CISG Advisory Council Opinion No. 5

The buyer’s right to avoid the contract in case of non-conforming goods or documents

4. Interpretation

a) General Remarks

4.1 A fundamental breach of contract giving the buyer the right to avoid the contract or to ask for substitute goods presupposes that the defect has a serious importance to the buyer. In considering avoidance, one has to take into account whether the buyer can be required to retain the goods because he can 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 terms of the contract, the purpose for which the goods are bought and finally, by the question of whether it is possible to remedy the defect. In any case, the question of time has to be given due consideration.

aa) Terms of The Contract

4.2 First and foremost, it is up to the parties to stipulate what they consider to be of the essence of the contract.[28] Whether or not a contractual agreement is of the essence is a matter of interpretation under Art 8 CISG. In doing so, several courts held a breach to be fundamental where the parties had explicitly agreed on certain central features of the goods, such as unsweetened apple juice concentrate,[29] the thickness of a roll of aluminium [30] or soy protein products that have not been genetically modified.[31] If the parties act accordingly, there is also no room for the seller to argue that he did not foresee the detriment to the buyer, if the goods do not conform to such express terms.

bb) Purpose for Which Goods are Bought

4.3 If the contract itself does not make clear what amounts to a fundamental breach, one of the central questions is for what purpose the goods are bought. Where the buyer wants to use the goods himself, such as machinery for processing, globes for marketing purposes [32] or compressors for use in air-conditioners [33], in the usual case it cannot be decisive whether the goods could be resold even at a discount price. Rather, the decisive factor is whether the goods are improper for the use intended by the buyer. However, regard is to be had to the question whether the buyer is able to make use of the goods or to process them differently without unreasonable expenditure.[34] Where the buyer himself is in the resale business, the issue of a potential resalability becomes relevant. There is also a fundamental breach here if the goods are not resalable at all, e.g., food not complying with national health regulations.[35] If the defect of the goods does not hinder their resalability, still, it cannot be said that there is never a fundamental breach. The question then is whether resale can reasonably be expected from the individual buyer in his normal course of business.[36] 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.[37] In determining the likelihood of this, regard is to be had to the retailer's specific target group of customers.[38] In all these cases, due regard should be had to the possibilities of the seller himself to dispose of the goods, thus balancing the possibilities and interests of the buyer and seller.

cc) Possibility of Repair or Replacement

4.4 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 the non-conformity of the goods can be remedied by the seller - e.g., by repairing the goods [39] or delivering substitute or missing goods [40] -- without causing unreasonable delay or inconvenience to the buyer, there is not yet a fundamental breach.[41] Here, due regard is to be given to the purposes for which the buyer needs the goods. If timely delivery of conforming goods is of the essence of the contract, repair or replacement usually will lead to unreasonable delay.[42] In finding such unreasonableness the same criteria have to be applied as in case of late delivery; namely whether exceeding a time limit - either a date or the end of a period of time - amounts to a fundamental breach. 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.[43] When the seller either refuses to remedy the defect,[44] simply fails to react, or if the defect cannot be remedied by a reasonable number of attempts within a reasonable time,[45] then a fundamental breach will also be deemed to have occurred.[46]

4.5 If in a given case the buyer is in a better position than the seller to have the goods repaired himself or by a third party, to buy missing parts [47] or -- in case of a defect in quantity -- to buy the missing amount of goods, he is obliged to do so and may not declare the contract avoided for fundamental breach.

dd) Additional Costs or Inconvenience Resulting from Avoidance

4.6 It may be questionable as to whether the fact that the goods are still on the premises of the seller -- e.g., in case of delivery EXW, or if the buyer realizes the non-conformity before the shipping of the goods -- or are stored in a warehouse affects the notion of fundamental breach because the goods do not have to be transported back to the seller in case of avoidance of the contract. The idea to prevent commercially unreasonable costs for the transport of the goods, might advocate lowering or raising the prerequisites for avoidance, respectively. However, even if the seller does not have to transport the goods back, he may face storage costs exceeding the costs for transportation.[48] Furthermore, in cases where the goods have already been shipped, they do not necessarily have to be transported back to the seller if the buyer avoids the contract; the seller may be able to redirect them to another buyer or sell them at the place where they are located. Thus it would be necessary to decide on an approach, independent from the location of the goods, in order to assess the costs that the avoidance of the contract would cause to the seller. This, however, would lead to unpredictable results.

c) Non-conforming documents

4.7 In the first place, one has to distinguish between two different situations: First, 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. Second, a contract of sale can require delivery by the handing over of documents of title, e.g., bills of lading. Other documents such as dock warrants, warehouse receipts or their respective electronic equivalents can also be required.

aa) Accompanying Documents

4.8 In the case of accompanying documents, the question as to 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.[49]

4.9 If the documents are delivered but do not conform to the contract description, this is to be treated like a defect in quality. Thus, initially, what is decisive is whether the defective documents limit the buyer in using the goods according to his plans, e.g., to resell them. 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 non-conforming documents, or – if not -- whether the non-conformity of the documents can be remedied in time either by the seller or by the buyer himself.[50]

4.10 The case of missing accompanying documents is to be treated like a defect in quantity and not as an equivalent to non-delivery of the goods. That means that also in this case, a fundamental breach of contract has to be established on the individual facts of the case, thus enabling the buyer to avoid the contract only in accordance with Art 49(1)(a) CISG; Art 49(1)(b) CISG is not applicable.

bb) Documentary Sales

4.11 Nowadays, a majority of international sales contracts incorporate the Incoterms of the ICC. A number of courts and scholars already hold that they have become a usage in international trade within the meaning of Art 9(2) CISG, thereby complementing the rules of the Convention.[51] Except for EXW, all Incoterms 2000 clauses contain the seller’s obligation to deliver or to assist the buyer to obtain certain documents of title.[52] Thus, in turn, all such contracts can be referred to as documentary sales contracts.

4.12 According to Art 1(1) CISG, the Convention applies to contracts of sale of goods. However, there cannot be any doubt that documentary sales of goods shall be covered by the Convention as well, "though in some legal systems such sales may be characterized as sales of commercial paper."[53] This even holds true for so called "string transactions", i.e., when documents are sold and transferred several times until the final purchaser takes physical delivery of the goods.[54]

4.13 In documentary sales contracts, the tender of "clean" documents is of the essence of the contract. Thus, B8 of all Incoterms 2000 clauses (except for EXW) provides that the buyer must accept the transport document and/or other evidence of delivery in accordance with the seller’s obligation. 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.[55]

4.14 However, the seller may remedy 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. However, again, this is only possible if it does not cause unreasonable inconvenience to the buyer or delay inconsistent with the weight accorded to the time of performance.[56]

4.15 In a majority of international sales contracts, the parties stipulate that the purchase price is to be paid by means of documentary credit including standby letter of credit.[57] In this case, the UCP 500 [58] usually apply, either by express reference or, as is frequently held, as an international trade usage [59] within the meaning of Art 9(2) CISG.[60]

4.16 Art 20 et seq. UCP 500 set out, in detail, under what circumstances the documents are to be accepted as clean, or may be rejected, respectively. However, this question concerns the relationship between the seller and the bank, which is not a subject of this Opinion. Suffice to say, that payment by means of documentary credit as such does not necessarily influence the possibility of the buyer to avoid the contract in case of non-conforming documents.

c) Commodity Trade

4.17 In those parts of the commodity market, where string transactions prevail and/or prices are subject to considerable fluctuations,[61] special standards have to be applied in determining whether there is a fundamental breach. There, 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.[62] 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.[63] As a result, in practice, the seller’s possibility to remedy a defect in the documents normally does not exist in the commodity trade. Thus, in this specific trade branch the solution under the CISG is quite similar to that under the perfect tender rule. However, the last buyer, who actually takes the goods, may not avoid the contract merely by relying on the non-conformity of the documents.

d) Buyer’s Right to Withhold Performance

4.18 In non-documentary sales cases, if the non-conformity of the tendered goods does not amount to a fundamental breach, as a general rule, the buyer is obliged to accept the goods as a right to avoid the contract does not exist according to Art 49(1)(a) CISG. However, in this situation, a right to withhold performance can be advocated independent of the regular legal remedies. The buyer can at least temporarily refuse payment and even suspend his obligation to take delivery until he has decided on his next courses of action.[64]

4.19 The CISG recognizes a right to withhold performance in several provisions. Art 58 CISG embodies the principle of "payment against delivery" as concurrent conditions. According to Art 71 CISG, a party may also suspend its own performance if performance by the other party is insecure. Further rights to withhold performance are contained in Arts 81(2) second sentence CISG, 85 second sentence and 86(1) second sentence CISG. The prevailing literature derives a general principle of a right to withhold performance according to Art 7(2) CISG from such provisions.[65]

4.20 As an initial consequence of that general right, the buyer may withhold the payment of the purchase price; however, this right must be limited to the extent of the non-conformity and the expected detriment. If the extent of the non-conformity cannot be easily ascertained, the buyer should be given the right to withhold the whole purchase price for a reasonable time that is necessary to inspect the goods and to estimate the extent of the expected detriment.

4.21 Besides the possibility to withhold the purchase price, the general right to withhold performance allows the buyer to suspend his obligation to accept delivery within the meaning of Arts 53, 60 CISG for a reasonable time.[66] This, however, does not mean that the buyer is not obliged to physically take possession of the goods and preserve them according to Art 86 CISG. The practical consequence of the buyer’s right to refuse to take delivery is only important where the risk of loss has not yet passed pursuant to Arts 67 or 68 CISG. The risk then passes according to Art 69(1) CISG when the buyer takes over the goods, which implies an acceptance -- within the meaning of taking delivery -- by the buyer.

FOOTNOTES

 28. This would amount to a "condition" in English legal terminology. See also the notion of "Zusicherung" under former §§ 459(2), 463 BGB (in force until 31 December 2001) or the "dicta et promissa" in Roman sales law, see Rabel, op. cit. (footnote 10), p. 132 et seq.

29. See GERMANY, OLG Stuttgart, 12 March 2001, CISG-online 841.

30. See CIETAC (China International Economic and Trade Arbitration Commission), 30 October 1991, CISG-online 842.

31. See SWITZERLAND, Appellationsgericht Basel-Stadt, 22 August 2003, CISG-online 943.

32. See GERMANY, LG München, 27 February 2002, CISG-online 654.

33. See UNITED STATES, Delchi Carrier, S.p.A. v. Rotorex Corp., US Court of Appeals (2nd Circuit), 6 December 1996, CISG-online 140.

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

35. See GERMANY, LG Ellwangen, 21 August 1995, CISG-online 279; ICC International Court of Arbitration, 8128 of 1995, CISG-online 526; SWITZERLAND, Appellationsgericht Basel-Stadt, 22 August 2003, CISG-online 943; GERMANY, BGH, 2 March 2005, CISG-online 999, in this case, however, avoidance was not declared, but the court granted a price reduction to zero. But see: GERMANY, BGH, 8 March 1995, CISG-online 144, mussels still good for consumption because there was no health risk.

36. See GERMANY, OLG Frankfurt a.M., 18 January 1994, CISG-online 123, the burden of proof that resale is not possible lies on the buyer; GERMANY, OLG Stuttgart, 12 March 2001, CISG-online 841.

37. See GERMANY, LG Landshut, 5 April 1995, CISG-online 193, clothes; GERMANY, Hans. OLG Hamburg, 26 November 1999, CISG-online 515, jeans; GERMANY, OLG Köln, 14 October 2002, CISG-online 709, designer clothes. See also: GERMANY, OLG Oldenburg, 1 February 1995, CISG-online 253, limited circle of interested sub-buyers would only buy the goods at a discount of 50%.

38. See GERMANY, OLG Köln, 14 October 2002, CISG-online 709, buyers of designer clothes have higher standards.

39. See SWITZERLAND, Handelsgericht des Kantons Aargau, 5 November 2002, CISG-online 715.

40. See GERMANY, LG Köln, 16 November 1995, CISG-online 265.

41. Cf. SCHLECHTRIEM/SCHWENZER/Schlechtriem, op. cit. (footnote 8), Art 25 para 20.

42. 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 abiding to the time limit is an obligation of especially essential importance.

43. See obiter, GERMANY, BGH, 3 April 1996, CISG-online 135, BGHZ 132, 290 et seq.

44. See GERMANY, LG Berlin, 15 September 1994, CISG-online 399.

45. See GERMANY, LG Oldenburg, 6 July 1994, CISG-online 274; UNITED STATES, Delchi Carrier, S.p.A. v. Rotorex Corp., US Court of Appeals (2nd Circuit), 6 December 1996, CISG-online 140.

46. For a thorough discussion of the dogmatic controversy considering the relationship between Art 49(1)(a) CISG and Art 48(1) CISG see: SCHLECHTRIEM/SCHWENZER/Schlechtriem, op. cit. (footnote 8), Art 25 para 20; Fountoulakis, Das Verhältnis von Nacherfüllungsrecht des Verkäufers und Vertragsaufhebungsrecht des Käufers im UN-Kaufrecht, Internationales Handelsrecht (IHR) 2003, p. 160 et seq.

47. See GERMANY, LG Heidelberg, 3 July 1992, CISG-online 38.

48. See CIETAC (China International Economic and Trade Arbitration Commission), 6 June 1991, CISG-online 845, transport costs of US $1,750 and storage costs for a period of three years approximately US $17,000.

49. See GERMANY, BGH, 3 April 1996, CISG-online 135, BGHZ 132, 290 et seq.

50. See for example: GERMANY, 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.

51. For references see supra (footnote 8).

52. See the provision A8 of the respective clauses.

53. See SECRETARIAT COMMENTARY, O.R., p. 16, Art 2 para 8.

54. See the thorough discussion of this question by: SCHLECHTRIEM, Interpretation, gap-filling and further development of the UN Sales Convention, at  http://www.cisg-online.ch/cisg/publications.html , text accompanying footnotes 15-24.

55. See ibid, at II.5.c)cc).

56. For a thorough discussion of this question, see above para. 4.4.

57. See SCHÜTZE, Das Dokumentenakkreditiv im Internationalen Handelsverkehr, 5th ed., Heidelberg 1999, p. 26; also see ICC Homepage:  http://www.iccwbo.org/home/documentary_credits/documentary_credits.asp .

58. Cf. 1993 Revision, ICC- Publication NO. 500.

59. See for a list of countries that have acknowledged collectively and banks in other countries which also have acknowledged them: Schütze, op. cit. (footnote 57), Appendix IV, p. 341 et seq.

60. See WITZ/SALGER/LORENZ/W. Witz, International Einheitliches Kaufrecht, Heidelberg 2000, Art 60 para 13, ibid, Art 54 para 3.

61. See for agricultural products: FUHRMANN/GIUCCI, Warenterminbörsen in Deutschland, Working Paper 9603, at 2.a., online at:  http://www.uni-potsdam.de/u/makrooekonomie/docs/9603.htm . For iron molybdenum: GERMANY, 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 Européens de Conjoncture Economique - Working Group on Commodity Prices, 1999, online at:  http://www.hwwa.de/Publikationen/Report/1999/Report191.pdf .

62. 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, op. cit. (footnote 54), 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 .

63. See SCHLECHTRIEM, op. cit. (footnote 54), at I.1.

64. SCHLECHTRIEM, op. cit. (footnote 54), at II.5.a).
 
65. See for a thorough discussion: SCHLECHTRIEM, op. cit. 54, at II.5.; idem, Internationales UN-Kaufrecht, 2nd ed., Tübingen 2003, at: 42d, 205 et seq., 250; STAUDINGER/MAGNUS, Wiener UN-Kaufrecht (CISG), Berlin 2005, Art 4 para 74a; W. Witz, Zurückbehaltungsrechte im Internationalen Kauf -- Eine praxisorientierte Analyse zur Durchsetzung des Kaufpreisanspruchs im CISG, in: Schwenzer/Hager (eds.), Festschrift für Peter Schlechtriem zum 70. Geburtstag, Tübingen 2003, p. 291, 293 et seq.; for case law see also GERMANY, AG Altona, 14 December 2000, CISG-online 692. The question was left open in GERMANY, OLG Düsseldorf, 24 April 1997, CISG-online 385. Section 42 of the Scandinavian Sale of Goods Acts (Finland, Norway and Sweden) also sets forth an explicit right to withhold; for comments see RAMBERG, Köplagen, Stockholm 1995, pp. 455-459. See also Art 7.1.3 UNIDROIT Principles 2004.
 
66. See SHLECHTRIEM, op. cit. (footnote), at II.5.c)bb).