CISG Advisory Council Opinion No. 9

Consequences of Avoidance of the Contract

To be cited as: CISG-AC Opinion No. 9, Consequences of Avoidance of the Contract, Rapporteur: Professor Michael Bridge, London School of Economics, London, United Kingdom. Adopted by the CISG-AC following its 12th meeting in Tokyo, Japan on 15 November 2008.

Reproduction of this opinion is authorized.

ERIC E. BERGSTEN, Chair
MICHAEL JOACHIM BONELL, ALEJANDRO M. GARRO, ROY M. GOODE, JOHN Y. GOTANDA, SERGEI N. LEBEDEV, PILAR PERALES VISCASILLAS, JAN RAMBERG, INGEBORG SCHWENZER, HIROO SONO, CLAUDE WITZ, Members
SIEG EISELEN, Secretary *

Index

Opinion [Black Letter Text]
Comments
1. Introduction
2. Drafting History
3. Interpretation

A)  General Remarks

aa) Effects of Avoidance
bb) Surviving Provisions of the Contract
cc) Related Contracts
dd) Termination Agreements
ee) Proprietary Consequences of Avoidance

B)  Restitution of Performance

aa) Nature of Restitutionary Relationship
bb) Exactness of Restitution
cc) Partial Restitution
dd) Concurrent Restitution
ee) Place of Restitution
ff) Costs of Restitution
gg) Time of Restitution
hh) Risk Prior to Restitution

C)  Restitution of the Fruits of Performance

aa) General
bb) Separation of Articles 81 and 84
cc) Concurrency
dd) Set-off Issues
ee) Commencement of Interest
ff) Rate of Interest
gg) Currency of Interest
hh) Cessation of Interest
ii) Benefits Derived from the Goods

Addendum: Cases Cited

OPINION

1.1  Rights to damages for non-performance against a party not exempted from liability under Article 79 survive avoidance of the contract, whether they have accrued prior to avoidance or arise from future non-performance.

1.2  Provisions of the contract survive its avoidance if they assist in the winding-up of the contract or are intended by the parties to survive avoidance.

1.3  An agreement to avoid the contract is governed by its terms and by the Convention.

1.4  The Convention does not deal with the proprietary aspects of restitution.

2.1  The right to restitution of performance on avoidance derives from the contract of sale and the Convention.

2.2  Restitution of the goods takes place at the buyer's premises or at the agreed place of delivery or at the place where the buyer acting reasonably has warehoused the goods, according to the case.

2.3  Restitution of the price takes place at the buyer's premises or at a bank of the buyer's choice.

2.4  Restitution of the price should be made in the currency of payment.

2.5  Additional costs arising after restitution are recoverable as damages from an unexempted non-performing party but not from a party whose non-performance is exempted under Article 79.

2.6  Restitution of performance by seller and buyer should take place within a reasonable time.

2.7  Where the buyer's restitutionary duty includes an account of money as a substitute for original goods, the seller may set off the corresponding portion of the price against this amount.

3.1  Restitution of benefits derived from the goods and of interest on the price should take place concurrently.

3.2  The concurrent restitution of benefits and interest should normally take place separately from the concurrent restitution of the goods and the price.

3.3  Monetary benefits flowing from the goods and interest on the purchase payable by the seller may be made the subject of a set-off.

3.4  Interest on the purchase price is normally determined by the commercial investment rate prevailing at the seller's place of business.

3.5  Interest runs from the date the seller receives the price to the date that repayment is made to the buyer.

3.6  It is irrebuttably presumed that the seller has earned interest on the price.

3.7  The seller has to prove that the buyer has derived benefits derived from the goods.

COMMENTS

1. Introduction

1.1  Where a contract is avoided, it is in the interests of both parties for the avoidance process to be carried out as quickly as possible with a minimum of cost, loss and delay.

1.2  The restitution of the goods and the price is based on a modified resale of the goods to the seller, drawing upon the rules in the Convention dealing with the original sale.

1.3  Because the Convention does not make provision for property rights in the goods or the price, avoidance takes place concurrently in the interest of mutual security of the parties. For that reason, concurrency should also be required for the restitution of interest and benefits.

1.4  The question whether a contract is avoided retrospectively or prospectively has divided legal systems but is not an issue that needs to be considered under the Convention, given the explicit way that the Convention sets out the effects of avoidance.

1.5  In determining the effects of avoidance, courts and tribunals should clearly separate restitutionary questions and damages questions.

2. Drafting History

 2.1  The first sentence of Article 81(1) CISG is more or less identical to the whole of Article 78(1) of the Uniform Law on the International Sale of Goods (ULIS) and Article 81(2) CISG is substantially the same as Article 78(2) ULIS. There is nothing in ULIS that corresponds to the provision in Article 81(1) CISG dealing with contractual provisions that survive avoidance. ULIS does, however, contain in its Article 81 provisions corresponding to Article 84 CISG, dealing with restitution by the buyer of benefits received from the goods and by the seller of interest on the price

2.2  The Working Group on the International Sale of Goods [1] considered a proposal that, where the contract has been avoided in part, the rule in Article 81(1) should be expressly limited to the relevant part of the contract.[2] This proposal was not adopted in the 1977 draft of UNCITRAL's Committee of the Whole.[3] At the 1980 Diplomatic Conference, concerns were expressed that the rule of restitution in Article 81 might be seen as giving rise to in rem consequences, affecting domestic bankruptcy legislation. A proposal was therefore made for a new paragraph stating that the seller's rights should not interfere with those of third parties or creditors in the buyer's bankruptcy, but the proposal was withdrawn after failing to gain the necessary support.[4]

2.3  The Working Group decided to adopt the ULIS provision (Article 81) dealing with the restitution of benefits flowing from the price and the goods on avoidance of the contract, but extended it also to cases where the buyer had required substitute goods to be delivered. At the Diplomatic Conference, a number of amendments were proposed to specify the rate of interest that the seller had to pay but were later withdrawn.[5]

3. Interpretation

A) General Remarks

 3.1  Avoidance of the contract under Article 81 of the CISG (hereinafter the Convention) is determined by Articles 49 (avoidance by the buyer) and 64 (avoidance by the seller) and can arise in two cases: first, where a fundamental breach has occurred and the party entitled to performance elects to avoid the contract; and secondly, where one party has served a time notice on the other, the other has failed to perform within the additional time prescribed in that notice, and the first party elects to avoid the contract. In either case, avoidance may occur where the non-performing party is not liable in damages as a result of an impediment beyond his control.[6]

      aa) Effects of Avoidance

3.2  The basic effect of avoidance is that both parties are released from their primary performance obligations [7] and are no longer entitled to perform those obligations.[8] The primary obligations of the parties include the seller's obligations to make delivery and transfer ownership [9] and the buyer's obligations to pay the price and take delivery.[10] Other related obligations may also be avoided, such as maintenance and service agreements. Rights to damages that may have accrued by the time of avoidance remain in existence, even as against the avoiding party. Where avoidance occurs after unexempted non-performance by one of the parties, the liability of that non-performing party includes damages for future non-performance prevented by the avoidance of the contract.[11] Avoidance may nevertheless occur as a result of exempted non-performance, where neither party is liable in damages for future non-performance.[12]

      bb) Surviving Provisions of the Contract

3.3  Provisions of the contract designed to govern the rights and obligations of the parties after or notwithstanding avoidance nevertheless survive avoidance of the contract. In this regard, dispute settlement provisions are specifically mentioned in Article 81(1). These include jurisdiction clauses and should also include arbitration clauses,[13] though these may be regarded as separate contracts and thus capable of surviving independently of Article 81(1).[14] The identity of other surviving clauses will depend upon the interpretation of the contract, but should normally include choice of law clauses, provisions for penalty and related payments,[15] force majeure clauses,[16] exclusion and limitation clauses and clauses making provision for the return of the goods.[17] These are all clauses that assist in the winding-up of the avoided contract. Certain other clauses, such as confidentiality clauses, might also survive avoidance if the intention of the parties, determined by interpreting the contract, is that they should do so. The survival of these clauses should turn upon the circumstances of non-performance and the interpretation of the particular contract of sale. For example, where the buyer avoids the contract because of the seller's non-performance, a put option allowing the seller to supply more goods is less likely to survive avoidance than a call option in favour of the buyer. If the buyer's call option did not survive, the buyer would have a claim for damages against the seller for future non-performance, which would not be the case if the non-performing seller's put option failed to survive. The survival of the buyer's call option gives the parties a chance to perform which would avoid a dispute and damages assessment. The seller's non-performance, however, which led to the avoidance of the contract of sale, gives the buyer good reason to doubt that the seller would perform any future contract of sale brought into existence by the exercise of that seller's put option.

      cc) Related Contracts

3.4  Once a contract of sale has been avoided, the Convention takes no express position on the survival of related contracts. The issues here bear some resemblance to those concerning the survival of options. Related contracts are not to be assimilated with the contract of sale to produce a single contract, so that they are avoided along with the contract of sale. In principle, they should survive the avoidance of the contract of sale. Some related contracts, for example, framework and master agreements, may not be governed by the Convention, so that the question of their avoidance would be a matter for their applicable laws. In cases where related contracts are governed by the Convention, there may be scope for the rules on contractual suspension and anticipatory repudiation if the behaviour of a party to a contract of sale raises serious concerns about its willingness or ability to perform related contracts.[18] Finally, the parties themselves, however, may make provision for avoiding related contracts by means of cross-default clauses in those contracts.

      dd) Termination Agreements

3.5  Where the parties consensually terminate the contract, the position is governed by their termination agreement[19] in accordance with the Convention.[20] To the extent that they are not displaced by conflicting terms in the termination agreement itself,[21] nevertheless, the provisions of Article 81 will also apply to supplement the termination agreement.[22]

      ee) Proprietary Consequences of Avoidance

3.6  Nothing in Article 81 deals with the existence of property rights in the goods or money subject to the restitutionary process. The Convention does not deal with the effect that the contract may have on the property in the goods sold.[23] In view of the way that the Convention ought to be interpreted and the gaps in its coverage filled,[24] it should also be regarded as not dealing with the property in the goods returned to the original seller under the restitutionary process and with the existence of proprietary rights in the price that the seller must repay to the buyer. The restitutionary process in the Convention amounts to a type of reverse sale of the goods back to the original seller. In the event of avoidance of the contract, the effect of a reservation of title clause is a matter for the applicable law governing proprietary matters and not for the Convention. Similarly, a seller's right to recover the goods on avoidance is subject to relevant property and insolvency laws.[25] A buyer prevented by such laws from making restitution of the goods will, because of the concurrent restitution rule (see below), be unable to require the seller to repay the price. Furthermore, where the buyer has acquired the property in the goods, the buyer is contractually bound to restore the seller to its original property rights.[26] The proprietary effect of the buyer's efforts to do so will be determined by the applicable law for proprietary matters.

B) Restitution of performance

    aa) Nature of Restitutionary Relationship

3.7  As seen above, the avoidance of the contract does not mean the avoidance of all provisions of the contract. In addition, the Convention at the point of avoidance introduces new rights and duties to give effect to avoidance by transforming the original contractual relationship into a winding-up or restitutionary relationship.[27] Where the agreement has been executed on both sides, restitution involves the return of the goods to the seller and the return of the price to the buyer.[28] If only one party has performed, then restitution takes place unilaterally. The requirement of restitution binds both parties, and not just the party whose non-performance led to avoidance.[29] The rights of the parties arising on avoidance are contractual and are not based on the unjust enrichment rules of any applicable law.[30] This restitutionary relationship does not foreclose rights to damages for breach of the contract of sale. The Convention calls for what is in effect a resale of the goods from the buyer to the seller but it leaves unstated the rules concerning the place and costs of restitution and the allocation of risk under that resale. There are, however, rules concerning the preservation and disposal of the goods after avoidance.[31] It has also been decided that a buyer has an actionable right for the seller to take redelivery of the goods.[32] This should be so whether it is the seller's or the buyer's non-performance that led to the avoidance of the contract. The receipt of the price is unlikely to raise the same practical problems but the principle is the same.

      bb) Exactness of Restitution

3.8  In relation to the goods, restitution means the redelivery of the very goods supplied.[33] Repaying the price is a different matter, compounded by currency issues. Repayment of the price should presumptively be in the currency of account and payment, where these are the same [34] and should be in the currency of payment if this is different from the currency of account.[35] It has nevertheless been held in one case that, if the buyer is truly to be restored to the pre-contractual position, the buyer must receive repayment in the currency which it expended to effect performance in the contract of sale. If the buyer therefore expended US dollars to acquire the roubles needed to pay the seller, this would mean that the buyer would be entitled to restitution in dollars.[36] This is incorrect. The restitution process is designed to reverse gain and not to compensate for loss. Since the seller's obligation under Article 81 is a restitutionary one, it would therefore be more appropriate if a buyer suffering currency losses made a claim for damages for such losses under Article 74.

      cc) Partial Restitution

3.9  Restitution under Article 81 need not necessarily be bilateral but can instead be unilateral restitution. This will be the case if only the seller or the buyer has performed. In addition, restitution may for various reasons be partial. A buyer avoiding the contract may not be able fully to restore the goods to the seller, for the goods or some of them may have been sold on to sub-buyers or transformed by a manufacturing or similar process into goods of a different kind. Although the buyer loses the right to avoid the contract if unable to restore the goods 'substantially' in the condition in which they were received, in exceptional cases the buyer may still avoid the contract.[37] First, the impossibility of making restitution may not be due to the act or omission of the buyer.[38] Secondly, restitution in full may not be possible because of the buyer's examination of the goods.[39] Thirdly, and most importantly, the goods may have been sold on, consumed or transformed before the buyer discovers that they are non-conforming. Where goods in these cases cannot be redelivered, the rules regarding the restitution of benefits in Article 84 come into play in place of the basic duty to redeliver the goods under Article 81.

3.10  Where performance has been executed on both sides, each party has some security for the return of performance by the other (see below). This will be more or less adequate from the buyer's point of view according to the quality and condition of the goods delivered. In addition, if only one party has performed, the question arises whether the non-performing party is entitled to some assurance that the other party will return performance, especially where the contract has been avoided for that party's fundamental breach. In such cases, the device of contractual suspension in Article 72, pending the receipt of adequate assurance of performance by means, for example, of a performance bond or standby letter of credit, may not usefully be extended. The party seeking restitution in these circumstances is not seeking to suspend the resale of the goods. Furthermore, no useful purpose would be served by requiring adequate assurance to be given, followed by an award of damages in the event of it not being given.

      dd) Concurrent Restitution

3.11  Article 81(2) requires restitution between seller and buyer to be concurrent.[40] The seller may not object to restitution in those cases under Article 82 where the avoiding buyer is excusably unable to redeliver all the goods.[41] Otherwise, the requirement of concurrent restitution applies in all cases. The concurrence of the parties' obligations means that each party has a type of security in not having to give credit to the other. If restitution by one party is prevented by national laws dealing with bankruptcy or currency restrictions, for example,[42] the party who is not prevented by these laws from making restitution is protected by the concurrency rule from having to make restitution.

      ee) Place of Restitution

3.12  The place of restitution is not dealt with expressly by the Convention but it is a matter governed by the Convention and so is to be determined by the general principles on which the Convention is based.[43] Taking first redelivery of the goods, suppose that the contract of sale calls for delivery at the seller's premises. If it is the buyer who avoids the contract for the seller's unexempted non-performance, requiring the buyer to redeliver to the seller's premises would give rise to an additional damages liability of the seller under Article 74. Furthermore, nothing in Article 81 would allow the buyer to insist on reimbursement of these carriage costs before handing the goods over. Concurrence goes to the reversal of delivery and payment and not to damages. The avoidance of economic waste may be seen as a general principle underlying the Convention.[44] A requirement of redelivery at the buyer's premises, even if the contract is avoided for the buyer's non-performance (see below), would allow for disposal of the goods in the local market and thus minimise the costs of the restitutionary process. In addition, redelivery at the buyer's premises avoids the complications of allocating risk in transit. It would also delay the process of restitution if the buyer had to hand over the goods at the seller's premises, thus adding further to the cost of restitution. Redelivery at the buyer's premises is therefore the general rule and is supported by cases where the seller is the non-performing party.[45] It can be seen as flowing also from the Convention rules on delivery, since the avoiding buyer, as part of the winding-up process, may be seen as reselling the goods to the seller. These delivery rules presumptively call for delivery at the seller's premises.[46] This result is preferable to requiring restitution to be made at the place of performance of the original primary obligations.[47]

3.13  Two exceptional cases should however be considered. If the contract calls for delivery of the goods at another place, then this place should be the place of redelivery. If the buyer acting reasonably has warehoused the goods at another place still, then the warehouse should be the place where the goods are to be redelivered, though any warehouse warrant or similar document that has to be produced to release the goods should be the subject of transfer at the buyer's premises.

3.14  In addition, if it is the seller who avoids the contract for the buyer's unexempted non-performance, it is less clear that redelivery should be required at the buyer's premises. If redelivery did take place there, the seller would have an action for damages against the buyer under Article 74 for any consequent costs of carriage. Nevertheless, the likely cause of a seller avoiding the contract is where the buyer fails to pay for the goods, in which case the seller would have a practical interest in taking an active position and expediting the redelivery process. This points to the efficacy of a clear rule in all cases, including cases where the contract is avoided for exempted non-performance, that redelivery should take place at the buyer's premises.

3.15  The place of repayment of the purchase price is also not dealt with expressly by the Convention. Treating the seller as the buyer of the redelivered goods, the price should be repayable at the original buyer's premises.[48] This obligation of the seller should not be interpreted too literally since the means of payment and repayment also have to be considered. If payment under the contract of sale has been made by a bank transfer, repayment by the same method to a bank of the buyer's choice represents the most practical method of effecting restitution. Requiring restitution of the goods and the purchase price in different places is not as such inconsistent with the rule of concurrency of restitution, though exact concurrency may be hard to achieve in all cases where redelivery and repayment occur in different places.

      ff) Costs of Restitution

3.16  Even though restitution may have taken place in full, with redelivery of the goods at the buyer's premises, there will frequently be additional costs arising out of the subsequent disposal of the goods. Any such additional costs of restitution should be borne by the unexempted non-performing party.[49] If for example goods already delivered to the buyer have to be shipped back to the seller, the cost of carriage should be borne by the unexempted buyer, if the seller avoided the contract, and by the unexempted seller, if the buyer avoided the contract. The unexempted buyer would be liable for the cost of carriage under Article 74; the unexempted seller would bear the cost of carriage on its own account.[50] In the latter case, if the buyer actually paid the cost of carriage back to the seller, it is arguable that this is a consequence of the seller's non-performance and that therefore the cost would be recoverable by the buyer as damages under Article 74.[51] If the goods can more efficiently be disposed of or used in a local market, then the requirement of mitigation of loss will limit a claim for damages against an unexempted buyer under Article 74 for the cost of carriage back to the seller.[52] The complication of an Article 74 damages claim having to be made by the avoiding seller would of course not arise if the cost of carriage were paid by the unexempted buyer.[53] In those cases where avoidance follows exempted non-performance,[54] the cost of carriage back to the seller should not be borne by the exempted buyer, who is exempt from liability for in damages non-performance in Article 79. This exemption is expressed in general terms as an exemption from paying damages under the Convention, and not in special terms as an exemption from paying damages for the non-performance that led to avoidance of the contract.[55] Since restitution is plainly a matter governed by the Convention, along with exemption, there is no room for the cost of carriage or of disposal of the goods to be allocated to another applicable law.

      gg) Time of Restitution

3.17  The Convention does not state when mutual restitution of performance has to take place but performance within a reasonable time may be inferred as a general principle under Article 7(2),[56] in the absence of an agreed time, upon or after avoidance of the contract. Since the duty to make restitution is a contractual one, any unexempted delay in effecting restitution, giving rise to loss suffered by the receiving party, should be compensable in damages in accordance with Article 74. Loss is more likely to arise where it is the seller who delays in making restitution, since the buyer may incur costs in warehousing or handling the goods when unable to put them to productive use. If the buyer is late in making restitution, so that the seller holds back the purchase price together with interest on the purchase price, the seller will not be incurring loss in holding the money but will indeed be earning interest on money not yet paid back to the buyer.

      hh) Risk Prior to Restitution

3.18  Requiring restitution of the goods at the buyer's premises minimises complications stemming from the allocation of the risk of loss. Apart from loss or destruction of the goods arising out of their defective state upon delivery,[57] there remains a need to allocate risk in the period between avoidance and redelivery. In principle, the question of whose fault led to the avoidance of the contract ought not to be relevant, or indeed whether there was fault at all, since the allocation of risk pertains to the identity of the party better able to take out loss insurance. That person is the buyer as the party in possession.[58] The cost of insuring the goods in very many cases will be negligible or non-existent: the buyer's insurance may cover all goods in its possession. If the contract is avoided because of the seller's unexempted non-performance, the buyer should be able to claim damages for the cost of insurance or safeguarding the goods under Article 74. If the contract is avoided for the seller's exempted non-performance, then Article 79 precludes transferring the cost of insurance to the seller by means of a damages claim. In those cases where the seller is at fault in making timely restitution, there is a case for transferring the risk to the seller in order to give an incentive to complete the restitutionary process. The better view, on balance, however, is that the reasons for allocating risk to the buyer remain valid for this case. The additional cost of insuring and safeguarding the goods beyond the due restitution date if the seller has failed to participate in a timely way in the process of restitution are recoverable as damages under Article 74.