Tuesday, August 9, 2011

Buyer's Right to Withhold Performance and Termination [Avoidance] of Contract under the UN Sales Convention

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1. Withholding Performance


1.1 Introduction


1.1.1. Concept of the Right


Withholding performance under the Convention, as in English law, means that the buyer is entitled to refuse to perform his obligation without being required or even being entitled to terminate [avoid] the contract. Obviously, if the requisites for the latter remedy are met and the buyer, before fulfilling his obligations, has declared the contract avoided in accordance with Arts. 4, 51, 7 or 7 of the Convention, he is no longer obliged to perform his obligations (Art. 81(1)). But such requisites may not be met or the buyer may not wish to declare the contract terminated, but rather demand goods fully conforming with the contract.


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In the provisions regulating the buyers remedies for sellers breach, although the Convention gives specific rights to withhold performance in certain cases, it does not make a general statement that the buyer is entitled to withhold performance of his obligations. The question is, therefore, whether the buyer has a general right to withhold performance of his obligations under the contract where the seller has performed his delivery obligations in a way which does not correspond with the contract or the Convention.


In this respect, some commentators have tried to infer from the Conventions provisions that the buyer should be given a general right to refuse to take delivery. But it seems that they have failed to distinguish between the buyers right to refuse to recognise goods the seller delivers as the contract goods and his right to refuse to take delivery and, consequently, they have relied on the provisions which concern the former rather than the latter. It is probably for the reason that the Convention does not expressly impose, as English law does, on the buyer a duty to accept what the seller delivers as the contract goods. It is, however, proposed to examine these two possible rights separately. Although in practice both may often arise at the same time, in some cases, the right to refuse to accept arises where the buyer has already performed his duty to take over the goods as defined in Art. 60.


1.1.. Importance of the Right


From the buyers point of view, the existence of the right to refuse to recognise the goods offered as the contract goods seems important, since the buyer will thus be entitled to resort to the remedies provided under Art. 46() or (). But what significance follows from the right to refuse to take delivery? It seems that the existence of the right to refuse to take delivery would also be significant for the buyer, not only in respect of the link between delivery and payment (Art. 58(1), ()), but also in regard to the passing of the risk (at least where the case falls into the scope of Art. 6). That is to say, as long as the seller does not deliver the goods in accordance with the contract and the Convention, the buyer can refuse to take delivery and thereby return the risk to the seller. The seller would face delay, and in order to avoid the undesirable consequences of delay, he would strengthen his efforts to perform. Since taking delivery and payment of the price generally are linked, the buyer would have the further advantages of paying later and not for non-conforming goods, for the seller who wants to obtain payment must take action against the buyer.


More importantly, the right will be significant where the seller fails to fulfil his obligations with respect to the place of delivery (Art. 1), or to specify the goods by notice (Art. (1)). The significance of the right is for the reason that the remedy prescribed under Art. 46(), () does not apply here, since it only relates to the sellers obligation to deliver conforming goods under Art. 5 and probably Arts. 41 and 4. In such cases, if the buyer has such a right he can refuse to take delivery and subsequently require performance according to Art. 46(1), and fix an additional period of time in accordance with Art. 47(1).


The remedy will also be significant for the buyer where the seller partially or fully fails to perform his obligations relating to the quantity, quality and other description required by the contract (Art. 5) or fails to fulfil his duty under Arts. 41 and 4, that is where the goods delivered are not free of the rights or claims of third parties. In such cases, the right to refuse to take delivery would be useful for the buyer where he wishes to require the seller to repair the non-conformity under Art. 46(). In such situations, the buyer can, if he is entitled, by turning the risk of the goods to the seller persuade him to cure the non-conformity as quickly as possible. Accordingly, in the case of the sellers failure to deliver goods in accordance with Arts. 5, 41 and 4, the buyer is not required to take delivery of them in order to have them cured later, but he can refuse to take delivery until cure is made.


Having considered the concept and importance of the remedy, the following discussion will try first to answer the question whether the Convention has recognised a general right to withhold performance and then to ascertain how the given right will work in different types of failure by the seller to perform his obligations.


1.. Withholding Performance as a General Right?


A close examination of the Convention provisions clearly shows, it is suggested, that the Convention has recognised the right to withhold performance for an aggrieved buyer in some occasions. However, in some cases the Convention has expressly applied the rule and in others it has impliedly recognised it.


1..1. Prospective Non-Performance


The Convention has expressly applied the right to withhold performance in Art. 71(1) under the heading of the right to suspend the performance of obligations. Under this provision, whenever it is apparent that a party, say the seller, will not be able to deliver goods or documents, the buyer is given a right to suspend the required steps leading to payment, such as the establishment of a letter of credit (Art. 54). However, the provision comes into operation only where it becomes apparent that the seller is about to commit non-performance of a substantial part of his obligations; it does not concern where the seller has performed his delivery obligations in a way which does not correspond with the contract requirements.


For the provision to be applied, certain requirements are to be satisfied.


First, the inability to perform must be apparent after the conclusion of the contract. If it was already apparent at the time of making the contract that one party would not be able to perform, the other party is not entitled to suspend his obligations.


Second, the appearance of prospective failure to perform must be caused by either a serious deficiency in the ability to perform, or in creditworthiness, or by conduct in preparing to perform or actually performing the contract (Art. 71(1)(a) and (b)).


Third, the expected failure must relate to a substantial part of the obligations of the party who is about to commit the breach. There is, thus, no right to suspend where the prospective breach only relates to a minor part of the obligations.


1... Actual Non-Performance


The right to withhold performance is also impliedly recognised by Art. 58(1) of the Convention. Under this provision, where the contract is silent as to the time of payment, the buyer is under the duty to pay only when the seller places the goods or the documents controlling their disposition at the disposal of the buyer. Hence, where the seller has failed to place the goods or documents at the buyers disposal, the latter is entitled to refuse to pay as long as the sellers failure continues.


Similarly, it seems that the Convention has also accepted the right to withhold performance where the seller has delivered non-conforming goods. In that event, the buyer is impliedly given a right to refuse to recognise the sellers non-conforming delivery as a conforming delivery. The buyers entitlement to refuse to accept the sellers non-conforming delivery can be inferred when it is proved that under the Convention the buyer is under a further duty to accept what the seller delivers in performance of the contract. The Convention provides no clear provision for this purpose. It simply provides The buyer must pay the price for the goods and take delivery of them as required by the contract and the Convention (Art. 5).


What is certain is that recognising the goods delivered as conforming to the contract is not the same as taking delivery, or even taking over the goods as prescribed by Art. 5. The duty to take delivery is defined by Art. 60. Under this Article the buyers duty to take delivery consists of two elements The first element is that he must do all the acts which could reasonably be expected of him in order to enable the seller to make delivery. For example, if the contract requires him to arrange for the carriage of the goods (as is often the case under the terms of an f.o.b. contract), he is bound to make the necessary contracts of carriage in order to enable the seller to deliver (hand the goods over to the first carrier for transmission to the buyer (Art. 1(a)). The second element of the buyers duty to take delivery is to take over the goods. It is the case where the seller is bound under the contract to make delivery by placing the goods at the buyers disposal at a particular place or at the sellers place of business (Art. 1(b) and (c). In such cases, the buyer will be regarded as having taken delivery when he has physically removed the goods from that place.


As is seen, taking delivery, as defined under Art. 60, is not inconsistent with the case where the buyer has done all the acts which enabled the seller to make the delivery but the buyer is nonetheless required to accept the goods in the sense that he is not allowed to reject them. This is where the buyer after receiving the goods when examining them (Art. 8) has realised that they are in conformity with the contract and the Convention. Accordingly, taking delivery does not include what is called here the duty to accept the goods. Under this interpretation, the buyer is under two separate duties to take delivery of the goods and to accept (not reject) them if they are in conformity with the contract.


This duty is clearly inferable from the provisions of Arts. 46() and 4(1)(a). The first provision gives the buyer a right to require the seller to tender replacement goods, and the second entitles him to avoid the contract provided that the sellers breach amount to a fundamental breach. Similarly, Art. 46() enables the buyer to demand that the seller repair the lack of conformity where it is reasonable having regard to all the circumstances. Beyond these circumstances, the buyer is not entitled to resort to these remedies but he has to accept them as the contract goods, otherwise he will be in breach of the contract. Accordingly, the buyer is under the duty to accept the sellers delivery where the lack of conformity does not fall into the foregoing circumstances.


Assuming that the buyer is under a reciprocal duty to accept the sellers delivery where it accords with the contract and the Convention, he will be entitled to refuse to accept where it does not conform to the contract terms and the Convention. This right not only corresponds with commercial practice, but can clearly be inferred from the provisions allowing the buyer to require the seller to tender substitute goods or to repaire them (Art. 46() and ()). These provisions, by allowing the buyer to require the seller to make a fresh tender or cure the non-conformity by way of repair (as the case may be) where the seller has delivered goods which do not conform with the contract and this Convention, presuppose that the buyer is entitled to refuse to accept them as the contract goods. Accordingly, it is quite possible for the buyer to retain his right under Art. 46(), () after having taken delivery or taken the goods over. This is the reason why Art. 86(1) speaks of the buyers right to reject after he has received the goods from the seller.


1... Early or Excessive Delivery


A further application of the right to withhold performance can be found under Art. 5. Under this provision, where the seller has made an early delivery, the buyer is entitled to refuse to take delivery of such a delivery (Art. 5(1)). He is also given a right to refuse to take delivery of the excess quantity where the seller has delivered greater than the contract quantity (Art. 5()).


1..4. Buyers Right to Refuse to Take Delivery as a General Remedy


Although the refusal to take delivery under this Article is mentioned in the catalogue of the buyers remedies in Art. 45, it can only be exercised in reference to the special case of early or excess quantity delivery under Art. 5. No clear provision is provided by the Convention to determine whether the buyer is entitled to refuse to take delivery of the goods delivered to him by the seller where they do not accord with the contract terms and the Convention, such as the cases where the seller has failed to perform his duty under Arts. 1, (1), 5, 41 and 4.


Some commentators, as already pointed out, have suggested that such a right, to some extent, can be inferred from the interpretation of the relevant provisions of the Convention. In justifying the view, they argue that this rule can be inferred not only from the express granting of that right under Art. 5 for cases of early delivery and delivery of excess quantity, but also from the fact that Art. 86(1) presupposes the existence of a right to reject. The advocates of the existence of this general remedy have also resorted to the link between payment and delivery (Art. 58(1), ()) and the right of the buyer to examine the goods under Art. 58(), and to Arts. 46(1) and 47(1) by saying that they are at least consistent with the assumption of the buyers right to refuse the taking delivery under certain conditions.


However, it seems that, although the view can be supported under the Convention, the provisions referred to above do not help to establish such a rule. This is because, first, although the first paragraph of Art. 5 can be relied on for this purpose, it is only applied to the case of early delivery. The second paragraph is entirely irrelevant. It simply provides that the buyer can refuse to accept the sellers offer of an extra quantity where he has delivered a quantity of goods greater than that provided for in the contract. It does not say that the buyer is entitled to refuse to take delivery of the whole goods the seller has delivered as contract goods. Secondly, Art. 86 presupposes that the buyer who has received the goods which do not correspond with the contract requirements is entitled to reject them. Such a statement, as indicated previously, is consistent with the principle that he can refuse to accept them as contract goods, not that he is entitled to refuse to take delivery which this Article presupposes has taken place in advance. This is the reason why these two Articles used different terminologies.


Nevertheless, it can be said that the Convention has impliedly recognised a right to refuse to take delivery for an aggrieved buyer under certain circumstances. This rule is inferable from taking into consideration the question in the light of the principles of the Convention upon which it is based. Under these principles, it might be concluded that the buyer is not obliged to take delivery where the sellers delivery is not in conformity with the contract and the Convention. For it is one of the principles of the Convention that the seller has to deliver in full conformity with his obligations and the buyer is only required to take delivery of such a performance. This principle can be inferred through the examination of the relationship between the main duties of the parties under the Convention. The essential duties of both the seller and the buyer, i.e., delivery, taking delivery of the goods and payment of the price, are provided by Arts. 0 and 5 of the Convention. Although the relationship between the buyers duty to take delivery and the sellers obligation to deliver goods is not expressly defined by the Convention, it seems that these two duties are interdependent. Some commentators have argued that such a relationship can be inferred from Art. 58(1) and () by saying that this Article qualifies the buyers duty to pay the price to the condition that the sellers delivery is to be in accordance with the contract and the Convention. However, it seems that Art. 58 is provided only to state that the sellers duty to deliver and the buyers duty to pay the price are concurrent obligations and they are to be performed at the same time when the contract is silent as to the time of payment. It is not intended to define the main duties of the parties. The main obligations of the parties are defined by Arts. 0 and 5. Although these two Articles do not expressly refer to each other, it is suggested that they must be read in connection with each other. Thus, the seller is obliged to deliver the goods, provided that the buyer is ready and willing to pay the price for the goods and take delivery of them as required by the contract and this Convention, and the buyer is bound to pay and take delivery, provided that the seller is ready and willing to deliver the goods as required by the contract and this Convention. Accordingly, the buyers duty under Art. 5, i.e., taking delivery and paying in exchange for the sellers delivery, is conditioned by the qualification that the sellers delivery conforms with the terms of the contract and this Convention. In accordance with this interpretation. the buyers duty to take delivery and pay the price under Art. 5 may be re-phrased as follows


It is the buyers duty to take delivery of goods delivered to him by the seller provided they are delivered in accordance with the terms of the contract and this Convention.


On this interpretation, where the seller has delivered goods in a way which does not conform with the contract terms and the Convention, the buyer is not in principle bound to take delivery of them. In more clear words, as long as the seller has not fulfilled his duty to deliver in accordance with the contract and the Convention, the buyers duty to take delivery has not indeed arisen. He is, therefore, under no obligation to perform his duty to take delivery under Art. 5.


1..5. Grounds for the Right


In the absence of an express statement by the Convention, in describing the right, its legal basis must be identified by interpreting the provisions of the Convention and taking into account the general principles upon which it is based. As pointed out above, the Convention, when supplying the provision regulating the timing of the performance, has at least implicitly referred to the interdependence of the sellers obligation to deliver and the buyers duty to pay. In that case, Art. 58(1) provides that the buyer, unless otherwise agreed, must pay the price when the seller places either the goods or the documents controlling their disposition at the buyers disposal in accordance with the contract and this Convention. It seems that this sub-paragraph intends to state that the sellers obligation to deliver the goods and hand over the documents controlling their disposition and the buyers duty to pay the price are tied together so that failure of one party to perform his duty would entitle the other to rely on the rule. A close examination of Arts. 46, 5, 58 and 71 of the Convention leads one to the conclusion that the Convention has based the right to withhold performance on the theory of reciprocal obligations. It is under this rule that the obligations are to be exchanged for each others performance at the same time, and refusal of one party justifies the other partys refusal to perform as long as the defaulting party continues his refusal.


The question which arises here is What degree of lack of conformity enables the buyer to refuse to perform his duty to accept and take delivery of the goods? No clear provision can be found under the Convention for this purpose. It can be said, however, that since the buyer by refusing to accept and take delivery of the non-conforming performance simply refuses to perform his counter-obligation, his option to do so need not be based on a showing of fundamental breach. He is only required to demonstrate that the sellers delivery is not in accordance with the contract and the Convention. This is because the right of refusal is based on the theory of reciprocity of the parties obligation rather than the theory of fundamental breach. However, in granting the right to refuse, one cannot be generous. Accordingly, the substance and the limits of the right to refuse to accept and take delivery have to be determined in detail according to the system of the buyers remedies under the Convention. The proposition would not, therefore, be acceptable that the goods should be in conformity of the contract in every aspect, otherwise there shall seemingly be a right of refusal. Such a broad proposition seems to undermine the system of remedies prescribed by the Convention. In one case, the Convention has referred to the criterion upon which the buyer may withhold performance (Art. 71(1)). In that case, it provides that the buyer will be entitled to do so where the sellers non-performance relates to a substantial part of his obligations. However, it is not clear what lack of conformity will enable the buyer to refuse to accept the goods in the case of delivery of non-conforming goods. It seems that the buyer is certainly not entitled to refuse to accept the goods for minor non-conformity. This right may be available for him where the sellers failure to perform his obligations in accordance with the contract terms and the Convention has attained a certain degree of seriousness. Close consideration of Arts. 46(), () and 71(1) of the Convention supports this restriction. Moreover, it accords with the principles of good faith (Art. 7(1)) and mitigation (Art. 77).


1.. Special Cases


1..1. Partial Delivery and Partial Non-Conforming Delivery


Although Art. 5() entitles the buyer to refuse to take delivery of the excess quantity, it does not make clear whether the buyer has the right to refuse to take delivery where the seller delivers less than the contract quantity. It could be argued that according to the principles already dealt with, the buyer can refuse to perform his obligations on account of the sellers partial non-delivery. The view can also be supported by the fact that short delivery gives the buyer the right to terminate the contract in its entirety in certain circumstances (Art. 51() which includes the right to refuse to perform his obligations insofar as this has not taken place. The same logic justifies the buyers right to refuse to perform until complete delivery in conformity with the contract is offered.


A further question is Does the buyer have the option to refuse to perform in respect of the missing part or non-conforming part where the seller has delivered goods some part of which conform with the contract? Art. 51(1) seems to enable the buyer to treat the missing and the non-conforming part (as the case may be) as the subject of separate contracts for the purpose of remedy and to resort to his remedies under Arts. 46-50. But those provisions do not include such an option. Can the buyer treat the missing or non-conforming part as the subject of a separate contract for the purpose of the right to refuse to perform for the proportion of the missing or the non-conforming part? Since he is entitled to terminate the contract with respect to the missing or the non-conforming part if the requirements of fundamental breach or Nachfrist notice procedure are satisfied, it can be said, by analogy, that he is entitled to refuse to perform the contract to the proportion of the missing part. The view can also be supported by Art. 58(1) which provides that the buyer is not bound to pay only when the seller places the goods at the buyers disposal in accordance with the contract. By analogy, the same rule is applicable where only part of the goods is in conformity with the contract. The same rule would be applicable to an instalment where the seller has delivered a defective instalment, since Arts. 51 and 7 are in fact concerned with a similar case, i.e., where the contract is severable.


1... Tender of Non-Conforming Documents


Although the Convention has referred to the sellers duty to deliver goods and documents in accordance with the contract terms (Arts. 0 and 4), it does not deal properly with the issue. It is therefore not quite clear whether the buyer has two separate rights to refuse to accept non-conforming documents and goods, and if so, what relation there is between these two rights. It appears that the issue must be examined according to the same principles as elaborated for goods.


According to the principles explained above, it seems that where the seller fails to tender the shipping documents, the buyer is entitled to refuse to pay the price, since where the contract does not specify otherwise, the buyer is under the duty to pay the price only when the seller places the ... documents controlling their disposition at the buyers disposal (Art. 58(1). In other words, the sellers duty to hand over the documents controlling the disposition of the goods at the buyers disposal and the buyers duty to pay the price are to be fulfilled at the same time. However, it seems that the rule prescribed under Art. 58(1) would not be applicable to all shipping documents, since the Convention qualifies the non-defaulting buyers right to withhold performance of his obligation to pay the price with the qualification that the documents should be those controlling their disposition. Accordingly, the sellers failure to tender documents which lack this qualification is to be placed within the category of defective delivery rather than non-delivery.


Where the seller tenders documents which do not correspond with the contract requirements, the buyer is not required to take delivery and pay the price in exchange for such documents, since, as the last phrase of Art. 0 and Art. 58(1) provides, the seller must tender documents which are in conformity with the contract, otherwise the buyer is not obliged to accept and pay for them. Furthermore, it seems that the right to refuse to take over the documents could be inferred from the obligation of the seller under Art. 4. Under this Article, the seller is obliged to hand over the documents at the time and place and in the form required by the contract. In addition, rejection of non-conforming documents is a well-accepted customary law which is to be given effect under Art. . Accordingly, where documents tendered by the seller do not show the respective conditions in respect of the goods and documents, the buyer would be entitled, under some circumstances, to refuse to accept them.


Rejection of Goods and Documents. From the preceding discussions it has been made clear that the Convention allows the buyer to reject defective documents. However, it contains no clear provision to regulate the case where the subject of the documents is defective. Does the buyer have a further right to reject the non-conforming goods when they are landed?


It seems that since the sellers duties to deliver the goods and the relevant documents are two separate obligations (Arts. 0-4), breach of each would give rise to a separate right to refuse to accept. Accordingly, the buyer should be given the right to refuse to accept the goods when they arrive. He should also be entitled to reject documents which do not comply with the contract even though the goods themselves are perfectly in accordance with the contract.


On the above interpretation, the question arises whether the right of rejection of non-conforming goods is impaired by the acceptance of the documents. What is certain is that where the given defect is reflected on the documents, the buyers acceptance may be treated as a waiver of his right to reject for the defect in the goods. But where the buyer accepts the documents, for example, a bill of lading, which turns out to have been falsely dated, it would not, it seems, prevent him refusing to take delivery of the goods on discharge from the ship. Although, the question is not expressly addressed by the Convention, it can be argued that, under the Convention, the buyer would lose the right to rely on the lack of conformity of the goods only if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he discovered it or ought to have discovered it (Art. (1)). Therefore, he can rely on an unspecified defect if at the time of acceptance he had neither knowledge nor means of knowledge of it. He can also rely on the non-conformity of the goods, even if at the time of acceptance of the documents with a minor defect he had neither knowledge nor means of knowledge of another defect in respect of the goods.


. Termination [Avoidance] of Contract


.1. Introduction


In the preceding part, it was seen that the Convention has given the buyer a right to withhold performance of his obligations as long as the seller has not fulfilled his delivery obligations in accordance with the contract and the Convention. This remedy, as already indicated, is distinguishable from the remedy of termination [avoidance] in terms both of the ground on which it is available and its effects. Withholding performance is based on the theory of reciprocity of obligations and will be justified where the lack of conformity is not minor, while termination is primarily based on the doctrine of fundamental breach. Termination, as will be seen below, will bring the contract to an end, while withholding performance will not affect the legal existence of the contract.


The following discussion first examines the circumstances in which the buyer will be entitled to terminate the contract for the sellers non-conforming delivery and then addresses the mechanism of exercising the right and the circumstances in which the buyer may lose his right to terminate. Finally, it takes a short look at the effects termination may have on the rights and liabilities of the parties.


.. Grounds for Termination


General Review. As a general rule, the Convention grants an aggrieved buyer the right to declare the contract terminated provided that the failure by the seller to perform any of his obligations amounts to a fundamental breach of contract as defined in Art. 5. However, the buyer may also be entitled to terminate the contract without being required to rely on the doctrine of fundamental breach. This possibility arises where the buyer resorts to the provision authorising him to request the seller to perform within a specified additional period of time of reasonable length (commonly referred to in the literature as the Nachfrist notice) (Art. 47). As will be seen, failure to comply with this request may be regarded as another ground upon which the buyers termination may be justified (Art. 4(1)(b)).


..1. Fundamental Breach


..1.1. Significance and Concept of the Test


Fundamental breach is one of the pillars of the Convention because various sanctions available to the buyer and seller, as well as certain aspects of the passing of risk, depend on this concept. Above all, the concept of fundamental breach is a key to the system of termination under the Convention. The Convention in several places bases the buyers right of termination on the fundamental breach test. Accordingly, the main question is What is fundamental breach? Art. 5 of the Convention defines it in the following terms


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.


In international sale contracts, it is a fresh legal concept, born from compromise and open to different interpretations. It should therefore be interpreted in its own context by taking into account the legislative history of its development.


..1.. Elements Constituting the Test


Art. 5 of the Convention sets up two major criteria for defining fundamental breach. First, the breach must result in a detriment to the innocent party; second, it must substantially deprive the innocent party of what he is entitled to expect under the contract. The last phrase of the Article also provides for the party in breach an avenue to escape from the drastic effects of his breach, if he can prove that he did not foresee (or could not have foreseen) the consequences of his breach. Meditation over the key words of definition employed in Art. 5 detriment, substantial and foreseeability, gives rise to some constructive questions What is detriment? What detriment is substantial? and When is the foreseeability test applied?


(I) Detriment. The first foundation for a breach being fundamental is that it must cause the non-breaching party detriment. The Convention itself does not contain any definition of the term detriment. Nor does it give any example of detriment that rises to the level of a fundamental breach. Confronted with such a newcomer word in the field of international sale, commentators have taken diverging views in its interpretation.


In the absence of precise definition, it seems that the term must be interpreted in light of the Conventions legislative history as well as its intended purpose. The legislative history of Art. 5 shows that the test developed out of the debate over the weaknesses of the 164 Uniform Law on the International Sale of Goods (hereinafter, ULIS)s criterion for defining the fundamental breach doctrine. The draftsmen, in avoiding the difficulty of subjectivity of the ULIS test, accepted the detriment criterion so as to present an objective test for determining the fundamentality of the breach. But the history of the word detriment is short. It was proposed in the sixth session of the UNCITRAL Working Group in 175, and was retained in the 178 Draft proposal. The nature and concept of the term has not been examined, either during the UNCITRAL Working Groups sessions nor in the 180 Diplomatic Conference. The only thing said with respect to the term detriment was that the Working Group report was quoted as pointing out the advantage of stressing that the term detriment had to be interpreted in a broader sense and set against the objective test of the contents of the contract itself.


However, an unofficial commentary by the UNCITRAL Secretariat on Art. of the 178 Draft Convention may provide some guidance as to the meaning and application of this term. The Secretariat Commentary stated that [t]he determination whether the injury is substantial must be made in the light of the circumstances of each case, e.g., 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. From this comment, it is possible to conclude that the drafters intended the word detriment to be synonymous with injury and harm, and it can also be exemplified by monetary harm and interference with the other activities.


The term can be further clarified by considering its purpose. The purpose is simply to allow the injured party to terminate the contract, demand substitute goods, or to prevent the risk of loss from passing to the buyer. These purposes, as will be seen later, clearly require a broad sense which is beyond the realm of compensation for damages. Accordingly, keeping in mind both its history and purpose, the term has to be interpreted in a broad sense and any narrow construction must be excluded.


(II) Substantial Deprivation. The second major requirement for a breach to be regarded as fundamental is that the detriment caused by the breach must have some degree of seriousness so that it substantially deprives the victim of breach of what he is entitled to expect under the contract. Unlike the nature of detriment, which was not much at issue either by UNCITRALs Working Group or in the Diplomatic Conference, the degree of its effects was and still is controversial. In this connection, the first question is What criteria should be applied to determine whether the detriment sustained by the victim of breach has resulted in fundamental breach?


The legislative history of the provision shows that it was controversial. Examination of the legislative history of Art. 5 shows that it was first suggested that to ascertain whether breach was fundamental, it should have been proved that the detriment caused by the breach was substantial and the Committee welcomed that proposal and inserted it into the definition of fundamental breach. In the Diplomatic Conference, however, the debate on the words substantial detriment to the other party was extensive. Some delegations labelled it something between vague, subjective and objective and flexible. The main objection to the substantial criterion was that substantial as an adjective caused as much uncertainty as fundamental itself, and, therefore, required an objective yardstick. Various proposals were offered for this purpose. Eventually, in order to reconcile the different proposals, it was decided that for a breach to be fundamental, it must result in such detriment as substantially to deprive the victim of breach of what he is entitled to expect under the contract.


However, in relying on the phrase the buyer was entitled to expect, one should be careful. It does not mean that the only criterion for this purpose is the buyers expectations from the contract, as the language of Art. 5 seems to suggest. His expectations are qualified by the last phrase what he is entitled to expect under the contract. It seems that this limitation introduces an important qualification and ensures that it is not solely the buyers expectations which are relevant. The buyer is clearly entitled to expect to receive the performance promised by the seller, but since this depends on the sellers contractual undertaking, it is defined as much by the sellers expectations as by the buyers. Thus, suppose that the buyer is deprived of the opportunity to obtain a particular benefit he expected to receive from the sellers performance but of which he has not informed the seller. Can it be said that the buyer is entitled to expect that benefit under the contract? Moreover, as will be seen in detail, the test of the buyers expectations is further limited by the qualification, which takes account of what the seller could reasonably foresee. This makes clear that if the buyer is deprived of a benefit which the seller could not foresee and could not reasonably be expected to foresee, the breach is not fundamental. Accordingly, the degree of the requisite substantiality of deprivation caused by detriment must be ascertained within the framework of the amount of detriment incurred by the buyer in respect of those expectations required under the contract. The legitimate expectation interest test of Art. 5, as described above is, therefore, the only criterion in determining whether or not deprivation is substantial.


The question which arises here is whether the only source for the buyers expectation interests is the terms of the contract, as the language of Art. 5 shows where it says he is entitled to expect under the contract -- which in principle refers to all the terms of the contract whether express or implied. Does it mean that any other circumstances of the case are not to be taken into account? The question came into view at the Vienna Conference when the German delegation proposed to amend the draft Art. on fundamental breach so that the determination of whether or not a detriment was substantial would have been determined by the express or implied contract terms themselves. This amendment was criticised by a number of representatives as too narrow. A substantial number of delegations suggested that the court has to examine the terms of the contract as well as the surrounding facts. It was on this general understanding that the text accepted by the Conference referred to the phrase what he is entitled to expect under the contract.


On this interpretation, the extent to which a party suffers an injury to its expectations will, therefore, be found not only in the language of the contract but in the circumstances surrounding the contractual relationship of the parties. However, it does not mean that the assessment of the existence of substantial detriment will depend on the circumstances of any individual case, even those circumstances take place after the time of making the contract. If some particular circumstances are significant for a contracting party, he should bring them into the other partys attention at the time of contract. Accordingly, it is fair to say that the Convention has not left the determination of the degree of a given detriment, and drawing the line between substantial and insubstantial deprivation, to the judges sole and sovereign appreciation, but requires him to decide in the framework of the contract and the circumstances that existed at the time it was made.


After all above, the main question still remains; At what point does deprivation resulting from detriment reach the threshold of substantial deprivation? The Convention has failed to introduce any concrete factors to guide the judge to decide whether the detriment sustained has attained the sufficient degree of substantial deprivation. The Convention seems to have left the question of determining the sufficient substantial deprivation of the buyer from his contractual expectations to the arbitrators to decide in the light of the circumstances surrounding any particular case. In any case, the court should decide the case by taking into account the value of the goods, the purpose for which the buyer has purchased the goods, and the degree of actual and prospective detriment caused by the breach, and other interference caused by the breach into his activities.


(III) Foreseeability. The foreseeability test in the final conditional clause of Art. 5 constitutes a further qualification. Although the sustained detriment which resulted in substantial deprivation prima facie makes breach fundamental, a breach will not be fundamental if the seller can rely on the last sentence of Art. 5.The legislative history of Art. 5 reveals that the burden of proving foreseeability of loss was originally on the party in breach. The 176 Draft Convention put the onus on the aggrieved party both to show that the breach of contract resulted in a substantial detriment to him and that the party in breach foresaw or had reason to foresee such a result. The Philippines delegate to UNCITRAL subsequently objected that this formulation was unfair to the injured party and that the burden should not rest on him to show that the breaching party ought to have foreseen the result of his conduct. In the light of this objection, the wording of the definition was amended at the 177 session of UNCITRAL so as to require the defaulting party to show that he could not reasonably have foreseen the consequences of his breach. At the Vienna Diplomatic Conference, the Egyptian delegation sought to amend the Draft Art. on fundamental breach by including express language indicating a shift in the burden of proof. The drafters refused to include the language which would raise questions of civil procedure. However, there was a consensus that this burden should be on the party in breach because of the logical difficulty of requiring the non-breaching party to prove what the party in breach actually foresaw or a reasonable man in its position could have foreseen.


The concept of foreseeability developed out of Art. 10 of ULIS which completely based fundamental breach on the foreseeability of events. Art. 5 of the present Convention, however, adds an objective test into the determination of whether a breach is fundamental by asking two questions (1) Did the party in breach foresee that the breach of contract would result in a substantial deprivation of the non-breaching party; and () Would a reasonable person of the same kind in the same circumstances have foreseen such a result. These two questions will require the court to view the contract from the subjective perspective of the party-in-breach, as well as from the objective perspective of a reasonable merchant of the same kind in the circumstances of the party in breach. These subjective and objective elements are cumulative, not alternative. The outcome is that a breach would be regarded as non-fundamental only where courts or tribunals are satisfied that both elements are proved.


The first requirement for negativing the claim for breach under Art. 5 is whether or not the party in breach actually foresaw the harm caused by the given breach. Whether the detriment caused by the breach was actually foreseeable by the seller depends on his knowledge of the facts surrounding the contract. In this respect, as some commentators suggested, factors such as the sellers experience, level of sophistication, and organisational abilities should be considered in showing whether or not the harm in question was foreseeable. In the light of such factors, the court may be satisfied that the seller was able to anticipate and recognise problems in the transaction. However, this requirement is a purely subjective one which focuses solely on the personal position of the breaching party. Certainly, any party who has committed a breach of contract resulting in serious consequences will hardly accept that he foresaw those consequences, but will most likely insist that, unfortunately, he did not foresee, as the Article describes it, such result. The mere allegation, however, does not suffice but, as explained above, the party in breach must prove his allegation.


In this connection, Art. 5 provides a further requirement. This is an objective test requiring the party in breach to show that a reasonable person of the same kind in his circumstances would not have foreseen that the given default would have caused the injuries in question to the innocent buyer. Since parties to international sales contracts are presumed to be merchants, a reasonable person can be construed as a reasonable merchant. A reasonable merchant would, therefore, include all merchants that satisfy the standards of their trade and that are not intellectually or professionally substandard. The features that may characterise reasonable merchants include


(1) The merchants degree of skill and professional qualifications (for example specialised licenses);


() The merchants professional associations or affiliations which may set competency standards;


() The length of the merchants business experience; and


(4) The geographic region in which the merchant does business.


The phrase of the same kind is the first element of precision intended to mitigate the effects of subjectivity of the first criterion of foreseeability. The meaning of the phrase has to be apparently inferred from the purpose of the clause. It is, as Professor Will suggested, provided to tailor a reasonable person to the likeness of the party in breach. The hypothetical merchant ought to be engaged in the same line of trade, doing the same function or operations as the party in breach. Not only must business practices be taken into account, but the whole socio-economic background as well, including average professional standards.


A further element is also provided by Art. 5 for the purpose of precision. Under this requirement, the court must take into account the reasonable merchant in the same circumstances, in which the party in breach was. By this requirement, the court should take into account conditions on world and regional markets, legislation, politics and climate ... in short [the] whole range of facts and events at the relevant time.


As was seen, a party alleged to be in breach thus has a difficult burden, but if he can show that he did not foresee the drastic effects of his default, and can prove that a reasonable merchant facing the same market conditions would not have foreseen such results, then the party claiming breach will not be able to rely on the sellers breach for termination.


Time for Foreseeability. The other issue that arises out of the definition of Art. 5 is At what time is the foresight of the party in breach to be judged? Is the relevant time when the contract was concluded or when the breach was committed, or does it depend on the circumstances of each case? Unlike Art. 10 of ULIS which was quite clear that the time point should have been the time of the conclusion of the contract, the language of Art. 5 does not expressly answer the question. This ambiguity has generated a substantial literature.


It seems that, like the other issues, it would be helpful to analyse the present issue in the light of legislative history of the provision. In the UNCITRAL Working Groups sessions and at the 180 Vienna Conference, some delegates proposed that this element be amended to restrict consideration to those circumstances that the party in breach could have foreseen when the contract was made. In UNCITRALs final [177] review of the sales provisions, one delegate proposed to limit the time for foreseeability to the time of the conclusion of the contract. Under another view, it was thought that it would be fairer to refer to the time at which the breach was committed. The decision was recorded as follows The Commission, after deliberation, did not consider it necessary to specify at what moment the party in breach should have foreseen or had reason to foresee the consequences of the breach. Finally, the UNCITRAL Draft Convention after some discussion preferred not to specify that point, thus leading the Secretariat Commentary to note that in case of dispute, that decision must be made by the tribunal.


As has been seen, the general understanding of the issue prior to the Vienna Diplomatic Conference was that the relevant time for foreseeability was left open. At the 180 Diplomatic Conference, the issue again came into focus and there were various attempts to specify the point in time at which the foreseeability standard is to be applied. One proposal would have limited Art. 5 to foreseeability at the time when the contract was concluded. The right to damages under Art. 74 is so limited. Had the proposal to similarly limit Art. 5 been approved, it would clearly have eliminated the possible anomaly of a right to avoid a contract even where there is no right to damages. However, this proposal was not approved nor did the delegates approve a related proposal which would have required foreseeability to be related to the reasons for the conclusion of the contract, or any information disclosed at any time before or at the conclusion of the contract. The Official Records indicate that the latter proposal was withdrawn following the statement that information provided after the conclusion of a contract could modify the situation as regards both substantial detriment and foresight. Although the other delegates were not unanimous, a substantial number favoured leaving the question at large to be decided by the adjudicating body, taking into account the circumstances surrounding the case in question.


As the preceding analysis shows, the travaux pr�paratoires offer no help to the court. Accordingly, one may argue that the question was deliberately left unanswered because the working groups could not agree on the answer. They therefore left the question to the courts. There is, therefore, no reason to impose an interpretation on Art. 5s foreseeability requirement that ignores post-formation developments. However, on this approach, one has to be in conformity to Honnolds view that information received by the seller later than the breach should not have any value attached to it.


Nevertheless, there is the possibility of arguing in support of the first approach. As explained when dealing with the concept of the injured partys expectations under the contract, whether or not the injured party was entitled to expect to have a particular benefit should be ascertained within the contract terms and other circumstances which came to the attention of the party in breach at the time of making the contract. The same analysis seems to be applicable to the measurement of foreseeability of the consequences of the breach. It can even go further and argue that the language of Art. 5 is in line with this approach, since it defines the consequences relevant to the determination of fundamental breach in terms of what a party is entitled to expect under the contract and the second sentence of the Article refers to the foreseeability of such result by the party in breach. Accordingly, as contractual expectations are formed at the time of contracting, foreseeability of substantial deprivation of those expectations by the reason of breach should also be measured at that time.


... Nachfrist


As already pointed out, termination of contract is primarily to be justified on the basis of the doctrine of fundamental breach. This criterion is to be applied even where the seller fails to perform his obligations within the contract time. Under this requirement, termination can be a thorny problem, for in any case the buyer must be sure that the breach is fundamental. This will not always be a proper solution for him. Once the seller is, for instance, late in performing, the buyer may rightly be doubtful whether the sellers delay amounts to a fundamental breach. One way to circumvent this problem is by use of the German law solution of Nachfrist according to which, where one party is in default the other party may give him a reasonable time within which he should perform his obligations. If at the end of this additional period of time, the defaulting party has not performed, the innocent party can terminate the contract. In the case of buyers remedies, Art. 47(1) adopted a version of this concept. The provision authorises the buyer to fix an additional period of time of reasonable length for performance by the seller of his obligations. The wording of the provision appears to cover the whole range of obligations arising under the contract and the Convention, such as delivery of all or part of the goods, the remedy of any lack of conformity by repair of the goods or by delivery of substitute goods or performance of any other act which would constitute performance of the sellers obligations. However, Art. 4(1)(b) only refers to the case where the seller has failed to deliver the goods. Accordingly, the question is whether the buyers right to terminate the contract on the basis of Nachfrist notice arises only where the seller has failed to deliver on the date set for delivery in the contract or if it also comes into operation in respect of failure to perform other obligations.


Although ULIS started with the idea that the buyer could avoid a contract only for a fundamental breach (Art. 4), it also allowed the buyer to demand that the seller cure the defect within a reasonable time and, if the seller did not, the buyer could declare the contract avoided (Art. 44()). The UNCITRAL Working Groups early drafts were also broad and covered any failure of the seller to perform any of his non-fulfilled obligations within the additional period of time. However, in 17 at the fourth session several representatives advanced proposals to restrict the notice-avoidance procedure to cases where the seller has not delivered the goods. UNCITRAL accepted those proposals on the ground that the procedure could be abused to convert a minor breach into a fundamental breach by using the Nachfrist system provided under Art. [47(1)] and avoid the contract where the seller did not perform his obligations within the additional time. The restricting provision survived in Art. 45(1)(b) of UNCITRALs 178 Draft Convention. At the Vienna Conference, the question of extension of the buyers right to avoid the contract on the ground of Nachfrist notice was again proposed by some delegations. The debate over the issue centred on whether a distinction should be drawn between non-delivery and non-conformity. Some delegations proposed that, since the aggrieved buyer by virtue of draft Art. 4(1) was empowered to fix an additional period of time for the seller to perform any of his obligations, it was appropriate to widen the sphere of application of draft Art. 45(1)(b) to give the buyer necessary remedies when the seller disregarded his fundamental obligations arising from the additional period of time. But as a result of the opposition of the State delegations, the Diplomatic Conference rejected the proposals to broaden the scope of notice-avoidance to include non-conformity and in order to avoid any possible misunderstanding, it added the phrase in case of non-delivery at the beginning of the notice-avoidance provision in Art. 4(1)(b). Based on this amendment, it can be concluded that the buyers right to avoid the contract on the ground of Nachfrist notice is restricted to non-delivery cases. Accordingly, the buyer will not be entitled to resort to the Nachfrist-notice rule to terminate the contract if the seller has failed to perform his duty to deliver substitute goods or other obligations under the contract and the Convention within the additional time.


The buyer will be entitled to terminate the contract on the Nachfrist-notice procedure where he satisfies the court that he has fixed an additional period of time of reasonable length and demanded that the seller deliver the goods within that period (Art. 47(1)). He also has to prove that the seller has not delivered the goods or had declared that he would not have delivered them within the period so fixed (Art. 4(1)(b).


No clear provision, however, can be found in the Convention to be relied in ascertainment of this vague term. Professor Will suggests that it must be ascertained on the particular circumstances of each case. He also suggests that among the various elements to be taken into consideration are the nature, extent and consequences of the delay, the sellers possibilities of and time needed for delivery, and the buyers special interest in speedy performance.


...1. Perfect Conforming Delivery or Substantially Conforming


Where the seller has delivered the goods subsequent to the buyers request, the latter will not be allowed to refuse to accept them and terminate the contract. The question which arises here is whether only a perfect tender would deprive the buyer of the right to rely on Nachfrist avoidance or a delivery which is substantially in conformity with the contract. Suppose, for example, that the seller is late in delivering the goods and the buyer sends a Nachfrist notice requiring complete delivery and within a reasonable period fixed by the buyers notice the seller delivers all but a small portion of the goods or delivers all, but all or part of them do not conform to the contract terms, can the buyer avoid the contract? Art. 4(1)(b) permits the buyer to avoid if the seller fails to deliver the goods within the period fixed by a Nachfrist notice -- a standard that could be construed to apply even though such failure does not amount to a fundamental breach.


It might be argued that the position is apparently covered by Art. 51(). Under this Article, a buyer who has received goods a part of which is not in conformity with the contract or is missing can avoid the contract in its entirety only if the failure to make delivery completely or in conformity with the contract amounts to a fundamental breach of contract. Thus a buyer who has received delivery of less than the required amount or non-conforming goods cannot avoid the contract as a whole by using the Nachfrist procedure. Termination can be justified in such a case where the lack of conformity amounts to a fundamental breach. The question can also be answered by the proper construction of the general principles on which the Convention is based (Art. 7()). One of those principles is that avoidance of the contract is effective only where the other side has committed a fundamental breach. Art. 7(1), furthermore, requires that the Convention is to be interpreted to promote ... observance of good faith in international trade. The Nachfrist provisions of the Convention can and should, therefore, be interpreted in a manner that does not undermine the fundamental breach standard for avoidance accepted as a general criterion by the Convention. In the light of these considerations, Art. 4(1)(b) should be construed to permit avoidance only where the seller fails to deliver within the additional time fixed by the buyer in accordance with Art. 47(1), a substantial part of the goods or where the delivered goods are substantially contrary to the contract.


.... Nachfrist Notice and Non-Conforming Documents


The other question which arises is whether the Nachfrist-notice avoidance can be extended to the case of non-tender of documents. There is no express provision in the Convention for such an extension, but Art. 4(1)(b) expressly refers to the case of non-delivery of goods. However, some commentators have suggested that By analogy, the provision also applies to the failure to transfer documents of title. This can be justified on the ground that in an international sale of goods, the parties normally bargain for documents. Without the documents of title, the buyer cannot access or resell the goods bargained for. Accordingly, the same logic which justifies the provision in the case of non-delivery of goods exists in the case of failure to transfer the documents of title.


... Breach of Severable Contract


In the preceding discussions, it became clear that the buyer may be entitled to terminate the contract either on the basis of the doctrine of fundamental breach or the Nachfrist rule. Application of these rules has been examined in respect of the case where the buyer wishes to terminate a non-severable contract as a whole for the reason of the sellers non-conforming delivery or late delivery. The Convention, in addition to that, provides some provisions under which the buyer may be able to terminate the contract in respect of some part of the subject-matter of the contract and keep the contract alive with respect to the other part (Arts. 51(1) and 7(1). In the following, the application of the doctrine of fundamental breach as well as Nachfrist rule is assessed in respect of such cases.


...1. Fundamental Breach and Severable Contracts


Where the seller makes a delivery which includes some non-conforming goods or of less than the required quantity of goods, Art. 51(1) entitles the buyer to exercise his remedies under Arts. 46-50, including Art. 4 which gives him the right to avoid the contract. Although the Convention does not expressly make a distinction between cases where the contract is or is not severable, it seems that, by recognising partial avoidance, Art. 51(1) presupposes that it should be the case where performance of the seller could be divided into conforming and non-conforming parts. Where the non-conforming part is severable, the reference means that both the conditions and the effects of Arts. 46-50 can be applied to that part. It follows that the buyer can treat the missing or non-conforming part as the subject of a separate contract that is severable for remedy purposes, and consequently terminate the contract in respect of that part, provided that the sellers failure constitutes a fundamental breach with respect to that part. In such situations the buyer can avoid the contract in its entirety only if the sellers default amounts to a fundamental breach of contract (italics added) as a whole (Art. 5()).


A similar rule is provided where the seller has committed a breach of contract in respect of one or more instalments under an instalment contract. Art. 7(1) permits the buyer to avoid the contract with respect to [an] instalment if the sellers failure to perform any of his obligations constitutes a fundamental breach of contract (italics added) with respect to that instalment. He is also empowered to avoid the contract in respect of future instalments if the sellers default in relation to any instalment gives the buyer good grounds to conclude that a fundamental breach of contract (italics added) will ocPlease note that this sample paper on Buyer's Right to Withhold Performance and Termination [Avoidance] of Contract under the UN Sales Convention is for your review only. In order to eliminate any of the plagiarism issues, it is highly recommended that you do not use it for you own writing purposes. In case you experience difficulties with writing a well structured and accurately composed paper on Buyer's Right to Withhold Performance and Termination [Avoidance] of Contract under the UN Sales Convention, we are here to assist you. Your persuasive essay on Buyer's Right to Withhold Performance and Termination [Avoidance] of Contract under the UN Sales Convention will be written from scratch, so you do not have to worry about its originality.

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