Class 4: Performance of Sale and Remedies

Transnational Commercial Law Course

Časlav Pejović
 ARTICLE 15 - WITHDRAWAL OF OFFER
• Article 15
• (1) An offer becomes effective when it reaches the offeree.
• (2) An offer, even if it is irrevocable, may be withdrawn if the withdrawal
reaches the offeree before or at the same time as the offer.
• A validly withdrawn offer never becomes effective and cannot be
accepted, even if the offeree becomes aware of the offer.
• Comment: In case of E-commerce, the term ‘reaches’ corresponds to
the point in time when electronic communication has entered the
offerree’s server (The CISG Advisory Council Opinion No. 1)
 ARTICLE 16 - REVOCATION OF OFFER

• Article 16
• (1) Until a contract is concluded an offer may be revoked if the revocation
reaches the offeree before he has dispatched an acceptance.
• (2) However, an offer cannot be revoked:
• (a) if it indicates, whether by stating a fixed time for acceptance or
otherwise, that it is irrevocable; or
• (b) if it was reasonable for the offeree to rely on the offer as being
irrevocable and the offeree has acted in reliance on the offer.
CISG Contract Formation

Withdrawal

Revocation
Offeror Offeree
Acceptance
 FIRM OFFER, WITHDRAWAL AND
REVOCATION
• CISG provides that an offer will be irrevocable if:
• Offeror indicates, whether by stating a fixed time or otherwise, that it is
irrevocable, or
• Offeree acts in reliance on the reasonable belief that it is irrevocable
(common law?)
• Comment: Article 16 regulates the point in time until which an offer remains
non-binding. Once an offer has been received, it can no longer be ‘withdrawn’. A
withdrawal that reaches the offeree after the offer may constitute revocatio
• Question: How different are a withdrawal and a revocation?
 ARTICLE 18 - ACCEPTANCE
• Article 18
• (1) A statement made by or other conduct of the offeree indicating assent to an offer is an
acceptance. Silence or inactivity does not in itself amount to acceptance.
• (2) An acceptance of an offer becomes effective at the moment the indication of assent reaches
the offeror. An acceptance is not effective if the indication of assent does not reach the offeror
within the time he has fixed or, if no time is fixed, within a reasonable time, due account being
taken of the circumstances of the transaction, including the rapidity of the means of
communication employed by the offeror. An oral offer must be accepted immediately unless the
circumstances indicate otherwise.
• (3) However, if, by virtue of the offer or as a result of practices which the parties have
established between themselves or of usage, the offeree may indicate assent by performing an
act, such as one relating to the dispatch of the goods or payment of the price, without notice to
the offeror, the acceptance is effective at the moment the act is performed, provided that the act
is performed within the period of time laid down in the preceding paragraph.
 JAPANESE CIVIL CODE
• Article 526 (1) “ A contract between persons at a distance
shall be formed upon dispatch of the notice of acceptance.”
• German Civil Code Sect. 130(1): “A declaration of intent that is
to be made to another becomes effective, if made in his absence,
at the point of time when this declaration reaches him.”
• French Civil Code Art. 1121. – “A contract is concluded as soon
as the acceptance reaches the offeror.”
• English law: The contract comes into existence at the moment
• when the acceptance was dispatched (“mailbox rule”).
• Q How comes that Japanese law is modeled after English law?
 ARTICLE 19 - COUNTER-OFFER
• Article 19
• (1) A reply to an offer which purports to be an acceptance but contains additions,
limitations or other modifications is a rejection of the offer and constitutes a counter-
offer.
• (2) However, a reply to an offer which purports to be an acceptance but contains additional
or different terms which do not materially alter the terms of the offer constitutes an
acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or
dispatches a notice to that effect. If he does not so object, the terms of the contract are the
terms of the offer with the modifications contained in the acceptance.
• (3) Additional or different terms relating, among other things, to the price, payment, quality
and quantity of the goods, place and time of delivery, extent of one party's liability to the
other or the settlement of disputes are considered to alter the terms of the offer materially.
 COUNTER-OFFER - COMMENTS

• •The CISG treats an acceptance with "additions, limitations, or other

modifications" as a counteroffer.
• This is so only if :
1) Additional or different terms "materially alter" the terms of the offer, and
2) Offeror fails to object to the change promptly.
• Changes to the following are considered to materially alter the offer: price, mode of
payment, quality and quantity of the goods, place and time of delivery, the extent of
one party’s liability to the other, settlement of disputes
• “Battle of Forms”
 EXAMPLE
• •Seller offers to sell a machine tool to Buyer. The offer is on standard
terms “which shall prevail over any terms and conditions in buyer’s order”
and includes a price variation clause for increased costs. Buyer’s order
form is a standard form materially different which states: “we accept your
order on the terms and conditions stated thereon”. Seller signs and returns
the slip together with a letter stating: “We are executing the order on our
offer terms”. The machine is then manufactured, but the Seller sought to
invoke the price variation clause before the delivery. Buyer protested.
• Question: Whose form prevails in this case? Was there a contract at all?
Performance and Remedies

Sale contracts involve several different sets of rules relating to various

aspects: formation, performance, remedies, distribution of risk.
First two sets of rules are generally present in all sale transactions, while
rules on remedies and risk distribution become relevant in case of non-
performance:
1. Remedies apply in case of breach of contract, and
2. The rules on risk distribution apply in case when non-performance is
not related to liability for non-performance (e.g., in case of force majeure)
 Performance and Remedies under CISG

Chapter I contains General provisions, including a provision on fundamental breach

(Article 25) and limitation of the right to specific performance (Article 28)
Part III of the Convention contains the substantive provisions of the sales law. Part III is
set out in five chapters. The core provisions are contained in chapters 2 and 3
Chapter 2 regulates firstly the obligations of the seller (Sections 1 and 2, Articles 30–
44), followed by the remedies available to the buyer (Section 3, Articles 45–52)
Chapter 3 mirrors Chapter 2 by setting out firstly, the obligations of the buyer in
Sections 1 and 2 (Articles 53–60) and then, in Section 3, the remedies of the seller
(Articles 61–65)
Obligations of the Seller

Article 30

“The seller must deliver the goods, hand over any documents relating to
them and transfer the property in the goods, as required by the contract
and this Convention.”

Comments: Seller’s obligation include:

1. Delivery of the goods in conformity with the contract, and

2. Transfer of property
 Conformity in Comparative Law

 Civil law:
 Aliud (totally different goods) vs. peius (non-conforming goods)
- Apparent and latent (hidden) defects;
- Lack of conformity of quality, quantity, packages
 Common law
 Implied warranties
 A) merchantability – an ordinary standard of the goods of average grade; and
 B) fitness for a particular purpose
 Express warranties
The goods have to meet specific quality standards for a specific period of time
 Perfect tender rule – the buyer may reject the goods that fail to conform exactly to
the contract (UCC Sect. 2-601)
 Conformity under the CISG

Article 35

(1) The seller must deliver goods which are of the quantity, quality and description
required by the contract and which are contained or packaged in the manner required
by the contract.

(2) Except where the parties have agreed otherwise, the goods do not conform with
the contract unless they:

(a) are fit for the purposes for which goods of the same description would ordinarily be
used;
 Conformity of the Goods

(b) are fit for any particular purpose expressly or impliedly made known to the seller at
the time of the conclusion of the contract, except where the circumstances show that
the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill
and judgement;

(c) possess the qualities of goods which the seller has held out to the buyer as a
sample or model;

(3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph
for any lack of conformity of the goods if at the time of the conclusion of the contract
the buyer knew or could not have been unaware of such lack of conformity.
 Caveat Emptor Rule
 Rationale of Article 35(3) of the CISG:

 Law protects only the buyer who acts with due diligence.

 Visible defects which can be discovered by vigilance and care need not
be disclosed.

 The meaning of the expression “could not be unaware” - gross

negligence?

 Question: What is the meaning of caveat venditor?

 Japanese Commercial Code
Article 526 Duty to Inspect Subject Matter & Notify of Defects

(1) In a sales transaction between Merchants, upon receiving the object of the sales transaction the
buyer must inspect it without delay.

(2) …if the buyer, as a result of the inspection under the provisions of that paragraph, discovers a
defect or shortfall in the quantity of the object of the sales transaction, it may not cancel the
contract nor demand a reduction of the purchase price or compensation on the grounds of that
defect or shortfall unless it immediately issues notice of the defect or shortfall to the seller.

(3) The provisions of the previous paragraph shall not apply in those situations where the
seller acts in bad faith.
 Japanese Civil Code

Article 572

“Even if the seller makes a special agreement to the effect that the seller will not provide the
warranties set forth from Article 560 through to the preceding Article, the seller may not be released
from that responsibility with respect to any fact that the seller knew but did not disclose, and with
respect to any right that the seller himself/herself created for or assigned to a third party.”

Question: Is there a bad faith if the parties agree “as is with all faults”? What is bad faith:
failure to disclose or attempt to conceal? Both? Freedom of contract?

Comment: Legal effect of “as is” clause: implied warranties do not apply, but fraud rules
do
 Right to Cure
Article 37

If the seller has delivered goods before the date for delivery, he may, up to that
date, deliver any missing part or make up any deficiency in the quantity of the
goods delivered, or deliver goods in replacement of any ­non-conforming goods
delivered or remedy any lack of conformity in the goods delivered, provided that the
exercise of this right does not cause the buyer unreasonable inconvenience or
unreasonable expense. However, the buyer retains any right to claim damages as
provided for in this Convention.

Comment: An illustration of the favor contractus principle incorporated in the CISG

 Examination
Article 38

“The buyer must examine the goods, or cause them to be examined, within as short a
period as is practicable in the circumstances.”

Question: What is the difference between “practicable” and “possible”? “Practicable” may
depend on the characteristics of the goods and how the goods can be examined under the
circumstances

Comment: Examination is not a legal obligation, but it is an action required to be able to

make a claim. The buyer may not make a valid claim for non-conformity, which would have
been detected if the buyer had examined the goods.
Notice
Article 39

The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the
seller specifying the nature of the lack of conformity within a reasonable time after he has
discovered it or ought to have discovered it.

Comment: The primary purpose of the notice is to allow the seller to obtain information on the
character of defects so that he can cure them. The notice simply stating “goods defective” is
insufficient; the notice must be specific. The notice may also be relevant as evidence of the condition of
the goods at the moment of delivery. Vagueness unavoidable – period will depend on the purpose, the
nature of the goods, the type of the defect…

Question: What is the “reasonable time” under Article 39? How long can it be?
Example
A sales contract called for delivery to Buyer of 500-gallon cans of chlorine in sealed metal
containers; when the seal is broken, the chlorine must be used promptly, or it will evaporate. On
June 1, a shipment under this contract was delivered to Buyer. Buyer stored the containers in his
warehouse without counting the number of cans or testing the contents.
On September 1, Buyer notified Seller that he had just opened containers to use the chlorine in
his chemical process and found that there were only 400 cans and that 200 contained chlorine
that did not meet the contract specifications.
Question: Did Buyer examine the goods “within as short a period as is practicable”? Did Buyer
send the notice to Seller specifying the lack of conformity “within a reasonable time after he has
discovered it or ought to have discovered it”?
Breach of Contract and Liability

 “Breach” means non-performance or improper performance of

contractual obligations
 Article 45 (1) “If the seller fails to perform any of his obligations
under the contract or this Convention,,,”
 Under the CISG, the seller’s liability is based on non-performance
regardless of the fault
 CISG does not define breach – it includes all cases of non-
performance
 Fundamental breach defined in Article 25 gives the right to
termination of contract and compensation of damages
Article 25 - Fundamental Breach

Article 25

“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.”
 Comments on Fundamental Breach
Fundamental breach can be assessed by using several criteria:
1.Express stipulation in the contract
2.Purpose of the contract
3.Possibility to cure

Comment: Substantial detriment relates to the seriousness of consequences for

the creditor, rather than the seriousness of a breach; it is a subjective notion that
depends on the expectation of the injured party. Such expectations must appear in
the contract, which transforms it into an objective criterion (e.g., if the contract
states “at the latest” as the delivery date)
Foreseeability
"The rights of the aggrieved party are limited in the event that the other party did
not foresee special consequences which make up the fundamentality of the
breach of contract. [...] the parties should draw their respective attention to such
consequences either in the contract itself or through additional information to be
given in principle until the conclusion of the contract.“
F. Enderlein & D. Maskow, International Sales Law (Oceana Pub. 1992) available at:
https://www.cisg.law.pace.edu/cisg/biblio/enderlein.html

Foreseeability -at the moment of entering into contract, or at the moment of breach?
Subjective and objective element – the party in breach must prove that he did not foresee
the substantial detriment and that no reasonable person in his place could have foreseen
this substantial detriment.

Question: Does foreseeability include an element of fault?

From German Practice
"A breach of contract is fundamental when the purpose of the
contract is endangered so seriously that, for the concerned party to
the contract, the interest in the fulfillment of the contract ceases to
exist as a consequence of the breach of the contract (and this was
capable of being known by the party in breach of the contract)” (
Oberlandesgericht Frankfurt 17 September 1991 )
 Remedies

Remedy is a secondary right that substitutes the original rights under the contract.
The purpose of remedy is to create a condition that would exist if the right was
complied with voluntarily without judicial assistance.
The right of a party to take a certain action, make a claim, or ask for court intervention
Parties often rely on the law for remedies instead of stipulating them in the contract –
it is better to prescribe remedies in contract!
Parties often in practice focus on the creation of the rights and neglect remedies
Remedies in Comparative Law

Civil law sticks closely to pacta sunt servanda; priority is given to specific performance,
including repair, replacement, and purchase of substitute goods. Damages are a subsidiary
remedy.

Common law focuses on results – parties are given an alternative to perform the contract or
pay damages (Posner, “Economic Analyses of Law”, 1977, at 88). Instead of the moral aspect
associated with pacta sunt servanda, common law is closer to the free entrepreneurship
concept. Damages serve to replace performance and compensate the party whose interests
were infringed. Specific performance is an equitable remedy granted at the discretion of the
court ”where the goods are unique or in other proper circumstance” (UCC 2-716.1).
Types of Remedies under the CISG

Article 45 contains an overview of the buyer’s remedies

 Specific performance (Articles 46-48) – to preserve the contract

 Damages (Articles 74-78) – substitute relief

 Avoidance of contract (Article 49) – limited scope

 Reduction of the price (Article 50) – may exist regardless liability

 CISG favors performance over termination (favor contractus)

 An American View
"'Fundamental breach' - OK, but strange; 'Nachfrist '- We don't understand it, we
never heard of it, but we like it; 'Price reduction' - We don't understand it, and we
don't like it; 'Specific performance' – We hope your courts will not resort to it as
much as they may.“

Allan Farnsworth, in: Lausanne Colloquium, "1980 Vienna Convention on the

International Sale of Goods" (Schulthess Polygraphischer Verlag, 1985)

Note: UCC 2-717 provides for a deduction of price “still due under the contract”
 Specific Performance: Example

Seller delivered seriously defective goods.

Buyer telexed, “Rejecting shipment for following serious defects [specifying them].
Demand prompt delivery in conformity with the contract.”

Seller replied, “Your rejection of the goods avoided the contract which releases
both of us from obligations under the contract (under Article 81, Effects of
Avoidance).”

Question: Was the seller’s reply correct under the CISG?

 Time Extension
Article 47

1. The buyer may fix an additional period of time of reasonable length for
performance by the seller of his obligations.

2. Unless the buyer has received notice from the seller that he will not perform
within the period so fixed, the buyer may not, during that period, resort to
any remedy for breach of contract. However, the buyer is not deprived
thereby of any right he may have to claim damages for delay in performance.

Comment: Article 47 facilitates termination of contract under Article 49.

 Right to Cure
Article 48

(1) Subject to article 49, the seller may, even after the date for delivery, remedy at his
own expense any failure to perform his obligations, if he can do so without
unreasonable delay and without causing the buyer unreasonable inconvenience or
uncertainty of reimbursement by the seller of expenses advanced by the buyer.
However, the buyer retains any right to claim damages as provided for in this
Convention.

Comment: Right to cure is the seller’s right to perform the contract after the deadline
(substitute performance) Another illustration of favour contractus.
 Right to Cure - Example
Seller delivered a machine to Buyer. When Buyer tested the machine, a defect in
one of its component parts prevented the machine from operating. Buyer notified
Seller that the machine had failed to operate. Seller offered immediately to replace
the defective part, but Buyer refused this offer and declared that the contract was
avoided. The time required for replacing the defective part was not important to
Buyer. He claimed that the machine had failed to function and that this constituted
a fundamental breach of the sales contract empowering him to avoid the contract.
Question: Was the Buyer entitled to terminate the contract?
 Avoidance of Contract

Article 49

(1) The buyer may declare the contract avoided:

(a) if the failure by the seller to perform any of his obligations under the contract
or this Convention amounts to a fundamental breach of contract; or

(b) in case of non-delivery, if the seller does not deliver the goods within the
additional period of time fixed by the buyer in accordance with paragraph (1)
of article 47 or declares that he will not deliver within the period so fixed.
Time Extension and Avoidance: Example

A contract called for Seller to manufacture and deliver a complex stamping machine
to Buyer by June 1st. Seller was late in making a delivery, and on June 2nd Buyer wired
to Seller: “We are anxious to receive the machine. Hope very much that it can arrive by
July 1st.” Seller delivered the machine on July 2nd, but Buyer refused the machine and
declared that the contract was avoided for failure to comply with the July 1st deadline
outlined in its wire of June 2nd. Buyer was not ready to show that the delay in delivery
from June 1st to July 2nd constituted a fundamental breach under article 25 and
relied solely on the notice-avoidance rules of arts. 47(1) and 49(1)(b).
Question: Was the Buyer entitled to refuse delivery and avoid the contract?
 Reduction of Price
Article 50

If the goods do not conform with the contract and whether or not
the price has already been paid, the buyer may reduce the price in the
same proportion as the value that the goods actually delivered had at
the time of the delivery bears to the value that conforming goods
would have had at that time.
 Reduction of Price: Comment
A distinction is made between damages and proportional reduction of price. Damages
may be claimed only against the party liable for breach of contract and damages, while
reduction of price can be demanded regardless of liability for breach of contract.
Reduction of the price typically applies to cases where the buyer became aware of
certain defects after delivery. If the buyer was aware of them at the time of contract, he
would pay a lower price.
The price is reduced in the proportion between the value of conforming goods and
non-conforming goods determined at the moment of delivery.
Origin is in Roman law action quanti minoris.
QUESTIONS TO THINK ABOUT
 What does it mean ‘conformity’?
 How different is quality from condition?
 How detailed should be the notice in case of non-conformity of the
goods?
 Should the fact of foreseeability be determined at the time when
contract is concluded or at moment of breach?
 Should the possibility of cure or repair to remove a defect, or of
delivering substitutes, be taken into account in determining whether
a breach is "fundamental"?
 ADDITIONAL READING MATERIALS

• J.O. Honnold, Uniform Law for International Sales (Kluwer 1999)

• P. Schlechtriem I. Schwenzer, Commentary on the UN Convention on the
International Sale of Goods (CISG) 3rd. edn. (Oxford Univ. Press 2010)

• www.uncitral.org/english/clout/
• https://iicl.law.pace.edu/cisg/cisg
• www.unilex.info/dynasite.cfm
• www.cisg-online.ch/