The panel was convened at 9:00 a.m., Saturday, March 31, by its moderator Gabriel Wilner of the University of Georgia School of Law, who introduced the panelists: Eduardo Grebler of Catholic University of Minas Gerais Law School and the International Law Association, Brazilian branch; Ingeborg Schwenzer of the University of Basel, Switzerland; and Paul Stephan of the University of Virginia School of Law.
FUNDAMENTAL BREACH OF CONTRACT UNDER THE CISG: A CONTROVERSIAL RULE
By Eduardo Grebler *
In April 2005 the international law community celebrated the 25th anniversary of the 1980 United Nations Convention on Contracts for the International Sale of Goods (the "CISG," or the "Convention"). (1) Until then, sixty-four states had adopted the Convention as their law on the international trade of goods; two years past, the number of signatory states (2) has increased to seventy, showing that the CISG has grown steadily to become one of the most
successful instruments of uniform commercial law worldwide. Before the CISG, two other uniform laws on the international sale of goods had been drafted in the early 1960s, (3) with very limited acceptance by the international law community. Globalization was not yet such an encompassing phenomenon as it would later turn out to be, but the fast-growing level of international trade was enough to encourage UNCITRAL, then a newly established agency of the United Nations, to attempt to create common grounds on the international sale of goods, in order to overcome--or at least diminish--the differences existing on that subject between common law and civil law traditions, as well as between the practices of more developed and less developed countries, and of capitalist and centrally planned economies.
Thus, since its inception the CISG was expected to become a piece of "international legislation," purporting to provide a set of rules of worldwide application to govern the most frequent type of commercial transaction of all times. In order to achieve this goal, the drafters of the Convention undertook to bridge the gap between the different legal approaches to the international sale of goods, so as to produce a text acceptable to the largest possible number of states.
Despite the significant number of states that since then became parties to the Convention, the international sale of goods remains ungoverned by a single set of rules of universal application. (4) The Convention is yet to become accepted by many states, and even where it has already been incorporated into national laws, parties sometimes avoid its application, and state courts at times seem hesitant to apply its rules.
My remarks comment on Article 25 of the Convention, which has been the object of recurrent criticism for both its form and its substance, (5) oftentimes presented as an example of flaws in the CISG that may account for the Convention not being adopted by a number of countries. I will then propose that the imperfections that do exist in Article 25 should not constitute a barrier for the adoption of the Convention as a whole by those states that have not yet done so.
FORMAL PROBLEMS OF ARTICLE 25
Article 25 of the CISG defines the concept of fundamental breach. It states:
A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. (6) The attempt of the CISG drafters to reconcile the dichotomy between common and civil law created some problems as to the drafting technique of the Convention, of which Article 25 is an example. (7) The structure of the proviso contains an affirmative qualifying statement ("A breach of contract committed by one of the parties is fundamental"), followed by a condition ("if it results in such detriment to the other party"), which is subject to another condition of a relative content ("as substantially to deprive him"), followed by a unspecified object ("of what he is entitled to expect under the contract"), followed by an exception ("unless the party in breach did not foresee"), finally accompanied by another negative exception ("and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.").
It is undeniable that the convoluted language of Article 25 makes its meaning somewhat difficult to perceive at first sight. Lawmaking technique tends to use Cartesian logics in the presentation of the factum species and of the legal hypothesis, so that statutes normally do not contain cumulative conditions of positive and negative values, neither a chain of conditions that may cancel off each other. It is true, then, that this provision has an "unfamiliar look" (8) and may give rise to a certain perplexity in its interpretation.
However, difficulties for the assimilation of legal texts produced in foreign languages are not unknown. Uniform laws translated into languages other than that in which they were drafted are frequently criticized for their structure and style, for lack of local flavor, or for sounding awkward. (9) In the case of Article 25, although concessions had to be made for the sake of achieving uniformity, structural problems are not such as to impair its understanding. Nonetheless, its unfamiliar language may be a cause of resistance by the legal community of a number of countries to adopt the Convention.
SUBSTANTIVE PROBLEMS OF ARTICLE 25
Characterization of fundamental breach is a pre-condition for the exercise of certain rights under the CISG, namely the termination of the contract by either party (Articles 49-1-a and 64-l-a), the request by the buyer for delivery of substitute goods (Article 46-2), and the preservation of remedies after the passing of risk (Article 70-2). As a result, a non-fundamental breach will entitle the aggrieved party only to claim damages from the other party, equal to the loss (including loss of profit) suffered as a consequence of the breach. Such damages, however, must not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. (10)
The meaning of the first part of Article 25 seems inconclusive, for the concept of fundamental breach depends upon the concept of substantial deprivation, but a definition of the latter is not found in the provision, leaving the interpreter without a benchmark as to the extent of deprivation required to constitute a fundamental breach. As it has been argued, "defining fundamental with substantial, to begin with, leaves an impression of playful tautology." (11)
The middle segment of Article 25 is also confusing to the mindset of lawyers in many countries, as it refers to the deprivation of what the party is entitled to expect under the contract, rather than to what the party in breach promised to deliver under the contract. In doing so, the CISG shifts the focus of the dispute, as the interpreter must decide on what the aggrieved party had the right to expect from the contract, instead of deciding on whether or not the contractual obligation was complied with by the party in breach. (12)
Finally, the last part of Article 25 subjects the notion of fundamentality of the breach to the notion of foreseeability of the result, thus requiring a judgment by the interpreter as to whether or not the party in breach did foresee, or could have foreseen, the result of his or her breach. This approach allows that a breach that substantially deprived the other party of what he or she was entitled to expect under the contract be regarded as not being fundamental, if the party in breach shows that it did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.
Several factual and abstract circumstances must be considered before the interpreter can say that a fundamental breach did occur. As a result, it may become difficult to respond to the basic question as to whether a contract is avoidable or not in a particular situation, without submitting the case to a court of law or to an arbitral tribunal.
Because the Convention treats the breach as a remedy of last resort, it may be difficult even for an adjudicator to find grounds to declare the contract avoided. For such a purpose, the default must have overtly caused an undeniable and grave loss to a right that the aggrieved party could expect from the contract, and such result must, or at least could, have been anticipated by the party in breach. As argued by Professor Zeller, "[e]ven severe nonconformities of goods, which are in essence amounting to a fundamental breach, do not guarantee that avoidance will be allowed by the courts." (13)
The practical consequence of that approach is that the aggrieved party may face difficulties to obtain compliance by the other party, because damages provided for in Article 74 of the CISG--themselves subject to foreseeability as to the possible consequence of the breach--may not be sufficient to encourage the party in breach to abide by the contract.
It is clear, then, that the approach of the Convention was that international sales contracts should not be terminated, except in extreme circumstances. The rationale adopted by the Convention drafters was that the avoidance of a transaction between parties located in different countries is economically inefficient, given that the goods have to be re-exported from one country to the other. To that conclusion, Professor Ferrari added that "this limitation helps to contain the number of cases in which the damaged party may take advantage of the defaulting party's breach in order to...