Non compliant sale of goods: compensation for damages if you prejudice the counterparty

Luca Davini
Lawyer in Milan and Turin


Article 25 of the Vienna Convention says that the breach of the contract by one of the parties is essential “when it causes the other party such injury as to substantially deprive it of what it was entitled to expect from the contract, unless the defaulting party foresaw such an outcome, and that not even a reasonable person of the same quality in the same circumstances could have foreseen it”.

What, however, is the prejudice that substantially deprives a part of what it was entitled to expect under the contract?

The first criterion, useful to qualify an essential default is the one that concerns the main performance of a purchase and sale contract: if the seller does not deliver the goods or the buyer does not pay the agreed price, without any doubt, we are facing an essential default (Article 25 CISG).

Quantity of goods

Given this, the first doubts arise when, for example, the quantity of compliant goods delivered does not correspond to what had been agreed. For example, the parties have concluded a purchase and sale contract for the purchase of one hundred workbenches, and upon delivery the examination of the goods makes it possible to find out that 97 workbenches comply with the contract, but the remaining three are defective to an extent that they cannot be used.

In a similar case, in which the defective quantity of the goods is small, the qualification of “essential default” will depend on the remedy offered to the buyer: if the seller allows the reduction of the price in proportion to the defective goods, the default will probably not be defined as essential but if, on the contrary, the seller will demand payment of the full price, the case of Article 25 of the CISG can be considered realized, since the buyer is deprived of the benefit that he could legitimately expect from the transaction.

Quality of goods

The second criterion that must be examined in relation to the “essentiality” of the non-fulfilment is that of the quality of the goods, with the aim of assessing the existence or not of an essential non-fulfilment in the event that the thing delivered by the seller is not functional for the use for which it is intended.

For example, in the case of selling bottles of wine, the buyer, once opened the bottles of wine, disputes the lack of quality of the product to the seller, who immediately offers to replace the part of defective bottles.

If the seller replaces the defective bottles in a short period of time, not causing any substantial damage to the buyer, the default cannot be qualified as “essential” and, therefore, the contract cannot be terminated. On the contrary, without this substitution, default would be essential and the buyer could terminate the contract under article 49.1 a) of the CISG.

Diversity of goods

Finally, it remains to be determined when there is an “essential default” in the case of delivery of a “type” thing other than the one agreed, or in the so-called aliud pro alio case, which is also considered in the Vienna Convention as a generic lack of compliance among others.

For this reason, the mere existence of an aliud pro alio will not allow to qualify the default as “essential”: it will instead be necessary to analyse the concrete circumstances to know if the delivery of something other than the one agreed qualifies the buyer according to Article 25 CISG.

Please note that the same criteria will apply to cases of lack of conformity resulting from defects in the wrapping or packaging of the goods.

Options for the buyer

In the event of failure of the seller (e.g. delayed delivery, delivery of defective goods, etc.), the Convention grants the buyer the following remedies:

(i) claim for performance (Article 4);

(ii) termination of the contract (Article 49);

(iii) price reduction (Article 50).

In addition to the above remedies, the buyer may request (iv) compensation for damage (Article 45) caused by the seller’s default (provided that it is not attributable to force majeure), constituted by the loss suffered as a result of the payment, including loss of profit.

The fact that the damage also includes damages that are not an immediate consequence of non-performance of the contract (e.g., loss of production, costs incurred for the withdrawal of defective products, etc.) is a common rule in the majority of sales legislation, which does not exclude that the parties can derogate from it with specific exemption clauses.

Article 47 (1) gives the buyer the right to set a further period of time, in addition to what is provided for in the contract, within which the seller can fulfil its obligations. However, if the seller fails to deliver within the expiry of the additional time period, the buyer may declare the termination of the contract avoided (article 49 (1) (b)).

Article 48 (1) gives the seller the so-called right of “care”, which allows him to correct any breach of his obligations arising from the contract or Convention, and to do so even after the date of performance provided for by the contract, provided that the exercise of this right does not cause unreasonable inconvenience to the buyer.

Options for the seller

What are the remedies provided by the CISG in favour of the seller in the event that the buyer does not comply, for example, to its obligation to pay or to take delivery of the goods or other contractual obligations?

In general, Article 61 (1) of the CISG states that the seller may:

demand fulfilment (that is pay the price or, as the case may be, take delivery of the goods or fulfil its other contractual obligations) or terminate the contract (only in the case of essential non-fulfilment) and

claim damages.

In the likely event of a claim for damages, the damage will consist of a sum equal to the loss, including loss of profit, suffered by the other party as a result of the default, provided that the buyer has not defaulted due to force majeure (Article 79 CISG).

A typical case that justifies a claim for damages is that which occurs when the buyer does not collect the goods, the seller consequently terminates the contract and sells the goods to a third party: in this case the amount of compensation is normally equal to the difference between the price paid by the third party and the price that was to be paid by the defaulting buyer.

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Marcello

Dear Aurelia, the information you have provided are not sufficient for an answer which is subject to a professional engagement. In any case, we should study the provisions of the contract and identify governing law of the contract.If it does not provide anything on governing law then conflict law shall apply (in the most part of the countries likely the governing law will be the law of the country where the agent is domiciled). best regards Marcello Mantelli

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Aurelia

I signed a contract with a fashion agency but there were no termination clauses in the contract and decided to withdraw it before one week after signature so sent them an email but after 14 days they sent me an email and asserted that because i didnt withdraw in legal deadlines i have to perform the contract and pay whole money.Noboday told me about any deadlines and nothing was in the contract!! Why did they claim such a thing?

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