8.3 OTHER ELEMENTS IN DEFINING FUNDAMENTAL NON-PERFORMANCE

8.3.1 Strict Compliance of Essence

Clearly, the emphasis of Art. 25 CISG is "on the degree of the detriment resulting from the breach" rather than on the degree of substantiality of the performance itself. The definition of a fundamental breach in Art. 25 is, however, not final. The parties themselves may in any part of their contract derogate from the requirements of Art. 25 in line with Art. 6 CISG, and thereby set their own standards as to what will be regarded as a fundamental breach under the contract.  ⁴²⁴  According to Art. 6 CISG, "not only may the parties determine the content and extent of their obligations by adopting contractual provisions that vary from the default rules in the Convention, but they may also indicate the circumstances under which the failure to perform by one party amounts to a fundamental breach. The principle of party autonomy thus requires looking at the nature of the contractual obligation for which strict performance might be essential."  ⁴²⁵ 

Thus, where the parties have expressly agreed or the established practices indicate that any deviation from all or specific contract terms constitutes a fundamental breach, the application of the approach focusing on the nature of the contract would entitle the aggrieved party to avoid the contract even if the breach is minor. For instance, the parties may, from the outset, characterize as fundamental, certain categories of non-fulfilment of obligations; e.g. by determining that time is of the essence. This would correspond to the principle of contract autonomy.  ⁴²⁶  In this respect, the significant difference is that where the parties fail to characterize their terms in this fashion, then in the case of a minor breach, Art. 25 will prevent avoidance. Also, the typical practice under CIF and other documentary sales is to be noted, where there is a general rule that the documents presented by the seller in a documentary transaction must be in strict compliance with the contract, buyers have therefore often been able to refuse the documents if there has been some discrepancy in them even if that discrepancy was of little practical significance.  ⁴²⁷ 

The above approach is confirmed under the UNIDROIT Principles and the PECL, particular regards are explicitly had to the nature of the contractual obligation. Art. 7.3.1(2)(b) UPICC explicitly looks not at the actual gravity of the non-performance but at the nature of the contractual obligation for which strict performance might be of essence. The Official Comment thereon clearly states: "Such obligations of strict performance are not uncommon in commercial contracts. For example, in contracts for the sale of commodities the time of delivery is normally considered to be of the essence, and in a documentary credit transaction the documents tendered must conform strictly to the terms of the credit."  ⁴²⁸  Similarly, under Art. 8:103(a) PECL, "the relevant factor is not the actual gravity of the breach but the agreement between the parties that strict adherence to the contract is essential and that any deviation from the obligation goes to the root of the contract so as to entitle the other party to be discharged from its obligations under the contract. This agreement may derive either from express or from implied terms of the contract. Thus, the contract may provide in terms that in the event of any breach by a party the other party may terminate the contract. The effect of such a provision is that every failure in performance is to be regarded as fundamental. Even without such an express provision the law may imply that the obligation is to be strictly performed. For example, it is a rule in many systems of law that in a commercial sale the time of delivery of goods or of presentation of documents is of the essence of the contract. The duty of strict compliance may also be inferred from the language of the contract, its nature or the surrounding circumstances, and from custom or usage or a course of dealing between the parties."  ⁴²⁹ 

In sum, the nature of the contractual obligation is also an important factor in the determination of fundamental breach: "Where the parties have expressly or implicitly agreed that in the case of a breach by one party the other party may terminate the contract, strict compliance with the contract is essential and any deviation from the obligation is to be regarded as a fundamental breach. Absent such an express provision, the duty of strict compliance may also be inferred from the language of the contract, the surrounding circumstances, custom, usage, or a course of dealing between the parties."  ⁴³⁰  This consideration of the nature of the contractual obligation violated in determining fundamental breach is explicitly provided for respectively in Art. 7.3.1(2)(b) UPICC and Art. 8:103(a) PECL; and are as well implied by the text of Art 25 CISG, its legislative history and the principle of party autonomy, which allows the parties to determine the circumstances under which a breach of contract will be fundamental.  ⁴³¹ 

8.3.2 Intentional Non-performance

Intentional non-performance is another factor in the determination of fundamental breach. For example, one party's express refusal to perform his obligation, such as to pay for the goods or to take delivery of them, constitutes fundamental breach, except where the promisor is entitled to refuse to perform.

Under the CISG, the approach that focuses on whether the breach was committed intentionally or recklessly "can be supported by the text of article 25. It is, however, incompatible with the remedial system of the Convention under which fault is not a condition of contractual liability and of no importance in the availability of either remedy. Recourse to this approach to determine fundamental breach is thus not permissible."  ⁴³²  By contrast, Art. 7.3.1(2)(c) UPICC clearly contains such a rule dealing with the situation where the non-performance is intentional or reckless. Similarly, PECL Art. 8:103(c) is also confined to intentional non-performance.

It may, however, be contrary to good faith to terminate a contract if the non-performance, even though committed intentionally, is insignificant.  ⁴³³  For example, in an Italian-German dispute over the delivery of textiles, some textiles were of a different color from that specified in the contract. After being informed by the Italian seller that he could not at that time deliver the remaining textiles of the ordered color, the German buyer declared the contract avoided. The Düsseldorf Court of Appeals held that a fundamental breach occurs if the seller declares seriously and definitely that he will not deliver substitute goods, but does not occur if he only declares that he cannot deliver at the moment.  ⁴³⁴  It is to be mentioned here that, unlike Art. 7.3.1(2)(c) UPICC, PECL Art. 8:103(c) sets a link between intentional non-performance and no reliance on future performance (to be discussed below) with the conjunction "and". Under this provision even if the non-performance in itself is minor and its consequences do not substantially deprive the aggrieved party of what he is entitled to expect under the contract, it might be treated as fundamental if there is indication of intentionality that gives the aggrieved party reason to believe that he cannot rely on the other party's future performance.  ⁴³⁵ 

8.3.3 No Reliance on Future Performance

In determining fundamental breach, consideration is also given to whether the breach gives the aggrieved party reason to believe that he may not rely on the other party's future performance. Under Art. 7.3.1(2)(d) UPICC the fact that non-performance gives the aggrieved party reason to believe that it cannot rely on the other party's future performance is of significance. If a party is to make its performance in instalments, and it is clear that a defect found in one of the earlier performances will be repeated in all performances, the aggrieved party may terminate the contract even if the defects in the early instalment would not of themselves justify termination. Sometimes an intentional breach may show that a party cannot be trusted.  ⁴³⁶  Such an approach is clearly found in PECL Art. 8:103(c) as mentioned above.

Another consideration gives the aggrieved party reason to believe that it cannot rely on the other party's future performance is the party's (in)ability to perform at all, e.g. in the context of sales of goods that is to say either to deliver the ordered goods or to pay the purchase price and to take delivery. Regardless of whether or not performance is due, non-performance is considered a fundamental breach where performance is objectively impossible, namely where the object of the transaction is unique and has been destroyed. For example, if a party contracts to sell his Kandinsky and it has perished, performance is objectively impossible since no one could deliver the painting. A fundamental breach has also been committed where only the party, which has yet to fulfill its obligation, is unable to perform the contract (subjective impossibility). If, in the foregoing example, the Kandinsky were not destroyed but stolen, the seller would only be subjectively prevented from performing, since the thief or any other person having bought the stolen painting from him would be able to deliver it to the buyer, if only theoretically.  ⁴³⁷ 

In practice, where a party has legitimately lost his faith and confidence in the other party's future performance and cannot be reasonably expected to continue the contractual relationship, courts have frequently found for fundamental breach. The reasons for the courts' findings can be best classified under the following headings: a) Violation of Exclusive Rights; b) Uncertainty as to Future Performance; c) Failure to Provide Security for the Purchase Price; d) Making Delivery Dependent on an Unjustified Condition.  ⁴³⁸  But where no future performance is due from the non-performing party, other than the remedying of the non-performance itself, or where there is no reason to suppose that it will not properly perform its future obligations, the aggrieved party cannot invoke PECL Art. 8:103(c).  ⁴³⁹ 

8.3.4 Disproportionate Loss

Finally, Art. 7.3.1(2)(e) UPICC deals with situations where a party who fails to perform has relied on the contract and has prepared or tendered performance, e.g. by invoking his right to cure (see Chapter 5). In these cases regard is to be had to the extent to which that party suffers disproportionate loss if the non-performance is treated as fundamental. Non-performance is less likely to be treated as fundamental if it occurs late, after the preparation of performance, than if it occurs early before such preparation. Whether a performance tendered or rendered can be of any benefit to the non-performing party if it is refused or has to be returned to that party is also of relevance.  ⁴⁴⁰ 

However, under the CISG "[t]he criterion employed by the UNIDROIT Principles, which looks at whether the breaching party would suffer a disproportionate loss as a result of the avoidance in determining fundamental breach, cannot be supported by the various cross-references to fundamental breach. To the contrary, the drafting history of article 46(2) gives good reason to view recourse to this criterion, in general, as prohibited."  ⁴⁴¹  In other words, consideration of the extent to which the breaching party suffers disproportionate loss in determining whether a breach is fundamental is supported neither by the wording of Art. 25 CISG nor by its drafting history. This factor, therefore, cannot be employed in the determination of fundamental breach of a CISG contract.  ⁴⁴²  Interestingly, neither is it explicitly dealt with under the PECL.