Contract avoidance under the CISG: fundamental breach and nachfrist

International Commercial Law

The objective of this work in writing is to address the following: 'Under the CISG, avoidance is the one-sided right of a party to terminate the contract by its mere declaration. Such termination of a contract is the hardest sword that a party to a sales contract can draw if the other party has breached the contract. No other remedy -- claim for performance, price reduction, damages -- has the same incisive effect & #8230; Therefore, it is clear that on the one hand the remedy of avoidance should not be granted too easily, but on the other hand there must be a borderline from where the innocent party must be entitled to bring the contract to an end.' This work will explain the concepts of fundamental breach and 'nachfrist' under the CISG and their importance in regulating international sales. In light of the analysis and in reference to the CISG in general, the question of whether the CISG adequately protect the interests of an innocent party where the other party is in breach of contract?

Is the CISG Adequate to Protect the Interests of an Innocent Party Where the Other Party is in Breach of Contract?

The Vienna Convention is of the nature that has influenced two other recent international instruments:

(1) the Principles of International Commercial Contracts drawn up by Unidroit and published in 1994; and (2) the Principles of European Contract Law prepared by the commission on European Contract Law. (Chigbo, 2009)

These instruments are stated to have been the product of "comparative legal discussion" and to have involved "a pooling of ideas from common law countries and civil law countries." (Chigbo, 2009) There is reported to have been confusion in the past over the use of the words 'resile', 'repudiate' and 'rescind' in relation to contracts and there are still variations but a standard usage is stated to have emerged in recent years. (Chigbo, 2009, paraphrased)

Breach of Contract

To resile means to "withdraw from it lawfully, in the exercise of a right to do so, but not in response to a repudiation or breach." (Chigbo, 2009)

It is related that repudiation of a contract is providing a clear indication through words or actions that the contract will not be performed by the repudiator and the repudiator has no right to withhold or refuse performance. Therefore, repudiation is a wrongful rejection or renunciation of the contract. It does not end the contract but gives the other party an option to rescind." (Chigbo, 2009)

To rescind a contract means to bring that contract to an end in view of future performance of primarily obligations, in response to a repudiation or material breach by the other party." (Chigbo, 2009)

Chigbo (2009) state that the reference of the aggrieved party 'treating' the contract as rescinded although this usage is sometimes encountered." (Chigbo, 2009)

It is related that a repudiation with be companied by or retailers. Chigbo states that it would be inaccurate to speak of the party that is aggrieved 'treating the contract as rescinded because the aggrieved party rescinds the contract, rather than treat it as rescinded. The Sale of Goods Act 1979 speaks of the party aggrieved by a material breach and their entitlement to treat the contract as repudiated." (Chigbo, 2009)

A fundamental breach is held as one that has been avoided in CISG Article 72 if:

(1) 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) 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; and (3) the other party has declared that he will not perform his obligations then the requirements of the preceding paragraph do not apply. (Guide to Articles 71 and 72 - Comparison with Principles of European Contract Law, 2010)

A breach is that which "deprives an innocent party of the whole benefit of the contract. The case cited is Hong Kong Fir Shipping Co. Ltd. V. Kawasaki Kisen Kaisha Ltd. [1952] 2 QB 26. Breach of a fundamental term is also stated to be a breach and cited as support as the cases of: (1) Yeoman Credit Ltd. v Apps [1962] 2 QB 508 at 517, in which it was decided that it may be a total non-performance of the contract; or (2) a total breach: Farnworth Finance Facilities Ltd. v Attryde [1970] 1 WLR 1053. (Guide to Articles 71 and 72 - Comparison with Principles of European Contract Law, 2010)

When a fundamental breach occurs the innocent party has the choice as to whether to terminate the contract. (Guide to Articles 71 and 72 - Comparison with Principles of European Contract Law, 2010)

Repudiatory Breach

Chigbo states that the contrast is of the nature that either party may be given the right to resile "if the consent of a third party to some step is not forthcoming when such consent is a condition precedent in such a contract." (Chigbo, 2009)

The term 'repudiatory breach' is used sometimes and is a term that is useful in some contexts however not precise enough for generalities in the area of breach of contract. A breach is stated to potentially have all the effects of a material breach and, in particular "…can justify rescission, even although it would be straining language to say that it indicated an intention to repudiate." (Chigbo, 2009)

Reasons for Declaring Contract Null and Void

It is related that contracts would be declared null and void at one time and of not effect 'ab initio' due to a material breach including such as failure to pay purchase price for land which had been bought, want of due execution or improper execution of a deed or failure to comply with a statutory requirement for the contract and lack of contractual capacity or failure to obtain the consent of a party to a contract where such consent is necessary etc." (Chigbo, 2009) Generally speaking 'breach' as it relates to a contract means a failure, without justification legally to perform an obligation under the contract as required by the contract." (Chigbo, 2009)

Contract law is specifically addressed in Articles 71 and 72 of the Principles of European Contract Law (PECL) which states as follows:

CISG 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. (Chigbo, 2009)

CISG 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. (Chigbo, 2009)

Within this framework the following the contract's conclusion it becomes clear that the other party will not perform a substantial part of his obligations due to either serious deficiency in the ability to perform or due to his lack of creditworthiness or due to his conduct in preparing to perform or in performing. If the seller has already sent the goods to the buyer then that seller may serve to prevent the goods being handed over to the buyer although the buyer might hold a document of sort entitling him to obtain the same goods. It is important to note that when a party suspends performance that party must give notice immediately of the suspension to the other party of the agreement and is required to continue in performing his obligations if the other party gives assurance that is adequate as to his performance of contractual duties. (Chigbo, 2009)

CISG Article 72

CISG Article 72 states that in the period leading up to the date for the contractual performance should it become obvious that one of the parties will effectively breach the contract fundamentally the other party has the right to declare the contract avoided. Should enough time be allotted the party that intends to declare the contract avoided must provide time that is reasonable in serving notices to other parties. The requirements set out in CISG Article 2 are stated to be non-applicable if the other party has declared that they will not conduct their statements.

Article 71 and 72 Compared

Article 71 set out that when it has become apparent that the other party to the contract will not perform a substantial part of the contractual obligations due to: (1) a serious deficiency in his ability to perform or in his creditworthiness; or (2) his conduct in preparing to perform or in performing the contract, that that party must promptly give notice to the other party of the suspension. However, in Article 72 it is set out that when it is clear that one of the parties will commit a fundamental breach of contract that reasonable notice must be given to the other party 'if time allows'. (Liu, 2005)

The preconditions that must be fulfilled include:

(1) the failure on the part of the buyer to pay for previous shipments;

(2) the failure on the part of the buyer to open a letter of credit;

(3) failure on the part of the seller to reduce price and commit the delivery of the goods on time; and (4) the deliberate termination of goods being delivered on the part of the seller. (Liu, 2005)

Preconditions are not fulfilled when:

(1) the goods were held back upon the buyer failing to establish a letter of credit;

(2) the seller having expressed an interest in deliveries being stopped while agreeing to continue negotiations; and (3) the failure on the part of the buyer to pay one installment. (Liu, 2005)

It is reported that quite different from the "ordinary breach of contract" following the date for performance when discovering this fact is not complex that in the case of anticipatory breach of contract there is a "hypothetical future breach situation." (Liu, 2005)

This means that one of the parties to the contract will make an estimation of the events which are to occur solely on the basis of his objective view influenced by a test that is objective in nature. Article 71 makes a requirement of "some standard of certainty concerning a future breach before one can spend the performance. The suspecting party bears the risk of presuming wrongly." (Liu, 2005)

Stated to be a more basic problem is the 'degree of certainty' that is set out as being required in relation to the other party's presumed failure to perform what is termed as a 'substantial' portion of the contractual obligations. The grounds required for conclusion that the other party will fail to perform this set out 'substantial' of their contractual obligations is emphasized and specifically that the 'suspending party "must prove that the non-performance 'becomes apparent' to him following the contract's conclusion. Therefore, it is stated that "decisive is not just the relevant information but whether the party wishing to suspend could "hold it to be true." (Liu, 2005)

The assessment of the term "becomes apparent" is cleared in CISG Article 71 in that the suspending party "cannot invoke the suspension right on mere hunches on the probability of non-performance." (Liu, 2005)

In other words, the term 'becomes apparent' makes a requirement of the apprehended non-performance being a likelihood equal to "a virtual certainty by normal business standards." (Liu, 2005)

The rule states as follows:

"An objective measure should be used to judge the reasons which would give rise to a suspension of performance; subjective fear by one party will not be sufficient. There must be a high level of probability (emphasis added) of non-performance (citation omitted). The reasons must become apparent to a reasonable person in the same circumstances." (Liu, 2005)