What Are Fundamental Contract Breaches in Law on Commerce
2005 and CISG 1980?
Fundamental breach is a type 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.
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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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