The respondent`s argument that in commodities trade any deviation from the contract is considered to be a fundamental breach, thus giving the possibility to avoid the contract, is without merit.
The contract between claimant and respondent does not have any characteristics inherent to a commodity trading; the transaction itself is inconsistent with the requirements of commodity market. Commodities are substitutable goods produced by large number of producers in bulk quantities (Windsor, 2010). Coltan, on the other hand, is not a commodity; it is a non-substitutable material produced by a limited number of producers and used for the production of electronic devices.(Tercero, 2012) For a number of reasons, coltan does not have an official price. The price of the coltan substantially depends on the supply-demand relation. The fact that the high volume of production of coltan comes from the politically unstable countries also affects the price, along with the lack of certification requirements and interests of the limited sectors. Moreover, the fact that the claimant and respondent were involved in long-term business relations rules out the necessity to use intermediary commodity exchange markets – another essential part of commodity trading. Even if the claimant admits that it is a commodity, not every breach will necessarily constitute the fundamental breach as the respondent alleges.
The commodities are subject to significant day-to-day price fluctuations. The respondent would have to sell the goods to another buyer when the prices increase which significantly lowers seller`s need for protection as intended by Article 25 and , in contrast, strengthens the need of protection of claimant in order to restore the balance.(Mullis, 1998). Even if one assumes coltan to be a commodity, the fundamental breach would not take place, as the respondent would have secured his business interests by selling the goods to another buyer thus preventing the loss of profit. This procedure is usual in commodities trading; it considerably lessens the risk that the seller will not be able to sell the goods at all.
The respondent was not entitled to avoid the contract without a fundamental breach of the claimant
Article 64 states that the seller may declare the contract avoided if the failure of the buyer to perform his obligations amounts to a fundamental breach. Article 25 provides that a breach of contract is considered fundamental only if in the result of that breach the other party becomes substantially deprived of the expected benefits under the contract. In other words, fundamental breach occurs when the party fails to receive what he was expected to receive under the contract (Bijl, 2009). There is no agreement which determines what factors make a certain breach substantial enough to be considered fundamental (Koch, 2012). Therefore, such determination must be made in light of the circumstances of the case.
Another element in determining of fundamental breach, as provided by the Article 25, is foreseeability. If a reasonable person did not foresee or could not have possibly foreseen the detriment caused by his breach, then the aggrieved party will lose his right to declare the contract avoided. The characteristics of reasonable person or, better to say, a reasonable merchant include the merchant`s degree of skill and qualifications, the length of the merchant`s business experience, geographical region in which the merchant does business, etc.(Koch, 2012).
Inability of performance is also one of the important factors in determining whether the fundamental breach occurred. Non-performance becomes a fundamental breach when the party fails to perform his contractual duties, for example, deliver the goods or pay the purchase price. At the same time, in the case decided by the Dusseldorf Court of Appeals, the seller sued the buyer for the purchase price, the buyer objected stating that he is entitled to avoid the contract because the seller failed to deliver the goods. The Court ruled that late delivery or non-delivery does not always constitute a fundamental breach under Article 25; the delivery was possible and the seller was ready to deliver. The Court noted that where delivery was objectively possible, but the seller for some specific reasons could not deliver the goods (subjective impossibility), the buyer would have the right to declare the contract avoided. However, as delivery was objectively possible, the seller did not commit fundamental breach. (Oberlandesgericht Düsseldorf)
The Supreme Court argued that in determining fundamental breach, the remedial system of the Convention must be taken into account. The purpose of this system is to ensure that the contract remains enforceable by limiting the use of avoidance option in favor of damage remedy or price reduction. Thus, the remedy of avoidance should be allowed as a method of last resort, i.e. as an adequate response to a breach so substantial that the non-breaching party losses its interest in performing the contract. (Bundesgerichtshof, 3 April 1996, VIII ZR 51/95). Ordinary breaches of contract should be primarily compensated through damages.( Internationales Handelsrecht (1/2010) 27).
As to the payment by the letter of credit, it is acknowledged that ordinarily, the late payment cannot be considered as a fundamental breach. The Supreme Court of Queensland held that the failure to open a letter of credit within the period provided by the contract does not amount to fundamental breach. The seller is entitled to avoid the contract only after the additional term for performance granted to the buyer pursuant to Article 64 expired. (Downs Investments v. Perwaja Steel). The ICC also held that the delay in opening a documentary credit does not necessarily amount to fundamental breach. It becomes so when the additional term fixed by the seller expires (Case No. 7585 of 1992; CC Arbitration Case No. 7197)
Application
There is no indication that, in the following case, the respondent was substantially deprived of his benefits under the contract and thus, was forced to declare the contract avoided. The claimant has faithfully fulfilled his duty to pay the contractual price and made all possible efforts to avoid the conflict. The first letter of credit has secured the rights and interests of the respondent. Articles 31 and 32 UCP allow for the partial shipment in the letter of credit; the respondent could have requested the payment only for delivery of 30 mt, instead of 100 mt as provided by the letter of credit. However, the respondent chose not to use that option but rather declare the contract avoided. After the respondent had denied the first letter of credit, the claimant immediately established a new letter of credit, eliminating all “mistakes’ that in the view of respondent became reasons why he avoided the contract. The alleged faulty performance of the claimant did not deprive the respondent of the benefits under the contract. Moreover, the claimant, being a reasonable merchant, could not foresee that his performance of the duty would result in a total loss of profit by the respondent; in a view of a reasonable person, the alleged faults of the buyer could not possibly result in any detriment to the sellers` interest in contract.
As we see from the provisions of the Convention, the question whether a particular breach is considered to be fundamental should be answered based only on the international law or on the applicable laws of the state, but not on the subjective contentions or opinions of the parties to the contract. A party cannot claim a fundamental breach and avoid the contract based on made-up excuses; due consideration should be paid to the standards and requirements of the law.
The respondent has violated the principles of good faith and cooperation between the parties to the international sales contract.
Along with the violation of provisions of the Convention, as well as the terms of the contract, the respondent has also violated the principle of good faith in international trade. This principle lies at the foundation of CISG. Article 7 provides that in interpreting of Convention due regard should be paid to the observance of good faith in international trade. Even though the law of Danubia (applicable law under the contract), does not contain any provisions regarding the obligation of the parties to observe good faith in their contractual relations, the parties still have this duty by virtue of international law, in this case, specifically by virtue of CISG. A party acts in bad faith when its conduct is inconsistent with the provisions of the Convention.
The claimant relied on the honesty and sincerity of the respondent, and, unfortunately, respondent failed to live up to the trust of the claimant. Instead of communicating to the claimant and informing him about the problem, the respondent without giving the chance to cure the defaults, avoided the contract and refused to fulfill his part of the duty thus causing the claimant to suffer substantial losses.
Conclusion
The respondent`s claim that in commodities trade any violation of the contract results in fundamental breach lacks any factual and legal basis. For many reasons, the transaction between the claimant and respondent cannot be qualified as the commodities trade. Moreover, even in commodities trade not every violation of the contract automatically amounts to a fundamental breach. The seller in these kinds of transactions always has the option to sell the goods to another client and thus avoid the situation when he becomes deprived of his interest under the contract - an essential condition of the fundamental breach.
The provisions of Convention prescribe and the courts affirm the principle that the contract can be avoided only in the event of the fundamental breach which occurs when the aggrieved party becomes deprived of what he is entitled to under the contract. Avoidance is the remedy of last resort and the courts will sanction it only when all other remedies are obviously ineffective in the given circumstances. In our case, nothing shows that the claimant`s conduct resulted in the loss of the benefit of the contract for the respondent. Moreover, under the reasonable person standard, the claimant could not possibly foresee the detriment even if it had occurred. Thus, the respondent`s avoidance was completely unwarranted.
The respondent has violated the most fundamental principle in international trade – the principle of good faith and the obligation to cooperate. Instead of trying to solve the misunderstanding together with the claimant, the respondent chose the most radical option - to avoid the contract and thus, undermine well-established partner relations with the claimant.
Works Cited
1. Katrina Winsor, He Applicability of the CISG to Govern Sales of Commodity Type Goods, 1 14 Vindobona J. of Int'l Com. L. & Arbitratio 83-116 (2010).
2. Tantalum-Niobium Int'l Study Ctr., Critical Raw Material for EU, Jan. 04, 2012.
3. Luis A. Tercero Espinoza, Case Study: Tantalum in the World Economy: History, Uses and Demand, 2012 POLINARES Working Paper N. 28 (2012).
4. Mullis, A., "Avoidance for Breach under the Vienna Convention" in Andreas, M. and Marburg, N. (eds.) Anglo-Swedish Studies in Law, 1998, Lusts Forlag, Uppsala, at p. 329.
5. Maartje Bijl, Fundamental Breach in Documentary Sales Contracts the Doctrine of Strict Compliance with the Underlying Sales Contract, 1 Eur. J. of Com. Cont. L. 19-28 (2009); Art. 4.3.1.
6. Robert Koch, The Concept of Fundamental Breach of Contract Under the United Nations Convention on Contracts for the International Sale of Goods (CISG), 2012 Rev. of the Convention on Cont. for the Int'l Sale of Goods (CISG) 1998, Kluwer L. Int'l (1999) 177 - 354. (2012).
7. Oberlandesgericht Düsseldorf, 18 November 1993, 6 U 228/92
8. Bundesgerichtshof, 15 November 1995; VIII ZR 18/94)
9. Australia 17 November 2000 Supreme Court of Queensland (Downs Investments v. Perwaja Steel
10. CC Arbitration Case No. 7585 of 1992 (Foamed board machinery),
11. CC Arbitration Case No. 7197 of 1992 (Failure to open letter of credit and penalty clause case)
