Substitute Delivery and Repair in case of Non-Conforming Goods under the United Nations Convention on Contracts for the International Sale of Goods

Under Article 30 of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), a seller has the obligation to deliver goods, hand over any documents relating to them, and transfer the property in the goods as required by the sales contract and the CISG. The duties required by the CISG encompass common obligations in sales described under Article 71 to Article 88 CISG, as well as obligations according to usages or practices between the parties under Article 9 CISG.^[1]

The seller’s duty to deliver goods is further governed under Article 35 CISG on standards and conformity of the goods. Article 35(1) CISG governs that the seller must deliver goods with the quantity, quality, description, and manner of packaging required by the contract. The goods must also comply with the standards expressly or impliedly agreed upon by the parties, as well as standards affecting the use of the goods, such as public law regulations, industry codes, technical, ethical, manufacturing or producing the goods, and relevant considerations pertaining to health, safety and the environment.^[2] In ascertaining such express or implied standards, Articles 8 and 9 CISG shall be used to interpret and determine the content of the parties’ agreement.^[3] The goods that are defective, different from the contract’s requirements (aliud), improperly packaged, or deficient in quantity are generally deemed as non-conforming goods.^[4]Several exceptions to this rule are governed under Article 35(2) CISG, where goods would still conform to the contract if they:

1. are fit for the purposes for which goods of the same description would ordinarily be used;
2. are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely on or it was unreasonable for him to rely on the seller’s skill and judgment;
3. possess the qualities of goods which the seller has held out to the buyer as a sample or model;
4. are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods.

The exceptions under Article 35(2) CISG above also exempt the seller from taking responsibility for any lack of conformity of the goods if the buyer knew or could not have been unaware of such lack of conformity when the contract was concluded.

Two Forms of Remedies Under Article 46 CISG – Substitute Delivery and Repair

Under Articles 46(2) and (3) CISG, buyers may require the seller to remedy the lack of conformity through reparation of the goods, or delivery of substitute goods if the lack of conformity constitutes a fundamental breach of the contract. Requests for reparation or substitution must be made in conjunction with a notice within time limitation pursuant to Article 39 CISG or a reasonable time thereafter. The buyer must also grant a reasonable period for the seller to repair or deliver substitute goods. Only if such period has elapsed with the seller’s refusal or non-performance, the buyer can avoid the contract under Article 49 CISG.^[5] After substitution or repair, the buyer must still comply with examination and notice requirements under Articles 38, 39, and 43 CISG (specifically for third party rights or claims under Articles 41 and 42 CISG).^[6] If the lack of conformity persists even after the sellers’ repair or substitute delivery, the remedies under Article 45 CISG are available once again for the buyer, including repair and substitute delivery.^[7]

On the side note, although the Secretariat’s Commentary on the 1978 Draft of the CISG and experts^[8] have expresslyopined that Article 46(2) CISG should not apply in cases of third-party rights or claims (Article 41 CISG) and third-party rights or claims based on industrial or intellectual property (Article 42 CISG), the CISG Advisory Council Opinion suggested otherwise.^[9] The Advisory Council commented that where appropriate, a practical interpretation and understanding of Articles 46(2) and (3) CISG favour their application in respect of Articles 41 and 42 CISG. After all, both articles regarding third-party rights or claims are often intertwined with issues of non-conforming goods.^[10]

Notice of Lack of Conformity under Article 39 CISG as a Prerequisite to Substitute Delivery and Repair

Pursuant to Article 39(1) CISG, the buyer must notify and specify the nature of such lack of conformity to the seller within a reasonable time after the buyer has discovered or ought to have discovered it upon examination under Article 38 CISG. The purpose of this Article is to allow the seller to collect and/or preserve evidence relating to the non-conformity, as well as to give the seller the necessary information to determine how the parties should react, i.e.,examining the goods and/or curing the lack of conformity by repair or substitute delivery of the non-conforming goods.^[11] Accordingly, a proper notice must sufficiently specify the lack of conformity to give the seller such necessary information. Meanwhile, the interpretation of ‘reasonable time’ to notify the seller is determined on a case-by-case basis as their circumstances differ, namely the nature of the goods,^[12] the nature of the defects, the buyer’s plans for the goods, the parties’ situations, and relevant market’s usages.^[13] With regards to Article 46(2) CISG, a longer period of time should be allowed as it is often difficult for the buyer to choose a form of suitable remedy.^[14]

In any event, the notification must be given at the latest within two years after the goods are handed over, unless this is inconsistent with the guarantee period under the sales contract according to Article 39(2) CISG. The sales contract between the parties must prevail over Article 39 CISG as it is subject to the parties’ power to derogate from or vary the effect of the convention’s provisions under Article 6 CISG. Without a specific guarantee period, the buyer will otherwise lose the right to rely on the non-conformity if it fails to give such notification within the two-year absolute cutoff or ‘outer time limits’.^[15] It will instead be restricted to other available remedies, such as claims for damages, price reduction, and avoidance of the contract.^[16] An exception towards Articles 38 and 39 CISG exists under Article 40 CISG, where the seller cannot rely on such articles if it did not disclose the facts of the lack of conformity which it knew or could not have been unaware of to the buyer.

Substitute Delivery of Goods Under Article 46(2) CISG

If the non-conformity constitutes a fundamental breach of contract, the buyer may require delivery of substitute goods under Article 46(2) CISG. The substitute delivery requires three circumstances to be met: (1) non-conforming goods,  (2) the non-conformity amounts to a fundamental breach of contract, and (3) a timely request for substitute delivery by the buyer.^[17] Under Article 25 CISG, a breach is fundamental if it results in the other party’s detriment as substantially depriving them of what is entitled to be expected 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. In relation to Article 46 CISG, a fundamental breach exists if: (a) the goods’ defect is not fully remedied within a reasonable period, (b) the seller refuses to conduct a repair, or (c) the seller fails to act upon the lack of conformity.^[18]

In this vein, the CISG Advisory Council opines that a fundamental breach does not exist if the delivered goods can still be used as intended and if it is unreasonable for the buyer to refuse the repair.^[19]  Furthermore, leading court decisions held that a non-conformity breach concerning the goods’ quality is not fundamental if the buyer can still use or resell the goods with reasonable effort or convenience, even with a rebate.^[20] Likewise, lack of conformity does not amount to fundamental breach if the defects are not major and easily repairable, or at least where the seller conducts speedy repair without inconveniencing the buyer.^[21] As was the case in SCAF Sociedad de Construçoes Aquino & Filho Lda. v. Fundicio Benito 2000, S.L., where the Court of Appeal of Barcelona declared that there was no breach of contract as the seller had complied with Articles 46(2) and 46(3) CISG by acknowledging the goods’ defects and offering to replace them free of charge.^[22] Another option is to resort to contract avoidance due to a fundamental breach of contract by the seller. However, this solution should be available only as a last resort (ultima ratio).^[23]

The seller has to bear the costs of substitute delivery and the buyer will usually be entitled to claim the transport costs to the place of destination as damages. Furthermore, the seller must reimburse the buyer’s detriments that are caused by the first delivery’s defects if they cannot be remedied through a substitute delivery.^[24] This was evident in the South Tyrolian Windows Case, where the Court of Appeal of Hamm held that the seller was supposed to pay for the exchange costs of the non-conforming ISO window-panes originally borne by the buyer.^[25] With regards to the place of performance, it is viewed that the place for substitution or repair is better located at the goods’ location in accordance with the contract for cost efficiency and sustainability reasons. Where such a location is indecisive, the CISG Advisory Council stated that it should be at the buyer’s place of business. However, Prof. Huber and Prof. Mullis suggested that it is more convincing for the original place of delivery to be the place of substitution.^[26]

On the other hand, the buyer must preserve and make restitution of the non-conforming goods or parts first delivered to the seller in order to invoke its right to request substitute goods pursuant to Article 82(1) CISG.^[27] The restituted goods must be in the condition when the buyer received them, unless the impossibility is: (a) not caused by the buyer’s act or omission, (b) due to the examination under Article 38 CISG, and (c) the goods have been sold, consumed, or transformed in a normal course of business or use before the buyer had or ought to have discovered the lack of conformity. In this regard, the seller must take back the goods or parts and bear the costs of restitution.^[28] However, the buyer is not bound to restitute the benefits deriving from the substituted non-conforming goods or parts first delivered nor account for any betterment caused by the delivery of substitute goods, or repair of the goods by delivery of substitute parts.^[29]

In case of delivery of a defective specific item, the buyer may only request for substitution if the sale involves an item that is economically equivalent to a replacement item which satisfies the buyer’s interest.^[30] Non-conformity should also be distinguished from partial non-delivery, where remedies are only available for the missing part of the goods and not the entirety of the delivered goods.^[31]

Repair of Non-conforming Goods Under Article 46(3) CISG

Pursuant to Article 46(3) CISG, the buyer may require the seller to repair the non-conforming goods unless such repair is unreasonable. A request for repair must also be made either in conjunction with the notice under Article 39 CISG or within a reasonable time thereafter.^[32] In determining whether a repair is unreasonable, the CISG Advisory Council opined that certain circumstances must be considered, such as: (a) whether the buyer is better placed to arrange for repair of the goods, (b) whether the seller offers to advance the costs for repair by the buyer or a third party, and (c) whether repair imposes costs on the seller that are disproportionate to the actual or prospective loss of or benefit to the buyer.^[33] The standards for reasonableness to request for a repair are generally decided on a case-per-case basis, but higher costs for repair than substitute delivery is a strong indication of unreasonableness under this Article.^[34] The seller’s repair request would also be unreasonable if buyers could easily repair the goods themselves, and if the trust between the parties has been destroyed, for example due to the seller’s deceit or previous failure to remedy the non-conforming goods.^[35]

As the cost for repair must be borne by the seller, it may be more reasonable and economically suitable if the repair is carried out at the place where the goods are presently located.^[36] In contrast to Article 46(2) CISG on substitute delivery, the non-conformity does not have to amount to a fundamental breach in order for the buyer to be able to rightfully request a repair under Article 46(3) CISG.^[37]

The Seller’s Initiative to Remedy the Non-conforming Goods

The seller may initiate remedy of the non-conforming goods at his own expense under Article 48 CISG. As it has to bear the costs and risk of failure of non-performance, the seller may choose between substitute delivery or repair of goods if both measures are adequate and equally suited to remedy the non-conformity.^[38] The seller may voluntarily deliver conforming goods without unreasonable delay, which causes the buyer’s right to require performance to be purposeless.^[39] In this regard, the buyer may fix a period of time for the delivery or repair, or instead immediately choose other remedies such as damages or price reduction.^[40] If the seller offers a repair within a reasonable time and the buyer rejects the offer without an adequate reason, the buyer cannot assert claims upon the seller’s failure to repair as long as he continues such rejection under Article 80 CISG.^[41]

Exceptions and Limitations Under the CISG

Even so, there are several exceptions and limitations to the buyer’s right for remedies under Articles 46(2) and 46(3) CISG, which are:

1. The seller’s performance to remedy the lack of conformity may only be required if the buyer has not resorted to inconsistent remedies under Article 46(1) CISG, namely avoidance of contract and price reduction under Article 50 CISG.^[42]
2. Pursuant to Article 28 CISG, substitute delivery is also limited by the availability of such remedy under local laws, since courts are not bound to order a substitution unless they would do so under their own domestic laws.  Courts in jurisdictions that restrict the availability of substitution may refuse to order such remedy and instead only award damages to the buyer.^[43] However, Article 28 CISG does not govern the buyer’s right to require substitution under Article 46(2) CISG, as it will only give privileges to the seller whose buyers have no rights under Articles 46(2) and 46(3) CISG based on their jurisdictions.^[44]
3. The buyer’s right to require substitute delivery is excluded if it is deemed disproportionate. The standards of proportionality itself are decided by the costs of substitution, the parties’ interests in the substitution, the nature and substitutability of the goods, as well as the seller’s position to substitute the goods.^[45]

Conclusion

Articles 46(2) and 46(3) CISG highlight two forms of remedy for non-conforming goods by the seller. After delivery, the buyer must examine the goods and give notice of non-conforming goods to the seller within a reasonable period of time. The seller may then repair or deliver substitute goods to remedy the lack of conformity. Should the seller fail to do so within a reasonable or agreed time, the buyer may avoid the contract under Article 51(2) CISG. Whereas a demand for substitute goods’ delivery by the buyer requires a fundamental breach of the contract, a request for repair does not include such a high threshold. Despite this, the two articles base their applications upon similar provisions in the Convention, such as the standards for non-conformity under Article 35 CISG and the time limits for notice of non-conformity under Article 39 CISG.