The Issue of Promoting Performance of the Contract and Related Claims

CHAPTER 1

Compared to different legal systems, the issue of promoting performance of the contract and related rights of the parties to require performance in case of failure to perform a duty is not explained in similar manner. For instance, continental European legal system, the issue of promoting performance of the contract and related claims to require performance is admitted uncomplicatedly, as a result of the principle of the backbone of the obligation, ‘agreement must be kept’. [1] Consequently, a party insisting a right to require performance without any legitimate reason is not taken into account most of the times while making a judgment.

On the other hand, in common law countries, the right to require performance, as a legal remedy is granted in exceptional circumstances where the goods are unique including commercial uniqueness or when an adequate amount of compensation or damages could not be obtained at law, only then the courts promote the performance of the contract. It can be said that the English and the American legal system, in promoting performance of the contract, maintains the protection against excessive economic obligations of the parties. [2]

However, Article 28 of the United Nations Convention on contracts for the International Sale of Goods 1980 (CISG), in spite of the fact that it runs contrary to the fundamental principle of harmonizing the laws on the International sale of goods, aims to bring a compromise between various legal systems on the issue of the right to require performance by way of putting limitations on its legal enforcement in different legal systems. The consequence of introducing Article 28 to the Convention is that, the courts of the contracting states to the Convention are now at a liberty to apply their own fundamental judicial procedures and rules while promoting the performance of the contract.

United Kingdom has not ratified the CISG but it will be given a formal consent to make it officially valid when there is time available in its legislative programme. [3]

In this paper, the particular importance given to the rights that compel performance will be examined from the perspective of the United Nations Convention on Contracts for the International Sale of Goods (CISG) and the English law to see the emphasis of their provisions on promoting performance of the contract.

THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (1980)

In international sales, the unification of its law was seen as one of the most difficult task and the effort to harmonize the law on international sale of goods can be traced as far as 1920s. The United Nations Convention on Contracts for the International Sale of Goods (CISG) came into force on 1st January 1988. The CISG governs the formation of contract, the right and obligation of parties to an International Sales Contract, with an aim to unify the law of International Sale of Goods. It has now gained worldwide acceptance by the major trading nations and has been ratified by vast majority of the nations as almost 80 per cent of the world’s trade is now governed by the Convention. [4]

The United Nation Commission on International Trade Law (UNCITRAL) drafted an International Convention with the help of a Working Group, which appointed working parties to determine the definition and scope of international sale of goods. The Working Group prepared and submitted two draft conventions on sales law as well as rules on the formation of the contract. The drafts were merged with the substantive provisions on the sale of goods to form ‘New York Draft’ which was sent to Governments of the United Nation Member States for comments. On the basis of the New York Draft, discussion and careful consideration took place in Vienna in 1980 as a result of which The Convention on International Sale of Goods (Vienna Convention) came into force on 1st January 1988, with 10 instruments of ratification achieved on 11th December 1986 required under Article 99 of the Convention. [5]

CONTENT OF THE CISG

CISG is divided into four parts. Part I deals with the rules on sphere of application and general provision with Article 1, 2, 3, and 6 talking about the contracts which fall within the sphere of application of the Convention. Part II lays down rules that govern the formation of the contract. Part III deals with the right and remedies of the parties; this part consists of most controversial provision on remedial regime as compared to English sale of goods law. [6] Part IV consists of final provisions. Denmark, Finland, Norway, Sweden have exercised the option of implementing the provisions of CISG without Part II or Part III. [7]

CHAPTER 2

SPHERE AND APPLICATION OF THE CISG

The Convention applies to contract of sale of goods between parties whose places of business are in different States, when the States are Contracting States or when the rules of private international law lead to the application of the law of a Contracting State. [8]

In Viva Vino Import Corp v Farnese Vini S.r.l, [9] the court held that the Pennsylvania law is the applicable law to the dispute as the agreement between the parties i.e. distributor ship and sales commission have no implications in the Convention. Moreover, Article 1(1) makes it clear that the Convention applies to the contracts of sale of goods and in the present case, the contract had no such terms in relation to specific goods, quantity and price, which according to Article 1(1) are excluded from the scope of definition of the concept of sale of goods.

However, according to Article 95, it is possible for a state to exclude Article 1(1)(b) i.e. when the rules of private international law lead to the application of the law of a Contracting State. Article 1(1)(b) will not bind any state exercising the right under Article 95. In KSTP-FM, LLC v Specialized Communication, Inc and Adtronics Signs, Ltd, [10] the buyer’s place of business was in the United States, and the Canadian Corporation was based in Canada, the court held that the CISG was the applicable law as both the places are contracting state to the CISG and the parties did not expressly opt out of the CISG.

It can be concluded in accordance with Article 2, that there are some exceptions to the sale of goods governed by the Convention e.g. consumer transaction, auction sales, sale of stocks, sale of share, negotiable instrument, are not cover by CISG. In Hunfeld v Vos, [11] it was held that the contract between the German buyer and the Dutch seller for the sale of a caravan was not governed by CISG as it was bought for personal, family or household use according to (Art. 2(a)).

MATTERS EXCLUDED FROM THE SCOPE OF APPLICATION OF THE CISG

CISG is not an exhaustive body of rules and there are some issues that are excluded from its sphere of application, [12] some parts of sales law and contract laws are not governed by the Convention [13] and Article 5 determines the extent to which these issues are governed. In general, the validity of the contract, effects of passing of property, burden of proof, are as such not dealt by the Convention. Article 79 refers to burden of proof but the issue still remains unclear, as there are cases in which domestic law has been referred. According to Ferrari, to promote uniformity in interpretation, the basic principles of the Convention should be kept in mind and the gaps should be filled accordingly.

A case that includes the issues that are excluded from its sphere of application – the rules of private international law should be applied, whereas the gaps that could be filled with interaction to other provisions the private international law must not be referred.

In Thermo King v Transports Norberts Dentressangle SA, et al, [14] the French Supreme Court revoked the Court of Appeals judgment. The French Supreme Court held that the contract between the United State and French company was not governed by CISG, stating that the Convention governs only the rights and obligations of the parties (Art.4) and the Convention applies to contract for international sale of goods (Art.1).

However, whether an issue comes within the general principles of the Convention or not may be a serous obstruction to the development of a uniform interpretation of the provision of the Convention. [15]

INTERPRETATION OF THE CISG

Article 7 imposes that the international character of the convention should be kept in mind while interpreting its provision, with an aim to promote ‘uniformity’ and the principle of ‘good faith’ in its application. In Schmitz-Werke GmbH & Co. v Rockland Industries Inc, [16] the appellate Court emphasized on the international character, the need to promote uniformity and the observance of good faith in international trade when interpreting the CISG. Moreover, it acknowledged the case law on the Uniform Commercial Code that complied with the CISG and stated that the domestic law of Maryland would be applicable only if the CISG does not provide a solution (Art. 7(2) CISG). As a result, the seller was held liable for breach of warranty under (Art. 35(2)(b) CISG) based on the fact that he failed to deliver drapery fabric called Trevia suitable for buyer’s purpose i.e. transfer printing. It can be concluded that the domestic law can only be referred where the solution of an issue is not derived from any of the provisions within the CISG.

Databases like ‘CLOUT’; ‘CISG-online’; and opinions issued by the CISG-AC, [17] researches court decision and aims to help in exchanging the decisions from the courts in one contracting state to the courts in other states governed by the Convention, in helping to promote uniformity in the Conventions application.

CHAPTER 3

THE OBLIGATION SCHEME OF THE SELLER UNDER THE CISG

The subject matter of the obligation is the decisive factor that constitutes failure to perform an obligation or breach of the contract. In general, the obligations of the seller are determined by the terms of the contract. For mercantile convenience, these obligations are further governed by the trade terms (e.g. FOB, CIF, FCA, etc) agreed between the parties. Article 30 [18] of the Convention deals with the obligations of the seller and apply to the contracts that contain no other specific provisions. According to Article 30 the obligations of the seller includes handing over the documents relating to the goods, transfer the property to the buyer with the primary obligation to deliver the goods. Additional obligations of the seller namely the place at which he is required to deliver, whether he is responsible for the carriage of the goods are dealt by Article 31 [19] of the Convention.

The rules laid down in Article 31 forms the justification of the rules concerning remedies for the buyers including performance of the contract. If the seller does not deliver the goods in accordance with Article 31, the buyer can demand specific performance for delivery of the goods i.e. specific performance of the seller’s delivery obligation. Article 32 and Article 33 enhances Article 31 as they govern special rules regarding notice of dispatch, contract of carriage and time of delivery.

According to Article 35, which unlike English law, does not differentiate between conditions and warranties, the goods delivered must conform to the requirements of the contract i.e. quality and quantity; packaging of the goods must be in conformity with the contract. Within a reasonable time the buyer must give notice specifying the nature of the lack of conformity in case the goods lack in conformity with the contract. [20] Specifying the nature of the lack of conformity in the notice is unknown in most of the legal systems. However, the requirement of giving a precise notice specifying the nature of the lack of conformity can be seen in Germanic legal system. To give notice of the lack of conformity corresponds to the buyer’s examination of the goods under Article 38, which lays down rules concerning the time for the examination of the goods. The ‘reasonable time’ under Article 39 to give notice of the lack of conformity starts to run from the time the goods are examined by the buyer or by an expert on his behalf. If the failure to give this notice by the buyer is justified, the buyer can claim damages or reduce the price. [21] However, the lack of conformity of the goods frees the seller from any liability if the buyer could not have been unaware of the lack of conformity of the goods at the time of the conclusion of the contract. [22]

Failure to comply with any of the obligations by the seller gives rise to the buyer’s remedies under Article 45.

FUNDAMENTAL BREACH

Article 25 of the Convention talks about the situations where a breach of contract is a fundamental breach. In simple words, a breach is a fundamental breach of a contract, if the state of being harmed is of a considerable importance or when there is a denial of a primary legal right to a party under the contract. Putting an obligation as a condition or a warranty or characterizing it as fundamental under a contract also plays an important role, in case there is a breach of that obligation to be construed as fundamental or not. It means that the parties are free to vary from the requirements under Article 25, in accordance with Article 6, subject to Article 12. The only defense that a party in breach has is to show that he could not have predicted in the circumstances a breach of obligation resulting in denying a just claim to the other party.

In Medical Marketing International, Inc v Internazionale Medico Scientifica S.r.l, [23] the United State Food and Drug Administration took possession of the goods, as they were found inappropriate to comply with the United State Governmental Safety Regulations. The court found that in a German precedent on Article 35 CISG, it was held by the German Supreme Court that a seller is not compelled to supply goods that correspond to the public law and regulations compelled at buyer’s place of business unless the regulations are identical to seller’s own state or he was informed about the regulations or due to special circumstances he knew or should have known about those regulations. In the present case, the German precedent on Article 35 was interpreted having regard to the international character and uniformity in its application; it was held that the seller should have been aware of the regulations before entering into the contract. The court conforming the arbitral award rejected the seller’s argument that the buyer had no legal right to avoid the contract under Article 49 for non-conforming goods, as the breach was fundamental.

CHAPTER 4

REMEDIES FOR BREACH OF CONTRACT BY THE SELLER UNDER THE CISG

Whether the breach of contract or failure to perform is or is not fundamental is the decisive factor as far as the remedies available to the buyer is concerned. The right to avoid the contract depends on this decisive factor. The remedy to require performance or specific performance is limited and available only if the breach is fundamental in case of delivery of non-conforming goods. On the other hand, in case of non-delivery there is no such restriction.

The remedies for beach of contract by the seller to perform any of his contractual obligations under the contract or the Convention are summarized in Article 45. The rights to require performance, avoidance of the contract, price reduction are regulated in detail under Article 46 to Article 52. Article 74 to Article 77, referred in Article 45, governs the right to claim damages. According to Article 45(2), the buyers can concurrently claim these remedies. Article 80 restricts the remedies in Article 45, if the failure to perform is caused by buyer’s own act or omission.

For the purpose of claiming damages or in order to exercise the rights under Article 45, a distinction must be made between the seller’s obligations and mere requirements. Article 77 [24] requires the parties to mitigate the loss who are entitled to damages. In case a seller fails to comply with his duty to take reasonable measures to make the loss less severe according to Article 77, a reduction in the damages can be claimed but not the liabilities under Article 45. [25] Hence, the duties to take reasonable measures to mitigate the loss are mere requirements and not obligations, it is rather a duty in the aggrieved party’s own interest.

If the implication of Article 77 is applied to other remedies in contrast to its historical application to apply only to the claims for damages, the situation becomes quite problematic. For instance, if there is a contract for goods to be manufactured by the seller and the seller demands specific performance of the contract by the buyer by demanding purchase price, where the loss could be mitigated by avoiding the contract. Then, if the right of the seller to claim specific performance is recognized, the unnecessary production costs could be reduced. On the other hand, if the right is not recognized it will be considered as violation of the duty to mitigate damages. [26]

The remedy of price reduction is not seen in English law.

BUYER’S RIGHTS UNDER ARTICLE 46 OF THE CISG

In Magellan International Corporation v Salzgitter Handel GMBH, [27] an action for anticipatory breach and specific performance of contract was brought in front of the court. The court, while considering the claim for specific performance stated that the remedy is available under ‘Article 46(1) CISG-to require performance’ with an exception that the court is not restrained to grant specific performance judgment unless it would do so under its own law of contract. [28] According to Par. 2-716(1) Uniform Commercial Code (UCC), if the hardship to accomplish the goods in market is shown by the buyer specific performance may be granted.

Article 46 CISG also grants other remedies to the buyer i.e. requiring the seller to deliver substitute goods, [29] and to repair non-conforming goods, [30] with some preconditions. In case of delivery of non-conforming goods, which constitutes a fundamental breach, the buyer must notify the seller of defects, according to Article 39 or within a reasonable time. In case of the right to require repair that is available only if the goods are defective, even if the breach is not fundamental breach of contract, the buyer must notify the seller of defects according to Article 39 and 50. In order to exercise the rights under Article 46, a buyer must not turn to other remedies that are inconsistent with the right to require performance such as to claim damages in case of failure to perform, avoidance of contract, reducing price, as specific performance is excluded from these remedies.

These rules on the right to require performance are there to facilitate various legal systems. For instance, by means of Article 28, it supports the civil law policy, to order performance as the primary remedy for the breach of contract, persuading the importance of contractual obligations. It also safeguards the doctrine followed by the common law countries, to order performance in exceptional circumstances, to maintain the protection against excessive economic obligations, while restricting a party insisting a right to require performance without any legitimate reasons. As a result, Article 46 in interaction with Article 28 expresses, a successful state of harmonization reached to the issue of promoting performance of the contract, keeping in mind the importance given to performance of the contract by different legal systems. So, the fact that it is considered to run contrary to the fundamental principle of harmonizing the laws on the International sale of goods is not true, as it was successful in reducing the friction to one of the most problematic issues of the law that is followed differently in different legal systems. In case of disputes where promoting performance is involved the courts are now at a liberty to refer their own legal system.

SELLER’S RIGHT TO CURE HIS BREACH UNDER THE CISG

The CISG encourages the performance of the contracts, as there are additional provisions, which gives a seller the right to cure his breach. However, if the breach is fundamental, the buyers have a priority on the right to avoid the contract. The buyer’s right to avoid the contract is not admitted by the court, if the seller could cure the breach without unreasonable inconvenience to the buyer. [31]

Article 48 covers the seller’s right to remedy his breach of contract and to perform the contract even after the date for delivery of the goods has passed. Article 53 [32] and Article 60, [33] puts an obligation on the buyer to take delivery of the goods in order to enable the seller to cure his breach. These obligations on the buyer clearly put forward another example of the Convention’s emphasis on promoting performance of the contract despite a breach by the seller. The buyer must disagree with the seller’s request to perform without delay, in case he wants to reject the seller’s right to remedy the defects. In one case, [34] the court upheld the action to claim the purchase price, when it was found that the buyer failed to give necessary information to the seller. As a result, the seller could not exercise his right to perform subsequent improvements.

In Marques Roque Joachim v La Sarl Holding Manin Riviere, [35] the seller was informed about the particular purpose of the goods to be delivered to the buyer (Art. 35(2)(b) CISG), it was found that the seller delivered non-conforming metallic elements that were not fit for buyer’s purpose. But the seller’s lack of conformity did not constitute a fundamental breach of the contract as it did not deprived the buyer of what he was entitled to expect under the contract (Art. 25 CISG). So, there was no good reason for the buyer to avoid the contract (Art. 49 CISG). The court, applying Article 48 and Article 46(3), held that the seller was entitled to recover the balance of the price as he had effectively cured the lack of conformity of the goods by repairing the metallic elements. On the other hand, in ICC Court of Arbitration-Paris, [36] in a contract governed by CISG, the buyer’s right to avoid the contract was upheld, in view of the fundamental character of the breach by the seller (Art. 49(1) CISG). The arbitrator rejected the seller’s right to cure the breach by supplying substitute goods in accordance with Article 48(1). Moreover, the arbitrator was of the opinion that the seller’s right to cure relies on buyer’s consent. In one case, [37] the court, having regard to the fact that the reasonable time of delivery in the parties field of business was a maximum of 8 weeks, held that the delivery of the goods had been delayed for about 14 weeks but the buyer had no evidence to declare the contract avoided as it did not amount to a fundamental breach of contract (Art. 49(1)(a) CISG).

In international sales, it is true to say that some of the provisions of the Convention are aimed to promote performance of the contract either by giving the seller a chance to repair non-conforming goods or to deliver substitute goods or by putting an obligation on the buyer to take delivery of the goods in order to enable the seller to cure his breach and perform the contract. The only defense, in which the party’s right to avoid the contract can be exercised or these rights and duties given under the Convention to promote performance can be restricted, is to show that the breach deprived the party of what was expected i.e. fundamental breach of contract.

It is important to note that the seller’s right to cure the breach under Article 48 exists only after the time of delivery has passed. The right to cure exists even before the date of delivery, Article 34 [38] and Article 37 [39] controls remedying the defects with reference to documents and goods respectively. Add the English law……

INTRODUCTION (ENGLISH LAW)

Sale of Goods Act 1979, concerned primarily with English law, came into force on 1st January 1980, applies to the whole of United Kingdom, replacing the Act of 1893 and parts of some other enactments such as Supply of Goods (Implied Term) Act 1973. The object of Sale of Goods Act 1979, was to consolidate and codify the laws relating to contracts for the sale of all types of goods, excluding particular categories of goods governed by special rules in other enactments. [40] With few exceptions [41] the provisions of the Sale of Goods Act 1893 generally applies to all types of contract for the Sale of Goods Act 1979. To say that the code acts as a set of rule, which applies to all contracts of sale is not possible as there are many factors, [42] which operates to bring a wide range of special statutory rules [43] into account. [44]

Some provisions of the Sale of Goods Act 1979, such as Section 62(2) makes express provision that “the rules of common law”, to supplement the code, applies to contracts for sale of goods. Even the principles of equity are applicable to the sales of goods [45] as a remedy was granted on equitable principle in Goldsmith v Rodger. [46] The Sale of Goods Act 1979, puts no restrictions or does not prevent the parties from incorporating equitable principle to a contract for sale of goods by express agreement between them. [47]

EQUITY AND SPECIFIC PERFORMANCE

Section 62(2) of the Act should not be construed in a way that it excludes the principle of equity to sale of goods. But there are some provisions in the Sale of Goods Act, which contains provisions corresponding to the individual rules of equity. [48] The code was passed keeping in mind the principles of equity and equitable remedies. [49] While interpreting Section 62(2) it can be said that the act is presumed to contain a complete and definitive statement of laws and rules, which governs all the aspects of particular subject it talks about.