Comments on Article 25 of the 1980 Convention on Contracts for the International Sale of Goods

27.11.2013

By: Dmytro A. Shemelin, Lawyer at Ilyashev & Partners
Source: CISG.Russia Project: United Nations Convention on Contracts for the International Sale of Goods, 1980

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.

A fundamental breach of contract, certain senior 25 of the Convention, is one of the key concepts of the Convention. In General, it delimits a situation when the breach of contract gives the right to its cessation (termination), from situations where the Treaty remains in force, but the aggrieved party is entitled to recover damages or other remedies.

In particular, a fundamental breach of contract:

• Is a prerequisite for a party’s right to avoid the contract under articles 49(1)(a) and 64(1)(a) and 51(2) of the Convention;
• It a fundamental breach is foreseeable, the other party may declare the contract avoided under articles 72(1) and 73 of the Convention;
• Is a prerequisite for a buyer’s right to require delivery of replacements for goods that failed to conform to the contract under Art. 46(2) of the Convention;
• impacts the operation of the passage-of-risk provisions under article 70 of the Convention.

In order to rank as fundamental, a breach must meet three conditions:

• One party has committed a breach of any duty or obligation arising out of contract (including any right expressly provided fir in the contract or arising out of the Convention for the purposes of such agreement);
• The aggrieved party must have suffered such detriment as to substantially deprive it of what it was entitled to expect under the contract;
• These consequences were reasonably foreseeable to the breaching party. Although the Convention does not expressly mention the time at which the consequences of the breach must have been foreseeable, the relevant here time is the time of the conclusion of contract (see 2012 UNCITRAL Digest, para. 4 on p. 118).

Common cases of material breach of contract

A. In effect, it has been determined – for good reason – that complete failure to perform a basic contractual duty (i.e., final non-delivery or final non-payment) constitutes a fundamental breach of contract.

Likewise, a final announcement of the intention not to supply or not to pay constituting an anticipatory breach of contract entitles the other party to declare the contract avoided under Article 72(1) of the Convention.

It has been determined on various occasions that even if there is an intention to perform in future, the circumstances of the case showed that the breach was very likely to occur. The breach is to be reasonably expected in case of buyer’s insolvency and placement under administration or a buyer’s refusal to open a letter of credit as required by the contract.

It has also been determined that non-delivery of the first installment gives the buyer reason to believe that further installments will not be delivered, and therefore a fundamental breach of contract is to be expected (article 73(2) of the Convention).

B. As a rule, late performance — whether late delivery of the goods or late payment of the price — does not in itself constitute a fundamental breach of contract. However, when the time for performance is of essential importance, delay as such may amount to a fundamental breach if:

• it is was specifically contracted for between the parties that the time for performance is of essential importance;
• it such essential importance is due to evident circumstances (e.g., seasonal goods);
• if the party in breach fails to perform during an additional period of time for performance fixed by the aggrieved party (see Articles 49(1)(b) and 64(1)(b) of the Convention).

С. Delivery of defective goods may be deemed a material breach of the contract as long as the buyer can not — without unreasonable inconvenience or with reasonable effort — use the goods or resell them even at a discount.

In particular, Court decisions on this point have found that a non-conformity concerning quality remains a mere non-fundamental breach of contract if the rectification of defects does not pose a major difficulty and does not cause much inconvenience for the buyer.

D. The violation of other contractual obligations can also amount to a fundamental breach. It is, however, necessary that the breach deprive the aggrieved party of the benefit of the bargain and that this result could have been foreseen by the other party.

E. The cumulation of violations of several contractual obligations makes a fundamental breach more probable, but does not automatically constitute a fundamental breach. In such cases, the existence of a fundamental breach depends on the circumstances of the case (see 2012 UNCITRAL Digest, para. 12 on p. 119).

See also an article by Franco Ferrari exploring the contents of fundamental breach of a contract in the light of 25 years of application of the Vienna Convention that have passed since the adoption of the document.