The Buyer’s Free Choice Between Termination and Avoidance of a Sales Contract

Author:Kalev Saare, Karin Sein, Mari-Ann Simovart

1. Introduction - 2. Comparison of material grounds for termination and for avoidance - 2.1. The possibility of simultaneous presence of grounds for termination and for avoidance - 2.2. Fundamental breach and fundamental mistake - 2.3. Knowledge of circumstances of breach or of mistake, and allocation of risk between parties - 3. Execution of termination and avoidance - 3.1. Form and content of... (see full summary)


Kalev Saare

Docent of Civil Law, University of Tartu

Karin Sein

Doctor iuris, Lecturer of Private International Law, University of Tartu

Mari-Ann Simovart

LL.M., Lecturer of Civil Law, University of Tartu

The Buyer's Free Choice Between Termination and Avoidance of a Sales Contract

1. Introduction

National private law systems of European Union member states have different approaches with respect to freely allowing or restricting the concurrence of avoidance for mistake and termination of contract. For instance in Germany1 , upon sale of a defective thing, the priority of applying a contractual legal remedy applies, and termination is either excluded or significantly restricted, even though a case of mistake per se would actually exist. The Austrian and Swiss civil codes, however, allow free concurrence of such claims; in Spain and Italy, juridical practice has recognised the right of one party - the buyer - to choose the most suitable remedy2. There are no provisions in the Estonian Law of Obligations Act3 (LOA) or the General Part of the Civil Code Act4 (GPCCA) that would prevent the entitled party from using the most suitable remedy if both termination and avoidance are simultaneously available. Conflicting viewpoints have, however, been expressed on this matter in Estonian legal discourse5.

Differing positions with respect to this question have also been assumed in the uniform law instruments (UNIDROIT Principles of International Commercial Contracts6 (PICC), Draft Common Frame of Reference7 (DCFR), and Vienna Convention on Contracts for the International Sale of Goods8 (CISG)). Pursuant to Article 3.7 of the PICC, for instance, a party is not entitled to avoid a contract on grounds of mistake if the circumstances on which that party relies afford, or could have afforded, a remedy for non-performance; i.e., the primacy of a contractual remedy applies. Pursuant to DCFR II.-7:216, however, a person is entitled to freely choose the most suitable remedy. With regard to the CISG, European Union member states have applied different interpretations regarding the relations and primacy of the right of termination of contract in relation to the right of avoidance of a contract governed by national law9. The above suggests that the prerequisites for and consequences of termination and avoidance of contracts require a comparative approach and clarification, as do situations of fact wherein the compositions of both termination and avoidance may be simultaneously fulfilled.

This article analyses the institutions of termination and avoidance of contract through the example of a sales contract, because, in practice, the choice between these two institutions causes the most problems in the context of a sales contract. Because of the limited scope of the article, it discusses only the legal remedies belonging to the buyer. The task of this research project does not include the specific types of sales contract, such as sale on approval, sale with right of repurchase, or the differences related to consumer sales - except by reference to a single characteristic example. As an example for grounds for avoidance, this article examines only mistake as one of the most commonplace grounds for avoidance of sales contract in practice, other possible grounds for avoidance are not looked at.

The article aims to determine whether in Estonian private law it would be necessary to set forth certain priorities or restrictions regarding the choice between these two legal remedies, or can justification be found for the DCFR rule that a person may choose freely between these legal remedies? The article therefore discusses the more significant problems concerning the possible priority between termination and avoidance, or the allowing of free choice between them. The study's hypothesis argues that establishing the priority of one institution over another with no exceptions is unjustified, and that in specific cases possible restrictions for preferring one over another can proceed only from general principles of civil law, primarily from the principle of good faith. With regard to the Estonian legal order, we proceed from the presumption that there cannot be an a priori right or wrong solution regarding the relationship between avoidance and termination. This does not, however, exclude the possibility that in other legal orders the same question could not be governed differently, depending on the peculiarity of the given order in question10.

2. Comparison of material grounds for termination and for avoidance
2.1. The possibility of simultaneous presence of grounds for termination and for avoidance

Concurrence of avoidance of sales contract and contractual claims (primarily termination, but in single cases also avoidance for mistake and the claim for amendment of contract pursuant to the clausula rebus sic stantibus doctrine11 ) emerges in the event that the circumstances of fact make up both legally relevant cases. This is primarily possible where a circumstance related to any characteristics of a sold thing that the buyer or the buyer and seller together assumed in error also becomes a condition of the sales contract and, in the event the given circumstance differs from reality, entails breach of contract by the seller and, thus, liability of the seller12. This constitutes a situation in which a flaw in the object sold, deemed to be fundamental breach, also constitutes a relevant mistake for the purposes of GPCCA § 92 and DCFR II.-7:201 - i.e., erroneous assumption of existing facts, whether caused by the other party, recognised by the other party, or commonly assumed if, the actual circumstances having been known, the transaction would not have been concluded in the first place or would have been concluded under materially different conditions, and the mistaken party does not bear the risk of mistake. An example could be employed from the official comments to the PICC13 wherein A, a farmer, who finds a rusty cup on the land sells it to B, an art dealer, for 10,000 euros. The high price is based on the assumption of both parties that the cup is made of silver, as other silver objects had previously been found on A's land. It subsequently emerges that the object in question is an ordinary iron cup worth only 1000 euros. Accordingly, B refuses to accept the cup and to pay the agreed price, on grounds that it does not comply with the terms of the contract. B also avoids the contract on grounds of mistake as to the quality of the cup.

The following differences can be found between the elements of the compositions of termination of sales contract and avoidance of sales contract for mistake: 1) the right of termination emerges if the problem lies in the performance of a concluded, valid contract (LOA § 101 (1) 4), § 116 (1), DCFR III.-3:501) whereas the right of avoidance for mistake emerges if the problem is related to the conclusion of the contract14 (pursuant to GPCCA § 92 (3) and DCFR II.-7:201); 2) termination presupposes a fundamental breach of contract (pursuant to LOA § 116 (2) and § 223, and DCFR III.-3:502 (1)), with the presence of a fundamentally erroneous assumption of actual circumstances upon entry into a transaction being required as grounds for mistake (i.e., in the presence of a correct assumption, the transaction would not have been entered into at all or would have been entered into under different conditions (pursuant to GPCCA § 92 (1) and (2), as well as DCFR II.-7:201 (1) (a)); and 3) if one of the grounds for identifying a material breach of contract, prerequisite for termination, pursuant to Estonian law, constitutes failure to eliminate initial (also immaterial15 ) non-performance by the additional term (LOA § 114 and § 116 (2) 5), and § 223 (1)), avoidance for mistake is not related to the possibility of eliminating the non-conformity, although the other party is able to eliminate the grounds for avoidance of contract by recognising the contract as understood by the mistaken party (GPCCA § 93, the same in DCFR II.-7:203). These differences, and also similarities of compositions, are discussed next, in sections 2.2-2.3 of this paper.

2.2. Fundamental breach and fundamental mistake

Application of termination as a contractual remedy generally presupposes fundamental non-performance of a contractual obligation (see LOA § 116 (1), the Civil Code of the Federal Republic of Germany16 (BGB) § 323 (1) and (5), the Civil Code of Holland17 (BW)'s Article 6:265 (1), CISG Article 49, PICC Article 7.3.1 (1), and DCFR III.-3:502 (1)). As an exception we can cite English law, under which the right of termination depends not on the severity of the breach but on the type of contractual obligation breached 18.

With regard to sales contracts, a breach of contract can be related to delay of performance of obligation and to unsatisfactory performance. The Estonian Law of Obligations Act, unlike the BGB, CISG, and PICC, enables turning a non-fundamental unsatisfactory performance into a fundamental breach of contract through an additional term for elimination of flaws given to the obligor (LOA § 116 (2) 5), and with regard to sales contracts this mostly constitutes the claim for repair of a thing, LOA § 22319 ). However, pursuant to DCFR III.-3:503, the institution of fixing an additional period of time is primarily related to delay in performance...

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