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1)The buyer, a retailer of wine in China, ordered 76 bottles of fine wine from a French wine merchant in August 2018. The contract price was £100,000 and the contract stipulated FOB Marseille (Incoterms 2010). Delivery occurred on 4th of December 2018. On 9th of September 2019, the buyer sent a notice titled ‘cancelation of contract’, stating that the products did not conform to the order as regards both quantity and quality. The bottles of wine had to be stored by the buyer for a period of 8 months before the wine would mature and could be sold for consumption. Opening the bottles before the 8-month period would have significantly reduced the value of the wine. Fifteen days later, the buyer brought a claim in a Chinese court against the seller with a view to recover damages. Evidence was produced in court which showed that the value of the wine it received was £90,000. Moreover, had the conforming wine been delivered it would have been worth £120,000. The buyer could have purchased substitute goods from another supplier for £105,000 at any time.
A)Provided the contract is silent as to choice of law, will the court refer to the jurisdiction’s conflict of law rules to ascertain which law governs the dispute?
B)What defences may the seller rely on in the current circumstances? In your opinion, will they be successful?
C)Provided no defences apply, what amount of damages may the buyer recover under the circumstances?
D)Given that the seller makes large and regular sales (including delivery obligations) to China, what advantages does the incorporation of FOB provide in this scenario?
Article 38- Time of Examination
(1) The buyer must examine the goods, or cause them to be
examined, within as short a period as is practicable in the
circumstances.
(2) If the contract involves carriage of the goods, examination
may be deferred until after the goods have arrived at their
destination.
(3) If the goods are redirected in transit or redispatched by the
buyer without a reasonable opportunity for examination by him
and at the time of the conclusion of the contract the seller
knew or ought to have known of the possibility of such
redirection or redispatch, examination may be deferred until
after the goods have arrived at the new destination.
Article 38 and 39
• Article 38 imposes a duty on the buyer to inspect the goods
“within as short a period as is practicable in the
circumstances.”
• Article 39 on the other hand states, “The buyer loses the right
to rely on a lack of conformity of the goods if he does not
give notice to the seller specifying the nature of the lack of
conformity within a reasonable time after he has discovered it
or ought to have discovered it.”
• Article 38 can play an instrumental role in determining when
the reasonable time period is to commence.
• Reasonable according to whose perspective? The seller or
buyer?
Article 39 A Compromise
• ULIS, required buyers to provide a notice of non-conformity
promptly upon the discovery of the defect or after it ought to
have been discovered. A very exacting standard in practice.
• Developed states: rule needed to secure evidence, repair
goods or to deliver substitute goods.
• Developing states: saw the requirement as a trap. Worried
about consequences.
• As a compromise promptly was replaced with the term “within
a reasonable time” to allow for flexibility.
• Article 44: reasonable excuse.
What is the timeframe within which the buyer should have provided
notice of non-conformity
• Considerations
1)Practices established between the parties:
2)Trade usage
3)Special nature of the goods: Perishable, seasonal,
durable goods.
4)The nature of the remedy chosen.
Specifying the Nature of the Lack of
Conformity
• What degree of specificity is required for the fulfillment of
the notice requirement?
• A majority of judgments on the issue favor an
interpretation that requires a precise and detailed notice.
• A notice that merely specifies that the goods are
defective would not allow for the achievement of the
objectives of the notice requirement. BUT
• A stringent requirement on specificity is out of touch with
commercial reality.
• Opinion Number 2 delivered by the Advisory Council: The
requirement of specificity has to be interpreted in light of
the circumstances of each case, and as such, simple
statement of the symptoms of a defect may well satisfy
the requirements of Article 39 in appropriate
circumstances.
• Degree of specificity and nature of goods: for example
uncomplicated goods vs complicated machinery.
• Level of skill of the buyer.
The Compromise Of Article 40
• The seller is not entitled to rely on the provisions of Articles 38
and 39 if the lack of conformity relates to facts of which he
knew or could not have been unaware and which he did not
disclose to the buyer.
• The seller’s obligation under Article 40 to disclose known nonconformities on pain of losing its protections under articles 38 and
39.
• WHY:
A) In such a case, the information gathering rationale is not relevant.
B) the provision of a notice in such an instance will not provide any
extra advantage that would enable the seller to cure the defect.
C) Limits opportunism on sellers part.
When must disclosure be made
• A) The time the seller hands the goods over to the buyer?
• B) At the time the goods were delivered?
• C) At the time the contract was concluded?
The compromise of Article 44
• Notwithstanding the provisions of paragraph (1) of Article
39 .. the buyer may reduce the price in accordance with
article 50 or claim damages, except for loss of profit, if he
has a reasonable excuse for his failure to give the
required notice.
• Article 44 does not by its terms grant a buyer relief from
the two-year cut-off of notice of lack of conformity
imposed by article 39 (2).
• The utility of this article is questionable.
• Article 39 (2) In any event, the buyer loses the right to
rely on a lack of conformity of the goods if he does
not give the seller notice thereof at the latest within a
period of two years from the date on which the goods
were actually handed over to the buyer, unless this
time-limit is inconsistent with a contractual period of
guarantee.
Open Price Terms
• Article 14: A proposal for concluding a contract addressed to one
or more specific persons constitutes an offer if it is sufficiently
definite and indicates the intention of the offeror to be bound in
case of acceptance. A proposal is sufficiently definite if it indicates
the goods and expressly or implicitly fixes or makes provision for
determining the quantity and the price.
• Article 55: Where a contract has been validly concluded but does
not expressly or implicitly fix or make provision for determining the
price, the parties are considered, in the absence of any indication
to the contrary, to have impliedly made reference to the price
generally charged at the time of the conclusion of the contract for
such goods sold under comparable circumstances in the trade
concerned.
Remedies
Seller (Article 61)
1. Avoidance
2. Specific relief
3. Price reduction
4. Damages:
General rule
Substitute transaction
Market Price Measure
5. Restitution
Buyer (Article 45)
Article 64(1)
Article 62
Inapplicable
Article 49(1)
Article 46
Article 50
Article 74
Article 75
Article 76
Article 81(2)
Article 74
Article 75
Article 76
Article 81(2)
Note: Suspension of performance, avoidance of the contract, and reduction of the contract price do not require
a judicial order.
Damages: General Rule
• Damages “consist of a sum equal to the loss, including loss
of profit, suffered by the other party as a consequence of
the breach” (Article 74).
• Application:
(a) Article 45 (1) (b) allows the buyer to recover damages
under
Article 74 if the seller “fails to perform any
of his obligations.”
(b) Article 61 (1) (a) does the same for the seller if the buyer
“fails to
perform any of his obligations”.
• An injured party who has not avoided the contract can
recover damages only under Article 74.
Calculation of loss under Article 74
• General rule: put the victim in the position it would be had the
contract been performed.
• Question: Buyer enters into a contract with a Seller for the
purchase of grade A apples at a price of £10,000, with
delivery to occur in 6 months. Assume that at the time of
delivery, grade A apples have a market value of £11,000.
Finally, assume that the Seller instead delivered the same
quantity of grade B apples valued at delivery at £9000.
What is the loss suffered by Buyer?
• Loss measured by the difference by the value of what it
expected to receive and what it did receive . i.e. £2,000.
Consequential and Incidental Damages.
• Article 74 speaks in unqualified terms: “loss…as a
consequence of breach.”
• Therefore the Article covers both sorts of loss.
• Incidental loss is out of pocket expenses incurred as a result
of breach e.g. Storage and transportation costs that would
not have been incurred had the contract been properly
performed.
• Consequential damages include liability to third parties
Standard for Recovery.
• Buyer contracted to purchase bales of hay for a total
price of £5million. Buyer then contracted to sell the hay
to a downstream buyer for £6 million. This contract
required Buyer to post a forfeitable performance bond of
£4 hundred thousand. When the seller failed to deliver
the hay to Buyer, Buyer avoided the contract with the
seller and canalled its contract with the downstream
buyer who called on Buyer’s bond.
Litigation Costs
• Divergence on whether attorney’s fees and other
litigation costs are recoverable as damages.
• Expectancy measure vs literal interpretation of “loss…as
consequence of breach”.
• Problem: If allowed only claimant can recover.
The Foreseeability Default
• Such damages may not exceed the loss which the
party in breach foresaw or ought to have foreseen at
the time of the conclusion of the contract.
• The foreseeability principle is based upon the general
principle of allocation of risk in a reasonable manner.
• Enables the parties to a contract to calculate their
potential liability at the time of conclusion of the contract.
• Incentivizes sharing of information.
Article 78 Interest
• Under the Convention, the right to recover interest on sums that are in arrears
is contained in Article 78.
• Unfortunately the article is silent as to the methodology that is to be adopted
in the ascertainment of the rate at which interest is to be charged.
• The issue of ROI was extensively debated during the drafting stages of the
Convention.
• While most courts, particularly German and Swiss tribunals have applied the
dictates of domestic law; others, though a minority, have found the dictates of
the Convention concrete enough in formulating the appropriate ROI.
• CISG AC Opinion No 14: ROI is the rate which the court at the creditor’s place
of business would grant in a similar contract of sale not governed by the CISG.
Reduction of the price
• Article 50- form of substitutional relief that has no counterpart in common law systems. Its measurement of
recovery is however familiar in civil law systems.
• It gives money allowance by way of a reduction in the contract price owed to the Seller.
• Limits on recoverable damages do not apply to article 50s remedy e.g. mitigation (Article 77 ), exemption from
liability (Article 79).
Calculation of price reduction
• Article 50 allows the Buyer to reduce the contract price where nonconforming goods are delivered.
• The reduction in price is stated in terms of a proportion rather than
the difference between the monetary value of expected
performance and actual performance.
• Reduce price= (value of nonconforming goods delivered/value of
conforming goods) x contract price.
• Seller and Buyer agree to a sale of goods at a price of £60. At the
time of delivery, the market price of the goods has decreased, so
that conforming goods would only be worth £40. The Seller
delivers goods that are non-conforming. As a result, at the time of
delivery, they are only worth £30. By what value can the Buyer
reduce the price?
Specific Relief
• Article 46 (1) provides that, the buyer may require performance by
the seller of his obligations unless the buyer has resorted to a
remedy which is inconsistent with this requirement. (Article 30:
delivery of goods, documents and title as required).
• Article 62 gives the Seller the same right to the Buyers
performance of the contract. (Article 53 pay the and take delivery
as required).
• Restriction: unless the aggrieved party must not have resorted to a
remedy which is inconsistent with specific performance e.g. price
reduction, avoidance).
• A request for damages is consistent with a request for specific
relief.
Limitation Under Article 28
• Common law vs Civil law divide.
• Compromise solution: “A court is not bound to enter a
judgement for specific performance unless the court
would do so under its own law”.
• Does not apply to arbitration.
Avoidance
• A remedy of last resort, only granted if the other party
has committed “fundamental” breach.
• Main requirements of avoidance:
(1) a fundamental breach of contract;
(2) notice;
• Additional time limit and fundamental breach.
Notice of Avoidance
• The CISG does not permit automatic termination of a
contract.
• Article 26 requires that the party who is entitled to terminate
the contract give notice of avoidance.
• Notice of avoidance must be communicated to the other
party by appropriate means of communication.
• The notice requires no specific form. Can be made orally.
• Time Limit: (1) If the seller has already delivered the goods,
the buyer can exercise right of avoidance only within a
reasonable time thereafter (Article 49(2)). (2) if the buyer has
already paid the price the Seller must exercise its right within
a reasonable time.
Consequences of Avoidance
• Four different consequences of a valid avoidance: release
from obligations, restitution of what has already been
performed, the right to calculate damages in an abstract
way, and the duty to preserve the goods.
• Injured party injured party can recover damages Under
Article 74, or it can obtain substitute performance and
recover under Article 75. The third option is to recover
damages under Article 76.
Substitute Performance Article 75
• Substitute performance for the buyer is the purchase of
replacement goods and for the seller the resale of the breached
goods.
• Article 75 requires that the substitute performance be obtained in
“a reasonable manner” and “within a reasonable time”.
• In principle goods can be resold in a reasonable manner at a low
price or replacement goods can be purchased in a reasonable
manner at a high price.
• The reasonable time requirement limits opportunistic behaviour.
• In calculating damages under Articles 74-76, the injured parties
duty to mitigate must be taken into account (Article 77).
• Assume that Buyer breaches a sales contract with a
contract price of £80 before Seller delivers the goods.
After Seller affectively avoids the contract it waits an
unreasonably long period of time to resell them. When it
eventually resells the goods, it receives £60 for them. Had
Seller resold in a reasonable and timely manner, it would
have gotten £75 for the goods. How much does B owe S
in damages?
Market Price Measure (Article 76)
• An injured party who has avoided and has not obtained a
substitute transaction may measure its damages by Article 76.
• Under Article 76, damages are equal to the difference
between the ‘current (market) price for the goods and the
contract price.
• Article 76 (2): reference to the price prevailing at the place
where delivery of the goods should have been made.
• The price is current as of the time of avoidance if avoidance
occurs before the goods have been delivered. If, on the other
hand the injured party avoids the contract after taking over
the goods, the current price is as of the time of such taking
over.
Restitution Following Avoidance
• After the contract has been avoided, the CISG gives a party
the right to restitution of the goods supplied or payment
made under the contract (Articles 81-84).
• The second sentence of Article 81(2) requires that the
restitution be concurrent.
• The right to restitution provides no right against third parties.
• The CISG does not expressly provide for the place and cost of
restitution.
• Article 84 (2) (b) goes further and obligates the buyer to
account to for all benefits which it derived from the goods if it
is impossible for the buyer to make restitution of them.
• Buyer contract with Seller for goods at a price of £100.
Which Seller delivers. Payment is due a month after
delivery. 2 weeks later Buyer resells the goods for £175 at
no additional costs to itself. Seller could not have sold the
goods for more than £100. When Buyer later refuses to
pay the purchase price Seller avoids the contract. How
much can Seller recover?
• Article 84(2) enables the Seller to sometimes recover
more in restitution than it could in damages.
