This chapter focuses on the common obligations of buyers and sellers under the CISG. These common obligations and concepts pertain to the passing of risk, fundamental breach, anticipatory breach, and adequate assurance. The first section reviews the passing of risk, which is the subject of a separate chap- ter of the CISG.1 Common Obligations is found in Chapter V of the CISG. It includes six sections: Section I, anticipatory breach and installment contracts;
Section II, damages; Section III, interest; Section IV, exemptions; Section V, effects of avoidance; and Section VI, preservation of goods. Section I’s cover- age of anticipatory breach will be examined in the present chapter. Section II (damages), Section IV (impediment), and Section VI (preservation) will be examined in Chapter10. Avoidance (Section V) will be examined along with thenachfristnotice in Chapter9.
passing of risk
The CISG sets forth the basic principle for the passing of risk in Article67.2 A pivotal issue for determining risk is where the contract requires the seller to hand over the goods. If the seller is not bound to hand over the goods at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer.3If, however, the seller is bound to hand over the goods to a carrier at a particular place, the risk does
1 United Nations Convention on Contracts for the International Sale of Goods, April11, 1980,1489U.N.T.S.3,19I.L.M.671,available atPace Law School Institute of International Commerce Law, http://www.cisg.law.pace.edu (last updated Sept.2003) (hereafter CISG), Chapter IV, Passing of Risk.
2 CISG at Art.67.
3 Id. at Art.67(1).See generallySecretariat Commentary to Art.67,available athttp://www.
cisg.law.pace.edu/cisg/text/secomm/secomm-67.html (if the contract specifies the passage of the risk of loss by the use of trade terms or otherwise, Article67does not apply).
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not pass to the buyer until the goods are handed over to the carrier at that place.4 In any event, risk of loss does not pass to the buyer until the goods are clearly identified in the contract.5Identification can be demonstrated by markings on the goods, shipping documents, notice to the buyer, or otherwise appropriate means.6
Courts interpreting Article67have focused on two issues. The first issue pertains to the consequences of damage to or deterioration of goods after they are handed over to the carrier. A number of courts have considered the liability of buyers and sellers in this context. A second issue regards the effect of additional contract terms on the application of Article67.
When risk of loss passes to the buyer pursuant to Article 67, the seller is held not to be responsible for any deterioration or damage to the goods.
InB.P. Oil International, Ltd. v. Empresa Estatal Petroleos De Ecuador,7 the buyer refused to accept delivery claiming that the goods did not conform to the contract specifications.8 The contract provided that the goods were to be delivered “CFR” and undergo a pre-shipment inspection for conformity.9 The U.S. Fifth Circuit Court of Appeals found that the goods should have been tested for conformitybeforerisk of loss passed to the buyer at the port of shipment.10The court also stated that the general principle in the event of subsequent damage or loss was that the buyer must first seek a remedy against the carrier or insurer.11
4 Id.
5 Id. at Art.67(2).
6 Id.
7 332F.3d333(5thCir.2003).
8 Id. at335.
9 Id. at338.
10 Id.
11 Id. at338,citing In re Daewoo Intl (Am.) Corp.,2001WL1537687,2001U.S. Dist. LEXIS19796, at∗8(S.D.N.Y.2001). Because there was a question of fact, however, as to whether the seller fulfilled its contractual obligations regarding the specifications of the goods before they passed the ship’s rail, the court ordered the district court to permit the parties to conduct discovery on this limited issue.Id. at339. German courts have likewise held that under Article67the seller is not responsible for the depreciation of goods. OLG Schleswig11U 40/01, Aug.22,2002, (F.R.G.),available athttp://cisgw3.law.pace.edu/cases/020822g2.html.
Another German court held that a seller is not responsible for subsequent damage to goods once they are handed over to the carrier. AG Duisburg,49C502/00, April13,2000, (F.R.G.), available athttp://cisgw3.law.pace.edu/cases/000413g1.html. In that case, the court held that Article67applied because the buyer was not able to prove that there was an agreement between the parties for risk of loss to pass to the buyer at a different location. A third German court stated that a seller is only be liable for any defect if it gave a mandate to the carrier regarding the means of shipment. OLG Schleswig,11U40/01, Aug.22,2002, (F.R.G.), available athttp://cisgw3.law.pace.edu/cases/020822g2.html. An Argentine court reached the same conclusion and held that after the risk of loss passed to the buyer, it was obligated to
Issues of the application of Article67often hinge on a court’s interpretation of contract terms that impact the passage of risk of loss. In one case, a French seller sold goods to a German buyer pursuant to a contract with a clause that it would deliver the goods to a carrier in accordance with its general business conditions of “free delivery, duty-paid, untaxed.”12 The dispute arose after the buyer denied that delivery had taken place, even after the seller produced an unsigned receipt with the buyer’s stamp.13 The court held that the clause
“free delivery . . .” should be interpreted under German law. As such, the seller undertook the risk of transportation of the goods.14Moreover, the parties’ past course of dealings included the seller using its own means of transportation to deliver to the buyer. The court found this to be added evidence of the parties’
intention to pass the risk to the buyer’s place of business in Germany. Because the seller was unable to prove that the goods were delivered to the buyer, no passing of risk to the buyer took place, and the seller was not entitled to claim the purchase price.15 It should be noted that when the risk of loss passes to the buyer pursuant to Article67, the risk passes irrespective of whether the contract contains a C & F clause16or whether the buyer has arranged to insure the goods while they are being transported.17
fundamental and anticipatory breach
Essential to a determination of the liability of buyers and sellers is whether there has been a fundamental breach or anticipatory breach of contract. Under Article25, a fundamental breach of contract occurs when an act by one of the parties results in the other party being substantially deprived of what it expected under the contract.18However, the detriment caused by the breach must have been foreseeable. If the breaching party did not foresee, and a reasonable person in the same circumstances would not have foreseen such
pay the purchase price unless the loss or damage to the goods was due to an act or omission by the seller.Bedial, S. A. v. Paul M¨uggenburg and Co. GmbH, Oct.31,1995, (Arg.); CLOUT Case No.191,available athttp://www.uncitral.org/english/clout/abstract/index.htm.
12 OLG Karlsruhe,15 U29/92, Nov.20,1992, (F.R.G.), CLOUT Case No.317,available at http://www.uncitral.org/english/clout/abstract/abst-30.pdf.
13 Id.
14 Id.
15 Id.
16 Bedial v. M¨uggenburg,supraNote609.
17 Audiencia Provincial de C´ordoba[Division3], Oct.31,1997, (Spain); CLOUT Case No.247, available athttp://www.uncitral.org/english/clout/abstract/abst-24.pdf.
18 CISG,supraNote1, at Art.25.See, e.g., Medical Marketing International, Inc. v. Internazionale Medico Scientifica, No.99-0380-5(1), S.R.L.,1999WL311945(E.D.La. May17,1999).
a result, there is no fundamental breach.19A fundamental breach gives the non-breaching party the right to avoid the contract or to require the delivery of substitute goods.20If the breach is considered nonmaterial, the aggrieved party is entitled to damages, but not the remedy of avoidance.21
The CISG provisions set a high threshold before a party anticipates a breach and can suspend performance.22 Anticipatory breach under Articles71,72, and73can occur in various contexts in the performance of a contract.23These articles aim to provide a remedy while keeping the contract intact. A party may suspend the performance of his obligations if it becomes apparent that the other party will not substantially perform as a result of a serious deficiency in its ability to perform, such as poor creditworthiness, or in its failure to prepare to perform.24If these preconditions exist, a party can suspend performance.
Alternatively, if a seller has dispatched the goods, he may prevent the goods from being handed over to the buyer.25Article72allows the suspending party to terminate the contract by electing the remedy of avoidance.26
The narrowness of the preconditions for suspension of performance is designed to prevent abuse of anticipatory breach. Another limitation on sus- pension of performance is that the party suspending performance must im- mediately give notice of suspension to the other party.27“Reasonable notice”
19 Id. Art.25.See generallyRobert Koch,The Concept at Fundamental Breach of Contract Un- der the United Nations Convention for the International Sale of Goods, inReview of the Convention on Contracts for the International Sale of Goods(1999),available athttp://cisg.law.pace.edu/cisg/biblio/koch.html. (discussing the concept of fundamental breach under the CISG); Clemens Pauly,The Concept of Fundamental Breach as an Interna- tional Principle to Create Uniformity of Commercial Law,19J.L. & Com.221,229–32(2000) (discussion includes German concepts related to fundamental breach, including the fact that German sales law does not distinguish between general and fundamental breach).
20 SeeCISG at Arts.46,49,51,64,70, and72, which specifically refer to the concept of a
“fundamental breach” to determine liability.
21 See id. arts.49(1)(a),51(2),64(1)(a),72(1), and73.
22 Jelena Vilus,Provisions Common to the Obligations of the Seller and the Buyer,inInter- national Sale of Goods; Dubrovnik Lectures 239,239–64(Paul Volken and Petar Sarcevic, eds.,1986).
23 See generallySeig Eiselen,Remarks on the Manner in Which the UNIDROIT Principles of Inter- national Commmercial Contracts may be Used to Interpret or Supplement Articles71and72of the CISG(Sept.2002),available athttp://cisgw3.law.pace.edu/cisg/principles/uni71,72.html (using the UNIDROIT principles as an aid to the interpretation of Articles71–72of the CISG); Seig Eiselen,Remarks on the Manner In Which The Principles of European Contact Law May Be Used to Interpret or Supplement Articles71and72of the CISG(Sept.2002), available athttp://cisgw3.law.pace.edu/cisg/text/peclcomp71,72.html (using the European Union legal principles as an aid to the interpretation of Articles71–72of the CISG).
24 CISG at Arts.71(1)(a) and (b).
25 Id.at Art.71(2).
26 Id.at Art.72.
27 Id.at Art.71(3).
to the other party enables the opportunity to provide adequate assurance of his performance.28If a party declares that he will not perform his obligations, notice need not be given.29Finally, a party’s right to suspend performance is limited by the reciprocal right of the other party to provide adequate assur- ance that it will perform. If the party provides such assurance, then the party is prohibited from continuing the suspension.30
The final context in which the CISG addresses common obligations of buyers and sellers for anticipatory breach is Article73. Article73provides the threshold for fundamental breach in the context of installment contracts.31If one party’s failure to perform any of his obligations constitutes a fundamental breach of contract with respect to that installment, the other party may de- clare the contract avoided only with respect to that installment.32However, if the failure to perform with respect to one installment gives the non-breaching party reasonable grounds to believe that the breaching party will not deliver a future installment, the anticipation of future breaches equates to a fundamen- tal breach allowing the non-breaching party to declare the contract avoided.33 The issues of fundamental breach as they pertain to installment contracts will be explored more fully later in the chapter.
Fundamental Breach: Article25
The concept of fundamental breach under Article25 is very restrictive. A breach must concern the essential content of the contract in order for it to be considered fundamental.34Courts and arbitral decisions have focused on three types of breaches as potentially fundamental – late delivery, deficiencies in the goods, and failure to uphold specific contractual terms.
28 Id.at Art.72(2).
29 Id. at Art.71(3).
30 Id.
31 Id.at Art.73.
32 Id.at Art.73(1).
33 Id.at Art.73(2). As is the case in other examples of avoidance, however, notice must be provided to the other party within a reasonable time.Id. Note that a buyer who declares the contract avoided in respect to any delivery may, at the same time, declare it avoided in respect to deliveries already made or of future deliveries if, by reason of interdependence, those deliveries could not be used for the purpose contemplated by the parties at the time of the conclusion of the contract.Id. at Art.73(3).
34 See, e.g., FCF S. A. v. Adriafil Commerciale S.r.l., BGE4C.105/2000, Sept.15,2000, (Switz.), available athttp://cisgw3.law.pace.edu/cases/000915s2.html (The breach must concern the essential content of the contract, the goods, or the payment of the price concerned, and it must lead to serious consequences to the economic goal pursued by the parties).
First, late delivery does not generally constitute a fundamental breach.35 Similarly, there cannot be a fundamental breach for failure to deliver where the parties have not agreed on a precise date of delivery.36 A buyer’s refusal to take delivery of goods may also not be considered a fundamental breach under certain circumstances. In one case involving staggered deliveries from May to December, the parties agreed that in return for a price reduction, the September delivery would take place in late August.37At the time of delivery, the buyer refused the goods and demanded the delivery be postponed until September. A French court determined that the buyer did not commit a fundamental breach, because the buyer was entitled to regard the bringing forward of the delivery date to late August as merely a reciprocal concession for a financial advantage.38As such, it could not be expected to have understood that a few days’ delay in taking delivery would constitute a fundamental breach on its part. Accordingly, the seller should have granted the buyer additional time in which to take delivery.
However, a delay in delivery can rise to a level of a fundamental breach when a timely delivery is in the special interest of the buyer.39The importance of the delivery date must be foreseeable at the time of the conclusion of the contract.40Depending on the circumstances of the transaction, such as the need to honor obligations to downstream purchasers, the delivery time may be considered a material term.
Second, a common type of breach is the delivery of deficient or defective goods or documents. In a German case of nonconformity of documents, a buyer made alternative arguments of nonconforming delivery amounting to fundamental breach and nonconforming delivery amounting to a non- delivery.41 This case, popularly known as the “blue cobalt” case, involved a contract that required the goods to be of British origin and accompanied by a certificate of origin. The seller delivered the goods to a warehouse in Antwerp,
35 OLG M¨unchen, 10O 5423/01, July1,2002, (F.R.G.),available athttp://cisgw3.law.pace.
edu/ cases/020701g1.html.
36 OLG M¨unchen,7U1720/94, Feb.8,1995, (F.R.G.),available athttp://cisgw3.law.pace.edu/
cases/950208g1.html.
37 SARL Ego Fruits v. La Verja, RG98/02700, Feb.4,1999, (Fr.), CLOUT Case No.243,available athttp://www.uncitral.org/english/clout/abstract/index.htm.
38 Id.
39 OLG Hamburg,1 U167/95, Feb.28,1997, (F.R.G.), CLOUT Case No.277,available at http://www.uncitral.org/english/clout/abstract/index.htm.
40 For example, the use of the Incoterm “CIF” by definition determines the contract to be a transaction for delivery by a fixed date.Id.
41 BGHZ VIII ZR51/95, Apr.3,1996, (F.R.G.),available athttp://cisgw3.law.pace.edu/cases/
960403g1.html.
as required by the contract, and sent certificates of origin to the buyer. The certificates of origin indicated that the goods were of South African origin.
The buyer declared the contract avoided on the grounds that the noncon- forming certificate constituted a fundamental breach and that, because of the defective document, there was no true delivery. The court rejected the buyer’s Article49(1)(b) (non-delivery) claim that the nonconforming delivery was a non-delivery. The court reasoned that under the CISG, nonconforming delivery still constitutes delivery, making Article 49(1)(b) not available to the buyer. The court also rejected the buyer’s avoidance claim under Article 49(1)(a) (fundamental breach) holding that it failed to prove a fundamental breach. It asserted that the buyer failed to present evidence that South African cobalt could not be sold or that the seller could not obtain conforming docu- ments of origin. The later assertion seems fanciful since the cobalt was clearly not of British origin. This case demonstrates that the concept of fundamental breach is narrowly construed under the CISG.42
Third, defects are considered fundamental only when the buyer is substan- tially deprived of what he was entitled to under the contract.43For example, tiles sold as “impermeable” that turned out to be easily stained by household items, such as juice, constituted a fundamental breach of the contract.44 A shipment of jeans that contained the wrong quantity and were incorrectly la- beled with the wrong sizes fundamentally breached the contract.45 InDelchi Carrier SpA v. Rotorex Corp., the U.S. Second Circuit Court of Appeals held that a fundamental breach of contract occurred when air compressors did not conform to the sample model and the accompanying specifications regarding cooling capacity and energy consumption.46However, the burden remains on the buyer to prove that due to the nonconformity, the goods provided were substantially below what was stipulated in the contract.47
Fundamental breach under Article25 is not confined to untimely deliv- ery or delivery of nonconforming goods. Under certain circumstances, any provision in a contract can be considered material and the breach would be
42 Id.
43 International Chamber of Commerce Arbitral Award1994, ICC International Court of Arbi- tration Bulletin Vol.6, No.2,67, CLOUT Case No.304,available athttp://www.uncitral.org/
english/clout/abstract/index.htm.
44 LG Saarbr¨ucken,8O49/02, July2,2002, (F.R.G.),available athttp://cisgw3.law.pace.edu/
cases/020702g1.html.
45 OLG Hamburg 1 U 31/99, Nov.26, 1999, (F.R.G.), available athttp://cisgw3.law.pace.
edu/cases/991126g1.html.
46 71F.3d1024,1027–29(2d Cir.1995).
47 See, e.g., BGHZ VIII ZR51/95 (buyer was unable to demonstrate that the quality of the goods it received was inferior to what was agreed upon).
considered fundamental. For example, a French seller of jeans negotiated a contract with an American buyer that specified that the ultimate destination of the goods was to be either South America or Africa.48 During the per- formance of the contract, the buyer repeatedly ignored the seller’s demand for proof of destination. Subsequently, the seller learned that a shipment of the jeans was delivered in Spain. A French court found that the buyer disre- garded the seller’s destination requirement and that this “attitude” constituted a fundamental breach of the contract.49
Failure to abide by exclusivity provisions can also give rise to a fundamental breach under Article25. In one case, an Italian manufacturer agreed to produce shoes according to a German buyer’s specifications. At a trade fair, the seller displayed some of the shoes produced under the specifications, bearing a trademark of which the buyer was the licensee.50 After the seller refused to remove the shoes, the buyer avoided the contract. The court held that the seller’s breach of the ancillary duty of preserving exclusivity constituted a fundamental breach of the contract.51
Anticipatory Breach, Adequate Assurance, and Installment Contracts:
Articles71–73
The concept of fundamental breach is also a determining factor in the con- text of anticipatory breach. The CISG affords both buyers and sellers the right to suspend or avoid a contract due to a fundamental breach under Articles 71–73.52 If a fundamental breach occurs or is likely to occur, the
48 S.A.R.L. Bri Prod. “Bonaventure” v. Soci´et´e Pan Africa Export(Feb.22,1995, (France), CLOUT Case No.154,available athttp://www.uncitral.org/english/clout/abstract/index.htm. In an- other case, it was determined that a buyer’s failure to pay large sums due as “performance payments” was a fundamental breach of contract.Shuttle Packaging Sys., L.L.C. v. Jacob Tsonakis, INA S.A.,2001WL34046276(W. D. Mich.2001).
49 S.A.R.L. Bri Prod. “Bonaventure,”Clout Case No.154.
50 OLG Frankfurt,5 U 164/90, Sept.17, 1991, (F.R.G.), CLOUT Case No. 2,available at http://www.uncitral.org/english/clout/abstract/index.htm.
51 Id. CompareFCF S.A. v. Adriafil Commerciale S.r.l., BGE, Sept.15,2000, (Switz.),available at http://cisgw3.law.pace.edu/cases/000915s2.html. The case involved a buyer who purchased shoes through a commercial agent. After the buyer learned that identical shoes made by an Italian manufacturer were being offered for sale by a competing retailer at a considerably lower price, the buyer attempted to avoid the contract. Holding that the buyer was not entitled to avoid the contract, the court stated that there was no fundamental breach because the manufacturer had no knowledge about the branches of its business partners. Ultimately, the two cases can be reconciled under the principle that an ancillary obligation can only be a basis for a fundamental breach when it goes to the principle performance under the contract.See, e.g., LG Frankfurt,3/11 O3/91 Sept.16,1991, (F.R.G.), CLOUT Case No.6, available athttp://www.uncitral.org/english/clout/abstract/index.htm.
52 CISG at Arts.71–3.See Shuttle Packaging Systems, L.L.C. v. Jacob Tsonakis, INA S.A.