THE FORMATION AND

PERFORMANCE
OF CONTRACTS FOR THE SALE
OF GOODS
WEEK 3
THE SALES CONTRACT
• The sales contract is universally recognized as the legal mechanism for
conducting trade in goods.
• The contract for purchase and sale embodies the agreement of the
parties, the buyer and seller.
• It expresses their intention to be bound by the contract’s terms,
commits them to perform their part of the bargain, and makes them
responsible for breach of contract if they do not.
• The sales contract is essential because it sets out rights and liabilities
that may extend well into the future.
LAW OF SALES
• Sales law, or the law of sales, is generally that body of law which governs
contracts for the present or future sale of goods. In most countries, the term sale
means a transfer of the ownership and possession of tangible goods (sometimes
referred to simply as “things which are movable” or “tangible personal property”)
from seller to buyer in return for a price or monetary payment.
• The “law of sales” does not apply to contracts for the sale of real estate or
intangibles, such as stocks, bonds, patents, copyrights, and trademarks. It does
not apply to contracts of employment, of insurance, or to the provision of
services.
• The reason for the distinction, as we will see, is that sales law developed out of
the practices of merchants and traders who dealt in goods.
• Generally speaking, courts look to the governing sales law to determine whether
a valid and enforceable agreement exists, how to interpret contractual provisions,
what remedies are available in the event of a breach, and what damages can be
awarded.
LAW OF SALES – NATIONAL DIFFERENCES AND
UNIFICATION
• Different countries, even with modern codes, often have different
rules for interpreting contracts, for remedies and awarding damages,
or even for determining if a contract exists at all. This is especially
true when buyer and seller come from countries with different legal
systems
• The ability to predict what will happen in the event of a breach of
contract is essential to commerce
• No nation can expect to attract foreign traders and firms without a
modern body of governing law to protect the contract rights of both
its own citizens and foreigners alike
LAW OF SALES – NATIONAL DIFFERENCES AND
UNIFICATION
• The history of legal development in many nations has often coincided
with its history of opening to the world through foreign trade. As
trade expanded, and as foreigner merchants came to trade, so did
nations require a more universally accepted set of laws.
• English common law spread through the early British Empire,
including the American colonies. Civil law and Napoleonic codes
spread through Europe, Latin America, Japan, and even China.
• This gradual process certainly unified laws, one country at a time.
However, as the twentieth century brought the world closer together,
there were calls for more organized efforts at unifying the sales laws
of diverse countries around the world
LAW OF SALES – NATIONAL DIFFERENCES AND
UNIFICATION
• The process of making national laws more uniform is known as the unification of
law.
• The unification of modern sales law has been ongoing since the early part of the
last century. Early efforts were made by the League of Nations, and by private
organizations and law societies, although those largely turned out to be
unsuccessful.
• In 1966, the United Nations created a new organization responsible for unifying
trade law, the United Nations Commission on International Trade Law, or
UNCITRAL (Vienna).
• UNCITRAL’s work led to a very successful effort in unifying the law applicable to
the international sale of goods and the adoption in 1980 of the United Nations
Convention on Contracts for the International Sale of Goods, or CISG.
• The CISG now forms the basis for a widely accepted body of international sales
law, now implemented into the national codes and statutes of more than 70
nations
APPLICABILITY OF THE CISG TO
INTERNATIONAL SALES
• The CISG applies if the following conditions are met:
• The contract is for the commercial sale of goods (the CISG does not define the
term “goods.”)
• It is between parties whose places of business are in different countries
(nationality or citizenship of individuals is not a determining factor).
• The parties’ places of business are located in countries that have ratified the
convention.
EXCLUSIONS FROM CISG
• The following types of sales have been specifically excluded from the
convention:
• Consumer goods sold for personal, family, or household use
• Goods bought at auction
• Stocks, securities, negotiable instruments, or money
• Ships, vessels, or aircraft
• Electricity
• Assembly contracts for the supply of goods to be manufactured or produced wherein
the buyer provides a “substantial part of the materials necessary for such
manufacture or production”
• Contracts that are in “preponderant part” for the supply of labor or other services
• Contracts imposing liability on the seller for death or personal injury caused by the
goods
• Contracts where the parties specifically agree to “opt out” of the convention or
where they choose to be bound by some other law
GENERAL REQUIREMENTS FOR A VALID
CONTRACT
• It is an agreement between parties entered into by mutual assent and
resulting from their words or from conduct that indicates their intention to
be bound
• It must be supported by consideration (the bargained-for exchange of a
legal benefit or incurring of a legal detriment)
• The parties must have legal capacity (they may not be minors, legally
incompetent, or under the influence of drugs or alcohol)
• The contract must not be for illegal purposes or contrary to public policy
• The CISG only governs the formation of a contract and the rights and
obligations of the seller and buyer. It does not provide rules for
determining whether a contract is valid, for determining whether a party to
a contract is legally competent, or for determining whether a party is guilty
of fraud or misrepresentation. These rules are left to individual state or
national laws
THE WRITING REQUIREMENT
• Under CISG Article 11, a contract for the international sale of goods “need
not be concluded in or evidenced by writing and is not subject to any other
requirement as to form. It may be proved by any means, including
witnesses.”
• This is in keeping with a basic concept found in the CISG: that the parties
should have flexibility in contracting and as much freedom of contract as
possible
• Several countries have elected to omit Article 11 from their version of the
CISG. In those countries, foreign sales contracts governed by the CISG must
still be in writing
• United States, Japan, China, and members of the European Union have
enacted laws recognizing the validity of electronic or digital signatures on
contracts and legal documents
PROBLEMS OF CONTRACT INTERPRETATION
• If the complete and final agreement has been put into writing, we say that the
contract has become “integrated.” An integrated contract is a written document
or documents that evidence the final and complete agreement of the parties
• The common law parol evidence rule states that a court may not consider in
evidence any written or oral statements that were made by the parties prior to or
at the time of concluding a fully integrated written contract if the statements are
offered to contradict, vary, or add to the terms of the written contract
• The civil law systems, which generally do not use jury trials in these cases, do not
have the same strict rule against the admissibility of parol evidence in most
breach of contract cases
• The parol evidence rule has not been incorporated into the CISG. Article 8 of the
CISG allows a court, when considering the intent of the parties to a contract, to
consider “all relevant circumstances of the case, including the negotiations, any
practices which the parties have established between themselves, usages, and
any subsequent conduct of the parties.”
THE ROLE OF CUSTOMS, PRACTICES, AND
TRADE USAGES
• Trade usages are rules derived from the widespread customs of an industry, the
practices of merchants in their past dealings, and the usages of trade terminology
and language
• Examples include use of specific descriptive terms, guarantees that the goods
“will be of average and acceptable quality for the kind and type of goods sold in
the trade,” and inclusion of trade terms to refer to which party is responsible for
shipping expenses and the risk of damage or loss of goods during shipment
• According to the CISG provisions of Article 9, the only trade usages that can be
used to interpret or fill in the gaps in a contract are
• (1) those to which the parties have agreed or that they have established between themselves
and
• (2) those usages of which the parties knew or ought to have known, and that are widely
known in international trade (or at least in those countries in which both buyer and seller are
located) and regularly observed in the industry or trade involved.
MUTUAL ASSENT: THE OFFER
• The contract laws of all countries require that the parties reach a
mutual agreement and understanding about the essential terms of a
contract. This is known as mutual assent
• Under Article 14 of the CISG, a communication between the parties is
considered an offer when
• (1) it is a proposal for concluding a contract and
• (2) it is “sufficiently definite and indicates the intention of the offeror to be
bound.”
• An offer is considered sufficiently definite if it
• (1) indicates or describes the goods,
• (2) expressly or implicitly specifies the quantity, and
• (3) expressly or implicitly specifies the price for the goods.
MUTUAL ASSENT: THE OFFER
• Are advertisements, catalogs or websites counted as offers?
• CISG Article 14 states, “A proposal other than one addressed to one or more specific
persons is to be considered merely as an invitation to make offers, unless the
contrary is clearly indicated by the person making the proposal.”
• Consequently, to be on the safe side, many attorneys recommend that a seller
include in all of its price sheets and literature, and on its Website, a notice that the
content does not constitute an offer.
• Open Price Terms
• CISG Article 55 states that where price is not fixed, the price will be that charged “for
such goods sold under comparable circumstances in the trade concerned.”
• Accordingly, if the buyer and seller fail to specify the price of the goods, a court
might look to the trade or to the market price of comparable goods to make its own
determination of price, and the contract and all its other provisions will remain in
effect.
MUTUAL ASSENT: THE OFFER
• Revoking Offers
• As a general rule, an offer may be revoked at any time prior to acceptance.
• Under the CISG, firm offers are valid even if they are not in writing.
• Moreover, an offer may not be revoked if the offeree reasonably relies on the
offer as being irrevocable and the offeree has acted in reliance on the offer.
• The Pro Forma Invoice
• The pro forma invoice is a formal document addressed to a specified buyer to
sell the products described according to certain terms and conditions
• Most pro forma invoices are specific and definite enough to meet the
requirements of an offer
• Sellers usually require the buyer to accept the offer by signing it and returning
it to them before shipment
MUTUAL ASSENT: THE ACCEPTANCE
• The acceptance is the offeree’s manifestation of the intention to be
bound to the terms of the offer
• CISG Article 18 states that
• “a statement made by or other conduct of the offeree indicating assent to an
offer is an acceptance.”
• an offeree may accept by “dispatching the goods or payment of the price,
without notice to the offeror” provided that the parties have established this
as a practice or it is routinely accepted in the trade, and if the act is
performed within the time for acceptance fixed by the offeror or within a
reasonable time.
MUTUAL ASSENT: THE ACCEPTANCE
• When an Acceptance is Effective
• Under Article 18, an acceptance is not effective upon dispatch, but is effective
when it reaches the offeror (or in the case of electronic transmission, appears
on the offeror’s fax machine or in his or her e-mail inbox).
• Article 16 protects the offeree by stating that the dispatch of an acceptance
cuts off the offeror’s right to revoke the offer. Thus, an acceptance may
possibly be withdrawn if the withdrawal reaches the offeror before or at the
same time as the acceptance does (Article 22).
• The Mirror Image Rule
• CISG Article 19(1) states, “A reply to an offer which purports to be an
acceptance but contains additions, limitations or other modifications is a
rejection of the offer and constitutes a counteroffer.”
STANDARD BUSINESS FORMS AND CONTRACT
MODIFICATIONS
• Business buyers commonly use a purchase order for placing orders
for goods from their vendors. Typically, it includes the description and
quantity of the goods ordered, a delivery address, and authorized
buyer’s signature
• The order confirmation (also called a “sales acknowledgment”) is the
seller’s formal confirmation of the buyer’s order, either accepting the
order, rejecting it or modifying its terms
• The preprinted terms on these forms may differ, sometimes in
significant ways. When this occurs, lawyers call it a battle of the
forms
BATTLE OF THE FORMS UNDER CISG
• In an international sales transaction governed by the CISG, an acceptance
containing new terms that do not materially alter the terms of the offer
becomes a part of the contract, unless the offeror promptly objects to the
change.
• However, a purported acceptance that contains additional or different
terms that materially alter the terms of the offer would constitute a
rejection of the offer and a counteroffer. No contract would arise at all
unless the offeror in return accepted all of the terms of the counteroffer.
• Under the CISG, an acceptance of the counteroffer may arise by assent or
by performance. In other words, if the original offeror takes some steps
toward performing the contract after having received a counteroffer, the
offeror will be deemed to have accepted the counteroffer and a contract
will be created on the new terms.
PERFORMANCE OF CONTRACTS - SELLER
• CISG Article 35 states, “The seller must deliver goods which are of the quantity, quality
and description required by the contract and which are contained or packaged in the
manner required by the contract.”
• Under CISG Article 35, unless otherwise agreed by the parties, the seller must deliver
goods that are of the quantity, quality, and description required by the contract and that
• 1. Are fit for the purposes for which goods of the same description would ordinarily be used
(unless at the time of contracting, the buyer knew or could not have been unaware that the goods
were unfit; the seller’s knowledge in this case is not relevant)
• 2. Are fit for any particular purpose expressly or impliedly made known to the seller at the time of
the conclusion of the contract, except where the circumstances show that the buyer did not rely,
or that it was unreasonable for him to rely, on the seller’s skill and judgment
• 3. Possess the qualities of goods that the seller has held out to the buyer as a sample or model
• 4. Are contained or packaged in the manner usual for such goods or, where there is no such
manner, in a manner adequate to preserve and protect the goods (unless at the time of
contracting, the buyer knew or could not have been unaware that the goods were not properly
packaged)
PERFORMANCE OF CONTRACTS - SELLER
• Conformance to Laws and Regulation in Buyer’s Country
• Technical regulations setting standards for product design and performance can vary
widely from country to country.
• This might include safety standards for foods, pharmaceuticals, automobiles, toys,
and consumer goods; flammability standards for children’s clothing; fire and
electrical codes; health codes; environmental standards; and rules for packaging or
labeling products.
• Does Article 35 require the seller to supply goods that conform to the national laws
of the buyer’s country?
• The cases seem to depend on the factual situations. The issue often turns on
whether the seller knew the uses to which the goods would be put, whether it knew
of the regulations in the buyer’s country affecting that use, and whether the buyer
had relied on the seller’s knowledge and expertise.
• It is usually only then that a court would hold that goods are nonconforming if they
do not meet the regulations for sale in the buyer’s country.
PERFORMANCE OF CONTRACTS - BUYER
• The buyer’s main responsibility is to pay the price for the goods and
take delivery of them as required (Article 53). In addition, the buyer
has an obligation to inspect the goods and notify the seller of any
nonconformity
• The buyer must inspect the goods within “as short a period as is
practicable in the circumstances” after they have arrived at their
destination (Article 38).
• The buyer must then give notice of any defect or nonconformity in
the goods within a reasonable time after it is discovered or ought to
have been discovered.
• If the defect can be discovered only upon use, the buyer has a
reasonable period from that time to notify the seller.
PERFORMANCE OF CONTRACTS - BUYER
• Some defects or other nonconformities may be latent, or hidden, and may take
longer to detect. There is no set time limit on discovering these, although the
time within which notice must be given to the seller of the nonconformity begins
to run at the time that the seller “ought to have discovered” the hidden defect
(Article 39).
• In any event, notice must be given within two years from the date on which the
goods were “handed over” to the buyer.
• If the buyer fails to give timely and proper notice, the buyer loses the right to
assert the breach against the seller.
• The parties are free to agree on other inspection and notice requirements and
frequently do so in international business.
• The notice of nonconformity should specifically, and in necessary detail, state
how the goods are nonconforming. This is necessary so a breaching party can
send substitute goods or otherwise correct the problem
REMEDIES FOR BREACH OF CONTRACT
• The remedies outlined in the CISG include
• (1) the setting of an additional time, or extension, for performance;
• (2) the right to remedy or cure;
• (3) avoidance (cancellation) of the contract
• (4) price reduction;
• (5) money damages; and
• (6) specific performance.
• The right to a remedy depends on whether or not the failure of
performance amounted to a fundamental breach.
THE REQUIREMENT OF FUNDAMENTAL
BREACH
• The CISG distinguishes between a serious or fundamental breach of the contract and one that is
minor or less than fundamental.
• Article 25 defines a fundamental breach as a breach of contract committed by one of the parties
that “results in such detriment to the other party as substantially to deprive him of what he is
entitled to expect under the contract, unless the party in breach did not foresee and a reasonable
person of the same kind in the same circumstances would not have foreseen such a result.”
• Examples of fundamental breaches
• Shipment of less than the full quantity of goods ordered by the buyer,
• Seller’s shipment of seriously defective goods that cannot be repaired or replaced on time, or that have no
value to the buyer under the contract
• Seller’s failure or refusal to ship at all
• Most late shipments are not a fundamental breach, and under the CISG sellers are usually given
additional time to perform even when they are late.
• A partial shipment may also amount to a fundamental breach if it presents a serious problem for
the buyer and one that cannot quickly be remedied.
• A buyer may also be in fundamental breach of a contract. This usually results from the buyer’s
refusal or inability to live up to its two primary responsibilities—to take delivery and to pay for the
goods.
SELLER’S RIGHT TO CURE: NACHFRIST PERIOD
• In the event that the seller has failed to deliver the goods, or has already delivered
nonconforming goods, and the time for their shipment or delivery has passed, the
seller may request the buyer to grant a reasonable extension of time to perform (or
to “cure” the problem), at the seller’s own expense, if it can be done without
causing the buyer unreasonable inconvenience or the uncertainty of
reimbursement of expenses incurred during the extension.
• If the breach is fundamental and, a “cure” seems impossible, the buyer need not
grant the extension.
• In the case of the delivery of nonconforming goods resulting in a breach that is not
fundamental, or in the case of a nondelivery that can be cured by the seller within
a reasonable time, the buyer may not unreasonably refuse the extension.
• If the buyer does not respond to the seller’s request within a reasonable time, the
seller is entitled to the requested extension.
• If the seller still does not perform within the extension of time, the buyer is then
released from the contract whether or not the breach was fundamental.
BUYER’S RIGHT TO AVOIDANCE
• When one party fails to perform, the contract does not automatically end. The contract,
or certain provisions of it, must be declared to be at an end, or “avoided” by one of the
parties.
• A buyer may declare a contract avoided where the seller’s failure to perform any
obligation amounts to a fundamental breach (Article 49). If the seller requests additional
time to cure a fundamental breach, the buyer need not grant it.
• If the buyer takes delivery of goods and learns they are so seriously defective as to
amount to a fundamental breach, the buyer must declare avoidance within a reasonable
time after he or she became aware, or should have become aware, of the breach. The
buyer need not pay for the goods or find a substitute buyer to take them.
• After notifying the seller of the avoidance, the buyer may simply return them for a full
refund of money paid or institute an action for breach of contract.
• When the goods can rapidly deteriorate or decay, the buyer may notify the seller and
then take steps to sell them.
• In the case of nondelivery, the buyer may avoid the contract only at the end of the
nachfrist period—at the end of additional time that the seller was given to perform.
• The buyer may bring an action for damages against the seller at that time.
SELLER’S RIGHT TO AVOIDANCE
• The seller also may avoid a contract.
• A seller may avoid a contract if a buyer fails to either take delivery or
pay the purchase price or otherwise commits a fundamental breach
(Article 64).
• The effect of avoidance is that the seller is released from the contract,
need not deliver the goods still in the seller’s possession, and may
claim their return if they have already been delivered.
• The seller also may bring a legal action for damages
PRICE REDUCTION
• One solution for the buyer in the event that the seller ships defective or
nonconforming goods is that of price reduction (CISG Article 50).
• A buyer who would like to retain the goods, even though they are perhaps
not the quality or specifications called for, may adjust the amount paid by
withholding a part of the purchase price in order to offset the reduced
value of the nonconforming goods.
• If the buyer can repair the goods or bring them up to contract
specifications, the buyer may adjust the price paid accordingly.
• If the goods have already been paid for, the buyer may ask that the seller
return a portion of the amount paid.
• The buyer may use the remedy of price reduction whether or not the
seller’s breach has been fundamental.
MONEY DAMAGES
• Damages for breach of contract are addressed in Articles 74-77.
• The CISG provides that a breaching party, whether buyer or seller,
shall be liable for damages in an amount sufficient to make the
injured party whole in the event of a breach.
• Article 74 states that damages to an injured party shall consist of a
“sum equal to the loss.”
MONEY DAMAGES – COMPENSATORY
DAMAGES
• In the event of a breach of contract by either buyer or seller, and the
nonbreaching party has exercised their right to avoidance of the contract, the
method of measuring money damages depends on whether the nonbreaching
party has been able to enter into a substitute transaction
• For example, if the seller fails to deliver or delivers nonconforming or worthless
goods, and the buyer has been able to purchase substitute goods, the buyer may
claim damages if the substitute goods cost more than the contract price
• If the buyer has not purchased substitute goods, damages are measured by the
difference between the contract price and the current market price or the price
of a reasonable substitute
• Similarly, if the buyer refuses delivery or fails to pay and the seller has avoided
the contract and resold the goods, the seller may recover damages in the amount
by which the contract price exceeded the price received in the substitute
transaction
MONEY DAMAGES – CONSEQUENTIAL
DAMAGES
• Consequential damages are those special or indirect damages arising as a
“reasonably foreseeable” consequence of the breach.
• They normally result from some special circumstances involving one of the
parties to the contract, where those special circumstances were made
known, or should have been known, by the other party.
• For example, assume that the buyer is purchasing the goods in order to
resell them at a higher price under a separate contract to a third party.
That fact is made known to the seller. If the seller breaches, it may be liable
for the buyer’s lost profits as well as other consequential damages resulting
from the buyer’s breach to the third party.
• Consequential damages are limited under Article 74 to those that the
parties “foresaw or ought to have foreseen at the time of the conclusion of
the contract.”
MONEY DAMAGES – LIQUIDATED DAMAGES
• Liquidated damages are monetary awards set forth and agreed to by
the parties within the express terms of a breached agreement.
• The CISG does not expressly address liquidated damages as a
measure of damages. Rather, it indirectly addresses liquidated
damages in several provisions.
• CISG Article 6 allows for the incorporation of agreed sums into a
contract for the sale of goods through its recognition of the principle
of freedom of contract.
• Articles 46 and 62 recognize the principle of pacta sunt servanda,
specifically, that contractual obligations must be kept.
• Finally, Article 74 recognizes the necessity of providing full
compensation for injured parties in the event of breach of contract.
SPECIFIC PERFORMANCE
• Specific performance is used when a court requires a party to the contract to
perform, or carry out its part of the bargain.
• Under CISG Article 46, a court may grant specific performance only if all of the
following conditions are met:
• (1) the buyer has not resorted to another remedy;
• (2) the seller failed to deliver or, in the case of nonconforming goods, the nonconformity was
so serious that it constituted a fundamental breach;
• (3) the buyer gave timely notice to the seller that the goods were non-conforming; and
• (4) the buyer made a timely request that the seller provide substitute goods.
• The court may grant specific performance without regard to whether money
damages are inadequate.
• Article 28 places a limit on the buyer’s right to specific performance by providing
that a court need not grant specific performance unless “it would do so under its
own law.”
ANTICIPATORY BREACH
• Anticipatory breach occurs when one party clearly sees that the other
party to the contract either will not perform a substantial part of its
obligations or will commit a fundamental breach.
• The breach may occur as a result of one party repudiating the
contract and notifying the other that it will not perform, or it may be
determined from the conduct of the breaching party
ANTICIPATORY BREACH – RIGHT TO SUSPEND
PERFORMANCE
• Either party may suspend performance under a contract if one party
realizes that the other party will not perform a “substantial part” of its
obligations.
• A buyer may suspend payment when aware of evidence that the seller
cannot or will not ship.
• A seller may suspend shipment when the buyer obviously cannot pay or
take delivery of the goods.
• A seller who has already shipped may stop the goods in transit.
• The right to suspend performance ends when the other party provides
adequate assurance that it will perform.
• If adequate assurance becomes impossible, the other party may then avoid
the contract entirely
ANTICIPATORY BREACH – RIGHT TO AVOID
PERFORMANCE
• If prior to the date of performance it becomes clear that one of the
parties is likely to commit a fundamental breach in the future, the
other party may avoid the contract.
• In contrast to the right to suspend, avoidance for anticipatory breach
is allowed where one party will never be able to perform.
• For instance, if the seller’s plant burns down, or if an embargo in the
seller’s country makes it legally impossible to ship the contracted
goods, then the buyer may avoid the contract
ANTICIPATORY BREACH – AVOIDANCE OF
INSTALLMENT CONTRACTS
• When a contract calls for the delivery of goods by installments, the
rules of avoidance apply to each individual delivery.
• Therefore, a buyer may refuse a single nonconforming shipment if the
seller has committed a fundamental breach.
• Where the breach of one installment indicates strong grounds that a
party will breach future installments, the nonbreaching party may
declare the contract avoided if done within a reasonable time.
• So, if a buyer refuses to pay for one or two installments, the seller
may avoid the remainder of the contract.
EXCUSES FOR NONPERFORMANCE –
IMPOSSIBILITY OF PERFORMANCE
• Under English law, a court may excuse a party’s nonperformance where it
becomes objectively impossible for it to perform.
• Objective impossibility means
• that it must be impossible for anyone to perform, not just this particular party, and
• that the parties did not expressly assume such risk.
• Examples of objective impossibility include death of one of the parties, the
destruction of the specific subject matter of the contract, or when
performance of the contract has been rendered illegal or made impossible
due to the fault of the other party.
• The inability to pay money is not usually an acceptable excuse.
• Supervening Illegality
• A contract becomes impossible to perform and the parties excused when
performance becomes illegal or prohibited by supervening government regulation
EXCUSES FOR NONPERFORMANCE –
FRUSTRATION OF PURPOSE
• Under the English common law, a party’s performance could be excused if
some unforeseen event occurred that frustrated the purposes of the
contract
• This event, called frustration of purpose, would have to totally destroy the
value of the contract to the party relying on the excuse
• Moreover, both parties must have known the purposes of the contract.
• To understand, one might ask the question, “Had this event existed at the
time of the contract, would the parties have gone through with it?”
• Today, the United States does not widely recognize frustration of purpose
EXCUSES FOR NONPERFORMANCE –
COMMERCIAL IMPRACTICABILITY
• A party is not liable for a failure to perform any of his obligations if he
proves that the failure was due to an impediment beyond his control and
that he could not reasonably be expected to have taken the impediment
into account at the time of the conclusion of the contract or to have
avoided or overcome it or its consequences (CISG Article 79)
• Extreme Hardship, Difficulty, or an Unreasonable Expense
• If the cost of performing the contract becomes so excessive that performance is
rendered unrealistic and senseless and threatens the viability of the business itself,
performance may be excused.
• Of course, what is a lot of money to one company may be a drop in the bucket to
another.
• Thus, if a large multinational corporation contracts to deliver goods at a contract
price and discovers that wage increases or an increase in the price of raw materials
will cause it to lose millions of dollars on the deal, the courts still may not release the
company from its obligation.
EXCUSES FOR NONPERFORMANCE –
COMMERCIAL IMPRACTICABILITY
• Unforeseen Events
• Courts also look to see whether the party claiming the excuse should have foreseen
the likelihood of its occurrence.
• If the event was foreseeable, the nonperforming party will not be released from its
obligations.
• This does not mean that the parties had to foresee the specific event that actually
occurred. Rather, the parties should have foreseen that an event of this kind could
occur.
• Thus, if a party is a sophisticated business, experienced and familiar with the risks of
entering into this kind of contract, they might have difficulty in proving that they
should not have foreseen a particular risk
• The courts generally feel that if a particular risk was foreseeable, then the parties
would have provided in their contract that performance would be excused if it
occurred
• If they did not provide for the excuse in the contract, then they must have intended
to bear this risk
EXCUSES FOR NONPERFORMANCE – CISG EXEMPTION
FOR IMPEDIMENTS BEYOND CONTROL
• CISG Article 79 provides that a party is not liable for a failure to
perform any obligations if
• (1) it was due to an impediment beyond control,
• (2) the impediment was not reasonably foreseeable at the time the contract
was concluded,
• (3) the impediment was unavoidable and could not be overcome, and
• (4) notice was given to the other party of the impediment and of its effect on
the contract.
• Unless an impediment renders performance permanently impossible,
it does not entirely excuse performance, but merely suspends it
during the time that the impediment exists.
EXCUSES FOR NONPERFORMANCE – FORCE
MAJEURE CLAUSES
• The term force majeure means “superior force.” It is a clause in a contract that
excuses a party from failing to perform on the occurrence of one or more
specified events.
• These clauses usually list with specificity those events that will excuse
nonperformance.
• These events might include war, blockades, fire, acts of governments, inability to
obtain export licenses, acts of God, acts of public enemies, failure of
transportation, quarantine restrictions, and strikes.
• Of course, such a clause assumes the party claiming the force majeure did not
cause the event and could not control it.
• In practice, most force majeure clauses do not excuse a party’s nonperformance
entirely, but only suspend it for the duration of the force majeure.
• Another special type of force majeure clause is the government approval clause.
Because government permission is often needed to transact business across
national borders, many companies include a provision in their contracts stating
that they are subject to obtaining government approvals or licenses.
CONCLUSION