Definition of fundamental breach of contract on international sale of goods

Abstract

The fundamental breach of contract is defined in Article 25 of the UN Convention on Contracts for the International Sale of Goods (CISG), which states: "A breach of contract committed by one of the parties is fundamental if it 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." When a fundamental breach of contract occurs, the deprived party (seller or buyer) has a right to avoid a contract. Avoidance of contract is the last resort remedy applicable in case other remedies are ineffective. Pursuant to Article 25 of the CISG, there are two criteria which must be fulfilled for a fundamental breach of contract to exist. The first criterion is objective; it comprises two conditions: a) there is a breach of obligation defined in the contract or in the CISG; and b) such a breach substantially deprives the other party of what the party is entitled to expect under the contract. The second criterion is subjective: the breaching party has to foresee such a result. Although this criterion is essentially subjective, it contains an objective element, embodied in the use of the reasonable person standard. Hence, even when the breaching party has not foreseen substantial deprivation of the other party as a result of breach, a substantial breach of contract will be deemed to exist if a reasonable person of the same kind in the same circumstances could have foreseen such a result.