Loss of Right to Reject and Terminate a Contract

In the field of international sale of goods, a buyer may have the right to reject the goods or the document and terminate the contract under some circumstances where the seller is in breach of the contract. This is a basic right for the buyer expressly stipulated not only in English law but also in some important international conventions such as United Nations Convention on Contracts for the International Sale of Goods (the CISG). In English law, if what the seller fails to do is a “condition” of the contract, the buyer may have the right to reject and terminate according to Section 30 of Sale of Goods Act 1979 (SOGA 1979). Similarly, Article 49(1), the CISG gives a buyer the right to declare the contract avoided if the seller’s breach is fundamental.

However, the right for a buyer to terminate and reject may be lost in some circumstances such as by the express terms of the contract, but this is not the key point for discussion in this research paper. The focus on the paper is where the right to reject and terminate has arisen but lost at a later stage. For example, once the buyer makes a total waiver, for instance, a statement that he will forgive the seller no matter what he does, he will lose the right to reject and terminate.

There are three parts in this paper, namely loss of the right in English law, in the CISG and the comparison of the rules between English law and the CISG. Loss of the right relating to goods and to documents will be discussed separately.

Loss of Right to Reject and Terminate under English Law

Sale of Goods Act 1979 is a very significant statute in the field of sale of goods which should be studied carefully. It seems that Section 35 of Sale of Goods Act provides a clue to when a buyer may lose his right to reject and terminate. Literally speaking, when the buyer “intimates to the seller that he has accepted them [1] “, or when he does any act “inconsistent with the ownership of the seller [2] ” when the goods have been delivered to him, or when he keeps the goods without intimating to the seller that he has rejected them after “the lapse of a reasonable time [3] “, he may lose the right to terminate and has to accept the goods.

Sale of Goods Act 1979 gives a comparatively clearer view about sale of goods than sale by documents which will be discussed later. Not much mentioned about terminating relating to documents, so that there might be some difficulty to do the research only depending on the Act. Fortunately, some common law doctrines, such as waiver and estoppel, can be found and still frequently applied to contracts of sale. What is worth mentioning is that these principles are used not only in sale by documents but also in sale of goods.

1.1 Loss of Right Relating to Goods

Under English law, if the buyer has the right to reject the goods and conducts lawfully [4] , he can refuse to pay the price or, if he has paid it, he can recover the money. In addition, he also has the right to claim for damages for non-delivery under section 51, SOGA 1979. After the rejection of the goods, the buyer has no responsibility to return the goods to the seller according to Section 36, SOGA 1979.

Nevertheless, the buyer may lose the right to reject the goods and terminate the contract under some circumstances, and then he has to accept the goods but has the right to claim for damages. [5] These special circumstances are as follows:

1.1.1 Waiver

Waiver, a basic concept in contract law, has different meanings in various situations relying on the context where the word appears. Still, there are some conflicts about its definition and types among academics. In my paper, “waiver” refers to the situation that the buyer who indicates that he will nevertheless finish performing the contract, or that he will accept the seller’s defective performance, or that he will never reject the defective goods, is thought to have “waived” his right to reject and terminate, because he has elected to affirm the contract and lose his right to reject. In Bentsen v Taylor [1] , the charterer said that he would nevertheless load but later he refused to do so. It was held that he was liable for the failure to load as he had waived his right to terminate. The buyer does not need to make a public statement that he will waive his right. He may show his choice by express words, or just by conduct.

Now that waiver might be a reason for a buyer to lose his right to reject the goods, what amounts to an effective waiver? If the buyer does not actually know of the existence of the right to terminate and has made the statement that he will accept the defective goods, has he affirmed the contract and lost the right to terminate? Different views can be found about the question. In Peyman v Lanjani [2] , the buyer did not know of his right, and it was held that the buyer had not lost the right to terminate, because he could not have elected to affirm the contract until he had known, “not only of the facts giving rise to terminate, but of the existence of the right itself [3] “. As GH Treitel pointed out that the only thing the buyer should pay attention to is that he had the right to reject and that he should have indicated that he would not exercise that right. [4]

Waiver bars the buyer’s right to terminate, but it dose not deprive him of the right to claim for damages. [5] From this point of view, waiver is very different from the concept “total waiver” which also bars the right for damages. This will be discussed later.

1.1.2 Estoppel

Estoppel, or sometimes used as “waiver by estoppel” [1] , may arise where the buyer has made the seller believe that the buyer would not exercise his right to terminate and the seller has relied on the words or conduct. Estoppel is also a principle of contract law and similar to waiver to some extent.

At the same time, there are some differences between waiver and estoppel. As Edwin Peel wrote in his book The Law of Contract, once the buyer has decided to affirm the contract and has made the seller known, he can never change his mind. On the contrary, estoppel has a suspensory effect, and the buyer might change his mind to terminate and reject by giving the seller reasonable notice; but “estoppel will have a permanent effect in cases where it would be inequitable to allow the injured party to retract his waiver [2] “. Secondly, as for whether knowledge required, in the case of waiver, the buyer should be aware of his right as discussed above; but in the case of estoppel, no knowledge required. No knowledge of the existence of the of the right, nor of the facts giving rise to it, is necessary. Thirdly, estoppel appears only when the seller relies on the buyer’s representation; waiver has no requirement like this.

1.1.3 Acceptance

The basic legal provision is Section 11(4), SOGA 1979, which stipulates that “Subject to section 35A below where a contract of sale is not severable and the buyer has accepted the goods or part of them, the breach of a condition to be fulfilled by the seller can only be treated as a breach of warranty, and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is an express or implied term of the contract to that effect”. It means that the buyer may lose the right to reject and terminate if he decides to affirm the contract. If the buyer has had a reasonable time to examine the goods, the right to reject will be lost if he intimates that he has accepted the goods under section 35. However, the right will not be automatically lost by “calling on the other to reconsider his position and recognize his obligation” [1]

So it is important to exam Section 35 and understand the concept of “acceptance”. As mentioned above, a buyer is deemed to have accepted the goods and lose the right to terminate in three situations. Firstly, he can intimate to the seller that he accepts the goods; secondly, he acts inconsistent with the ownership of the seller when the goods are delivered to him; thirdly, he keeps the goods for more than a reasonable time without intimating to the seller that he rejects them. [2] I will exam these three situations in turn.

The first situation is quite clear and straightforward. Intimation of acceptance refers to when the buyer tells the seller that he accepts the goods. It seems very easy to apply. However, the real world is quite different. There arises a question whether the notes signed by the buyer without reading it amount for a real acceptance. If the buyer has signed a printed note though without true intention to accept it, it would be likely that he has waived his right to terminate. However it is not fair as to the buyer. The Law Commission [3] recommended that an acceptance is not binding before the buyer has had a reasonable time to exam the goods.

The second situation is that a person cannot reject the goods if he acts in a way which is inconsistent with the ownership of the seller, whether this amounts to an acceptance or not [4] , for that the buyer has dealt with the goods as an owner.

The question what kind of act is deemed to be “inconsistent with the ownership of the seller” is quite difficult to answer. “The truth is that the phrase‘inconsistent with the ownership of the seller’is one with no fixed meaning”. [1] It remains to the court to decide whether the act in question is could be thought as “inconsistent with the ownership of the seller”. The most common type is “resale and delivery of the goods” [2] . However, there are still some arguments about whether delivering the goods to a sub-buyer is a sign of accept. In the past, delivering the goods to a sub-buyer was usually treated as an act inconsistent with the seller’s ownership. However, the Sale of Goods Act made it clear in 1994 that delivery to a sub-buyer is not in itself to be regarded as an act inconsistent with the seller’s ownership. That is made clear in Section 35(6), which says that “the buyer … is not … deemed to have accepted the goods merely because … the goods are delivered to another under a sub-sale or other disposition”. There seems to have been no case in which the mere fact of a sub-sale, without more, was held to deprive the buyer of his right to reject. [3] What else is required is not clear, though. It may make a difference, for example, if the buyer knows that the goods do not conform with the contract and still sends them to the sub-buyer.

The third situation is that the buyer retains the goods for more than a reasonable time without telling the seller he wants to reject the goods, then he will be thought to have accepted the goods. The problem here is that what may people think is “a reasonable time”. Judge Jack QC in Truck (UK) Ltd v Tokmakidis GmbH [4] provided some options, which inserted by PS Atiyah in his book The Sale of Good [5] : “(1) it was necessary to look at the question by balancing the opposing interests of the buyer and the seller; (2) the reasonable time to exercise the right to reject could not be less than the time for the buyer to have a reasonable opportunity to examine the goods; (3) the reasonable time to exercise a right to reject might well be linger than is required to examine the goods; (4) the time could be extended by dealings between the buyer and the seller, in particular as regards the repair of the goods;” and “(5) there was only one reasonable time and not different times for different defects”.

The right to reject will be lost even if the buyer has not discovered that the goods do not conform to the contract requirements. In other word, the buyer could be held to have accepted the goods and so lost his right of rejection under SOGA, even where he did not know of the seller’s breach or did not know his right. However, it is “not usually possible to reject the goods long after delivery” [1] if the buyer finds out some latent defects years after delivery. Part acceptance dose not of itself bar the right to terminate. [2]

1.2 Loss of Right Relating to Documents

There are not many comments and articles about loss of the buyer’s right to reject and terminate in English law. Little useful information can be found.

In the first place, two problems should be identified. Firstly, there are various documents that usually accompany a contract of sale, such as insurance policies, certificates of origin, certificates of inspections, and so on, not only the documents of title, for instance bills of lading, but also other documents such as dock warrants, warehouse receipts. The documents mentioned and discussed here is the documents of title. Secondly, there are two separate rights in the field of sale by documents, namely the right relating to goods and the right relating to documents. Though some relationship may be found between them, they are two independent set of rights. Similarly, in this paper, two separate rights should be distinguished: the right to reject the goods and the right to reject the documents. In the British Traders & Shippers case, it was held that the buyer is not deprived of his right relating to goods only by dealing with the documents. [3]

Waiver and estoppel are two doctrines in area of contract in English law, so that they can be applied to the documentary sales.

If the buyer does accept the documents, in principle, this does not prevent rejection of the goods later. The right to reject the documents is separate from the right to reject the goods. But in certain circumstances the buyer will, exceptionally, lose the right to reject the goods if he accepts the documents. This is where the problem relating to the goods was apparent from the documents and the buyer would have been entitled to reject the documents because of the problem. An example of this would be where the bill of lading states that the goods were shipped in a damaged condition. We have seen that the documents can be rejected if the bill of lading is not clean. If the buyer nevertheless accepts the documents and by so doing treats the damage as a minor matter, he cannot later treat the same damage as a serious matter and reject the goods on the ground of that damage. This is because by accepting the documents when the documents reveal a problem, the buyer is giving the seller the impression that he does not consider the problem serious enough to merit rejection. Having given the seller that impression, the buyer is not allowed to contradict that impression by rejecting the goods.

The leading case on this exception is Panchaud Frères v. General Grain [1] , where the problem revealed in the documents was not damage, but late shipment. The case involved a c.i.f. contract in which the goods were to be shipped in June or July. In fact, the goods were shipped in August. The sellers tendered a bill of lading stating that the goods were shipped on July 31. They also tendered a certificate of quality stating that the goods were shipped in August. Not seeing that there was a problem, the buyers took up the documents and paid the contract price. When the goods arrived, the buyers rejected them and, having discovered that the goods had been shipped late, justified the rejection on the ground of late shipment. The Court of Appeal held that, having accepted the documents which revealed the late shipment, the buyers could not reject the goods on the same ground. There is, therefore, a clear exception to the basic rule that acceptance of the documents does not affect the buyer’s right to reject the goods. As in the case of Tradax International SA v Goldschmidt SA, if the goods arrive before the shipping documents, and the buyer physically takes delivery or otherwise deals in the goods, he will be held to have accepted them. [1] If the buyer resold the documents, for instance, he will hardly be able to reject the goods unless the sub-buyer himself rejects.

In conclusion, it should be stressed that in cases like Panchaud Frères v. General Grain the buyer loses the right to reject the goods, but simple acceptance of the documents does not affect the buyer’s right to claim damages for the breach in relation to the goods. As Devlin J made clear in Kwei Tek Chao v.British Traders & Shippers, the right to claim damages will only be lost in rare cases, where there has been a total waiver of the breach.

In conclusion, a buyer may lose his right to reject and terminate when he is deemed to accept the goods according to Section 35 of Sale of Goods Act 1979, or when his wording or conduct matches the conditions of the doctrine of waiver or estoppel. As for the loss of right to reject the documents, not much information can be found. The buyer may also lose the right under the doctrine of waiver and estoppel as well.

Loss of Right to Reject and Terminate under the CISG

Shift focus on the CISG, Article 49 provides the buyer with the remedy to avoid the contract. Paragraph (2) makes clear that the remedy may be lost if the buyer hesitated too long before declaring the contract avoided when the goods are delivered to him. The restrictions on the remedy of avoidance follow not only from paragraph (2) but from other articles of the Convention as well [2] , such as Articles 39, 43, 82 and others.

2.1 Loss of Right Relating to Goods

2.1.1 Failure of Giving Notice

Under the CISG, it is very important for a buyer who intends to reject and terminate to give notice of the lack of conformity of the goods to the seller in a reasonable time after he has, or ought to have, discovered it. The time should be within two years from the date of handing over the goods. [1]

In general, the buyer may lose all the remedies he could have had including the right to reject and terminate if he does not give the notice within a reasonable time under Article 39(1). The question of when the buyer should have known of the defect leads to the rules on the examination of the goods [2] . As in English law, Article 38(2) states that “If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination.” Article 44 also allows the buyer to give notice after that time, but he will only be allowed two remedies in this case: price reduction and damages. The notice must be given within two years of actual delivery to the buyer. [3]

A similar rule can be found in Article 43, the buyer is required to send a notice to the seller within a reasonable time after he has become aware or ought to have become aware of the right or claim of the third party over the goods and must specify the nature of such a right or claim. The buyer’s failure to give the required notice will result in the loss of his right to otherwise available remedies based on the breach of the seller’s obligations under Articles 41 and 42. [4] Consequently, the right to avoid the contract according to Article 49(1) (a) is deprived of in the same way if the nature of the claim amounted to a fundamental breach.

Similarly, the provision contained in Article 43(1) is comparable to that of article 39(1) for the requirement of notice where non-conforming goods are handed over. However, compared to Article 39, Article 43 gives the buyer two sets of benefit. Firstly, unlike Article 39, there is no such time-limitation of two years, so that the reasonable time for notification, is open-ended and may extend for quite a long time. Secondly, even after this reasonable time and the period for notification has expired, the buyer may receive protection against the seller who knows that there is right or claim reserved by a third party, under Article 43(2). Under the circumstances, Article 49(2) (b) no longer applies. [1]

2.1.2 Beyond the Time Limit

Article 39(2) establishes a comparatively short period for the buyer to notice the lack of conformity, two years from when the goods are actually handed over to the buyer. Beyond the time limit the right to rely on non-conformity is lost. Consequently, if non-conformity amounted to a fundamental breach, the right of avoidance according to Article 49(1)(a) is lost already at that point. Unlike the period for notice established in 39(1), which is designed to be flexible and to vary with the circumstances, the two-year limit in article 39(2) is precise and non-variable except where the contractual period of guarantee exception applies. Indeed, the apparent purpose of article 39 is to provide a specific, predictable period, so that the seller may have confidence when the deal is totally finished.

When there is a conflict between national law and the CISG, one court which considered this question struggled to reconcile a one-year limitations period in domestic law with the two-year notice period in article 39(2), eventually opting to extend the domestic limitations period to two years. [2]

The overriding principle of the autonomy of the will of the parties recognized in article 5, would allow the parties to derogate from the general obligation to give the notice required by paragraph (2). However, in the absence of a special provision, it would not be clear whether the obligation to give notice within two years was affected by an express guarantee that the goods would retain specified qualities or characteristics for a specified period. Accordingly, paragraph (2) provides that this obligation to give notice within two years will not apply if “such time-limit is inconsistent with a contractual period of guarantee”. Whether it is, or is not, inconsistent is a matter of interpretation of the guarantee. [1]

2.1.3 Examination and Acceptance

As in English law, the buyer is not obliged to reject the goods or avoid the contract. The buyer may choose not to reject or terminate, even though the breach is fundamental. If he has accepted the goods, he can not change his mind later. Moreover, as with the English rules on acceptance, the buyer can lose the right to terminate without explicitly stating that the goods are accepted. [2]

2.1.4 Inability to Restore

The buyer also loses the right to avoid the contract if he has done something to the goods and they cannot be returned to the seller substantially in the condition the buyer received them in. The same restriction also applies to rejection of the goods and requiring substitute goods. This is all dealt with by Article 82 and is obviously similar to some of the English rules dealing with acts inconsistent with the seller’s ownership.

Article 82, unlike the preceding Articles 39 and 43, adds an independent rule applying to anyone of the different hypotheses of avoidance: the right of avoidance is lost when the buyer is unable to restitute the goods substantially in the condition in which he received them and cannot rely on the three exceptions provided. [3] It follows from the general restitution rule that a seller who has delivered the goods either wholly or in part may claim restitution from the buyer of the goods supplied. [1] Article 82(1) is an outcome of the general rule: the buyer loses the right to declare the contract avoided if it is impossible for him to make restitution of the goods substantially in the condition in which he received them.

The general rule that the buyer loses the right to avoid and to demand redelivery if he cannot return the goods in the condition received is subject to three exceptions.

First, the buyer need not return goods substantially in the condition received if the impossibility of making such restitution is not due to the buyer’s act or omission. [2] Under this exception, the buyer is relieved of his duty to make restitution not only where the deterioration of the goods is attributable to the seller, but also where the goods are lost or damaged due to force majeure or the act of a third party. It has been suggested, however, that this limitation relieves the buyer of his duty to make restitution only in cases where he has exercised reasonable care in protecting the goods. [3]

Secondly, according to Article 82(2)(b), the buyer need not return goods in the condition received if the goods (or – as is more likely – part of the goods) have perished or deteriorated as a result of the examination provided for in Article 38.

Finally, the buyer need not return the goods in the condition received if the goods or part of the goods have been sold in the normal course of business or have been consumed or transformed by the buyer in the course of normal use before he discovered or ought to have discovered the lack of conformity. [4] In this case, however, the buyer must account to the seller for all benefits derived by such sale or consumption. [5]

Article 82(1) imposes a requirement that, in order to preserve its right to avoid the contract or require the seller to deliver substitute goods, an aggrieved buyer must retain the ability to make restitution of goods that the buyer received under the contract “substantially in the condition in which [the buyer] received them”. Several decisions have denied a buyer the right to avoid the contract because it could not meet this requirement. Thus where a buyer attempted to avoid a contract for the sale of flower plants because the delivered plants allegedly were defective in appearance and color, a court noted that the buyer had lost the right to avoid under article 82(1) because it had discarded some plants and resold others. [1] A buyer of textiles, some of which did not conform to a pattern specified in the contract, was also found to have lost the right to avoid because it resold the goods. [2] And another buyer lost its right to avoid the contract because, after it discovered that marble slabs delivered by the seller were stuck together and broken, it cut and processed the slabs, thus making it impossible to return them substantially in the condition in which they were received. [3] Several other decisions have refused to deny a buyer the right to avoid [4] , even though the buyer could not make restitution of the goods substantially in the condition in which they were received, because the requirements of one or more of the exceptions in article 82(2) were satisfied. [5]