Case Study - Avoidance of Contract

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Date: 2003.09.24

Court/Tribunal: Supreme court, France

Goods Involved: Decorated laminated glass panels

Citation: http://www.cisg.law.pace.edu

Key Articles: Arts 25, 49(2)(b)(i) CISG

B, an UAE buyer, placed an order with S, a French seller, for the manufacture and supply of 128 decorated laminated glass panels for use in an Egyptian hotel project in Dubai.  As a dealer, S executed the order on a contract-out basis without direct participation into the manufacture, assembly and packaging of the panels.  The panels were handed over to B at a French port for delivery to Dubai.  On arrival, B found, among other defects, some of the panels non-sticky for use.  B and S disputed about the true cause of all the alleged defects.  The last expert report stated that manufacturing flaws was only one of the possibilities to cause the non-sticking problem.  Afterwards, B waited for more than eight months before declaring the contract avoided.  The key issue here was when the reasonable period of time within which B had to declare the contract avoided started to run. 

Under the contract, B was responsible for arranging the transportation and stockage of the 128 panels after they were delivered at the French port on 1997.01.07.  On arrival of the goods in Dubai, B discovered apparent defects in 35 glass panels which were unusable because the decorative films on them were creased and had become unstuck.  On 1997.02.26 B notified S that the goods did not comply with the “required norms”.  S admitted only the reality of the existence of the deficiency, but denied any of his liability for it.  Adopting an amicable posture, B unilaterally arranged for several experts to examine and analyse the cause of the defects, but the expert reports produced conflicting results.  The last expert report, which was not objected to by both parties, stated that the film-sticking problem was caused by superficial condensation on the panels due to excessive humidity in the goods.  The excessive humidity could be a result of manufacturing flaws, damage during sea carriage, or improper storage of the goods.  B sought a remedy of avoidance of contract on 1998.05.06.  The trial court dismissed B’s claim because he had not proved with certainty the original cause of the defects observed.  The appeal court disagreed with the trial court’s reasoning, but nonetheless held that B’s claim for avoidance of contract was inadmissible because he had not declared it within a reasonable time.

The appeal court gave the following reasonings:

• Though lacking evidential certainty about the cause of the defects, B was obliged to sue S without waiting for an expert report amicably agreed by the parties because, under the circumstances, only a judicial expert examination ordered by the court would be able to establish the cause.  B’s delayed lawsuit led to the impossibility of conducting such an examination.

• The date of the last expert report 1997.08.22 was considered the starting point of the reasonable period of time within which B had to declare the contract avoided.  More than eight months had lapsed when B declared the contract avoided on 1998.05.06,   his declaration could not be deemed to be made within a reasonable time.  

• S was not required to prove his innocence because the transportation had been arranged by B and the packaging was found to be intact on arrival at the French port.

B appealed for judicial review of the appeal court’s judgment on two issues: (i) the burden of proof for the cause of the nonconformity of goods was wrongly imposed on him and (ii) the seller’s obligation in relation to proper packaging of goods in Art 35(2) was wrongly interpreted.

The Court found that the defects in the goods that were discovered in Dubai could not be attributed to S, so B was responsible for proving the nonconformity of the goods. Basing on the fact that the transport had been undertaken at B’s risk and that proof was not provided that the packaging of goods were defective at the time of delivery at the French port, the appeal court’s interpretation of Art 35(2) was correct according to the law. The Court held that B’s arguments were not well founded and his appeal was rejected. 

1. Burden of proof for nonconformity of goods

In general, a buyer who has taken delivery of the goods without complaints or reservations as to their conformity has to prove that the goods were nonconforming before or at the time the risk passed. This general rule applies to all cases in which the buyer gives timely or untimely notice of nonconformity pursuant to Art 39. The burden of proof is on the buyer based on the principle of proximity of proof. B made no complaints on the delivery of the goods at the French port on 1997.01.07. The complaints about the defects in the glass panels was made 50 days later after B conducting an examination of the goods in Dubai. Thus, the appeal court seemed to be perfectly correct in holding that B, not S, was to bear the burden of proof for the alleged nonconformity of goods.

However, B might be entitled to have an opportunity to perform a quick and superficial investigation of the conformity of the goods on their arrival in Dubai. Art 58(3) provides that the buyer is not bound to pay the price until he has had an opportunity to examine the goods. By an extensive interpretation of this article, arguably, the buyer should not be bound to waive making reservations as to the conformity of the goods until he has had an opportunity to get a cursory look of the goods. This kind of cursory inspection should be allowed in cases of contracts including sea carriage like the present case. If B complained to S immediately after performing a quick and superficial inspection of the glass panels on their arrival in Dubai, there might be a chance for B to argue for the shifting of the burden of proof to S. 

2. “Within a reasonable time” under Art 49(2)(b)(i)

The rationale behind Art 49(2)(b) is to impose time limits on the buyer’s right to avoid the contract so that he cannot delay in declaring contract avoidance in order to speculate on market fluctuation. In cases of delivery of nonconforming goods, the buyer becomes entitled to invoke Art 49(2)(b)(i) after he knew or ought to have known the nonconformity of goods constituting a fundamental breach of contract. The period of reasonable time within which the buyer has to declare contract avoidance starts to run as soon as indications pointing to an existence of fundamental breach can be objectively decided. The buyer’s subjective knowledge enabling him to justify a declaration of contract avoidance is irrelevant. The buyer loses the right to a remedy of avoidance of contract if not declaring within a reasonable time.

Accordingly, the fate of B’s claim was dependent on the answers to two questions: First, when could B justify the existence of S’s fundamental breach? The last expert report had not given clear indications to B about the cause of the defects, so he might not be able to rely on it to justify the existence of a fundamental breach. Arguably, B could continue his investigation about the real cause and therefore the time should not start to run from 1997.08.22. Secondly, what was the length of the reasonable period within which B must declare the contract avoided? Since the manufacturing work of the glass panels had been contracted out, B might need more time to gather evidence indirectly from the relevant contractor. Besides the “reasonable time” should be measured in a much more generous way in the present case on two grounds: (i) The reasonable person, having the same kind of B’s cultural background which cherish maintaining amicable relationships in business, would need more time to consider cancellation of a contract if that would result in ending of a business relationship and (ii) The glass panels, which were custom-made for the dome in an Egyptian hotel project, probably had no resale value. Thus a period longer than usual would not enhance B’s opportunity to speculate on market fluctuation. 

Nevertheless, in the present case, there was a lapse of exactly 16 months (1997.01.07 to 1998.05.06) between the actual delivery of the goods and the declaration of the avoidance of the contract. The lapse of time was undoubtedly too long by any standard. Hence, even the above-mentioned factors might be applied to favour a longer-than-usual period, the court of appeal had safely concluded that B’s claim for the avoidance of the contract under Art 49(2)(b)(i) was inadmissible.  

3. Principle of favour contractus

The overall merits of the present case did point to a direction that B was not entitled to claim the avoidance of the contract. For want of efficiency and certainty, the Court should not waste too much time to find out how troublesome it was in B’s mind driving him to take months to decide on whether or not to avoid the contract. Moreover, the Court may rely on the general principle of upholding contracts (favour contractus) to explain the dire situation B’s claim getting into. It is a general principle on which the Convention is based. This principle is embodied in Arts 25, 49 and 64. The restrictive rules in these three articles on contract avoidance connote that contracts governed by the CISG are to be upheld whenever it is possible. 

Not only there is a clear position in the CISG that avoidance of contract is a remedy of last resort and that contracts should be upheld whenever it is possible, it is also advocated that the notion of fundamental breach should be narrowly interpreted. When it is doubtful whether or not a breach may qualify as fundamental, it should generally be assumed that no fundamental breach is existent. Considering the facts that the final expert report’s finding was not decisive and the previous expert reports produced conflicting results, S should not be assumed as having committed a fundamental breach of contract. Absence of the existence of a fundamental breach, B’s claim for the avoidance of the contract basing on nonconformity of goods under either Art 49(1)(a) or Art 49(2)(b) would not be successful at all. Consequently, by relying on this principle, the Court could ascertain that B’s appeal must be rejected.