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Part XI Remedies for Breach of Contract, 47 Avoidance

From: Global Sales and Contract Law (2nd Edition)

Ingeborg Schwenzer, Edgardo Muñoz

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Avoidance of contract — Breach of contract — Damages and contract — Frustration and contract — Interpretation of contract — Performance of contract — Remedies for breach of contract — Conformity of goods

(p. 758) 47  Avoidance

(p. 759) A.  General

47.01  The concept of avoidance of contract has in many of its facets given rise to long-standing debates. Although nowadays certain convergences can be ascertained, the traditional starting points often vary considerably and typically follow directly from the approach individual legal systems take to the system of breach of contract and the system of remedies. In this chapter, the basic structures of the remedy of avoidance will be outlined.1 The effects of avoidance and the resulting unwinding of the contract will be dealt with in a subsequent chapter.2

47.02  As avoidance sharply contradicts the very notion of pacta sunt servanda, it represents the most severe interference with the contractual relationship established between the parties.3 However, the often complicated unwinding of the contract as the result of this remedy is also increasingly found to be undesirable.4 As is shown at various points in this chapter, from a comparative perspective the development in all legal systems—independent of their individual approach to avoidance—has been and is to make avoidance a remedy of last resort. This is particularly obvious at the international level where the bar for the availability of avoidance is consistently raised.5

I.  Concept

47.03  Avoidance of contract, as presented in this chapter, is a reaction to a disturbance in the performance of the contract.6 In dealing with this concept of avoidance this work follows the conceptual guidelines of the CISG. Hence, the concept of avoidance as understood here is the potential reaction to any problems arising in the performance of a sales contract. It thus covers all reasons for contracts coming to an end.

47.04  The understanding of the concept of avoidance on which this chapter is based necessitates delimiting avoidance from other concepts. First, the conceptual nature of avoidance must not be confused with the notions of ‘withdrawal’ or ‘revocation’ as described in the chapter on the formation of contracts.7 These latter concepts relate to the question of when a declaration has taken effect and whether a contract has been concluded. However, where consumer protection legislation envisages so-called ‘rights of withdrawal’,8 these are actually quite close to the avoidance of the contract, as the contract has already been concluded when such rights are exercised. Moreover, the legal consequences in these situations often are similar to those of avoidance.

47.05  Furthermore, ‘avoidance’ must also not be confused with ‘rescission of contract’. The term ‘rescission’, as it has been used earlier,9 relates to the possibility under domestic laws and the uniform projects to set aside contracts based on mistake, fraud, duress, and similar concepts.10 The term ‘termination’ as found in the uniform projects describes the same concept as avoidance in this work.11

(p. 760) 47.06  Issues may be raised as to the precise dogmatic classification of avoidance of contract. The traditional dogmatic understanding is that avoidance is a right while damages is a remedy. While admittedly this distinction is still found in many legal systems, it is not of relevance for the presentation in this context. For the main part, this distinction has lost much of its relevance as modern legal systems at the domestic level, following the lead of the CISG and the uniform projects list the options of an aggrieved party in case of breach of contract together thus indicating that this distinction is outdated at least as far as the availability of avoidance is concerned.12

47.07  At the domestic level—apart from avoidance for breach of contract—contracts may come to an end for different reasons. In many respects these reasons would trigger avoidance under the CISG. Some of these cases fall within domestic categories such as validity. In traditionally structured civil law systems this is the case with initial impossibility, for example.13 Under a number of these legal systems subsequent impossibility ends the contract ex lege.14 In common law jurisdictions sales contracts which cannot be performed because the goods have already perished at the time of contracting are void.15 Following the conclusion of the contract, the concept of frustration may bring a contract to an end.16 Furthermore, in many jurisdictions situations of hardship may lead to the contract being dissolved.

II.  Terminology

47.08  Throughout this work the above-described concept is termed ‘avoidance’. Other terms that are frequently used in the legal world include ‘rescission’, ‘cancellation’, and ‘termination’. As this work is set out to present sales law on a global scale it is justifiable to adopt the language used by the CISG—the most relevant set of rules globally. It would be disadvantageous to depart from an established nomenclature in international sales transactions.

47.09  Ambiguities as to the terminology used may, however, arise particularly at the international level. While the CISG employs the term ‘avoidance’, PICC and PECL have used this term for situations involving mistake, fraud, duress, and similar concepts.17 The term given to the remedy for breach of contract by PICC and PECL is ‘termination’.18 This approach has also been followed by the DCFR.19 Hence, for present purposes, what is termed ‘termination’ by the uniform projects is termed ‘avoidance’ in this work. What is termed ‘avoidance’ in the uniform projects is termed ‘rescission’ in this work.

(p. 761) III.  Avoidance by Agreement

47.10  Legal systems do not generally object to the parties ending their contractual relationship by agreement. In essence, such agreement is nothing other than a contract to avoid the initial contract and, thus, falls perfectly within the principle of freedom of contract.

47.11  A specific case closely related to the avoidance by agreement is that of repudiation in common law jurisdictions following the English model. In these legal systems repudiation of the contract—that is a unilateral statement to the effect that performance of the contract is refused—does not suffice to bring the contract to an end. Rather, it is necessary for the aggrieved party to accept the repudiation.20

47.12  Particular problems arise where the parties do not negotiate an avoidance of the contract but instead they remain inactive for a long period of time until one party demands performance from the other.21 This will especially be the case where the market rises and the buyer consequently wishes to get the goods delivered on the original terms, thus increasing its profit on the resale in the market.22 The debate concerning this group of cases focuses on instalment contracts where the issue is most likely to arise; this is especially where the contract does not envisage specific delivery dates but where the buyer is intended to ‘call off’ the goods.23

47.13  There are different solutions conceivable for these scenarios. One possibility is to construe the parties’ inactivity as an implied agreement to avoid the contract altogether.24 Commonly referred to as ‘abandonment’, there appears to be some divergence amongst common law systems. The difficulties with abandonment naturally arise from the fact that such agreement would still have to meet the general requirements established by the rules on contract formation.25 Classifying the mere inactivity of the parties as legally relevant declarations leading to a binding agreement does not sit comfortably with the otherwise established principle that silence is typically not of relevance.26

47.14  Australian courts, seemingly more so than other jurisdictions, have demonstrated a preparedness to infer that the parties, by their conduct, have discharged their contract by an abandonment agreement.27 The inference that the parties do not wish to proceed must be a clear one.28 Because that agreement is an inferred one, it is said that it does not need to follow the traditional offer and acceptance model, nor do the subjective intentions of the parties play any part.29

(p. 762) 47.15  Some of the more recent statements under English case law30 have suggested that there was an implied term to the effect that where the buyer does not call for delivery of the goods within a reasonable period of time, delivery lapses.31

47.16  In civil law jurisdictions such situations may be solved by making use of the principle of venire contra factum proprium. These systems typically are familiar with the general requirement of good faith. In other words, where a party was inactive and has created the reasonable assumption of the other party that it is no longer interested in the contract, that party displays contradictory behaviour when it suddenly wishes to go through with the contract. The obligee will be prevented from doing so in particular where the obligor has reasonably relied on the obligee’s inactivity and is now prejudiced, for example because it has sold the goods elsewhere.

47.17  Whether solving these cases in common law jurisdictions by the parallel concept of estoppel is possible remains disputed. Some court statements were affirmative in this regard, especially where the obligor had already relied on the obligee’s inactivity and changed its position.32 Yet, there is also a strong view which contends that the mere inactivity of both parties does not allow for a sufficiently conclusive inference of estoppel.33 Another solution advocated by courts and commentators operates with the concept of repudiation and its acceptance.34 The starting point is to hold the buyer to be under a duty to request delivery within a reasonable period of time.35 Failing to do so, the buyer commits a repudiatory breach which is—and may be—accepted by the seller without communication but by its own inactivity.36

B.  Grounds for Avoidance

I.  General

47.18  A contract is only avoided, if there is a right to avoid the contract or if avoidance occurs ipso facto.37 The requirements that must be met for avoidance as well as their interplay strongly depend on the approach a legal system takes with the basic structures of breach of contract and remedies for breach. Overall, three factors are crucial in determining whether avoidance is possible. Obviously, first, the parties may have agreed on a right to avoid the contract. (p. 763) Secondly, the gravity of the breach committed plays an important role. Thirdly, the so-called Nachfrist concept is important in the discussion.

1.  Contractual Agreement

47.19  It is clear in all legal systems that parties may agree on the right of one party to avoid the contract in specific situations.38 The two most important examples in this context are agreements that breach of a specific contract clause gives the creditor a right to avoid the contract, and trade terms which do similarly. The latter category, in particular, encompasses trade terms which allow the buyer to avoid the contract and turn to another seller if it can obtain the goods from this second seller under better conditions.39 The buyer, however, must prove that the offer of the third seller is serious and that it promises performance.40

47.20  The notion of the parties agreeing on those situations in which the aggrieved party shall be entitled to avoid the contract must not be confused with an avoidance of the contract by agreement as discussed earlier.