Fundamental breach under the us law,vietnam law and the cisg

TRƯỜNG ĐẠI HỌC LUẬT THÀNH PHỐ HỒ CHÍ MINHKHOA CÁC CHƯƠNG TRÌNH ĐÀO TẠO CHẤT LƯỢNG CAO

FUNDAMENTAL BREACH UNDER THE US LAW,VIETNAM LAW AND THE CISG

Bộ môn: Law of Contract Giảng viên: Th.S Trần Thanh Tâm

3 Tạ Nguyễn Duy Lâm 2153401020121 4 Nguyễn Hoàng Trúc Linh 2153401020131 5 Trần Ngọc Khánh Linh 2153401020141

Thành phố Hồ Chí Minh, ngày 13 tháng 10 năm 2023

1.A definition of fundamental breach in US, Vietnam and CISG 1.1 In Vietnamese Law

Article 3(13) of Law on Commerce 2005 presents that fundamental breach means breach of contract by one party causing loss to the other party to the extent that such other party is not able to achieve its objective of entering into the contract 1

1.2 In US Law

The US law doesn’t stipulate obviously and directly the definition of fundamental breach, but Restatement (Second) of Contracts 1981 refers to the term “material breach” It is similar to the term “fundamental breach” However, it is used more commonly than the term “fundamental breach” in US law

A “material breach” which is defined by Westlaw from the provisions of Article 241 of Restatement (Second) of Contracts is a breach that is serious enough to justify the other party in abandoning the contract A “material breach” is one that substantially defeats the purpose of the contract, or relates to an essential element of the contract, and deprives the injured party of a benefit that he or she reasonably expected.

1.3 In CISG

Article 25 of CISG 1980 regulates that 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 2

1.4 Similarities

These definitions of fundamental breach are based on a breach of a contract and the significant and serious impact of the consequences of the conduct breach by one party against what the parties expected to achieve from the

Võ Sỹ Mạnh (2015) Vi Phạm Cơ Bản Hợp Đồng Theo Công Ước Viên Năm 1980 Về Hợp Đồng Mua Bán HàngHóa Quốc Tế Và Định Hướng Hoàn Thiện Các Quy Định Có Liên Quan Của Pháp Luật Việt Nam RetrievedOctober 8, 2023,

https://amilawfirm.com/wp-content/uploads/2023/08/1R.-Luận-án-Vi-phạm-hợp-đồng-theo-Công-ước-Viên-1980.pdf.

1.5 Differences

The first criterion is the basis for determining the level of serious impact on the expected benefits from the contract It is different depending on the legal regulations of each country or international For example, Vietnam law determines the level of the damage in relation to the purpose of entering into the contract The US law bases on an essential element of the contract which is stipulated in Article 241 of Restatement (Second) of Contracts The CISG is based on substantial prejudice and results in a substantial deprivation of what the aggrieved party is entitled to expect from the contract unless the breaching party could not have foreseen it and a reasonable person would not have foreseen consequences if they were in a position and similar circumstances The second criterion is that the breaching party and a reasonable person of the same kind in the same circumstances would not have foreseen such a result The CISG is more advanced than Vietnam law and the US law when it takes into account both the interests of the person suffering the damage and the person causing the damage because it considers objective factors that make it impossible for them to predict that damage will be caused 4

Bùi Thị Bích Sơn (2011) Tuyên bố hủy hợp đồng và hậu quả pháp lý của việc hủy hợp đồng mua bán hàng hóaquốc tế theo Công ước Viên 1980 và Luật thương mại 2005 Graduate dissertation Ho Chi Minh City University ofLaw, 17.

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2.Elements of fundamental breach in US, Vietnam and CISG and caselaws

2.1 In Vietnamese law

There is no requirement that fundamental breach must contain the specific terms Through the definition of fundamental breach in Vietnam law, we conclude that fundamental breach must contain two following terms: One party causes loss to the other party to the extent that such other party is not able to achieve its objective of entering into the contract.

The other party fails to achieve its objective of entering into the contract Case5:

Regarding contract disputes credit and contracts rent warehouse.

Bank P lent money to Company N under the medium-long-term credit contract dated November 18, 2015 and the attached Debt Acceptance Agreements as follows: Loan amount: 50,000,000,000 VND Loan term: 120 months (Detailed loan term according to debt agreement) Essence: According to each debt agreement Overdue interest rate: equal to 150% of the interest rate during the overdue debt transfer period Loan purpose: Supplement investment capital to build rental houses Company N provides collateral for loans under the Credit Contract As of June 2016, Company N has not fulfilled its obligations under the medium-long term credit contract Bank P has repeatedly urged and reminded the debt, but Company N still does not fulfill its debt payment obligations to Bank P, leading to a violation of payment obligations according to Article 4 of the medium-long-term credit contract Violation of consent in the signed credit contract When disbursed from Bank P, Company N uses the loan to start investing in building a factory according to the installed project During this process, this work affected the rainy weather, so the project was slow to complete, and at the same time, the price of many construction materials increased, so construction costs were increased to complete to ensure contingency calculations.

Because of the lack of capital to complete the project, Company N has difficulty producing finished factory products and creating rental sources Company N requested Bank P to continue disbursement to help Company N complete this rental factory project to put it into business, however, Bank P did not agree to this request Faced with the fact that the factory has been completed and is looking for customers to rent, the real estate market in the area is on a positive upward trend, so Company N hopes to soon find a source of income from factory rental above to repay the loan to Bank P Company N

Judgment No: 12/2018/KDTM-PT in Binh Duong province court Date: March 6, 2018

requests to continue implementing the contract, the original loan amount of 50,000,000,000 VND has not yet been paid at the present time, this amount will be paid after the end of the contract Loan term (120 months from November 23, 2015).

From the above judgment, we can see that there was a fundamental breach of contract through the following factors:

There was damage to Bank P when Company N had not yet fulfilled its payment obligations to the Bank, leading to a breach of payment obligations, affecting Bank P.

Failure to fulfill payment obligations not only causes damage to the Bank but also affects the purpose of entering into a contract between Bank P and Company N Company N cannot supplement capital for construction investment factory as planned and Bank P failed to achieve its profitable lending goals and revenue and profit goals, even affecting its finances.

2.2 In US law

Article 241 of Restatement (Second) of Contracts 1981 provides for circumstances significant in determining whether a failure is material In determining whether a failure to render or to offer performance is material, the following circumstances are significant:

a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;

b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;

c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;

d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;

e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing Case6:

Fact: The plaintiff is A&P Excavating and Materials Company (hereinafter

referred to as "A&P"), a wood manufacturing company that signed a contract with Mr Geiger on August 22, 2014 In it, Mr Geiger granted A&P logging rights on properties owned by him in Rogersville, Tennessee In addition, the contract also stipulates A&P's obligation to comply with the best standards and implement necessary forest conservation measures according to the 6 Based on A&P Excavating and Materials, LLC v Geiger case

standards of the Tennessee Department of Forest Protection and Management On December 2, 2016, A&P had the opportunity to claim that Mr Geiger committed a concurrent violation by allowing another individual to participate in logging in the same area as A&P This work greatly reduced the amount of timber that A&P was able to harvest, and A&P offered Mr Geiger compensation equivalent to $600,000.

On March 5, 2016, Geiger filed a counterclaim in which he claimed that A&P violated the concurrent study Specifically, A&P was unable to complete the task of managing and preserving forests in his property area A&P itself has committed acts such as not cleaning the mining area after completion of mining but moving to another area as well as moving and adding new mining machines to the mining area without inform Mr Geiger.

Decision: Court of First Instance: The Court of First Instance held that A&P's

conduct in failing to comply with the best standards and implement necessary forest conservation measures according to the standards of the Tennessee Department of Forest Protection and Management violated the law serious breach of contract Therefore, Mr Geiger has complete grounds to stop performing the contract and let another party participate in the exploitation Court of Appeal: First of all, the Court of Appeal needs to review the wording of the terms in the contract The Court of Appeal held that the provision was clearly stated and would be the basis for review.

Next, the Court of Appeals considers the grounds to determine whether one party has materially breached the contract or not.

The Court of Appeal thereby reaffirmed that A&P's failure to comply with the criteria was a material breach of contract Specifically, A&P's failure to comply with the standards was contrary to the defendant's instructions

Explanation: A&P deprived Mr Geiger of the benefit of insuring that the

logging operation proceeded in an orderly fashion and did not cause damage to the Property or Big Creek, for which Mr Geiger could have been liable Similarly, it would be difficult to compensate Mr Geiger for any such damage, and based on the history of communications between the parties, it appears unlikely that A&P would have cured its failure under the Contract So that, A&P’s behavior constituted material breach of contract.

2.3 In CISG

“Fundamental breach of contract” is a legal regime stipulated in Article 25 of the CISG However, the CISG does not provide a specific explanation to determine what fundamental breach must contain From the provision of Article 25, it shows that fundamental breach must contain the following terms:

a) A breach of a contract The existence of a breach of a contract is the primary element of a fundamental breach under the CISG, thus without breach Article 25 is not applicable 7

b) A breach that causes the detriment that substantially deprives the other party of what he was entitled to expect under the contract.

c) The detriment could have been foreseen by the defaulting party, and by a reasonable person of the same kind under the same circumstances of the breaching party 8

Delchi v Rotorex is considered a good example of using the criterion of percentage of damaged goods when determining a fundamental breach of contract In January 1988, Rotorex agreed to sell 10,800 air compressors to Delchi for use in room air conditioners Before signing the contract, Rotorex sent Delchi a compressor model with technical details about performance However, while the second shipment was on its way to Delchi, Delchi discovered that a large number of compressors from the first shipment were of a quality that did not conform to the samples and accompanying specifications Specifically, Rotorex discovered that up to 93% of delivered air conditioner compressors had weak cooling ability and consumed more power than the samples and technical details accompanying the samples The Federal Court of Appeals upheld the judgment of the New York Court and held that the seller had fundamentally breached the contract because the cooling capacity and power consumption of the air conditioner were important factors in determining the price product quality value.9

Case10:

Facts: In January 1988, Rotorex Company agreed to sell 10,800 air

compressors to Delchi Company for use in room air conditioners Before signing the contract, Rotorex sent Delchi a compressor model with technical details about performance However, while the second shipment was on its way to Delchi, Delchi discovered that a large number of compressors from the first shipment were of a quality that did not conform to the samples and accompanying specifications Specifically, Rotorex discovered that up to 93% of delivered air conditioner compressors had weak cooling ability and consumed more power than the sample products and technical details attached to the samples.

4 Robert Koch, The Concept of Fundamental Breach of Contract under the United Nations Convention onContracts for the International Sale of Goods (CISG), REVIEW OF THE CONVENTION ON CONTRACTS FORTHE INTERNATIONAL SALE OF GOODS (CISG), 1998, KLUWER LAW INTERNATIONAL 177, 261 (1999).8

Ana Paula S C Rizzo de Barros, Definition of Fundamental Breach under CISG’s Art 25 and Analysis of RecentCase Law, page 16, 17.

Thanh Thanh, “Fundamental breach under CISG", Viet Nam lawyer journal, 18th January 202110 Based on Delchi v Rotorex [266]

Decision: The Federal Court of Appeal held that the rate of 93% of the goods

being of a quality that did not conform to the contract provisions in relation to the total contract value was a very significant injury and that such breach of contract was considered as fundamental breach

Elements constitute fundamental breach in Based on Delchi v Rotorex [266] case:

Rotorex delivered air-conditioners which were not proper for the requirements of the samples This is a violation of contractual obligations

93% of delivered air conditioner compressors had weak cooling ability and consumed more power than the sample products and technical details attached to the samples 93% was the substantial deprivation and led to Delhi losing what they expected from the contract.

The air conditioner is the subject of the contract, so it is clearly agreed upon by the parties There is no reason the consequences of a violation cannot be foreseen.

2.4 Similarities

One party causes loss to the other party

The detriment resulting from the breach must extensively hamper the legitimate contractual expectations of the aggrieved party.

2.5 Differences

There is no foreseeability in Vietnam law and US law whereas a breach that causes a detriment that substantially deprives the other party of what he was entitled to expect under the contract is not a fundamental breach if the detriment could not have been foreseen by the defaulting party, and by a reasonable person of the same kind under the same circumstances of the breaching party under the CISG’s interpretative rules.

The US law refers to the likelihood that the party failing to perform or to offer to perform will cure his failure and the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing while Vietnam law and the CISG doesn’t point out that Under US law, in determining whether a failure to render or to offer performance is material, the innocent party's benefit which they want from the contract must be reasonably expected which was shown through Article 241(a) of Restatement (Second) of Contracts 1981 Meanwhile, Vietnam law and CISG only seem to stipulate that what is harmed is what the innocent party aims or expects to achieve when entering into the contract, without mentioning the reasonableness of that aim or expectation

3.Conditions to be excluded from liability for fundamental breach3.1 In Vietnamese Law

According to Article 294 (1) of Law on Commerce 2005 there are following conditions:

a) Upon occurrence of any event which the parties have agreed will give rise to immunity from liability;

b) Upon occurrence of an event of force majeure;

c) Upon a breach by one party which was due to the fault of the other party; d) Upon a breach by one party which was due to implementation of a

decision of a competent State administrative body of which the parties could not have known at the time.

3.2 In US Law

Exclusion of liability clauses;

Other principles stipulate under the law

3.3 In CISG

Failure was due to an impediment beyond the party’s control;

Failure by a third person whom he has engaged to perform the whole or a part of the contract;

The party who fails to perform must give notice in a reasonable time to the other party of the impediment and its effect on his ability to perform.

3.4 Similarities

3 different law systems illustrate hardship and force majeure.

3.5 Differences

In Vietnam law and the US law, there are provisions to be excluded from liability that the parties have agreed will give rise to immunity from liability and a breach by one party which was due to the fault of the other party while the CISG does not provide that.

The CISG makes a request that the party who fails to perform must give notice in a reasonable time to the other party whereas vietnam law and the US law don’t regulate an obligation of notice to the aggrieved party.

The CISG is more advanced than vietnam law and the US law when there is protection for the party breaching the contract because of the third person’s fault; however, it doesn’t refer to the fault of the other party which is a condition of exclusion liability