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Part XI Remedies for Breach of Contract, 47 Avoidance

From: Global Sales and Contract Law

Ingeborg Schwenzer, Pascal Hachem, Christopher Kee

Content type:
Book content
Product:
International Commercial Law [ICML]
Published in print:
26 January 2012
ISBN:
9780199572984

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

Subject(s):
Avoidance of contract — Remedies for breach of contract — Anticipatory breach and damages

(p. 708) (p. 709) 47  Avoidance

  1. A.  General 47.01

    1. I.  Concept 47.03

    2. II.  Terminology 47.08

    3. III.  Avoidance by Agreement 47.10

  2. B.  Grounds for Avoidance 47.18

    1. I.  General 47.18

      1. 1.  Contractual Agreement 47.19

      2. 2.  Cause-Oriented v Unitarian Approach 47.23

    2. II.  Cause-Oriented Approach 47.26

      1. 1.  General 47.26

        1. (a)  Civil Law and Common Law 47.26

        2. (b)  Conditions, Warranties, and Intermediate Terms 47.28

      2. 2.  Impossibility, Frustration, and Impracticability 47.32

        1. (a)  General 47.32

          • (i)  Development and Functions 47.33

          • (ii)  Scope 47.37

        2. (b)  Requirements 47.40

      3. 3.  Delay 47.41

        1. (a)  Notion of Delay 47.45

        2. (b)  Nachfrist 47.49

          • (i)  General 47.49

          • (ii)  Calculations of Period 47.55

        3. (c)  Period of Grace 47.58

        4. (d)  Time of Essence 47.61

          • (i)  General 47.62

          • (ii)  Express Contract Terms 47.66

          • (iii)  Interpretation 47.70

      4. 4.  Non-Conformity 47.77

        1. (a)  Civil Law Legal Systems 47.78

        2. (b)  Common Law 47.85

          • (i)  General 47.85

          • (ii)  Perfect Tender Rule 47.86

          • (iii)  Acceptance 47.93

          • (iv)  Revocation of Acceptance 47.102

      5. 5.  Legal Defects 47.108

    3. III.  Unitarian Approach 47.110

      1. 1.  General 47.111

      2. 2.  The Nachfrist Approach 47.112

      3. 3.  The Fundamental Breach Approach 47.115

        1. (a)  General 47.115

        2. (b)  Notion of Fundamental Breach 47.117

        3. (c)  Non-Performance in General 47.122

        4. (d)  Non-Conformity 47.129

          • (i)  Cases of Fundamental Breach 47.130

          • (ii)  Relevance of Possible Cure 47.134

          • (iii)  Relevance of Nachfrist 47.135

    4. IV.  Specific Cases 47.136

      1. 1.  Anticipatory Breach 47.136

        1. (a)  General Acknowledgement 47.137

        2. (b)  Threshold for Avoidance 47.140

        3. (c)  Notice 47.144

        4. (d)  Avoidance and Mitigation 47.150

      2. 2.  Partial Avoidance 47.153

        1. (a)  Cause-Oriented Approach 47.155

        2. (b)  Unitarian Approach 47.159

        3. (c)  Partial Non-Performance 47.162

      3. 3.  Instalment Contracts 47.163

      4. 4.  Non-Conforming Documents 47.167

  3. C.  Loss of Right to Avoid 47.170

    1. I.  General 47.170

    2. II.  Impossibility to Make Restitution 47.171

  4. D.  Mechanisms for Avoidance 47.178

    1. I.  Ipso Facto 47.181

      1. 1.  Terminology Ipso Facto and Ipso Iure 47.182

      2. 2.  Impossibility and Frustration 47.183

      3. 3.  Other Instances of Non-Performance 47.185

      4. 4.  Avoidance Clauses 47.186

      5. 5.  Expiration of Nachfrist 47.187

    2. II.  Court Order 47.189

      1. 1.  General 47.189

        1. (a)  Systems Following this Approach 47.190

        2. (b)  Reasons for this Approach 47.194

      2. 2.  Hardship 47.196

    3. III.  Declaration by Aggrieved Party 47.198

      1. 1.  General 47.198

      2. 2.  Contents and Form of Declaration 47.202

        1. (a)  Content 47.203

        2. (b)  Form 47.205

      3. 3.  Time for Declaration 47.206

        1. (a)  General 47.206

        2. (b)  Statutory Time Stipulations 47.207

        3. (c)  Dispatch v Receipt of Declaration 47.209

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. 710) 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 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. 711) 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. 712) 47.15  Some of the more recent statements under English case law 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.30,31

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. Secondly, the gravity of the breach committed plays an important role. Thirdly, the so-called Nachfrist concept is important in the discussion.

(p. 713) 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.41 Where the parties have agreed that a specified event, or the breach of a certain clause in the contract, entitles the other party to avoid the contract, that event or breach is still required for a right to avoid the contract. By contrast, the parties may agree on the avoidance of the contract although no specified event or breach has (yet) occurred. The parties may simply no longer be interested in the contract for whatever reason. In order to achieve legal certainty it is advisable to form an actus contrarius to the contract, thus putting the parties’ intentions as regards the fate of the contract and their rights and obligations beyond doubt. As demonstrated earlier,42 simple inactivity by the parties can lead to difficult questions thus creating legal uncertainty.

47.21  A specific case of contractual agreements leading to the avoidance of the contract are so-called avoidance clauses. Such clauses provide that in case of a certain breach or clause being violated by the breach, the contract shall be avoided immediately without any further act by the aggrieved party. These clauses are particularly popular in legal systems that follow the French concept of requiring a court order for avoidance of the contract to be effective. In essence, they enable the parties to circumvent what may prove to be a time-consuming and costly procedure. Hence, these ‘clauses résolutoires’ or ‘cláusulas resolutorias’—aside from France, Belgium, and Luxembourg—play a particular role in Ibero-American legal systems.43 However, in some of these systems cláusulas resolutorias, while dispensing with the need for a court order, do not lower the threshold down to ipso facto avoidance, but leave the contract intact until the aggrieved party declares avoidance of the contract.44

47.22  A field related to grounds for avoidance created by contractual agreement is that of conditions and warranties.45 This is of particular importance for common law jurisdictions following the English model.46 In a nutshell, the breach of a condition gives the aggrieved party the right to immediately avoid the contract independent of the significance of the breach.47 The breach of a condition is in itself considered to be serious enough to justify avoidance of the contract. The breach of a warranty on the other hand never triggers the right to avoid the contract but only (p. 714) gives rise to damages.48 The breach of a term that stands in between conditions and warranties, the so-called ‘intermediate’ or ‘innominate’ terms, only amounts to grounds for avoidance where the breach goes to the root of the contract.49 In common law jurisdictions following the English model it is universally accepted that the question whether the term breached is a condition or a warranty is a matter of contract interpretation.50 Thus, the agreement of the parties is the first reference point in determining whether an obligation under the contract amounts to a condition.51

2.  Cause-Oriented v Unitarian Approach

47.23  As discussed earlier in the context of the general approaches taken by legal systems to remedies for breach of contract, two main approaches can be discerned. One group of legal systems employs a cause-oriented approach where the availability of a remedy depends on the type of breach that has been committed. The decisive categories are impossibility or frustration, delay, and non-conformity of the goods. Each of these categories establishes different requirements for the right of the aggrieved party to avoid the contract.

47.24  In contrast, the other main approach is the so-called unitarian approach which, in the context of avoidance, means that the requirements for its availability are always the same and do not depend on a particular category of breach. As explained further below,52 the concept of fundamental breach has moved to the forefront under this approach although the concept of Nachfrist retains some of its prominence.

47.25  With regard to avoidance of contract, the party lines run differently than in the context of damages. While traditionally structured civil law systems preserve Roman heritage also in the context of avoidance, it is important to note that common law jurisdictions also take a cause-oriented approach to avoidance of the contract and apply the same three main categories of disturbance in the performance of the contract, namely frustration, delay, and non-conformity. Each of these categories has significant influence on the requirements to be met for avoidance to be available.

II.  Cause-Oriented Approach

1.  General

(a)  Civil Law and Common Law

47.26  Traditionally structured legal systems follow the so-called cause-oriented approach both as regards non-conformity as well as the general system of remedies for breach of contract. In the context of avoidance the traditional groups of cases—impossibility, delay, and non-conformity—resurface as separate grounds for avoidance. A variation of this approach is found in modern or recently modernized civil law legal systems in Eastern Europe and Central Asia. These systems maintain impossibility as a separate ground (p. 715) for avoidance but apart from this scenario operate with the concept of fundamental breach which was taken over from the CISG.53

47.27  However, with regard to the avoidance of the contract, common law legal systems likewise do not follow a unitarian approach but rather must be seen as following the cause-oriented approach.54 This is due to the fact that despite the condition versus warranty approach, the reasons for which contracts may come to an end effectively mirror those of the traditionally structured civil law legal systems. Frustration, untimely performance, and non-conformity of the goods are the three grounds on which the contract may be ended.

(b)  Conditions, Warranties, and Intermediate Terms

47.28  For common law jurisdictions following the English model it is furthermore of relevance to outline the distinction of conditions,55 warranties, and intermediate terms. While for the concept of frustration these categories are irrelevant as the contract is automatically avoided, they are of utmost importance when it comes to timely performance and conformity of the goods. As a basic rule under the English model, which—save for the USA—is still followed in common law jurisdictions around the world, the traditional presumption is that all contract terms can be classified as being either conditions or warranties.56 Conditions are considered to form the root of the contract. Thus, the breach of a condition—independent of its gravity57—is considered to always go to the root of the contract and thus justify avoidance of the contract.58 On the other hand, the breach of a warranty does not give a right to avoid the contract but restricts the aggrieved party to a damages claim.59

47.29  This classic distinction of conditions and warranties, which is also expressly found in all sale of goods legislation following the English model,60 proved to not always produce appropriate results. This became visible outside of sales law in the Hong Kong Fir case.61 In this case a clause in a two-year charterparty required the ship to be seaworthy ‘in every way fitted for ordinary (p. 716) cargo service’.62 The ship did not fulfil this requirement. Numerous repairs were necessary and by the end only 17 months of the two-year contract remained. The hirers avoided the contract. The question arose as to whether the requirement of seaworthiness amounts to a condition. The English Court of Appeal held that the requirement for seaworthiness is so broad that it could be breached in many different and trifling ways. For example, ‘if a nail is missing from one of the timbers in a wooden vessel … at the time of sailing, the owners are in breach of the seaworthiness stipulation’.63 If seaworthiness were to be regarded as a condition, such breach would trigger the right to avoid the contract. However, ‘It is contrary to common sense to suppose that in such circumstances the parties contemplated the charterer should at once be entitled to treat the contract as at an end for such trifling breaches.’64 By a majority vote65 the court therefore refused to classify the contract term as either condition or warranty.66 The court held that where a term did not amount to a condition in a strict sense, ‘the remedies open to the innocent party … depend entirely upon the nature of the breach and its foreseeable consequences’.67 These terms are now commonly referred to as ‘intermediate terms’. The right to avoid the contract in case of breach of such an intermediate term now depends on whether the breach goes ‘so much to the root of the contract that it makes further commercial performance impossible or in other words [whether] the whole contract [is] frustrated’.68

47.30  In the context of the sale of goods area, the Cehave case69 determined that the rulings laid down in Hong Kong Fir also apply to sale of goods transactions.70 In that case citrus pulp pellets for use in animal food were bought for about £100,000 and required to be shipped ‘in good condition’ to Rotterdam in several shipments, each to be regarded as a separate contract. The first shipments gave no cause for concern. However, the fourth shipment was damaged.71 As the market value of such goods had dropped anyway, the buyers declared the contract avoided and demanded repayment of the purchase price, which the sellers refused.72 At this time the goods were unloaded and lodged in flat-bottomed barges known as ‘lighters’, with both parties disclaiming ownership.73 ‘Now comes an astonishing sequence of events.’74 A Rotterdam importer of feeding products took interest in the goods and approached the owners of the lighters to buy them. Upon application by the lighter owners the Rotterdam County Court authorized the sale to the importer which was perfected by court-appointed agents. The price was fixed at £33,720. The importer immediately resold the goods to the original buyers at the same price it had paid. The buyers then used them for their original purpose ‘in the same way as they would (p. 717) have done if [the goods] never had suffered any damage’.75 The Court of Appeal held that the requirement for shipment in good condition was an intermediate term.76 Although the English Sale of Goods Act only distinguishes conditions and warranties the court found that this did not preclude the application of the general common law outside of the statute.77

47.31  These developments under English law have been followed in common law jurisdictions based on the English model.78 It follows that in sale of goods transactions the buyer is able to avoid the contract where the breach of the intermediate term goes to the root of the contract. The language used by Diplock LJ in Hong Kong Fir 79 in relevant parts is now also found in Article 25 CISG80 where the requirements for breach to be fundamental are set out.81 Commentators on English law note that the test for avoidance based on breach of an intermediate term will rarely be satisfied in practice.82

2.  Impossibility, Frustration, and Impracticability

(a)  General

47.32  All legal systems recognize that in some circumstances a supervening event relieves the obligor from performance and at the same time that event either avoids the contract or gives the obligee a right to do so.83 In these situations legal systems speak of impossibility, frustration, and impracticability. It should be noted that as regards frustration and impracticability, terminology in common law jurisdictions is inconsistent and thus occasionally the term impossibility is used which technically is just one example of frustration and impracticability.84 From a legal standpoint, however, these categories are not synonymous. Legal systems differ on the scope and effects of these concepts.

(i)  Development and Functions

47.33  The concept of impossibility stems from Roman law and is a typical feature of traditionally structured civil law legal systems. Its function is to relieve the (p. 718) obligor from the obligation to perform. However, it does not extinguish the obligation to pay damages; that obligation being dependent on fault.85 Thus, where the impossibility has been caused by the obligor, it remains liable for damages.

47.34  Frustration, or versions of it,86 are known to all common law jurisdictions. Impracticability as found in the USA operates additionally to frustration.87 Under traditional common law liability in contract law was absolute.88 Even in case of impossibility non-performance was not excused.89 Since the appearance of the doctrine of frustration in common law, there have been two distinct approaches to determining whether a contract is frustrated. The first (in time) was based on the notion of an implied term—much along the lines of a force majeure clause that might be found in contracts today, save for different consequences. It had always been open to parties to provide in their contract that the occurrence of certain events would discharge one or both parties from their obligations.90 Pursuant to the implied term theory, the parties would have implied a term to the effect that if the circumstances (which had in fact subsequently occurred) did occur then both parties agreed the contract was at an end.91 This approach was widely criticized as being completely unrealistic and artificial, as clearly the parties had not contemplated such.92 Subsequently, courts would change the theoretical foundation93 and recognize discharge by frustration to be an operation of law rather than an effect of the (implied) will of the parties.94 The modern approach is the test of a radical change in position.95 It should be noted that in all cases frustration can only occur after the conclusion of the contract.96 Today many common law jurisdictions following the English model have enacted statutes on frustration or its effects.97

47.35  In the USA a specific version of frustration has emerged over time. It differs from its English antecedent insofar as the contract is not avoided ipso facto98 but rather allows the co-contractant to avoid the contract by declaration.99 Impracticability is an additional concept exclusively found in the USA.100 As noted it combines relief from performance as well as from damages. Aside from impracticability the doctrine of frustration remains applicable.101 The distinction (p. 719) between impracticability and frustration lies in the applicability of impracticability to the obligation to deliver, whereas the doctrine of frustration addresses the obligation to pay money.102

47.36  Both versions of frustration as well as impracticability relieve the obligor not only from performance of the contract but also from the obligation to pay damages for non-performance. This is due to the fact that where the supervening event is caused by the obligor, it is not considered a frustrating event and hence the obligor cannot rely on it.103 It is important to note that in the USA frustration and impracticability put the fate of the contract in the hands of the obligee. Thus, for example the obligee may await a positive change in circumstances.

(ii)  Scope

47.37  It is clear that all three concepts encompass situations where performance of the contract has become factually impossible. Furthermore, it is conceivable that in certain situations the obligor may be prevented from performance by a legal interference.104 Typical examples include situations where government interferes with the contract by appropriating the goods, occupying the premises, or shutting down operations.105

47.38  As of recent times economic impossibility is increasingly recognized as a sub-type of impossibility in the civil law legal systems. However, here the line drawing to hardship must be observed. Where the surrounding economic circumstances change it is primarily upon the parties to negotiate a solution to the situation. Failing any agreement, the provisions or principles of hardship become relevant.106 Where these do not lead to a result, the case may then be considered to be one of economic impossibility.107

47.39  In all common law jurisdictions there appears to be no doubt that the doctrines of frustration (in all versions) and impracticability cover factual and commercial impossibility.108 It appears that in the USA the threshold for commercial impracticability is lower than that of commercial impossibility under traditional common law.109 Nevertheless, a change in the economic surroundings of the contract making performance economically more onerous110 will rarely lead to impracticability.111 For example, a drop in the market price for gas by 65 per cent caused by a government regulation subsequent to the conclusion of the contract on the facts of the case did not suffice to establish impracticability.112

(b)  Requirements

47.40  By and large, the requirements for impossibility, frustration, and impracticability to have occurred or be present can be summarized on the basis of four components.113 In the first instance there must be a supervening event impacting on performance. Secondly, the contract must have been formed on the basis that the supervening event would not take place. Thirdly, the party seeking to be excused by impracticability must not be at fault. Finally, that party must not have contractually assumed the risk of the supervening event occurring. Hence, seen in total the threshold is that ‘a contractual obligation has become incapable of being (p. 720) performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract’.114

3.  Delay

47.41  The second ground for avoidance in legal systems following the cause-oriented approach to avoidance of contract is delay. In sale of goods transactions delay is typically of relevance where the seller is late in delivery or where the buyer is late in taking delivery and/or paying the purchase price.

47.42  The delimitation of delay and impossibility on its face appears simple.115 Delay means that the obligor does not perform at the required point in time although performance is possible.116 Yet that distinction in practice is not always that clear cut. For example, where the purpose of the contract can only be achieved by timely performance, late performance by the obligor results in subsequent impossibility.117

47.43  It should be noted that in common law jurisdictions delay in performance has a different kind of interplay with avoidance from that in traditionally structured civil law systems. As discussed below, in civil law jurisdictions the fixing of an additional period of time plays an important role although it differs depending on the exact legal tradition and mechanism of avoidance.118 In common law jurisdictions following the English model, primary regard must be had to the question whether timely performance as a matter of contract interpretation was a condition or a warranty.119 In the former case, avoidance of the contract is possible; in the latter the aggrieved party is restricted to a claim for damages.120

47.44  In the USA timely delivery of the goods contributes to the tender to be made by the seller being perfect.121 Hence, late delivery renders the tender of the seller imperfect and thus—in principle—falls within the perfect tender rule122 which as a starting point enables the buyer to immediately avoid the contract.123 Conversely, timely payment is part of the buyer’s tender. Accordingly, the seller may avoid the contract if the buyer fails to make a due payment.124 In that sense, as a starting point, under the USA Uniform Commercial Code time is always of the essence.125

(a)  Notion of Delay

47.45  The notion of delay126 generally refers to those cases where there is late performance although performance is possible. This means that the delivery of non-conforming goods does not constitute a late delivery of conforming goods. In those legal systems that adhere to the traditional distinction of aliud and peius, the case is one of non-delivery and thus (p. 721) delay where the delivered goods are classified as aliud; that is, goods different from those called for by the contract.127

47.46  Civil law legal systems differ on the requirements for delay. Germanic systems except Austria,128 those influenced by German law,129 as well as Ibero-American legal systems130 and the Middle Eastern and Arab systems131 generally require that the aggrieved party puts the breaching party on notice unless—as will usually be the case in practice—a time for performance was specified in the contract.132 This notice must contain a request for performance and is not be confused with the additional period of time for performance that the aggrieved party may or must fix before avoidance of the contract.133

47.47  In many other legal systems there appears to be no requirement for a specific notice to trigger delay. Indeed, at least the distinction of notice and additional period of time appears artificial, as in practice the party awaiting performance will seldom send two different communications, one requiring performance and one fixing an additional period of time for performance to be carried out.

47.48  Legal systems operating with fault-based liability furthermore differ on whether fault on the part of the breaching party is necessary to constitute delay. Domestic German law answers this question in the affirmative.134 The vast majority of these legal systems, however, do not establish fault as a requirement for delay but focus on the time for performance and possibly notice. A differentiated approach is taken in Austria where objective and subjective delay are distinguished.135 Objective delay simply means that the obligor does not perform at the right time.136 The aggrieved party may then either insist on specific performance or fix an additional period of time and avoid the contract upon its expiration.137 In case of subjective delay—that is, where the delay is due to the fault of the breaching party—the aggrieved party can either insist on specific performance and claim losses caused by the delay or may avoid the contract and claim for damages for non-performance.138

(b)  Nachfrist

(i)  General

47.49  Where a party is in delay, some legal systems start out on the premise that the aggrieved party may fix an additional period of time for the other party to perform—the so-called Nachfrist.139 The role of the Nachfrist, however, differs among legal systems. Under the (p. 722) Germanic model as still employed in Austria140 and Switzerland141 the fixing of an additional period of time is necessary for the aggrieved party to avail itself of the right to avoid the contract.142 This model has been followed by German-influenced legal systems such as Greece143 but also in East Asia144 and is also found in Eastern European legal systems.145 Hence, under these legal systems the aggrieved party may not avoid the contract if it has failed to fix an additional period of time.

47.50  In many other legal systems, the situation is different. This in particular applies to the Ibero-American legal systems146 and the Middle Eastern and Arab legal systems147 but also to Italy. In those legal systems the aggrieved party is generally allowed to fix an additional period of time for the other party to perform. However, the aggrieved party is not obliged to do so. The mechanism works differently in these systems and is closely intertwined with the process of avoidance in these systems.

47.51  Following French law, the above-mentioned systems148 regard avoidance generally as only effective when ordered by a court.149 However, where the aggrieved party has fixed an additional period of time, a court order is no longer necessary as the contract will automatically be avoided upon the expiration of the additional period.150 Hence in these legal systems, fixing an additional period of time enables the aggrieved party to circumvent the necessity for a court order. This is also the way in which the Peruvian Supreme Court explained this position. The court held that fixing an additional period of time is an optional right of the aggrieved party to obtain specific performance or to achieve the automatic avoidance of the contract upon the expiration of the additional period of time for performance.151 The court held that where the aggrieved party fails to fix an additional period of time, this does prevent that party from later applying to the court for avoidance of the contract.152

47.52  However, this does not mean that whenever there is delay that avoidance is a necessary consequence. Where the aggrieved party immediately applies to the court for avoidance of the contract, the court may, when reasonable under the circumstances, refuse immediate avoidance and grant an additional period of time to the breaching party.153

47.53  Despite the differences among legal systems regarding the role and effects of Nachfrist, there is common ground regarding the situations in which fixing an additional period of time is not necessary to achieve the desired effects. The primary situation envisaged is that where a time for (p. 723) performance was specified in the contract and time was of the essence.154 However, fixing an additional period of time is also not necessary where it would be useless from the outset,155 for example because the contract breacher definitively refuses to perform.156

47.54  It is arguable that common law jurisdictions know of a concept equivalent to Nachfrist.157 There is limited English authority which suggests that if time was originally of the essence158 in a contract but waived by a buyer, then the buyer could subsequently give a notice fixing a reasonable period in which the seller had to deliver.159 Commentary has questioned how effective such a notice would be, observing that it is not possible for one party to unilaterally change the nature of a term from an intermediate one to a condition.160 However, a functionally equivalent approach would be to treat the notice as advising the obligor that failure to perform by the specified date would be considered an act of repudiation.161

(ii)  Calculations of Period

47.55  The notion of an additional period of time for performance that the aggrieved party may or must fix is naturally, on its face, unspecific. Thus, the appropriate length of that period always depends on the individual circumstances of the case, especially the type of goods involved and—particularly in international transactions—on the location of the parties. Some legal systems, envisaging the fixing of an additional period of time, content themselves with requiring that period to be of a reasonable length.162

47.56  However some of the Ibero-American legal systems, as well as Italy, are more specific and require that the additional period fixed by the aggrieved party be not less than 15 days.163 At the other end of the spectrum, some of the Middle Eastern and Arab legal systems go so far as to provide for an additional period of only three days following the day on which delivery should have occurred.164

47.57  Those systems which only establish the general requirement of reasonableness do not then state what happens if the established period is in fact unreasonable. In Austria and Germany fixing an unreasonably short period of time automatically starts a reasonable period of time.165 In Switzerland the breaching party may not rely on the additional period being unreasonably short if it does not immediately object when notified by the aggrieved party about the length of the period.166

(c)  Period of Grace

47.58  The notion that the aggrieved party may or must fix an additional period of time for the other party to perform is found in particular in Germanic legal systems, (p. 724) legal systems influenced by German law in Europe and East Asia, as well as in some systems in Eastern Europe and among the Ibero-American and Middle Eastern and Arab legal systems.167

47.59  However, following French law closely in this regard some legal systems in Europe, but especially also among the Middle Eastern and Arab countries as well as among the Ibero-American legal systems, do not require the aggrieved party to fix such an additional period of time. Rather, they authorize courts to fix such an additional period before terminating the contract.168 Yet, they may be more restrictive when it comes to commercial contracts where that particular power of the court is frequently limited to exceptional circumstances.169

47.60  The concept of the court giving the obligor a final chance to perform where the obligee seeks avoidance has not made it to the international level. The CISG expressly states that no such period is available where the obligee has resorted to a remedy for breach of contract.170

(d)  Time of Essence

47.61  There are instances where timely performance is of an essential nature. This means that late performance is not a mere inconvenience to the aggrieved party and that an additional period of time—whether fixed by the aggrieved party or the competent court—is not helpful. These are scenarios where the delay frustrates the purpose of the contract either because it can no longer be fulfilled at all or where the position of the aggrieved party has already suffered due to the conditions of the particular market. In both instances, the aggrieved party loses the interest in obtaining performance.

(i)  General

47.62  The expression ‘time of the essence’ is typically associated with common law legal systems; however, its basic content can be applied generally. Broadly speaking, it concerns the question of whether late performance, of itself, can trigger the right to avoid the contract.

47.63  For common law legal systems following the English model this means that timely performance needs to amount to a condition.171 The sale of goods Acts in these jurisdictions expressly state that unless otherwise agreed in the contract, time is presumed not to be of the essence.172 In the USA—as briefly alluded to earlier—timely performance is part of the perfection of the tender to be made by the seller and the buyer respectively.173

47.64  For civil law systems this means that otherwise obligatory additional periods of time do not have to be fixed and—in those systems where avoidance is decreed by courts which are authorized to also grant a period of grace—that there is no room for protecting the obligor against avoidance.

(p. 725) 47.65  It should be noted that in the present context the focus is on situations where the obligor performs late and thus the obligee seeks to avoid the contract. General questions relating to the time for performance especially premature performance have been addressed in previous chapters for the seller and the buyer respectively.174 It is noteworthy, however, that in common law jurisdictions some situations in which the obligor performs too early are also discussed under the heading of ‘time is of the essence’.175

(ii)  Express Contract Terms

47.66  In line with the principle of party autonomy, it is in the first instance up to the parties to make clear the importance of timely performance. Hence, where this is indeed crucial for the parties they should expressly state that time is of the essence. Where this has occurred, the situation does not pose particular difficulties.176 Avoidance of the contract is possible if the time for performance is not met. Matters are naturally different where a potential waiver is at issue or where the parties in any other way may have indicated a contrary intention.

47.67  Another way of making timely performance essential is the choice of a trade term which deems time to be of the essence. This is the case for ICC INCOTERMS® CIF and FOB in the 2000 version.177 The fact that time is of the essence under the FOB term has particular implications for the buyer. Under the FOB term the essential nature of timely performance not only pertains to the buyer’s primary obligation to take delivery but also to its pre-delivery duty to nominate a ship and notify the seller of the readiness to load.178

47.68  Whether ICC INCOTERMS® CIF and FOB will continue to be interpreted as making time of the essence also in their 2010 version is yet to be seen. However, there is no apparent reason why there would be any changes. Certainly, the long-established understanding of such crucial terms in international trade would militate against a change in opinion.

47.69  Similar considerations apply to so-called just-in-time contracts. In essence, where a company operates with just-in-time contracts, the aim is to reduce inventory and thus save storage costs by obliging the co-contractant to deliver precisely at the time the goods are needed for production.

(iii)  Interpretation

47.70  Where the parties have not made time essential by an express contract term, the issue is to be determined by contract interpretation.179 Factors to be considered in particular include the type of goods, the identity of the parties, and the economic environment in which the transaction takes place.180

47.71  The likelihood that time will be of the essence is naturally higher in commercial contracts than in usual C2C or B2C sales. Commercial buyers often intend immediate resale or use of the goods. The way this likelihood is recognized in legal systems differs, however, and depending on whether the respective jurisdiction belongs to the common law or civil law family.

(p. 726) 47.72  In some civil law legal systems there are express provisions which for commercial sales presume that, where the parties have agreed on a delivery date and the seller is late, the buyer is no longer interested in performance but rather intends to avoid the contract and claim damages for non-performance loss.181 The rationale underlying this is thus the identity of the parties as merchants. In other systems the presumption that the buyer is no longer interested in performance applies to all sales contracts.182 However presumption does not go so far as to presume that time was of the essence.183 Rather, it must be established that time was of the essence. A similar position follows from the USA UCC where the perfect tender rule essentially leads to the same result.184 However, the presumption established in civil law systems has the further legal effect of relieving the seller from specific performance as the buyer must immediately notify the seller of its interest in obtaining performance despite the delay. Given the USA UCC does not envisage specific performance as a standard remedy,185 this issue does not arise there.

47.73  Common law jurisdictions following the English model appear to focus less on the identity of the parties but rather on the type of goods and the individual market. For the sale of commodities it is generally presumed that time is of the essence, unless a contrary intention is revealed by the contract, for example where the parties have not fixed a delivery date.186

47.74  One reason for this may be that statutory sales law does not distinguish C2C and B2B sales, instead only establishing specific rules for B2C transactions. The main reason, however, appears to be that the broad presumption approach of a number of civil law systems is considered inappropriate, particularly in situations where, for example, the seller has to source raw materials, and manufacture a customized machine over an extended period of time.187

47.75  At first glance, the presumption established in a number of traditional civil law legal systems, that time is of the essence where the parties are merchants, appears to be a stricter position than that of common law. However, under traditionally structured civil law legal systems the sphere of application of the sale of goods provisions is considerably more restricted than that of the sale of goods Acts following the English model. Indeed, in the above given example188 the contract for the customized machine in these civil law legal systems would typically not fall within the sale of goods regime. Hence, the presumption that time is of the essence between merchants will in practice apply predominantly to the sale of generic goods and commodities.

47.76  Where no presumption applies, it is necessary to determine whether, in the individual circumstances of the case, timely performance was of an essential nature. The decisive issue is whether the contract stands or falls with timely performance—that is, whether the purpose of the contract can still be fulfilled or whether it is frustrated. Classic textbook examples include the delivery of Christmas trees after the festive season or the delivery of a wedding cake after the celebrations.189 To some extent, these examples can be broadened to seasonal goods in general. In another example, the contract provides that machinery must be delivered to the High Arctic during the arctic summer which lasts only for a very few weeks. After this time period the ground is simply too hard to install the machinery ordered.190

(p. 727) 4.  Non-Conformity

47.77  The third default ground on which the buyer may seek to base the avoidance of the contract is the delivery of non-conforming goods.

(a)  Civil Law Legal Systems

(i)  General

47.78  Under Roman law the two remedies of the buyer in case of non-conforming goods were the actio quanti minoris (reduction of purchase price) and the actio redhibitoria (return of goods against the purchase price).191 Thus, in essence, avoidance of the sales contract was more readily available than a claim for damages; a claim for damages was only available in cases where a stipulatio (express warranty) was breached or where the seller had acted fraudulently.

47.79  Traditionally structured civil law legal systems to this very day reflect Roman heritage in that reduction of the purchase price or return of the goods against the purchase price are still envisaged as the primary remedies. The remedy of damages still assumes, at least conceptually in theory, a comparatively minor role.

47.80  As is the case in many other aspects of sales contracts, the distinction of aliud and peius is also of relevance in the context of avoidance. Where the goods delivered to the buyer are classified as peius, the buyer has the actio redhibitoria available—that is, the buyer can demand unwinding of the contract and hence can ask for the purchase price back. However, where the goods are classified as aliud, and thus the case is one of non-delivery, the buyer cannot simply avoid the contract but must resort to the above-described rules on delay to avail itself of the right to avoid the contract after it has fixed an additional period of time.192

47.81  Modern and recently modernized civil law legal systems in Eastern Europe and Central Asia have abandoned the distinction of aliud and peius. Furthermore, they appear to no longer envisage avoidance for any non-conformity. Rather, they now establish the requirement for a fundamental breach to justify avoidance by the aggrieved party.193

(ii)  Exceptions

47.82  Despite the fact that traditionally structured civil law legal systems appear to not be familiar with the concept of fundamental breach, they typically do not simply grant the buyer a right to elect between the reduction of the purchase price and avoidance of the contract. Indeed, these legal systems have also developed mechanisms to restrict the availability of avoidance to prevent undesired results.

47.83  Traditionally structured legal systems today appear not to be prepared to allow the buyer to avoid the contract for every non-conformity.194 Rather, they often require—at least in court practice—that the breach be of a certain seriousness. The adoption of this position is supported by the fact that even the majority of Roman jurists were uncomfortable with allowing the buyer to resort to the actio redhibitoria for every defect and thus advocated restrictions on the buyer’s choice of remedy with the focus being on the gravity of the breach.195

47.84  Today a common phrasing particularly popular in the Ibero-American legal systems is that the defect must be ‘grave and important’.196 This will typically only be the case where the use of the (p. 728) goods is rendered substantially or even completely impossible by the non-conformity.197 Such restriction is also found in Eastern Europe and Central Asian legal systems198 as well as in some Middle Eastern and Arab commercial codes.199 Among the East Asian civil law countries Japan and South Korea allow for avoidance based on non-conformity only, where the purpose of the goods is frustrated by the defect.200 In that sense these legal systems look favourably upon the approach taken by the CISG.201 In Central Europe, Austrian law envisages avoidance only where repair is not feasible and proper use of the goods not possible.202 This places Austrian law very close to the position of the CISG that a non-conformity does not amount to a fundamental breach where it can be reasonably cured.203 In Switzerland scholars now directly advocate that avoidance is only possible where the non-conformity amounts to a fundamental breach as defined in Article 25 CISG.204 The textual basis for this approach is found in Article 205(2) Swiss CO which provides that the court may deny avoidance and allow the buyer only to reduce the purchase price where the circumstances do not justify avoidance. Indeed, it can be argued that such justification is lacking where the breach is not a fundamental one.

(b)  Common Law

(i)  General

47.85  In common law legal systems avoidance of the contract due to non-conformity depends on the acceptance of the goods by the buyer. If the buyer has accepted the goods there is no right to avoid the contract.205 In other words, the buyer may only reject the goods prior to acceptance. This being said, it is evident that determining whether the buyer has accepted the goods is decisive for the question whether it may avoid the contract due to non-conformity of the goods. Yet in the USA, even where acceptance has occurred, it may be possible for the buyer to revoke acceptance and regain the right to avoid the contract.206 Finally, the so-called perfect tender rule in common law is an important issue in the context of avoidance due to non-conformity.

(ii)  Perfect Tender Rule

47.86  The so-called perfect tender rule enables the buyer to immediately reject the goods independent of the seriousness of the non-conformity.207 The rule is most clearly stated in the USA § 2-601 UCC208 which, in relevant part, states ‘if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may: (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units an