EFFECTS OF AVOIDANCE: Perspectives from the CISG, UNIDROIT Principles and PECL and case law

Abstract

Under the United Nations Convention on Contracts for the International Sale of Goods (1980; “CISG” or “Convention”), the effects of avoidance are described in Arts. 81 to 84, four articles of unequal importance dealing with the consequences which result from a declaration of avoidance accomplished by a party in accordance with the conditions set forth in CISG Arts. 49, 51, 64, 72 and 73.2 Among the four, Art. 81 states the basic consequences of avoidance,3 while Arts. 82 to 84 give “detailed rules for implementing certain aspects” of Art. 81.4 From the outset, it is to be made clear that the Convention does not apply to “consensual avoidance” – i.e., termination of the contract that occurs where the parties have, by mutual consent, agreed to cancel the contract and to release each other from contractual obligations – but rather is properly limited to cases where one party “unilaterally” avoids the contract because of a breach by the other party.5 Avoidance is the process through which an aggrieved party, by notice to the other side, terminates the contractual obligations of the parties. If the contract is not avoided, the Convention contemplates that the basic exchange of goods and price will be completed despite a breach, with damages or other remedies to compensate for defects in the exchange.6 That is to say, failure to effectively avoid the contract means that the parties remain bound to perform their contractual obligations. Courts have found a failure of effective avoidance where a party failed to follow proper procedures for avoidance (i.e., lack of timely and specific notice of avoidance to the other party) or where a party lacked substantive grounds for avoiding (e.g., lack of fundamental breach).7 In any event, as a rule, only avoidance of contract makes it clear that the contract will not be performed. When the contract is avoided, the parties lose the right to perform and regain their freedom of disposition. Up until then it is their duty to remain loyal to the contract.8 On the other hand, however, in cases of “consensual avoidance,” it has been asserted, the rights and obligations of the parties are governed by the parties' termination agreement.9 In this regard, a relevant ruling is found in [Austria 29 June 1999 Oberster Gerichtshof [Supreme Court]]:10 “The CISG does not regulate […] the consequences deriving from a consensual avoidance of contract. It is up to the parties to reach adequate arrangements or agree upon adequate provisions for the avoidance (citations omitted). Should, however, as here, no adequate arrangements have been made, the resulting gaps are to be filled under the CISG and not through recourse to national law (citation omitted). In so far as the parties do not autonomously regulate the legal consequences of the consensual avoidance of the contract in their agreement for avoidance – particularly the bearing of risk, the place of performance and the bearing of the costs – the remaining gap must be filled by interpretation according to Art. 7(2) CISG ...” In addition, it is to be made clear that Art. 81 et seq CISG are effective only between the parties. They do not affect the consequences with regard to third parties, namely those which may follow from contracts entered into by the buyer prior to the avoidance (resale, rental, etc.). This issue is governed by the applicable law.11