Larry_A_DiMatteo_-_International_Sales_Law_A_Global_Challenge-Cambridge_University_Press_2014

demarcation line between “hard,” strict remedies – termination of contract and substitute delivery – and the use of “soft” remedies, such as compensation and the price reduction remedy.26

The nonbreaching party has the right to terminate the contract in the event that the failure of the other party constitutes a fundamental breach (CISG Articles 49 and 64); when the partial failure or lack of conformity is considered fundamental breach of contract (Article 51); if, prior to the date for performance of the contract, it is clear that one of the parties will commit a fundamental breach (Article 72); and if the failure of one party amounts to a fundamental breach of an installment or when a breach of an installment is grounds to conclude that a fundamental breach of contract is likely with respect to future installments (Articles 73(1) and (2)).

The CISG’s is a unique system of remedies based on the distinction between fundamental and nonfundamental breach – specifying that termination can be resorted to only in cases of fundamental breach of contract. The key rationale of the system is contract preservation (derived from the principle pacta sunt servanda), which attempts to avoid contract termination. As a consequence of this underlying principle, termination will be granted only after exhaustion of other options.

IV. Analysis of CISG Case Law

Extant jurisprudence illustrates the different factors used by courts to determine the different types of breach of contract as well as factors that can be considered to determine whether or not the breach is fundamental for the purpose of the CISG.27 Due to its practical importance within the CISG’s remedial system and its vagueness, the concept of fundamental breach has generated much commentary by scholars and practitioners. However, these theorists have not agreed on the factors that are considered crucial in determining whether the harm was “sufficiently substantial” to constitute a fundamental breach of contract.28 There is also no consensus as to determining the relevant moment in which the breaching party foresaw or should have foreseen the consequence of the breach.

This part examines seven approaches used in case law in making the determination as to whether a breach amounts to a fundamental breach: (1) strict performance approach,

(2) economic loss approach, (3) frustration of purpose approach, (4) remedy-oriented approach, (5) anticipatory breach approach, (6) future performance approach, and (7) offer to cure approach.

A. Strict Performance Approach

This approach applies whenever contracting parties explicitly or implicitly agree that in case of breach of certain obligations specified in contract, the other party may terminate

26Andrew Babiak, “Defining Fundamental Breach,” 126.

27Robert Koch, “The Concept of Fundamental Breach of Contract under the United Nations Convention on Contracts for the International Sale of Goods (CISG),” 13, available at http://cisgw3.law.pace.edu/cisg/ biblio/koch.html.

28Existing case law has not determined what moment would be relevant for defining foreseeability. In the most publicized cases in which the court found the existence of fundamental breach, the particular interest of the injured party in the fulfillment of obligations clearly stemmed from elements of the contract.

the contract. Whether a fundamental obligation is a basis for fundamental breach can be determined by an express provision in the contract or from any existing business practices between the parties. In accordance with the principles of pacta sunt servanda and bona fides, courts often use the strict performance approach. However, the answer may not be obvious under this approach29

In the case of Italdecor S.a.s. v. Yiu’s Industries (H.K.) Ltd.,30 the court considered time of delivery as an essential term of the contract because of an express stipulation in the contract that delivery was to be made at an exact time. The Italian buyer and Hong Kong seller concluded a contract for the sale of knitted goods, with the following clause precisely defining the conditions for delivery and payment: “Delivery: 3rd December, 1990; Terms of payment: deposit: US $6,000.00; Balance: bank cheque.” Before the delivery date, the buyer issued a bank cheque in the amount of the deposit, but the goods were not delivered. After the date for delivery had expired, the buyer canceled the purchase order. The seller replied on 14 December 1990, stating that it would deliver the goods but only after payment of the entire purchase price.

The court held that seller’s failure to deliver the goods at the date fixed by the contract – as required by CISG Article 33(a), which states that the “seller must deliver goods if a date is fixed or determinable from the contract, on that date” – entitled the buyer to declare an avoidance of the contract under CISG Articles 45(1) and 49(1). It further held that the cancellation of the purchase order sent by the buyer was equivalent to a notice of avoidance required by CISG Article 26. The court reasoned that the concise text of the delivery clause and its fundamental importance to the buyer, who expected to receive the goods in time for the holiday season (which was made apparent to the seller), made it a fundamental element of contract performance. Therefore, the failure to deliver at the date fixed by the contract amounted to a fundamental breach by the seller.31

29 See Spanish paprika case (Landgericht Ellwangen, August 21, 1995, 1 KfH O 32/95, available at http://cisgw3.law.pace.edu/cases/950821g2.html); FCF S.A. v. Adriafil Commerciale S.r.l.t (Case No. 4C.105/2000, Schweizerisches Bundesgericht Court of Switzerland, September 15, 2000, available at http://cisgw3.law.pace.edu/cisg/wais/db/cases2/000915s2.html); chemical fertilizer case (Arbitral Award No. 8128, the ICC Court of Arbitration, Basel (1995), available at http://cisgw3.law.pace.edu/cases/ 958128i1.html); Foliopack AG v. Daniplast S.p.A. (Case No. 77/89, the Pretura di Parma-Fidenza of Italy, November 24, 1989, available at http://cisgw3.law.pace.edu/cases/891124i3.html); Italdecor S.a.s. v. Yiu’s Industries (H.K.) Ltd. (Case No. 790, the Corte di Appello di Milano of Italy, March 20, 1998, available at http://cisgw3.law.pace.edu/cases/980320i3.html).

30Italdecor S.a.s. v. Yiu’s Industries (H.K.) Ltd., Case No. 790, Corte di Appello di Milano of Italy, March 20, 1998, available at http://cisgw3.law.pace.edu/cases/980320i3.html.

31The same ration decidendi was followed in Foliopack AG v. Daniplast S.p.A., Case No. 77/89, Pretura di Parma–Firenza of Italy, November 11, 1989, available at http://cisgw3.law.pace.edu/cases/891124i3. html). The Italian court held that seller’s delay in delivering the goods together and the fact that after two months from the conclusion of the contract the seller had delivered only one third of the goods amounted to a fundamental breach under CISG Article 49(1)(a). This case involved a Swiss buyer who ordered goods (plastic knapsacks, wallets, and bags) from an Italian seller, specifying that the goods shall be delivered within ten to fifteen days. After continued delays, the buyer cancelled the order and demanded refund of the price. The seller admitted that it had handed over the goods to the carrier only after receiving the notice of cancellation from the buyer and that, moreover, the delivery was partial. The buyer refused to accept the late and partial delivery and commenced an action claiming avoidance of the contract, along with a refund of the purchase price with interest and damages. The court held that the buyer was entitled to avoid the contract and to recover the full purchase price.

B. Economic Loss Approach

Despite the view noted previously that denies that the amount of the loss suffered is a determining factor in finding fundamental breach, the case law shows that in a significant number of cases the court focused on the degree of economic loss in reaching a decision. The courts determining fundamental breach and the right to terminate the contract consider the relative size of the nonconforming delivery or the amount of expenses needed to redress the consequences of the nonconformity or breach.32

In the pressure cooker case, a Portuguese seller and a French buyer entered into a contract for the sale of pressure cookers to be distributed in a French chain of supermarkets.33 After delivery, some of the cookers had a defect that made their use dangerous. As a result, both the buyer and the distributor brought an action against the seller, claiming termination of contract and damages. The appellate court found the existence of fundamental breach because the number of the defective pressure cookers was substantial, amounting to almost one-third of the total sale.34

C. Frustration of Purpose Approach

In a significant number of cases,35 the courts examined the purpose of the contract and whether that purpose had been frustrated. Applying this approach, courts start from the premise that the buyer asked for delivery of specific goods for specific and determined reasons. Thus, the buyer’s inability to use the goods in a way stipulated by the contract constitutes a fundamental breach of contract. This approach is closest to the definition of the concept of fundamental breach as set out in CISG Article 25. Using this approach, courts ensure that the nonbreaching party is given the opportunity to get out of a contractual relationship when the purpose of maintaining the contract has ceased to exist. In that case, it is not relevant to assess whether the breach is full or partial nonperformance, whether there has been delay in delivery, or whether there was delivery of nonconforming

32This approach was applied in the frozen bacon case (Oberlandesgericht Hamm, September 22, 1992, 19 U 97/91 Landgericht Bielefeld, January 18, 1991, 15 O 201/90, available at http://cisgw3.law.pace.edu/ cases/920922g1.html); sport clothing case (Landgericht Landshut, April 5, 1995, 54 O 644/94, available at http://cisgw3.law.pace.edu/cases/950405g1.html); Delchi Carrier SpA v. Rotorex Corp. (available at http:// cisgw3.law.pace.edu/cases/940909u1.html); scaffold fitting case (Court of Arbitration of the International Chamber of Commerce, ICC Arbitration Case No.7531 of 1994, available at http://cisgw3.law.pace.edu/ cases/947531i1.html); pressure cooker case (Case No. 2002/18702, Cour d’Appel de Paris of France, 4 July 2004, available at http://cisgw3.law.pace.edu/cases/040604f1.html), and T-13/05 case (Foreign Trade Arbitration Court attached to Serbian Chamber of Commerce, January 5, 2007).

33Pressure cooker case, Case No. 2002/18702, Cour d’Appel de Paris of France, April 4, 2004, available at http://cisgw3.law.pace.edu/cases/040604f1.html.

34In the T-13/05 case of the Foreign Trade Arbitration Court attached to Serbian Chamber of Commerce, January 5, 2007. The arbitrator rejected the plaintiff’s request for substitute delivery of goods. The court held that the fact that eighteen percent of the goods were nonconforming did not amount to a fundamental breach. Vladimir Pavic´ and Milena Djordjevic,´ Primjena Beckeˇ konvencije u arbitraznojˇ praksi Spoljnotrgovinske arbitrazeˇ pri Privrednoj komori Srbije (Pravo i privreda, Belgrade, No. 5–8/2008), 580.

35Medical Marketing International, Inc. v. Internazionale Medico ScientificaS.r.l. (Civ. A. 90–0380, U.S. District Court, E.D., Louisiana, May 17, 1999, available at http://cisgw3.law.pace.edu/cases/990517u1. html); Sacovini/M Marrazza v. Les fils de Henri Ramel (Cour de Cassation, Ire chambre civile, January 23, 1996, available at http://cisgw3.law.pace.edu/cases/960123f1.html); machinery case (Tribunale di Busto Arsizio of Italy, December 13, 2001, available at http://cisgw3.law.pace.edu/cases/011213i3.html).

goods. If the purpose of the contract is no longer viable due to the breach, then the breach is fundamental. However, the nonbreaching party has to show that the consequences of the breach are of such a nature that the suffered damage essentially deprived him or her of what he or she reasonably expected from the contract.36 This approach does not consider the remedial system of the CISG and the underlying principles of pacta sunt servanda and contract preservation.

In the designer clothes case, an Italian seller and a German buyer concluded a contract for the sale of high, quality seasonal women’s clothes.37 A large number of the clothes in the first delivery were of a bad fit and the clothing sizes deviated significantly from the customary scale. The buyer immediately complained about the nonconformity of the goods; at the same time, it informed the seller that it was no longer interested in further deliveries and requested a refund of the advance payment. The court found that the seller committed a fundamental breach of contract that entitled the buyer to avoid the contract. According to the court, although the remedy of avoidance should be the remedy of last resort, in the case at hand, avoidance was justified. The buyer had given timely notice of the nonconformity and provided an expert opinion confirming the seriousness of the defects. As to the objection raised by seller that the buyer had not expressly declared its intention to avoid the contract, the court held that under the CISG no such express declaration is required, it being sufficient that the buyer clearly indicates that it no longer wants to be bound by the contract. The notice of avoidance requirement was met by the buyer’s fax stating that it placed the goods at the seller’s disposal, that it wanted an immediate refund, and that it would not accept any further deliveries.38

D. Remedy-Oriented Approach

In cases involving delivery of nonconforming goods, the courts most frequently apply the remedy-oriented approach, following the remedial system of the CISG. This method determines whether it is reasonable for the buyer to retain the goods and to claim damages for the loss suffered. Under this approach, only if it is clear that the injured party cannot compensate the damage or successfully request a price reduction is it possible to resort to termination.39 This approach applies only in case of nonconformity of goods, as in case of other type of injury this approach cannot be used.40

36Perovic,´ Bitna povreda ugovora, 165.

37Designer clothes case, Case No. 16 U 77/01, Oberlandesgericht Koln¨ of Germany (November 14, 2002), available at http://cisgw3.law.pace.edu/cases/021004g1.html.

38The primary consideration why the court found the existence of fundamental breach is the frustration of the purpose of the contract because the buyer was engaged in retail sales and the goods could not be resold due to the defects.

39For these statements of the court, see Oberlandesgericht Koln,¨ Germany, October 14, 2002, available at http://cisgw3.law.pace.edu/cases/021014g1.html (“The buyer shall be authorized to request avoidance only as a last resort”); Landgericht Munich, Germany, February 27, 2002, available at http://cisgw3.law. pace.edu/cases/020227g1.html (“Since restitution as a result of the avoidance of a contract is – as is clearly illustrated by the case at hand – particularly burdensome in the international context, avoidance should only be a remedy of last resort”); Oberster Gerichtshof, Austria, September 7, 2000, available at http://www. cisg.at/8 2200v.htm (mentioning that the avoidance of the contract constitutes an “ultima ratio” remedy).

40This approach is also applied in the fabrics case (Case No. 6 119/93, the Oberlandesgericht Dusseldorf of Germany, February 10, 1994, available at http://cisgw3.law.pace.edu/cases/940210g2.html); saltwater isolation tank cases (Case No. HG920670, the HandelsgerichtZurich¨ of Switzerland, April 26, 1995, available at http://cisgw3.law.pace.edu/cases/950426s1.html).

This approach was first used in the cobalt-sulfate case decided by the German Supreme Court.41 A Dutch seller and a German buyer concluded several contracts for the sale of cobalt with specific technical qualities. The buyer declared the contracts avoided on the following grounds: the delivered cobalt was of a lower quality than that agreed to under the contracts, the cobalt was produced in South Africa and not in the UK as indicated in the contracts, and the seller had delivered nonconforming certificates of origin and quality. The seller denied the buyer’s right to avoid and brought suit to recover the purchase price. The supreme court held that the buyer had not validly avoided the contracts and awarded the seller the full contract price.

According to the court, in the CISG remedial scheme, the remedy of avoidance for nonconformity of goods represents the last resort in respect to the other remedies available to the nonbreaching party. In the case at hand, the seller’s delivery of nonconforming goods did not amount to a fundamental breach of contract. In determining whether the nonconformity is fundamental, it is decisive whether the buyer can make use of the goods or resell them in the ordinary course of business without unreasonable inconvenience. The fact that the buyer might be forced to resell the goods at a lower price is not to be considered in itself an unreasonable difficulty. The court denied the existence of a fundamental breach because the buyer should have proved unreasonable difficulties in trading the nonconforming goods.

The shoes case involved a contract for the sale of a stock of women’s shoes.42 The buyer did not pay part of the price, alleging that the seller had not delivered the goods within the agreed time and that the goods did not conform to the contract. The seller commenced legal action, claiming payment of the balance of the price. The court held that the nonconformity in the goods did not amount to a fundamental breach because the defects did not prevent the buyer from making reasonable use of the goods. The buyer had only alleged that the shoes had “defects” and that they had been made with a material different from that agreed upon by the parties. The buyer, however, failed to prove that the shoes could not be reasonably used otherwise because of these defects.

E. Anticipatory Breach Approach

Anticipatory breach approach is used in situations where, prior to the date of performance, one party reasonably believes that the other party will breach the contract in the future.43 The CISG allows the nonbreaching party to anticipate the breach and leave the contractual relationship in order to minimize its damages.44 In Ostroznik Savo v.

41Cobalt-sulfate case, Case No. VIII ZR 51/95, Bundesgerichtshof, April 3, 1996.

42See shoes case, Case No. 5 U 15/93, the Oberlandesgericht Frankfurt am Main of Germany, January 18, 1994, available at http://cisgw3.law.pace.edu/cases/940118g1.html.

43CISG, Article 72 provides:

If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.

If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance.

The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations.

44This approach was also applied in Roder Zeltund Hallenkonstruktionen v. Rosedown Park Pty Ltd and Reginald R Eustace, 1995 Fed. Ct. Rep., Australia, available at http://cisgw3.law.pace.edu/cases/950428a2. html.

La Faraona soc. coop. a r.l.,45 the court ruled that the seller’s failure to continue to supply the needed quality of goods constituted fundamental breach. Further, there was no need to fix an additional period for performance, as the parties had known from the outset that the seller would not have been in a position to deliver the goods for several months. Similar reasoning was applied in the iron-molybdenum case.46 The Hamburg Court of Appeals found that the seller committed a fundamental breach when it asked for additional time or delivery beyond the stipulated time in the contract due to ongoing negotiations with its supplier. Such a declaration, the court held, constituted a fundamental breach because it created uncertainty for the buyer as to whether the goods would ever be delivered.

F. Future Performance Approach

The Future performance approach is used in contracts that require a series of deliveries. In such cases, the principle of fundamental breach when applied may lead to different results depending on the circumstances of the breach – failure to perform one obligation is not a fundamental breach relating to the contract as a whole or the breach of performance of one or more obligations (for example, nonconforming deliveries on one or more installments of an installment contract) is a fundamental breach of the entire contract.47 Even though these scenarios relate to future performance, as does the anticipatory breach approach, the anticipatory breach approach relates to situations where fundamental breach of contract has not occurred yet. Under the future performance approach, at least, a substantial part of the obligation has already been breached.48

In the barley case,49 the arbitration body ruled that the seller had the right to declare the contract avoided on the grounds of fundamental breaches in the buyer’s payment on installment deliveries. The buyer alleged that the goods were nonconforming and refused to take further deliveries. After fixing an additional time for performance without results, the seller declared the contract avoided and claimed damages and interest. Interestingly, the court first held that the two separate contracts concluded by the parties were to be considered a unitary transaction and represented a contract for the delivery of goods in installments under CISG Article 73(2) CISG – the contracts had been executed on the same day; they provided for the delivery of the same kind of goods in installments, and were subject to similar terms. In the case of a contract for delivery of goods in installments, if one party’s failure to perform with respect to any installment gives the other party reasonable grounds to conclude that a fundamental breach will occur with respect to future installments, the party may declare the entire contract avoided. The

45Ostroznik Savo v. La Faraona soc. coop. a r.l., Tribunale di Padova – Sez. Este of Italy, January 11, 2005, available at http://cisgw3.law.pace.edu/cases/050111i3.html.

46Roder Zeltund Hallenkonstruktionen v.Rosedown Park Pty Ltd and Reginald R Eustace, 1995 Fed. Ct. Rep. Australia, available at http://cisgw3.law.pace.edu/cases/950428a2.html.

47CISG, Article 73.

48This approach is also applied in the Marlboro case (Oberlandesgericht Frankfurt a.M., September 17, 1991, 5 U 164/90, available at http://cisgw3.law.pace.edu/cases/910917g1.html); Bonaventure jeans (S.A.R.L. Bri Production Bonaventure v. Societ´e´ Pan Africa Export, Grenoble, Chambre Commercial, February 22, 1995, available at http://cisgw3.law.pace.edu/cases/950222f1.html).

49Barley case, Arbitral Award S2/97, Schiedsgericht der Borse¨ fur¨ Landwirtschaftliche Produkte – Wien, December 10, 1997, available at http://www.unilex.info/case.cfm?pid=1&do=case&id=346&step= Abstract.

court held that if the first two installments were nonconforming, then that would amount to a fundamental breach of the entire contract. The nonconforming deliveries made it highly probable that such a breach would occur with respect to future installments, in the absence of contrary declarations or measures on the part of the seller. However, the arbitral court determined that the goods were not defective and ruled in favor of the seller.50

G. Offer to Cure Approach

Considering offers to cure the defect of goods is not explicitly provided as part of the definition of the concept of fundamental breach. However, the offer to cure approach can be applied in a limited number of cases where the following conditions are fulfilled:

(1) the breaching party is able to cure without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty, (2) a nonperforming party subsequently offers full performance, and (3) the cure of the defect would prevent the damaged party from being substantially deprived of what it expected under the contract.

In the acrylic blankets case, the court held that there is no fundamental breach when there is a serious offer to cure the defect.51 In that case, the buyer refused payment of the purchase price on the grounds that the seller had broken an exclusive distribution agreement and had delivered defective goods. The Spanish manufacturer of the goods offered to make a substitute delivery against payment of the purchase price and was rejected. With regard to the alleged nonconformity of the goods, the court held that, even if proven, such a breach of contract would not be fundamental, because the seller’s supplier had offered substituted delivery. The court reasoned that the buyer’s right to avoid the contract under CISG Article 49(1)(a) generally prevailed over the seller’s right to cure under CISG Article 48(1). However, referring to its underlying purposes, the court held that article 49(1)(a) only prevails if the delivery of nonconforming goods amounted to a fundamental breach. In determining fundamental breach, the court stated that regard must be had not only to the gravity of the breach, but also to the willingness of the seller to cure the defect. Where the seller is willing to make substitute delivery and such delivery would not cause the buyer unreasonable inconvenience even where the nonconformity is of “major significance” does not constitute a fundamental breach.

V. Hybrid Approach: A Proposal

Based on this chapter’s analysis of the existing approaches to the determination of fundamental breach, an alternative or hybrid method – that combines the purpose of the

50Consequently, although the buyer could not rely on Article 73(2) CISG), the seller had the right to declare the two contracts avoided according to Article 64(1)(b) CISG because the buyer had breached its duty to take delivery of the goods, under CISG Article 60, and had expressly refused to accept any other future deliveries. The seller was awarded damages for lost profits.

51This approach is applied in: acrylic blankets case (OLG Koblenz, 2 U 31/96, January 31, 1997, available at http://cisgw3.law.pace.edu/cases/970131g1.html); Marques Roque, Joaquim v. S.A.R.L. Holding Manin Riviegravere (Courd’appel de Grenoble, April 26, 1995, available at http://cisgw3.law.pace.edu/cases/ 950426f1.html); wall tiles case (LG Baden-Baden, August 14, 1991, 4 0 113/90, available at http://cisgw3. law.pace.edu/cases/910814g1.html); furniture case (OLG Oldenburg, February 1, 1995, available at http://cisgw3.law.pace.edu/cases/950201g1.html).

contract approach (whether the aggrieved party has been substantially deprived of what it expected out of the contract) and the remedy-oriented approach (whether the aggrieved party’s interests can be protected through remedies short of avoidance) – is best. This hybrid approach includes the broadening of the frustration of purpose test because it most resembles the concept of fundamental breach as enunciated in CISG Article 25, where the breach “results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract.”52 This expansion should be coupled with the avoidance as last resort remedial scheme of the CISG. This approach requires a thorough examination of whether remedies other than avoidance, such as the payment of damages, would provide sufficient protection to the nonbreaching party.

A. Methodology of the Hybrid Approach

The new methodology that we propose consists of two phases. Accordingly, only when the conditions from both are cumulatively fulfilled should a court or arbitral tribunal find a fundamental breach and award the avoidance remedy. The first phase requires us to examine whether the purpose of the contract from the perspective of the nonbreaching party has been frustrated by the breach. The second phase examines whether the interests of the aggrieved party in five situations – difficulty in quantifying damages, loss of confidence in future party performance (installment contracts), anticipatory breach, cure fails to prevent frustration of contract, and Article 79 excuse is available – have been substantially damaged or affected as a consequence of the breach. If the two conditions are present, the court should grant the remedy of avoidance.

B. Stage One: Purpose-Driven Test

The first stage would consider whether the intended purpose of the contract had been frustrated by the breach. The first stage is purpose driven and, in essence, is a broader version of the frustration of purpose approach. It would not only be applicable to the delivery of nonconforming goods, but also to other cases of nonperformance enumerated in the CISG, such as late delivery or late payment, failure to deliver in full, defect in title, and missing or defective documents. Moreover, it would also apply to anticipated breaches of other obligations that as a whole “frustrate” the aggrieved party’s purpose in entering into the contract.

C. Stage Two: Interest-Driven Test

The second stage of the hybrid approach examines whether the aggrieved party needs the remedy of avoidance or substitute delivery to be made whole, as opposed to the granting of damages or price reduction. If not, then the court should not declare a fundamental breach. The second stage considers the interests of the aggrieved party, thus, it is interest driven. Based on the analysis of case law and the text of the CISG, avoidance of the contract or request for the substantive delivery should be granted in the

52German contract law Professor Robert Koch proposed expansion of the remedy-oriented approach without full explanation (Koch, “The Concept of Fundamental Breach of Contract”). Given that his proposal has not been precisely formulated, we believe that our method will further strengthen and broaden it.

following situations. First, in cases where it is difficult to identify, quantify, and prove the damages caused to the nonbreaching party, such as where the court is unable to determine the market price for nonconforming goods or when the injured party has suffered or is likely to suffer damages for breach of business reputation. Second, in cases where the breach reasonably causes a party to lose confidence in the other party’s ability to perform, which is often the case in installment contracts. Third, in cases where it is fairly clear that a party will commit a fundamental breach in the future. Fourth, when an offer to cure is not made or when it is impossible for cure to prevent the substantial frustration of the contract. Fifth, when a party is exempted from liability under CISG Article 79.53

D. Application of Hybrid Approach

The Supreme Court of Germany, in the shoes case,54 applied the remedy-oriented approach, stating that the buyer did not have the right to avoid the contract despite the delivery of shoes of a different color than those specified in the contract. The rationale given by the court is that the nonconforming goods could have been resold. The application of the frustration of the purpose approach would bring us to a completely different result. The frustration of the purpose approach requires the court to examine whether the breach hindered the buyer’s contractual expectations at the time of contract formation as to the disposition of the goods. The breach would have been deemed fundamental if the intent of the buyer was to be able to sell high-quality shoes of a certain color that were in high demand for that selling season.

The hybrid approach would prevent such divergent determinations. The hybrid approach requires an analysis of whether the intended use of the goods has been frustrated because of the breach of contract and an examination of whether an award of damages is a sufficient and adequate remedy for aggrieved party. Applying the hybrid approach to the shoes case would have resulted in a finding that the granting of damages was a sufficient remedy. The result would be different if evidence was provided that the breach resulted or would result in a loss of the goodwill and reputation.

E. Advantages of Hybrid Approach

It is clear that different approaches applied by the courts for determining fundamental breach are restricted in scope. For example, the anticipatory breach approach refers to future deliveries, whereas the remedy-oriented approach has been limited to cases of nonconformity of the goods. The hybrid approach combines an analysis of the intended purpose of the contract and the interests of the aggrieved party that is applicable to all situations involving future performance, as well as in the other scenarios discussed in this chapter.

Some further examples are provided here to show how a single hybrid approach would apply to the different fundamental breach scenarios and eliminate the myriad of existing

53Koch, “The Concept of Fundamental Breach of Contract.” This scheme is a modified version of Koch’s suggested approach.

54Shoes case, Case No. 5U 15/93, the Oberlandesgericht Frankfurt am Main of Germany, January 18, 1994, available at http://cisgw3.law.pace.edu/cases/020220g1.html.

approaches. In the fabric case,55 the court applied the remedy-oriented approach focusing on whether the partial delivery of nonconforming goods could be used by the buyer and whether the aggrieved party could be compensated by an award of damages.56 The hybrid approach would allow the aggrieved party to show that there has been substantial deprivation of what he or she was entitled to expect under the contract and that he or she cannot be adequately compensated by the award of damages or by a price reduction of the price. If the buyer is able to prove these elements, then he or she would be entitled to avoidance.

In Foliopack v. Danipast,57 where the anticipatory breach approach was applied, the court held that there was a fundamental breach of contract. More precisely, in this case, the aggrieved party that was late in fulfilling its contractual obligations was given a time extension for delivery. Two months after payment of the price, however, the buyer was still waiting for two-thirds of the delivery. The court, in accordance with the CISG Article 73, held that the buyer was justified avoiding the contract. Application of the hybrid approach would have produced the same results, because this was a case of substantial deprivation and an offer to cure would not have alleviated the consequences of the delayed delivery. Because the interests of the aggrieved party were not fulfilled nor was there an offer by the breaching party to cure, application of the hybrid approach would have resulted in finding of a fundamental breach.

In sum, a hybrid approach would ensure a higher level of legal certainty in the determination of fundamental breach and the resulting right of avoidance. It is structured to require the parties to anticipate their inability to perform their essential obligations under the contract. The anticipating approach and approach of future performance also require the same response, but they cannot be used when the breach involves a nonconforming delivery. The hybrid approach focuses on two essential principles: contractual purpose and just compensation of the nonbreaching party. This approach incorporates a unified system of remedies provided by the CISG. Due to the different interpretations of fundamental breach of the contract by diverse courts and countries, international sales law has been plagued by legal uncertainty and insecurity. This makes it difficult for contracting parties to foresee whether an anticipated breach would be considered fundamental or whether a fundamental breach has occurred, triggering right of avoidance. In the absence of explicit contractual provisions that stipulate when fundamental breach arises (strict performance approach), the hybrid approach enables the aggrieved party to determine whether a fundamental breach has occurred and the remedies available in case of such breach. The hybrid approach thus contributes to the legal certainty and predictability of legal trade.

55Fabrics case, Case No. 6 U 119/93, the Oberlandesgericht Dusseldorf of Germany, February 10, 1994, http://cisgw3.law.pace.edu/cases/940210g2.html.

56In this case, the buyer stated that part of the delivered goods did not comply with the specifications of the contract, given that design had deviated from the agreed one. The buyer paid only for the part of the delivery that was in conformity with the terms of the contract. The seller filed a lawsuit and demanded full payment. The court decided in favor of the seller and held that the buyer did not have the right to terminate the contract due to the lack of conformity of the part of the delivered goods. The court further held that the buyer failed to prove that the nonconforming part of goods could not be used in the manner defined under contract.

57Foliopack AG v. Daniplast S.p.A, Case No. 77/89, the Pretura di Parma-Fidenza of Italy, November 24, 1989, available at http://cisgw3.law.pace.edu/cases/891124i3.html.