What Are Fundamental Contract Breaches in Law
on Commerce 2005 and CISG 1980?
Fundamental
breach is atype of contract breach, in which the Law on Commerce
2005 defines that a breach of contract committed by one of the parties is
fundamental if it causes damage to the other party to the extent that the other
party fails to achieve purpose of contract conclusion. The significant factor
that makes the difference between the fundamental and minor breach of contract
is the materiality.
Fundamental breach is an important foundation
for the imposition of trade remedies such as temporary suspension of
performance, suspension of performance or contract cancellation when the contract
has no specific agreement. Nonetheless, Law on Commerce 2005 does not provide
further guidance on fundamental breach. Court or arbitrator has a right to
determine whether a breach is fundamental on a case-by-case basis.
As set forth in CISG 1980, 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. CISG also does not provide specific
provisions to explain fundamental breach in details. Nonetheless, it can be
deemed that in order to constitute a fundamental breach, three following
factors need to be met: (i) a breach is made, (ii) detriment resulted from such
breach substantially deprives him of what he is entitled to expect under the
contract, and (iii) the breach can be foreseen.
The difference between constitution of a
fundamental breach under CIGS 19080 and Law on Commerce 2005 is that: a breach
cannot be treated as under CISG 1980 in case the breaching party did not
foresee and a reasonable person of the same kind in the same circumstances
would not have foreseen such a result. Law on Commerce 2005 does not stipulate
factor (iii) as mentioned herein but requires that (1) a breach is made and (2)
damage resulted from such breach causes other party failed to achieve its
purpose of contract conclusion to constitute a fundamental breach. The
aggrieved party accordingly has a right to impose remedies such as temporary
suspension of performance, suspension of performance or contract cancellation.
The consequence factor of fundamental breach
in Law on Commerce 2005 is similar to CIGS 1980. In case the purchaser is
aggrieved party, what he/she is entitled to expect under the contract is right
to receive the goods, to own the goods and to sell to other parties to earn
profits or manufacture products or other ways he/she can make a profit. In case
the seller is aggrieved party, what he/she is entitled to expect under the
contract is right to receive payments, which is profits he/she may earn. The
purpose of contract conclusion as provided in Law on Commerce 2005 is same as
what the purchaser and seller are entitled to expect under the contract as
stipulated in CISG 1980.
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