International Business Law
International purchase-sale [3]
Liability for breaching a contract
Mgr. Tomáš Gongol, Ph.D.
International Business Law PEM/NPPMO

Breach of contract
Can be any failure to fulfill obligations of one party. Not only the contractual obligations but
also the ones arising from Vienna Convention or from practice and usual habits between parties
•if seller breach the contract
oDeliver goods
oDeliver goods without any defect
oHand over documents
oTransfer ownership rights
•
•if buyer breach the contract
oTake over goods
oPay the purchase price
•

DEFECTS
The seller has to deliver goods without defects – in practise it is the most common reason for
breach the contract
Two types of defects:
Factual defects
§Quality, manufacturing and quantity
§Factual defect is also goods which is not properly packed
Legal defects
§Transferring of ownership rights which do not follow the law of third party (liens, copyright,
industrial property…)

Defects sorting

Tady ten graf jsem vymenila za SmartArt. Prijde mi praktictejsi pracovat s nim, kdyz jakoby drzi u
sebe a nejsou to samostatne celky (kruhy, textova pole a sipky)

Process of factual defect notifying
Art. 36: The seller is liable in accordance with the contract and this Convention for any lack of
conformity which exists at the time when the risk passes to the buyer, even though the lack of
conformity becomes apparent only after that time.
The moment of risk transition (art. 36)
Seller is responsible for any damage which has been done to goods to the moment when risk passes to
the buyer even if the damage is obvious after that time.
•
Answer to the following questions are important for buyer:
1.Until when the defect should be discovered
2.Until when the defect should be notified
3.What content and form should the notification have

1. Defect discovery
Checking the goods (art. 38)
•The buyer has to check the goods or make someone to do so as soon as possible – depending on the
circumstances
oGenerally: the more sophisticated goods, the more time the checking takes


•If the contract include the transport of goods, then the checking the goods can be postponed till
it’s delivered to the destination
oIt’s situation when the goods is handed over, e.g. in Hamburg (the place of fulfillment) and it’s
transported by cargo ship to the buyer’s factory (the destination)
Art. 38: The buyer must examine the goods, or cause them to be examined, within as short a period
as is practicable in the circumstances.

Example (checking the goods by another buyer)
•A German seller and Belgian buyer. Object – water polo T-shirts.
•T-shirts were sold to another buyer after 6 weeks. In the meantime there were not checked.
•The other buyer noticed some defects.
•The court rejected the reasoning that T-shirts weren’t checked because they could be damaged
during the control which was provided by the Belgian buyer.
•Decision: The Belgian buyer was obliged to randomly check the goods and was not entitled to let
the duty of checking the goods to the other buyer.

2. Notifying a defect
Termination of buyer’s rights (art. 39/1)
1.OBVIOUS defects (can be found at regular checking)
oEsp.: amount, packaging, missing parts
oThe buyer has to notify a defect in due time after the defect was discovered.
§
§Otherwise the buyer’s rights are terminated (damage compensation right, right to change or repair
of goods, withdraw from the contract or right to reduce the purchase price)
§Problem: “reasonable time” (in practice it’s better to set a fixed date in the contract)
§
(1) The buyer loses the right to rely on a lack of conformity of the goods if he does not give
notice to the seller specifying the nature of the lack of conformity within a reasonable time after
he has discovered it or ought to have discovered it.

2. Notifying a defect
Termination of buyer’s rights (art. 39/2)
2. HIDDEN defects
•The buyer has to notify the defect in two years from the day when the goods were handed over to
the buyer.
§
§Unless this period is in accordance with
 the contractual guarantee period
(the guarantee can be agreed also by contract,
there is nothing about that in
Vienna Convention)
™
(2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does
not give the seller notice thereof at the latest within a period of two years from the date on
which the goods were actually handed over to the buyer, unless this time limit is inconsistent with
a contractual period of guarantee.

Example:
•Czech seller and German buyer, the object: fish
•The German seller rejected to pay, because fish were infected
•Court stated that the buyer didn’t check the goods soon enough according to art. 39 (reasonable
time)
oThe court rejected the reasoning of the buyer that it was a hidden defect. The buyer was supposed
to arrange the inspection of those fish as soon as it was possible.
o
o The court also stated that notifying a defect 4 weeks after it was discovered is insufficient.
Sufficient time would be in 8 days (see art. 39)

Form of notifying
•The buyer is obliged to notify the specification of any defects if they are obvious
•Each defect must be described
•
•In case of hidden defects it is enough to notify them
•The form of the notification is not regulated
oSo informal agreement are valid which is basically general regulation known for any purchase
contract
o
o
o
o
o
o

Moderation (Art. 40)
If defects are not notified then buyer’s rights won’t be terminated in case that:
oIf the seller knew or could have known and didn’t tell the buyer

Example:
oWine contained 7 % of water and then was destroyed by state authorities at buyer’s expenses.
oAccourding the court the buyer didn’t lose the damage compensation right even thought the buyer
didn’t test the wine if it was water or not. The seller had to be aware of the defects.
oIt is based on different definition of % water in wine by different state regulation
Art. 40: The seller is not entitled to rely on the provisions of articles 38 and 39 if the lack of
conformity relates to facts of which he knew or could not have been unaware and which he did not
disclose to the buyer.

Zmírnění – tímhle si nejsem moc jista, nemohla jsem najit zadny oficialni preklad na zmirneni
pouzivany v pravnickych kruzich

Moderation (art.44)
The buyer didn’t send any defect notification for excusable reasons.
„Excusable reasons“:
oNatural disasters,
ostrikes etc.
oDiseases
Art 44: Notwithstanding the provisions of paragraph (1) of article 39 and paragraph (1) of article
43, the buyer may reduce the price in accordance with article 50 or claim damages, except for loss
of profit, if he has a reasonable excuse for his failure to give the required notice.

Remedies for breach of contract
•If the seller fails to perform any of his obligations under the contract or CISG, the buyer may:
oExercise CISG rights (art. 46-52)
oClaim damage compensation (art.74-77)

•If the buyer fails to perform any of his obligations under the contract or this Convention, the
seller may:
•exercise the rights provided in articles 62 to 65
•claim damages as provided in articles 74 to 77

The key for choice of claims (art. 25)
Art. 25: A breach of contract committed by one of the parties is fundamental if it results in such
detriment (harm) 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.
Need to determine whether the breach of the contract is fundamental (significant) or not
(insignificant)
o
oCORE: Certain claims (e.g. withdraw from a contract), are basicaly connected only with significant
breaching a contract
o
Fundamental breach of a contract
o
•I.e. existence of FORESEEABLE SIGNIFICANT DAMAGES
™
Recommendation for practice: determine directly in the contract what is fundamental breach of
contract and what is not

Performance in natura (46/1)
Art. 46/1 The buyer may require performance by the seller of his obligations unless the buyer has
resorted to a remedy which is inconsistent with this requirement
oBuyer can require originally promised performance if:
§If nothing was delivered –> set a deadline additionally
§If the delivery is defected (lack of conformity)–> require delivery of substitute goods
§Only in case that the defect is significant !
§Only if defects were noticed and claimed on time and properly
•If the delivery is defected – require to remedy the lack
§Also in case that the defect is insignificant (but also significant) breach
§
•There are strict requirements, because it’s a problematic issue in international relations (due to
transport distances)

Avoidance of contract (Art. 49)
1.Immediately, if the seller breached the contract in a significant way by failure any of own
duties
§E.g. goods are not delivered (fixed contracts)
§It’s better to specify in the contract: e.g. late delivery, quantity deviation greater than 5%
etc.

2. After expiring of additional delivery period for the event of failure to deliver goods
•The seller is obliged to return the purchase price with interest (counted from the time when the
purchase was made)
•
(1) The buyer may declare the contract avoided:
(a) if the failure by the seller to perform any of his obligations under the contract or this
Convention amounts to a fundamental breach of contract; or
(b) in case of non-delivery, if the seller does not deliver the goods within the additional period
of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will
not deliver within the period so fixed

Example:
•A German buyer and an Italian seller.
The object is footwear.
•The buyer notified defects by telephone 19 days after the deliver.
•The buyer didn’t pay the purchase price and avoided the contract
•
•The seller sued the German buyer and the court decide that it was a significant breach of the
contract, therefore the buyer had right to avoid.
oThe buyer also met the condition about notifying the defect, according to Vienna Convention
(notification within a reasonable time)

Purchase price reduction (art. 50)
If goods is not in accordance with the contract, then the buyer may reduce the purchase price
oOnly in range which is corresponding to the ration between the price with the goods had in the
moment of delivery and the price which the goods would have in that moment if it was without
defects.
•An one-sided action
•Possible to use also if the price was already paid – the right to a refund
•Problem: “the reduction size”
Art. 50: If the goods do not conform with the contract and whether or not the price has already
been paid, the buyer may reduce the price in the same proportion as the value that the goods
actually delivered had at the time of the delivery bears to the value that conforming goods would
have had at that time. However, if the seller remedies any failure to perform his obligations in
accordance with article 37 or article 48 or if the buyer refuses to accept performance by the
seller in accordance with those articles, the buyer may not reduce the price.

Right to other performance of a contract (art. 37 and 48) „seller’s initiative“
If the seller delivered the goods before the delivery period
oRemedy: up to date for delivery the seller can deliver missing parts or quantity of goods so the
seller can change the defected goods or repair goods which was already delivered

If the seller would like to to the same after the date of delivery
oRemedy: the seller van remove defects additionally in case that….
§It is without undue delay and
§It’s no excessive harm for the buyer
§The notification about it is considered as a request – if the buyer don’t respond then it will
presumed that it means an approval

Example:
•A Dutch seller and a German buyer. The object is fabrics.
•The buyer notified defects 4 days after delivery - insufficient  quantity and goods which was not
in accordance with the contract.
•The seller wanted to use the right to other performance of the contract (art. 48). The buyer
refused and also refused to pay the purchase price and wanted to partially withdraw from the
contract
•The Dutch seller sued the German buyer for not paying the purchase price.

Example:
•The court decided in favor of the seller
oThe buyer didn’t specify amount of missing goods therefore couldn’t withdraw from the contract
(art. 51/1)
oIt wasn’t significant breach of the contract, among other things, because the seller wanted to fix
the problem immediately.
oThe buyer refused the offer from the seller to other performance (art. 48)
oThe right to withdraw has priority over the right to other performance only in cases of
significant breach of contract!
oThe buyer didn’t have right to ask for price reduction, because he turned down “other performance”
according to art. 48

Seller’s claims if the contract is breached by the buyer
1.Require in natura performance
2.
oThe seller may set additional deadline for the buyer to meet all obligations
§Esp. in case that the buyer didn’t pay the purchase price or didn’t take the delivery
2.Withdraw from the contract
oIf the seller breached the contract in a significant way
oOr failed to perform the contract even within an additional time period
o
3.Right to specify the goods
oIt should be specified by the buyer (textiles, grains, leathers, etc.)

Right to damages
•It’s sufficient to claim the right to damages if one party shows that:
1.The other party breached the contract, Vienna convention, practise, etc.
2.The damage occurred
3.There is a causal relation between breaching the contract and damages
•The fault is not se detected (tzv. Strict liability)
•
•Exempt is also possible if there is a circumstance excluding responsibility
–
oThe obstacle is independent to parties' wills and it couldn’t be predicted (so called vis major).
When the obstacle is removed then it has to be performed.
§Wars, revolutions, pirate attacks
§Natural disasters
§Power interventions – boycotts, embargoes…
•
•Compensation range:
oReal damage (reducing the asset of the damaged party = loss)
oLost profit (not increasing the asset of the damaged party)
§E.g. loss caused by interrupted production due to delivery of defected device or absence of profit
due to inability to re-sale of goods

Jako objektivni odpovednost jsem nasla preklad strict liability, ale nejsem si jim uplne jista…
Taky predpokladam, ze vis major se nijak nepreklada…

Example D.Novak [1]
•Czech seller: DAVID NOVAK – BRICKS PRODUCER and German buyer: DEUTSCHER KOSMETIK GmbH, made a
contract. The subject was 120 pallets of bricks. The goods was supposed to delivered to a seller’s
warehouse in Znojmo (application of EXW clause).The goods was properly packed and ready to go
•
•In the day of delivery one of buyer’s authorised employee briefly checked pallets and didn’t
discover any defect. The goods was delivered to the buyer’s settlement in Dortmund where it was
stocked for 3 weeks

•After this time the buyer decided to build a new wing of own factory for production of soap by
using the bricks. During construction the buyer found out that every sixth pallet contains more
than 10% of bricks which (due to internal defects) break into piecies and are not usable. The
bricks were used normally)
•

Tyhle priklady jsem rozdelila na dva slidy. Zdalo se mi, ze textu je tam zbytecne moc na jedne
strane a neni uplne citelny. I me, ktera se to nemusim ucit, to trochu odrazovalo.. Otevrit
strankou plnou odshora dolu textem

Example D.Novak [2]
•The buyer immediately interrupted the construction and counted the exact overall number of
defected bricks. Then the buyer instantly notified the seller. The expertise study which was made
on the buyer’s order was found that the defect is caused by insufficient burning of bricks.
•The contract contained: All financial and nonfinancial disputes shall be settled by a general
court in Switzerland, on neutral ground
•The buyer asked for delivery of 30 pallets of bricks as a damage compensation for loss of profits
caused by delays
•
•The seller refused this claim with reasoning they are unjustified and didn’t supply any other
pallets
•
•Therefore the buyer sued the seller in the Czech republic. The seller objected that the dispute is
invalid and was supposed to be solved in Switzerland (because of the clause).

Questions and answers
•Q: What is the legal regime of the contract?
A: Vienna Convetion
•Q: Consider validity of arbitation clause
A: Valid
•Q: Review this situation and decide if the claims were legitimate.
A: Important! The buyer checked the deliver of bricks and didn’t see any defects, that meanss it’s
a hidden one which can be notified in 2 years.
  The buyer did claim it in the right time. It’s significant breach of contract -> other
performance. The claim has to be reasonable – 30 pallets is too much. Possible to claim  only real
damages and lost profits
•Q: Presume the authorised employee noticed defects: bricks are cracked in the every second pallet,
but it was caused by using low-quality clay which was delivered from the German partner. How would
the legal classification of the case change?
A: Significantly. It would not longer be a matter of Vienna Convention, but Contract for Work.

Example
ABC + Murphy [1]
Company ABC Compact is settled in Padua, Italy and the other company is Murphy, Ltd. Which was
established in Great Britain and now operating in the Czech republic. Those two parties concluded a
sample contract.
  According to that contract ABC should do a research and other marketing  activity in the
territory of Italy for Murphy, Ltd. And also ABC should take different industrial goods on own
account and behalf. Details about the goods was regulated in an attachment of the sample contract.
  Specific sub-contracts were supposed to be concluded in an easier way (via email containing type
and amount of goods) because most of provisions regarding purchase and sale was already in the
sample contract.
The goods had been delivered regularly for approx. 3 years.  All complains were solved and the
seller never objected anything. There is no notarial deed.

In the sample contract was also included:
o”Any disputes arising from this contract shall be settled by consolidational process in the
International Court of Arbitration in Paris.”
o”This contracts as well as its clauses and performance of it is followed by Czech law
o”Parties declare that in case of breaching the contract there is a lump sum for damages in the
amount 10times more than breached performance”
o”The buyer is obliged to check the goods immediately, not later than in three working days after
stocking in in the warehouse in Padova, Italy. Quantitative defects shall be noticed and summarised
in the presence of a notary. This notification should be sent by recorded delivery to the seller in
five days after the checking. Other defects – which are not possible to notice at regular check –
can be noticed within one year from the date of delivery.
o“Any deviation from this written contract is possible in written form only

Tenhle obrat: ve výši desetinásobku dotčeného porušovaného plnění” si nejsem jista jestli jsem
prelozila spravne.. Je to treti odrazka.

After about one year the seller’s situation began to change. The seller had changed the supplier of
material of the production and the new supplier obviously wasn’t very good at technology of the
production.
Three years later the cooperation between parties hit a snag. There was following situation: The
buyer took over one shipment and kept it in the warehouse. After approx. two weeks they checked the
amount and found out it doesn’t match with the contract. So they lodged a complaint and sent it by
recorder delivery by themselves. And also reduced the purchase price.
At the same time other buyer collectively began to complain about seller’s goods. Most common
reasoning was that the act of wearing out came too fast. According to expert’s opinion which it was
caused by using inappropriate technology during production of material for goods. The buyer also
claimed the same cause and demanded a compensation.

The seller replied following:
”If the claim is a quantitative nature, then it’s inconsistent with contract, because it didn’t
follow certain method and deadlines. The contract can be change only in writing.”
“If the claim is a qualitative nature then it’s interesting the situation is about material which
was already known as not perfect. However given the one-year period the complaint is unjustified
and all claims of its customer has to be dealt on their own.”
“If the claim is about the clause conserning lump sum, then it’s invalid from the perspective of
the Czech law, because it’s too vague and can’t be specified.”
™
At the same time the seller stated that withdraw from the sample contract
 in all parts with one month’s notice, due to untrustworthiness of the buyer.

Questions and answers
Q: What is the legal regime of those contracts?
  A: Sample contract. Generally it’s the same as settlement of distributor, but the choice of Czech
law takes precedence. The individual purchase contracts: Vienna Convention
Q: What if the buyer wants to sue the seller directly, before a Czech court. Is it even possible?
A: The collision of judicial and conciliation procedure is not solved anyhow (only by arbitration).
Therefore it is possible to sue them before a court in the Czech republic.
Q: Consider the seller’s objection concerning the claim about quantitative defects. How could the
buyer respond?
A: Given that the seller didn’t object anything against the complaints in the past, it means they
accepted them, so they lost the possibility to demand  any written changes in the contract (see
art. 29/2). According to that the party lost the opportunity to demand any changes in written
contract if the party breach the contract itself.

Q: Consider the seller’s objection concerning the quality of goods. How could the buyer respond?
A: Quality defects are bright example of hidden defects. The deadline for claims is reduced by
parties from two year to one year. However the seller can’t rely on the deadline if he knew about
the fact that material used for the goods wasn’t in a good quality (=caused defects) and didn’t
inform the buyer. In this case the buyer can lay a claim.
Q: Presume the dispute is settled before a court or Arbitration Court in Czech republic. Consider
the law regime of the clause on a lump sum compensation.
A: Apply of Czech law: Most likely it’s not a limitation of damages, but a contractual penalty
Q: Could the seller withdraw? Consider it, keeping Vienna Convention in mind.
A: No, the seller couldn’t just withdraw from the contract. Vienna Convention provides two types of
withdrawing, a) performing the contract, b) termination of a contract based on a unilateral act –
withdrawal from a contract that is fixed to certain conditions