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Start / Schwenzer, Avoidance of the Contract
Autor Prof. Dr. Schwenzer, Ingeborg (Switzerland)
Title Avoidance of the Contract in Case of Non-Conforming Goods (Art. 49 (1) (a) CISG)
Published in -
Additional About author - Dr. iur. (Freiburg im Breisgau), LL.M. (UC Berkeley), Professor of Private Law, University of Basle, Switzerland. Curriculum Vitae
Note - This article is based upon the paper given by the author at the conference held in Vienna on March 15-18, 2005 on the topic: 25 Years United Nations Convention on Contracts for the International Sale of Goods (CISG) and 20 Years UNCITRAL Model Law on International Commercial Arbitration. It will later also be published in a special issue of the University of Pittsburgh Journal of Law and Commerce containing all papers from that conference.

The author gratefully acknowledges Mariel Dimsey LL.B. (Hons) (UQ), B.A. (UQ) and lic. iur. Benjamin Leisinger for their assistance in the preparation of this article.
Table of contents
I. Fulltext
II. Footnotes
I. Fulltext 
I. General Remarks

Art 49(1 )(a) CISG provides that avoidance is possible, and only possible, "if the failure by the seller to perform any of his obligations under the contract or this convention amounts to a fundamental breach of contract." According to Art 25 CISG, a breach is fundamental "if it results in such detriment to the [buyer] as substantially to deprive him of what he is entitled to expect under the contract, unless the [seller] did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result."

This presupposes that the defect has a certain objective importance. Therefore, the lack of conformity must be so serious that the buyer cannot be required to retain the goods and could not be adequately compensated by damages or a price reduction. The substantiality of the detriment to the buyer may be ascertained by having regard to the express stipulations of the parties, the purpose for which the goods are bought and finally, to the question of whether it is possible to cure the defect.

II. Express Stipulations

With regard to express stipulations, it is up to the parties to stipulate what they consider to be the essence of the contract. If the seller then fails to deliver in accordance with the express stipulations given, he cannot argue that he did not foresee any detriment that occurs to the buyer. Consequently, it is not surprising that courts have found a fundamental breach of contract to exist where delivery was made by the seller in derogation from the agreed central features of the goods, such as genetically not modified food. (1)

III. Purpose for Which Goods are Bought

In the absence of express stipulations, regard should be had to the purpose for which the goods in question were bought. Whether or not the goods actually fulfil this purpose will be relevant in determining whether there is a fundamental breach. Where the buyer wants to use the goods himself, the fact that the goods could be resold, whether at a discount price or not, is irrelevant. (2) Rather, the decisive factor is whether the goods are totally improper for the use intended by the buyer, to the extent that the buyer is not able to make use of or to process the goods differently without unreasonable expenditure. (3) Where, however, the buyer is in the resale business, the issue of potentially being able to "on-sell" the goods becomes relevant. A fundamental breach will exist if the goods cannot be resold at all, e.g. food not complying with national health regulations.(4) In other cases, the question is whether resale of non-conforming goods can reasonably be expected from the individual buyer in his normal course of business. A wholesaler with broader access to markets in the business concerned has more opportunities to resell the goods than a retailer. A retailer cannot be expected to resell the goods at a discount price if, by doing so, he would be likely to damage his own reputation. (5) In determining the likelihood of this, regard is to be had to the retailer's specific target group of customers. (6)

IV. Seller's Possibility to Cure

An important limitation on avoidance under the CISG is the seller's possibility to cure. Though the objective essential nature of the defect is always a necessary condition to establish a fundamental breach of contract, it will not always be sufficient. In cases where cure by the seller -e.g. by repairing the goods (7) or delivering substitute or missing goods (8) - is still possible without causing unreasonable delay or inconvenience to the buyer, there is not yet a fundamental breach, or rather, the buyer may not yet avoid the contract even though the breach otherwise appears to be fundamental. (9) Here, due regard is to be given to the purposes for which the buyer needs the goods. If timely delivery is of the essence of the contract, repair or replacement by the seller will usually lead to unreasonable delay within the meaning of Art 48(1) CISG. (10) Furthermore, the buyer should not be expected to accept cure by the seller if the basis of trust for the contract has been destroyed, e.g. due to the seller's deceitful behaviour. When the seller either refuses to cure the defect, simply fails to react, or if the defect cannot be cured by a reasonable number of attempts within a reasonable time, then a fundamental breach will also be deemed to have occurred.

V. Documents and "Avoidance"

With respect to international sales contracts involving documents, special uniform rules and trade usages have been established by the International Chamber of Commerce. The Incoterms 2000 (11) contain detailed rules governing the obligations of the seller to provide for documents, (12) and the buyer to accept them, (13) respectively, whereas the Uniform Customs and Practice for Documentary Credits of the ICC (14), the UCP 500, lay down special rules for cases where payment is to be made by means of documentary credit, including standby letters of credit. Both sets of rules are widely incorporated into international sales contracts.

In international sales contracts involving documents, a distinction needs to be made at the outset between three different situations: Firstly, there are various documents that usually accompany a contract of sale, e.g. insurance policies, certificates of origin, certificates of inspections, custom clearance certificates etc. Secondly, a contract of sale can require delivery by the handing over of documents of title, e.g. bills of lading, dock warrants, warehouse receipts or their respective electronic equivalents. Finally, one has to consider the special situation of payment by documentary credit including letter of credit.

1. Accompanying Documents
In the case of accompanying documents, the question of whether the buyer may avoid the contract must be decided by resorting to the general mechanisms of the Convention already established for determining a fundamental breach. (15)

Thus, initially, what is decisive is whether the defective documents limit the buyer in reselling the goods or using them according to his plans. If they do not, a fundamental breach can never be assumed. If they do limit him, the seriousness of the defect depends upon whether the buyer can still use the goods in a reasonable way even with unclean documents, or - if not -whether he can easily acquire clean documents himself. (16)

2. Documentary Sales
In documentary sales contracts, the tender of clean documents is of the essence of the contract. This implies the buyer's right to reject any tender of non-conforming documents irrespective of the goods' actual conformity or non-conformity with the contract. However, the seller may cure any lack of conformity in the documents. If, for example, the bill of lading is "unclean" because it refers to damage to the goods or their packaging, the seller may tender a new bill of lading relating to other goods, which does not contain such a reservation. If the bill of lading indicates a late loading date, the seller may subsequently purchase goods "afloat" which were loaded on time and tender to the buyer the bill of lading issued for those goods. According to Art 34 2nd sentence CISG, this is possible without any relevant restrictions if the seller handed over the "unclean" documents before the time required by the contract. After this date, cure is only possible under the prerequisites of Art 48(1) CISG. That means that the seller may only remedy the failure if he can do so without unreasonable delay. Special regard is to be had to the stipulations of the contract and the circumstances of the individual case that may make timely performance of central importance. (17)

3. Documentary Credits
If the contract provides for payment by documentary credit, this implies that the documents have to be "clean" in every respect. Otherwise, the buyer has the right to avoid the contract. (18) This necessity of strict compliance of documents can be derived directly from Art 13(a) UCP 500. Art 20 et seq. UCP 500 set out, in detail, under which circumstances the documents are to be accepted as clean, or may be rejected.

4. Commodity Trade
With regard to commodities, special standards have to be applied in determining whether there is a fundamental breach. In the commodity market, string transactions prevail and prices are subject to considerable fluctuations. (19) Therefore, timely delivery by the handing over of clean documents - that can be resold in the normal course of business - is always of the essence of the contract. (20) If the parties do not stipulate this importance by respective clauses, this can be derived from the circumstances by an interpretation of the contract pursuant to Art 8(2), (3) CISG. (21) As a result, in practice, the seller's possibility to cure any defect in the documents according to Art 48(1) CISG (22) does not exist in the commodity trade.

VI. Final Remarks: The CISG as an Effective Solution

The concept underlying the CISG of the essential nature of a breach being the decisive factor for the continuing existence of a contract provides an effective system of remedies. The CISG concept of avoidance receives support not only due to the interest in upholding the contract, whereby cancellation should only be a remedy of last resort, but also on a reflection of real business practice and the case law on the area. Importantly, the CISG, used in conjunction with the INCOTERMS and the UCP 500, offers a workable solution for the scope of issues and potential problems in the area of commodity and documentary sales law.

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II. Footnotes 
(1) See OLG Stuttgart, 12 March 2001, CISG-online 841; CIETAC (China International Economic and Trade Arbitration Commission), 30 October 1991, CISG-online 842; Zivilgericht Basel-Stadt, 1 March 2002, CISG-online 729.

(2) See LG München, 27 February 2002, CISG-online 654.

(3) See ICC International Court of Arbitration, 7754 of 1995, CISG-online 843; OLG Stuttgart, 12 March 2001, CISG-online 841. But see: LG München, 27 February 2002, CISG-online 654, globes still could be used for advertising even though they were not able to rotate.

(4) See LG Ellwangen, 21 August 1995, CISG-online 279; ICC International Court of Arbitration, 8128 of 1995, CISG-online 526; Zivilgericht Basel-Stadt, 1 March 2002, CISG-online 729. But see: LG Darmstadt, 22 December 1992, CISG-online 177, affirmed by BGH, 8 March 1995, CISG-online 144, mussels still good for consumption because there was no health risk.

(5) See LG Landshut, 5 April 1995, CISG-online 193, clothes; Hans. OLG Hamburg, 26 November 1999, CISG-online 515, jeans; OLG Koln, 14 October 2002, CISG-online 709, designer clothes. See also: LG Oldenburg, 6 July 1994, CISG-online 274, partly revising, but not regarding the arguments to Art 25 CISG, OLG Koblenz, 1 February 1995, CISG-online 253, limited circle of interested sub-buyers would only buy the goods at a discount of 50%.

(6) See OLG Koln, 14 October 2002, CISG-online 709, buyers of designer clothes have higher standards.

(7) See Handelsgericht des Kantons Aargau, 5 November 2002, CISG-online 715.

(8) See LG Koln, 16 November 1995, CISG-online 265.

(9) See HONNOLD, Uniform Law for International Sales Under the 1980 United Nations Convention, 3rd ed., Boston 1999, pp. 327-32.

(10) All Incoterms 2000 clauses in A4 call for delivery "on the date or within the period agreed for delivery". One German Court, Hans. OLG Hamburg, 28 February 1997, CISG-online 261, has argued that a C.I.F. contract has to be understood as a fixed term contract. But see: ICC International Court of Arbitration, 7645 of 1995, CISG-online 844, the Incoterms clauses C.F.R. do not, however, specify that the abidance within the time limit is an obligation of especially essential importance.

(11) See ICC- Publication Nr. 560 ED.

(12) See A8 of the respective clauses.

(13) See B8 of the respective clauses.

(14) Cf. 1993 Revision, ICC- Publication Nr. 500.

(15) See BGH, 3 April 1996, CISG-online 135, BGHZ 132, 290 et seq.

(16) See for example: BGH, 3 April 1996, CISG-online 135, BGHZ 132, 290 et seq. In this case, seller provided for a non-conforming certificate of origin and a non-conforming certificate of analysis. The court held that the seller could easily get a new certificate of origin from the local Chamber of Commerce and that the certificate made by buyer's expert was a valid new certificate of analysis.

(17) See below, para 4. for commodities.

(18) See also: Art 7.3.1, Official Comment to UNIDROIT Principles 2004, 3b.

(19) See for agricultural products: FUHRMANN/GIUCCI, Warenterminborsen in Deutschland, Working Paper 9603, at 2.a., online at: http://www.uni-potsdam.de/u/makrooekonomie/docs/9603.htm. For iron molybdenum: Hans. OLG Hamburg, 28 February 1997, CISG-online 261: price was 9.70 US $/kg and changed to 30 US $/kg. For commodity prices in general, see: MATTHIES/TIMM, World Commodity Prices 1999-2000, Association d'Instituts Europeens de Conjoncture Economique - Working Group on Commodity Prices, 1999, online at: http://www.hwwa.de/Publikationen/Report/1999/Report191.pdf.

(20) Cf. UNIDROIT Principles 2004, Art 7.3.1, Official Comment 3.b.; BRIDGE, The Sale of Goods, Oxford 1997, p. 155; POOLE, Textbook on contract law, 7th ed., Oxford 2004, para 7.5.3.2; SCHLECHTRIEM, Interpretation, gap-filling and further development of the UN Sales Convention, at. http://www.cisg-online.ch/cisg/publications.html, footnotes 15-24, at I.1.; MULLIS, Termination for Breach of Contract in C.I.F. Contracts Under the Vienna Convention and English Law; Is there a Substantial Difference?, in: LOMNICKA/MORSE (ed.), Contemporary Issues in Commercial Law (essays in honor of Prof. A.G. Guest), London 1997, p. 137-160, at: http://www.cisg.law.pace.edu/cisg/biblio/mullis.html.

(21) See SCHLECHTRIEM, Interpretation, gap-filling and further development of the UN Sales Convention, at. http://www.cisg-online.ch/cisg/publications.html, footnotes 15-24, at I.1.

(22) See above at IV.

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