and arbitrators with a wide discretion and allows them to take the individual circumstances of the special case at hand into consideration when determining whether or not a fundamental breach of the contract has occurred. However, because of this broad definition, each innocent party might be led to believe that it is indeed entitled to avoid the contract. The other party, of course, holds the view that the violation of the contract, especially the delivery of the non-conforming goods, was not so grave as to entitle the other party to sanction such breach with avoidance. This uncertainty leads to substan- tial economic costs caused by delay in decision-making or by legal pro- ceedings.
This thesis will focus on the failure to deliver goods that are in confor- mity with the contract, which is said to be “certainly the most recurrent situation in international sales litigation”13.
The aim of this thesis is to, firstly, illustrate the general concepts devel- oped by case law and legal doctrine underlying Arts 49(1)(a) and 25 CISG and then, secondly, apply those general concepts to specific cases, i.e. the trade of commodities, and the trade of goods with incorporation of certain trade terms such as “CIF”, “CFR”, or “FOB”. Hence, readers should obtain guidance and assistance in determining whether there was a fundamental breach in cases of delivery of non-conforming goods.
The author hypothesizes that, in these special situations, the standard to be applied with regard to the conformity of the goods can be – and usu- ally is – very strict and fundamentality of the breach of contract can more readily be assumed.
First, however, it will be necessary to illustrate the cases in which the goods are non-conforming. Non-conformity is a logical prerequisite for the avoidance of the contract for breach due to non-conforming goods and must be understood before turning to the question of when such non- conformity actually generally constitutes a fundamental breach under Art 25 CISG.
12 See LUBBE, RabelsZ 2004, p. 446; HONSELL/Karollus, Art 25 para 11; SINGH, at 2.2. 13 See GRAFFI, Int’l Bus. L.J. 2003, p. 341.
A. Non-Conformity of the Goods, Art 35 CISG
With regard to remedies, some legal systems distinguish between the sev- eral specific kinds of failures to perform.14 The Swiss Code of Obligations (CO), for example, distinguishes between delay, impossibility and non- conformity of the goods. While the consequences of a delay by the obli- gor are set forth in Art 102 CO and the following articles, Art 97 CO deals with impossibility and Art 197 CO et seq. with non-conformity of the goods in sales contracts. However, the CISG does not follow this arti- ficial distinction.15 On the contrary, the Convention lays down a uniform set of remedies.16 Moreover, under the CISG’s system of remedies,17 there is no distinction between “conditions” and “warranties”, “hidden defects” or “apparent defects”, neither is there any distinction between “ancillary duties” and “primary obligations”.18 No matter what kind of failure to per- form arises, a breach of contract exists and the buyer can always have re- course to the remedies laid down in Arts 45 to 52 CISG.19 In fact, there can even be a fundamental breach of the contract entitling the aggrieved party to avoid, if the breaching party breached a duty under the contract that, in the terminology of Swiss domestic law, would be considered to be an “ancillary duty”20 and that, nevertheless, was of fundamental impor-
14 Cf. POIKELA, NJCL 2003, p. 18. 15 Cf. ZWEIGERT/KÖTZ, p. 515; FREIBURG, p. 48; FERRARI, IHR 2005, p. 3; AICHER, p. 113; POIKELA, NJCL 2003, p. 18; HENSCHEL, NJCL, at 4.1.; BE- NICKE, IPRax 1997, p. 327; STORME, Schuldnerpflichten, p. 14. 16 Cf. ZAMIR, La. L. Rev. 1991, at II. C. 2. a.; KRUISINGA, p. 26. 17 With its uniform set of remedies for all different kinds of breaches, the CISG served as a role model for modern domestic codifications, such as the Law of Obligations in the Netherland’s Wetboek and the German Schuldrechtsre- form, as well as other domestic sales or commercial laws. See SCHLECHTRIEM/ SCHWENZER/Schlechtriem, Commentary, Introduction. 18 Cf. KRUISINGA, p. 26 et seq.; GRAFFI, Int’l Bus. L.J. 2003, p. 338; BENICKE, IPRax 1997, p. 328; SCHLECHTRIEM/SCHWENZER/Müller-Chen, Commentary, Art 45 para 5; BRUNNER, Art 45 para 5; HERBER/CZERWENKA, Art 45 para 2; ENDERLEIN/MASKOW/STROHBACH/Enderlein, Art 45 para 1. 19 The remedies for breach of contract by the buyer are laid down in Arts 62-65 CISG. 20 See SCHWENZER, OR AT, para 4.22.