The concept of “fundamental breach” in international sale

Marcello Mantelli
Lawyer in Milan and Turin


Having examined the remedies available to the seller and buyer in the event of non-performance by the other party, however, it must be considered that, under the Vienna Convention (CISG), not all defaults have the same importance nor the same consequences. Indeed, the CISG distinguishes “essential breach” from the rest of defaults for the purposes, fundamentally, of the exercise of actions for substitution and termination (articles 46.2 and 49.1 a/ CISG, respectively).

CONCEPT OF ESSENTIAL BREACH

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

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

To answer this question, we will try to shed light on the concept by referring to the principles that have emerged from the work of the doctrine and the decisions of the European Courts regarding the indicated precept, but above all by examining concrete cases.

THE FAILURE TO DELIVER AND THE NON-PAYMENT OF THE PRICE

The first criterion useful to qualify a default as essential is the non-performance that concerns the main performance of a contract of sale and purchase: if the seller does not realize the delivery of the thing or the buyer does not pay the agreed price, without a doubt, we are faced with an essential non-performance of the corresponding party (article 25 CISG).

The doubts arise when, for example, the quantity of the delivered goods does not correspond to what was agreed upon.

When does this lack of conformity constitute an essential breach?

This question cannot be answered simply by referring to the quantity of goods that were delivered but it is necessary to consider the rest of the circumstances.

For example, the parties entered a sales contract for the purchase of one hundred bottles of wine.

Upon delivery, examination of the goods reveals that 97 bottles conform to the contract, but the remaining 3 are found to be defective to the extent that they could not be used.

In such a case, where the defective quantity of the goods is small, the qualification of “essential breach” will depend on the remedy offered to the buyer: if the seller will allow the reduction of the price in proportion to the defective bottles, the breach probably cannot be defined as essential, but if, on the contrary, the seller demands the payment of the entire price, the case of Article 25 CISG may be considered to have been fulfilled, since the buyer is deprived of the benefit that he could legitimately expect from the transaction.

Let us consider another case.

An Italian producer sells wine to a German buyer but fails to deliver the quantity of bottles stipulated in the sales contract.

The producer, however, solicits partial payment for the goods he had already delivered, and the buyer, for his part, solicits compensation for damages caused by the defective performance and claims his right to suspend payment until the goods have been delivered in full.

In such a case, partial delivery does not constitute an essential breach of contract under article 25 CISG in relation to 49.1 CISG.

With reference, on the other hand, to non-delivery of the goods on the agreed date, it constitutes an “essential breach” only if the buyer has a special interest in delivery on time and the seller can foresee that the buyer would prefer non-delivery to late performance of the contract.

LACK OF QUALITY OF THE GOODS

The second criterion we will examine in relation to the “essentiality” of non-performance is that of the quality of the goods: if the thing delivered by the seller does not work for the use for which it is intended, will there exist an essential breach on the part of the seller?

An example may help.

A contract to buy and sell bottles of wine has been concluded. When the buyer opens the wine bottles, he complains about the lack of product quality to the seller, who immediately offers to replace the defective part of the bottles. If in this case the seller (knowing of the lack of conformity after delivery) replaces the defective bottles within a short period of time, causing no substantial damage to the buyer, the breach cannot be characterized as “essential” and, therefore, the contract cannot be terminated. Without this replacement of the defective part under the specified conditions, default would be essential, and the buyer could terminate the contract under Article 49.1(a) CISG.

Let us consider a different case.

The parties finalize a sale of bottles of wine, the geographical origin of which was agreed upon in the contract.

Since the actual origin of the wine delivered was different from that agreed upon, the buyer declares the contract terminated for lack of conformity.

In such a case, in order to be able to ascertain the existence of an essential breach, it will be decisive to know whether the buyer will still be able to resell the bottles of wine in his usual business relations without unreasonable difficulties. In this case, the resale of the wine at a lower price and without unreasonable hardship precludes the default from qualifying as “essential.”

If, on the other hand, the defects in the wine were irreparable, the default would have to be qualified as “essential”, for example, in the case of artificially sweetened wine.

GOODS OF A DIFFERENT KIND

It remains to be determined when a case of delivery of a thing of a different “type” from that agreed upon is considered an “essential breach”.

We have already seen in the previous articles how the case of an aliud pro alio is considered in the Vienna Convention as one non-conformity among others.

Therefore, the mere existence of an aliud pro alio will not allow the non-conformity to be qualified as “essential”: instead, it will be necessary to use the criteria set out in this contribution and analyze the concrete circumstances in order to know whether the delivery of something other than what was agreed upon prejudices the buyer within the meaning of Article 25 CISG.

Note that the same criterion is applicable to cases of lack of conformity based in defects in packaging or packing.

FAILURE OF SECONDARY OBLIGATIONS

At the margin of the elements enunciated in Article 35 CISG, there are other obligations of the seller whose non-performance may cast doubt on its essentiality.

Is it possible that the seller’s breach of a secondary obligation could come to be essential?

The answer must be yes, at least if certain conditions are fulfilled, as in the following case.

An Italian wine producer receives an order from a German buyer to produce 100 bottles of wine to be made in accordance with the specifications given by the buyer. The sale is based on an exclusive distribution contract for the produced bottles that the seller had granted to the buyer.

Once produced, the Italian seller puts the bottles up for sale at a trade fair without the buyer’s consent and refuses to take them back when the holder of the exclusivity enjoins him to do so.

The day after the fair, the German buyer notifies the seller that he has broken off business relations with him, informing him that from that time on he would go to another producer to buy the wine and refusing to pay for the order.

In such a case, the seller’s failure to perform a secondary obligation such as it is to disregard the buyer’s exclusive right may constitute an essential breach, thus giving rise to termination of the contract, if it endangers the purpose of the contract, such that the prejudiced party (the buyer) loses its interest.

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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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