CISG Advisory Council Opinion No. 5

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

To be cited as: CISG-AC Opinion no 5, The buyer's right to avoid the contract in case of non-conforming goods or documents 7 May 2005, Badenweiler (Germany). Rapporteur: Professor Dr. Ingeborg Schwenzer, LL.M., Professor of Private Law, University of Basel.

Adopted by the CISG-AC on the 9th meeting held in Philadelphia with no dissent.

Reproduction of this opinion is authorized.

JAN RAMBERG, Chair
ERIC E. BERGSTEN, MICHAEL JOACHIM BONELL, ALEJANDRO M. GARRO, ROY M. GOODE, SERGEI N. LEBEDEV, PILAR PERALES VISCASILLAS, PETER SCHLECHTRIEM, INGEBORG SCHWENZER, HIROO SONO, CLAUDE WITZ, Members
LOUKAS A. MISTELIS, Secretary

INDEX

Opinion
Comments
1. Introduction
2. Domestic Legal Systems
3. Drafting History
4.Interpretation
    a) General Remarks
        aa) Terms of the Contract
        bb) Purpose for Which Goods Are Bought
        cc) Possibility of Repair or Replacement
        dd) Additional Costs or Inconvenience Resulting from Avoidance
     b) Non-Conforming Documents
         aa) Accompanying Documents
         bb) Documentary Sales
     c) Commodity Trade
     d) Buyer's Right to Withhold Performance

Annex: Case Law Overview

OPINION

Article 49 CISG

(1) The buyer may declare the contract avoided: (a) 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;

or (b) [...]

1. In determining whether there is a fundamental breach in case of non-conformity of the goods giving the buyer the right to avoid the contract according to Art 49(1)(a) CISG, regard is to be given to the terms of the contract.

2. If the contract does not make clear what amounts to a fundamental breach, regard is to be given in particular to the purpose for which the goods are bought.

3. There is no fundamental breach where the non-conformity can be remedied either by the seller or the buyer without unreasonable inconvenience to the buyer or delay inconsistent with the weight accorded to the time of performance.

4. Additional costs or inconvenience resulting from avoidance do not influence per se whether there is a fundamental breach.

5. The issue of avoidance in case of non-conforming accompanying documents such as insurance policies, certificates etc., must be decided by resorting to the criteria set forth in 1. to 4.

6. In the case of documentary sales, there is no fundamental breach if the seller can remedy the non-conformity of the documents consistently with the weight accorded to the time of performance.

7. In the commodity trade, in general, there is a fundamental breach if there is no timely delivery of conforming documents.

8. If the non-conformity does not amount to a fundamental breach, the buyer still has a right to withhold payment and to refuse to take delivery if reasonable under the circumstances.

COMMENTS

1. Introduction

1.1. Interpretation and Evidence under the CISG

1.1 Rules on avoidance of contract in case of non-conforming goods have to take into account three different interests:[4] The buyer is interested in a low threshold for avoidance, while the seller's interest is in a high threshold for avoidance. Economic reasons such as costs and risk of transportation or storage may also play a role. These conflicting interests have to be balanced.
 
1.2 There have been great differences of opinion among domestic legal systems concerning the question of under which circumstances the buyer may avoid the contract in case of non-conforming goods or documents. Art 49(1)(a) CISG provides that avoidance is 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."

1.3 Reference to case law shows that the interpretation of the notion of fundamental breach in cases of non-conforming goods by national courts and arbitration tribunals differs considerably even within one single legal system.

1.4 Special problems arise with respect to non-conforming documents and the commodity trade in particular. Special rules have been established by the International Chamber of Commerce. Thus, the Incoterms 2000 [5] contain detailed rules governing the obligations of the seller to provide for documents,[6] and the buyer to accept them,[7] respectively. Such rules are widely incorporated into international contracts.[8]

2. Domestic legal systems

 2.1 Civil law systems were originally based upon the Roman sales law rule that, in the case of defects in the quality of the goods, the buyer had the right either to demand reduction of the purchase price (actio quantiminoris) or to avoid [9] the contract (actio redhibitoria).[10] However, modern statutes, such as the German Statute on Modernization of the Law of Obligations,[11] the Scandinavian Sales Laws [12] or the Netherlands Civil Code,[13] are oriented towards the CISG and apply the notion of fundamental breach or similar key concepts for the avoidance of the contract. The same is true for other international uniform law instruments, such as the UNIDROIT Principles [14] and the Principles of European Contract Law.[15]

2.2 In contrast to this, common law sales law was based upon the idea that the buyer could only avoid (terminate) the contract if the non-conformity is sufficiently serious.[16] This restriction, however, only applies to accepted goods,[17] thus making "acceptance" or its revocation key notions. Before there has been acceptance, the so-called "perfect tender rule"[18] applies, giving the buyer the right to reject the goods if they do not conform to the contract in any respect. However, during the past decades the perfect tender rule itself has been subject to several restrictive modifications. Thus, s. 15A Sale of Goods Act, inserted by the Sale and Supply of Goods Act 1994, states that if the buyer does not deal as a consumer, the breach may not be treated as a breach of condition if the breach was so slight that it would be unreasonable for the buyer to reject the goods. Similarly, some US courts have limited the perfect tender rule by applying the good faith principle,[19] especially in cases of a rightful and effective cure [20] by the seller in accordance with § 2-508 UCC.[21]

3. Drafting History

3.1 The basic concept of fundamental breach was already present in Art 10 ULIS [22] and was not questioned during the preparatory work for the CISG. The function of this concept in the case of tender or delivery of non-conforming goods was to avoid causing these goods to be returned, which would result in considerable economic detriment.

3.2 Although the concept of fundamental breach itself was unquestioned, the preconditions for the breach being fundamental and the necessity to declare the contract avoided remained in dispute until the Vienna Conference. Ultimately, it was decided that the seriousness of the breach should be determined by reference to the interests of the promisee as actually laid down and circumscribed by the contract.[23] Concerning the avoidance of the contract, the CISG clearly deviates from ULIS. Under Art 44(2) ULIS, the buyer could fix an additional time to remedy any breach in cases, where the non-conformity of the goods or the delay in delivering conforming goods did not yet amount to a fundamental breach under Art 43 ULIS. The fruitless elapse of such a "Nachfrist" always enabled the buyer to avoid the contract, regardless of the fundamentality of the original defect in performance. Art 49(1)(b) CISG, in contrast, limits the possibility for the buyer to fix an additional period of time to cases of non-delivery, thus excluding this possibility for non-conforming goods.[24] Still, also under CISG the weight the contract accords to the time of performance always has to be kept in mind when defining a fundamental breach.[25]

3.3 The history of the CISG clearly documents that there is no equivalent to the original perfect tender rule in Anglo-American law. Although its wording could be misunderstood,[26] Art 86 CISG in itself does not give the buyer a general right to reject any non-conforming tender.[27] Rather, under the CISG such a right is limited to certain situations: Art 52 CISG allows the buyer to refuse to take delivery only if the seller delivers the goods before the date fixed or if he delivers a quantity of goods greater than that provided for in the contract. In all other cases of non-conforming tender, the requirement for rejection is a fundamental breach. 

4. Continued on PAGE TWO 

FOOTNOTES

1. The CISG-AC is a private initiative supported by the Institute of International Commercial Law at Pace University School of Law and the Centre for Commercial Law Studies, Queen Mary, University of London. The International Sales Convention Advisory Council (CISG-AC) is in place to support understanding of the United Nations Convention on Contracts for the International Sale of Goods (CISG) and the promotion and assistance in the uniform interpretation of the CISG.

2 This opinion is a response to a request by the Chair of the International Sales Committee of the International Law and Practice Section of the New York State Bar Association. The question referred to the Council was:

"Under what circumstances may the buyer avoid the contract under Article 49 CISG in case of a non-conforming tender? If the parties to a contract do not derogate from or vary the effect of any of the provisions of the CISG, are there circumstances in which the CISG would permit avoidance if the goods or the tender of delivery fail in any respect to conform to the contract."

This opinion is focusing on the most important issues of non-conforming tender, namely non-conforming goods and documents.

3. The rapporteur gratefully acknowledges lic. iur. Benjamin K. Leisinger for his assistance in the preparation of this opinion.

4. Cf. SCHLECHTRIEM, Subsequent Performance and Delivery Deadlines -- Avoidance of CISG Sales Contracts Due to Non-conformity of the Goods, at I. Avoiding a Contract on Account of Non-Conformity with Tendered Goods, p. 1 et seq., online at  http://www.cisg-online.ch/cisg/Schlechtriem-PaceInt'lLRev.pdf .

5. See ICC- Publication No. 560 ED.

6. See A8 of the respective clauses.

7. See B8 of the respective clauses.

8. This may be done, firstly, by express reference. Furthermore, there is a tendency among courts and scholarly opinions that such rules amount to usages in international trade within the meaning of Art 9(2) CISG. See WITZ/SALGER/LORENZ/W. Witz, International Einheitliches Kaufrecht, Heidelberg 2000, Art 9 para 14; ITALY, Marc Rich & Co. A.G. v. Iritecna S.p.A., Corte d'appello di Genova, 24 March 1995, CISG-online 315; ARGENTINA, Elastar Sacifia v. Bettcher Industries, Inc., Juzgado Nacional de Primera Instancia en lo Comercial, 20 May 1991, CISG-online 461; UNITED STATES, St. Paul Ins. Co. v. Neuromed Med. Sys., US District Court (S.D.N.Y.), 26 March 2002, CISG-online 615; UNITED STATES, BP International, Ltd. and BP Exploration & Oil, Inc., Plaintiffs-Appellants v. Empressa Estatal Petroleos de Ecuador, et al., Defendants, Empresa Estatal Petroleos de Ecuador and Saybolt, Inc., Defendants-Appellees, US Court of Appeals (5th Circuit), 11 June 2003, CISG-online 730. More differentiated: Bridge, The International Sale of Goods, Oxford 1999, at 2.48 and 2.49; SCHLECHTRIEM/SCHWENZER/Schmidt-Kessel, Commentary on the UN Convention on the International Sale of Goods (CISG), 2nd ed., Oxford 2005, Art 9 para 26.

9. Domestic legal systems use many different notions, such as termination, nullification, repudiation, cancellation, rescission or avoidance. This opinion always uses the expression "avoidance" as this reflects the terminology of the CISG, see, e.g., in Arts 49, 75, 76(1) CISG.

10. Cf. Germany: former § 462 Bürgerliches Gesetzbuch (BGB) (in force until 31 December 2001); France: Art 1644 Code Civil; Switzerland: Art 205 Code of Obligations. But see Austria: Art 932 Allgemeines Bürgerliches Gesetzbuch (ABGB), only giving a right to avoid the contract in cases where repair is not feasible and a proper use is not possible. For details see Rabel, Recht des Warenkaufs, Volume 2, Tübingen 1958, p. 232 et seq.

11. SCHULDRECHTSMODERNISIERUNGSGESETZ of 26 November 2001, in force since 1 January 2002, § 323 BGB.

12. See Section 39 Norwegian Sale of Goods Act 1988  http://www.jus.uio.no/lm/norway.sog.act.1988/doc#116 ; Section 39 Finnish Sale of Goods Act 1987  http://www.finlex.fi/pdf/saadkaan/E9870355.PDF ; Section 39 Swedish Sale of Goods Act 1990. For details see KJELLAND, Das neue Recht der nordischen Länder im Vergleich mit dem Wiener Kaufrecht (CISG) und dem deutschen Kaufrecht, Aachen 2000.

13. See Art 6:265 Burgerlijk Wetboek.

14. See Article 7.3.1 UNIDROIT Principles of International Commercial Contracts 2004.

15. See Article 4.303 Principles of European Contract Law.

16. Under English Law, avoidance depends upon the question whether there was a breach of condition or a mere breach of warranty. See for the distinction between "condition" and "warranty": Cehave N.V. v. Bremer Handelsgesellschaft m.b.H. (The Hansa Nord), 1 Q.B. 44 (C. A.), 1976; see also s. 11, s. 14 and s. 15A of the Sale of Goods Act 1994. According to § 2-608(1) Uniform Commercial Code (UCC), the buyer may revoke acceptance if acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to the buyer if the buyer has accepted it. For an overview of the system of avoidance in common law systems in general see Treitel, Remedies for Breach of Contract, Oxford 1988, Sections 259, 260.

17. Under English law, in s. 35(1) Sale of Goods Act as amended by the Sale and Supply of Goods Act 1994, it is laid down that the buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller. For details see Benjamin's Sale of Goods, 6th ed., London 2002, 12-044 et seq. In the UCC, acceptance is dealt with in § 2-606. Acceptance occurs in three different ways: according to § 2-606(1)(a) UCC, the first possibility is that the buyer, after a reasonable possibility to inspect the goods, signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity. Pursuant to § 2-606(1)(b) UCC, acceptance also occurs, if the buyer fails to make effective rejection after the buyer had a reasonable opportunity to inspect the goods. Finally, acceptance occurs if, according to § 2-606(1)(c) UCC, "the buyer does any act inconsistent with the seller's ownership". Here, the buyer's knowledge and behavior is decisive; for illustrations see WHITE/SUMMERS, Uniform Commercial Code, 5th ed., St. Paul 2000, § 8-2.

18. See § 2-601(a) UCC, s. 35 Sale of Goods Act 1994.

19. See § 1-203 UCC. See also Treitel who points out, "[t]his so-called perfect tender rule [particularly as recited in UCC 2-601] at first sight gives rise to a very wide power to terminate regardless of the seriousness of the nonconformity. But the appearance is deceptive as the requirement of seriousness is re-introduced by a number of other provisions which must be read together with UCC 2-601." Treitel, op. cit. (footnote 16) Section 269. For other relevant provisions of the UCC, see ALBERT H. KRITZER, Guide to Practical Applications of the CISG, Deventer/Boston 1990, Suppl. 4 (February 1993), p. 206.

20. Such a cure can be the delivery of conforming replacement goods, repair or even price adjustments sufficient to compensate the buyer and reduction in the price. See for replacement goods: T.W. Oil, Inc. v. Consolidated Edison Co., US Court of Appeals (N.Y.), 15 December 1982, 1982 N.Y. LEXIS 3846; DEL DUCA/GUTTMAN/SQUILLANTE, Problems and materials on sales under the Uniform Commercial Code and the Convention on International Sale of Goods, Cincinnati 1993, p. 359; Calamari & Perillo, Contracts, 3rd ed., St. Paul 1988, § 11-20, p. 468. See for repair: Wilson v. Scampoli, US Court of Appeals (D.C.), 2 May 1967, 1967 D.C. App. LEXIS 156. For price adjustments and reduction: WHITE/SUMMERS, op. cit. (footnote 17), § 8-6, p. 338; Oral-X Corp. v. Farnam Cos., Inc., US Court of Appeals (10th Circuit), 26 April 1991, 1991 U.S. App. LEXIS 7377.

21. In the course of the recent revision of the UCC there have also been discussions in the Study Group as to whether to replace the perfect tender rule with the requirement that would permit rejection only if a non-conformity "substantially impairs the value of the performance to the buyer", see the draft of § 2-501 UCC as of July 1996  http://www.law.upenn.edu/bll/ulc/ucc2/ucc2sale.pdf . However, ultimately a majority of the Study Group recommended that the perfect tender rule be maintained as the standard, see § 2-601 UCC Draft 2002. For the whole discussion see: Lawrence, Symposium: The Revision of Article 2 of the Uniform Commercial Code: Appropriate Standards for a Buyer's Refusal to Keep Goods Tendered by a Seller, 35 Wm and Mary L. Rev. 1635, 1637 et seq. (1994).

22. Uniform Law on the International Sale of Goods, online at  http://www.unidroit.org/english/conventions/c-ulis.htm .

23. Cf. O.R. p. 295 et seq., p. 300; SCHLECHTRIEM/SCHWENZER/Schlechtriem, op. cit. (footnote 8), Art 25 para 2.

24. During the drafting of the CISG, a number of attempts were made to reintroduce the "time element". See O.R., p. 354 et seq.

25. Cf. SCHLECHTRIEM, op. cit. (footnote 4), p. 6.

26. Art 86(1): "If the buyer has received the goods and intends to exercise any right under the contract or this Convention to reject them, [...]". Art 86(2):"If goods dispatched to the buyer have been placed at his disposal at their destination and he exercises the right to reject them, [...]".

27. See O.R., p. 399. 

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