4.4 EFFECTS OF SERVING A NACHFRIST NOTICE

Generally, the serving of a Nachfrist notice which grants additional time has two kinds of effects. First of all, during the fixed period, limited remedies are available but the others are suspended. Hence the other party gets another chance at performance. Secondly, if the other party does not make use of this opportunity prior to the expiring of the additional period, the party serving the notice is entitled to declare the contract avoided upon the expiry. In other words, a Nachfrist notice has the main consequences that the aggrieved party, during the additional period specified in the notice, in general has to stick to the contract while retaining his limited rights. After that Nachfrist has elapsed fruitlessly, he has the right to avoid the contract.

4.4.1 Remedies Available/Suspended during the Period

Understandably, in order to protect the non-performing party who may be preparing to perform the contract as requested by the aggrieved party who has sent a Nachfrist notice, perhaps at considerable expense, during the additional period specified in the notice the latter may not resort to some remedies for breach of contract, unless he has received notice from the former that he will not comply with the notice.

In this respect, a point well worth noting is the different wording used in the three instruments. Under the CISG, Art. 47(2) reads pertinently that "the buyer may not, during that period, resort to any remedy for breach of contract. However, the buyer is not deprived thereby of any right he may have to claim damages for delay in performance." Similarly, Art. 63(2) stipulates in part that "the seller may not, during that period, resort to any remedy for breach of contract. However, the seller is not deprived thereby of any right he may have to claim damages for delay in performance." By contrast, under the UNIDROIT Principles, the first sentence of Art. 7.1.5(2) reads: "During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages but may not resort to any other remedy." An identical rule is found in the first sentence of PECL Art. 8:106(2): "During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages, but it may not resort to any other remedy." According to the three texts, the right to recover damages arising from late performance is in any event, even when the non-performing party has performed within the Nachfrist, not affected. However, one area of uncertainty within the CISG has been removed under UPICC Art. 7.1.5(2) or under PECL Art. 8:106(2) by clearly stating that the aggrieved party "may withhold performance of its own reciprocal obligations" while an additional period of time is fixed. With these remedies unaffected, the party who grants the extension of time, on the other hand, cannot terminate or seek specific performance during the extension time.  ²²³ 

On the one hand, the setting of an additional period of time for performance at first has a disadvantageous effect on the party who set such an extension. Firstly, among the rights granted by the three instruments this refers to the right to early termination of the contract and/or such which practically amount to it. Even if the non-performance was a priori a fundamental breach of contract, the aggrieved party is not in a position to declare the contract avoided; he has to wait until the period of time has expired. He cannot require performance and at the same time avoid the contract. This does not have to be expressly laid down here; it would follow from the general principles, like waiver or estoppel.  ²²⁴  Secondly, the aggrieved party can within the additional period of time not seek specific performance. This is acceptable because the right to require performance and the right to set an additional period of time for performance are basically variants of the right to obtain performance between which the aggrieved party can choose from the outset.  ²²⁵ 

The wording of the rule, on the other hand, is not completely exact. It is nevertheless indeed problematic when the aggrieved party must not exercise other rights ensuing from a breach of contract either, but rather has to wait and see whether the buyer performs within the Nachfrist. For example, under the CISG, if the seller delivers within the Nachfrist and a lack in quality becomes apparent the buyer may well invoke his rights under non-conforming delivery before the period set has expired. However, if the buyer has required repair within a fixed period of time, he cannot request delivery of substitute goods before that period has expired, even if there was originally the possibility to do so.  ²²⁶ 

In short, as stated in the Official Comment to PECL: "During the period fixed the aggrieved party may not take further action against the debtor; it may withhold its own performance and it may claim damages for the delay in performance or other losses caused by the non-performance, but it may not seek specific performance or terminate the contract during the period of notice."  ²²⁷ 

4.4.2 Early End of the Existing Uncertainty upon Rejecting Notice

The aggrieved party does not need to wait until the Nachfrist has expired, only when the non-performing party has declared that he will not perform within the additional period of time because such a declaration on the non-performing party's part will mean "an early end of the existing uncertainty".  ²²⁸ 

In this respect, under the CISG, the aforementioned Art. 47(2) is clearly limited at the outset to the situation "[u]nless the buyer has received notice from the seller that he will not perform within the period so fixed, [...]"; similarly, Art 63(2) reads that "[u]nless the seller has received notice from the buyer that he will not perform within the period so fixed, [...]". In more general terms, the second sentence of UPICC Art. 7.1.5(2) provides in part: "If it receives notice from the other party that the latter will not perform within that period, [...], the aggrieved party may resort to any of the remedies that maybe available under this Chapter." Similarly, the second sentence of PECL Art. 8:106(2) reads in part: "If it receives notice from the other party that the latter will not perform within that period, [...], the aggrieved party may resort to any of the remedies that may be available under chapter 9."

Since the rejecting notice has to refer to that there will be no performance also during the Nachfrist it can only be given after the Nachfrist has been set and the non-performing party has received the respective information. When the non-performing party has named before a date of performance later than the expiry of the Nachfrist, the aggrieved party cannot rely on it because it is very well possible that the setting of an additional period of time inspires the non-performing party to make exceptional efforts to keep to the period granted. The situation is different when performance is rejected definitely and once and for all. It is not sufficient in this case (by contrast to anticipatory non-performance, see the discussion in Chapter 9) that it becomes apparent or is clear that the non-performing party will not keep to the Nachfrist. If, however, the notice is given, the contract can be avoided at once (according to, e.g., CISG ArtS. 49(1)(b) / 64(1)(b)), even when the delay does not yet constitute a fundamental breach of contract.  ²²⁹ 

4.4.3 Termination upon Expiry of the Extension

4.4.3.1 In general

Once the additional period specified in the Nachfrist notice is expired, the second sentence of UPICC Art. 7.1.5(2) provides in part that "if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that maybe available under this Chapter." Similarly, the second sentence of PECL Art. 8:106(2) stipulates that "if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that may be available under chapter 9." In this respect, although no counterpart rule is found in the CISG, the Secretariat Commentary makes it clear that once the additional period of time has expired without performance by the seller/buyer, the buyer/seller may not only avoid the contract under Art.49(1)(b)/64(1)(b) but may resort to any other remedy he may have. In particular, the buyer/seller may claim any damages he may have suffered because of the delay in performance. Such damages may arise even though the seller/buyer has performed his obligations within the additional period of time fixed by the buyer/seller.  ²³⁰ 

Nonetheless, it is to be recalled that the most advantageous aspect of a Nachfrist procedure is that, in contrast to the general rule of termination, the requirements of fundamental non-performance need not be fulfilled, because "[t]he Nachfrist procedure, [...], makes performance of basic contractual obligations within the period fixed in the notice 'of the essence' of the contract. It makes non-performance within the time so fixed the equivalent of a fundamental breach of contract and thus allows a party awaiting performance to eliminate uncertainty concerning the amount of delay that is serious enough to justify avoiding the contract."  ²³¹  By granting an additional period of time, that party can therefore relieve himself of the risk that, eventually, the breach might be held not to have been fundamental. Therefore, the most frequently occurring consequence upon the expiry is perhaps the termination of the contracts. In this respect, different (nevertheless similar in substance) approaches are found in the three instruments.

4.4.3.2 CISG approach

As stated earlier, unlike the including of the avoidance provisions within the Nachfrist article under UPICC 7.1.5 or PECL Art. 8:106, the CISG provides for a separate provision dealing with avoidance by the side of the Nachfrist procedure envisaged elsewhere. In this respect, the buyer's ability to avoid the contract after the serving of a Nachfrist notice is outlined in Art. 49(1)(b), and the seller's in Art. 64(1)(b).

Another point well worth noting is that the CISG in its jurisprudence indicates that only in the context of seller's non-delivery or buyer's failure to pay the price or take delivery of the goods does the expiration of a Nachfrist give rise to a right to avoid the contract. In this respect, the wording of Art. 47(1) appears to cover the whole range of obligations arising under the contract and the Convention, such as delivery of all or part of the goods, the remedy of any lack of conformity by repair of the goods or by delivery of substitute goods or performance of any other act which would constitute performance of the seller's obligations. However, Art. 49(1)(b) only authorizes the buyer to declare the contract avoided: "in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed." Thus, only in the event of non-delivery does the expiry without performance of the Nachfrist entail the right of the buyer to avoid the contract.  ²³²  In any other situation, the setting of a nachfrist does not provide a basis for avoidance for the buyer.  ²³³  Similarly, Art. 64(1)(b) authorizes the seller to declare the contract avoided: "if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of Article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so within the period so fixed." Unlike the general term in Art. 62, Art. 64(1)(b) also presumes a restricted case through being limited to the event of failure to pay the price or take delivery.

Flechtner analyses the underlying considerations behind such limitations envisaged in CISG ArtS. 49(1)(b) / 64(1)(b) as follows: "Despite the drafters' failure to provide clear guidance, the Nachfrist provisions of the Convention can and should be interpreted in a manner that does not undermine the fundamental breach standard for avoidance. Under Article 7(2), questions not expressly settled in the Convention must be answered 'in conformity with the general principles upon which it is based.' One such principle is that avoidance of the contract is proper only where the other side has committed a serious breach. Article 7(1), furthermore, requires that the Convention be interpreted 'to promote ... observance of good faith in international trade.' In light of these considerations, Articles 49(1)(b) and 64(1)(b) should be construed to permit avoidance only where there has been a failure to perform a material portion of the specified obligations within the time fixed in a Nachfrist notice."  ²³⁴ 

Despite these limitations, neither the limitation to non-delivery in Art. 49(1)(b) nor the limitation to failure to pay the price or take delivery in Art. 64(1)(b) does in any way preclude that a breach of other obligations, whose non-performance does not yet constitute a fundamental breach of contract at the time for performance, becomes such as more time passes. This may be emphasized by fixing a Nachfrist as well. However, in this event, it will not suffice to prove that a Nachfrist of reasonable length was fixed and performance was not made nevertheless, but it must be proved that the conditions for the existence of a fundamental breach of contract are given. This is true, for instance, of the fixing of a Nachfrist for the performance of the obligation to participate in the manufacture of the goods, which is not to be considered as part of the obligation to take delivery.  ²³⁵  By contrast, non-performances during the Nachfrist of those most essential obligations such as seller's delivering the goods or buyer's paying the price or taking delivery, constitute according to Arts. 49(1)(b) and 64(1)(b) immediately, after the expiry of the Nachfrist, a fundamental breach of contract, without having to prove that the conditions for the existence of a fundamental breach of contract are given.  ²³⁶ 

Finally, it is to be noted that the buyer's obligation to pay the price, pursuant to Art. 54 CISG, includes taking such steps and complying with such formalities which may be required by the contract and by any relevant laws and regulations to enable payment to be made, such as registering the contract with a government office or with a bank, procuring the necessary foreign exchange, as well as applying for a letter of credit or a bank guarantee to facilitate the payment of the price. Therefore, the Secretariat Commentary states that the buyer's failure to take any of these steps within an additional period of time fixed by the seller in accordance with Art. 63 CISG would authorize the seller to declare the contract avoided under Art. 64(1)(b).  ²³⁷  However, Enderlein and Maskow have their reservations here because the buyer insofar is granted several options and he cannot be forced by the seller to choose one. Furthermore, not even a general date is fixed in regard to most of these steps vis-à-vis the seller so that there is neither a connecting point for the setting of a Nachfrist. To put it briefly, the relevant obligations of the buyer are not feasible enough so that such a far-reaching interpretation of the obligation to pay the price could lead to abuse by the seller.  ²³⁸ 

4.4.3.3 UNIDROIT Principles / PECL approach

Art. 7.3.1(3) UPICC follows the approach adopted under the CISG and provides: "In the case of delay the aggrieved party may also terminate the contract if the other party fails to perform before the time allowed it under Article 7.1.5 has expired." Similarly, PECL Art. 9:301(2) also provides as: "In the case of delay the aggrieved party may also terminate the contract under Article 8.106 (3)." Thus, the two Principles contain a very similar termination situation through the Nachfrist procedure, but with some variance due to the delicate difference over the Nachfrist procedure itself between them.

As mentioned above, the two Principles also include the avoidance provisions within the Nachfrist article under UPICC 7.1.5 and PECL Art. 8:106, respectively. In this respect, UPICC 7.1.5(3) reads: "Where in a case of delay in performance which is not fundamental the aggrieved party has given notice allowing an additional period of time of reasonable length, it may terminate the contract at the end of that period. If the additional period allowed is not of reasonable length it shall be extended to a reasonable length. The aggrieved party may in its notice provide that if the other party fails to perform within the period allowed by the notice the contract shall automatically terminate." PECL Art. 8:106 provides similarly: "If in a case of delay in performance which is not fundamental the aggrieved party has given a notice fixing an additional period of time of reasonable length, it may terminate the contract at the end of the period of notice. The aggrieved party may in its notice provide that if the other party does not perform within the period fixed by the notice the contract shall terminate automatically. If the period stated is too short, the aggrieved party may terminate, or, as the case may be, the contract shall terminate automatically, only after a reasonable period from the time of the notice."

As indicated in the aforementioned two texts, the position at the end of the period of extension depends on whether the late performance was already fundamental at the time when the extension was granted. In this situation, if the contract is not completely performed during the extension, the right to terminate for fundamental non-performance simply springs into life again as soon as the extension period expires. On the other hand, if the late performance was not yet fundamental, termination would only be possible at the end of extension if the extension was reasonable in length.  ²³⁹  One should note, however, if the aggrieved party serves a notice of less than a reasonable period it need not serve a second notice; it may terminate after a reasonable time has elapsed from the date of the notice.  ²⁴⁰ 

On the other hand, both texts indicate that the aggrieved party may provide for automatic termination. It may say in its notice that the contract shall terminate without further notice if the defaulting party fails to perform within the period of the notice. Although no similar rule is found under the CISG, such an automatic termination may be included in a CISG Nachfrist notice under the general party autonomy doctrine. Once such an automatic termination is expressly provided for in the notice, if the defaulting party in fact tenders performance after the date set in the notice, the aggrieved party may simply refuse to accept it. However, if the aggrieved party actually knows that the defaulter is still attempting to perform after the date, good faith requires it to warn the defaulter that the performance will not be accepted. If the defaulting party asks the aggrieved party whether it will accept performance after the date set, good faith requires the aggrieved party to give an answer within a reasonable time.  ²⁴¹  One should note, however, PECL Art. 8:106(3) expressly states that: "If the period stated is too short, [...] as the case may be, the contract shall terminate automatically, only after a reasonable period from the time of the notice." Although no similar rule is found in UPICC 7.1.5(3), it appears that such a slight distinction bears technical manner rather than a substantial difference.

Finally, it is to be noted that an additional paragraph which is not found in the PECL is added to UPICC Art. 7.1.5(3), which reads: "Paragraph (3) does not apply where the obligation which has not been performed is only a minor part of the contractual obligation of the non-performing party." (Art. 7.1.5(4)) In this respect, it is said that the UNIDROIT Principles include a de minimus threshold such that a Nachfrist notice does not allow avoidance of the contract where the unperformed obligation is minor. In this regard, the UNIDROIT Principles mirror more closely the CISG. As with the threshold under the UNIDROIT Principles, the CISG's limitation of avoidance to, for instance, cases of non-delivery can also be viewed as a de minimus threshold, since the rest of the seller's obligations can be viewed as less important (or more compensable by damages) than the delivery obligation.  ²⁴²