The Weaving Machines Case: Fundamental Breach and Nachfrist Procedures

Tribunal	CIETAC (China International Economic and Trade Arbitration Commission)
Date of Award	1994-09-05
Docket No.	CISG/1994/10
Parties	Chinese Buyer (Claimant) v. Swiss Seller (Respondent)
Goods/Sector	Weaving machines, tools and accessories
Key Issues	Fundamental breach; Nachfrist; Avoidance; Damages; Foreseeability of damages; Mitigation of loss; Interest
CISG Articles	Art. 25, Art. 47, Art. 49, Art. 74, Art. 77, Art. 84

Facts

In 1994, a Chinese buyer entered into a sales contract with a swiss seller for the purchase of weaving machines, tools and accessories. The contract established specific terms regarding delivery, pricing, and quality requirements.

Disputes arose between the parties regarding performance of the contract. The aggrieved party claimed that the other party's failure to fulfill its contractual obligations caused significant commercial losses and disrupted downstream business operations.

The aggrieved party submitted a written arbitration application to the China International Economic and Trade Arbitration Commission (CIETAC) on 4 January 1994, invoking the arbitration clause in the sales contract. The claimant sought damages for the losses suffered as a result of the breach, including compensation for the commercial losses incurred.

Legal Issues

1. Did the breach constitute a "fundamental breach" under CISG Art. 25?

CISG Article 25 defines a fundamental breach as one that results in such detriment to the other party as substantially to deprive it of what it is entitled to expect under the contract. The key test is whether the non-breaching party's contractual expectations were substantially defeated. The question was whether the nature and extent of the breach deprived the aggrieved party of its essential contractual expectations. [1]

2. Was the buyer entitled to avoid the contract?

Under CISG Article 49(1)(a), the buyer may declare the contract avoided if the other party's failure to perform amounts to a fundamental breach. Article 47 further allows the buyer to fix an additional period (Nachfrist) for performance, and avoidance may follow if the seller fails to perform within that period. [2]

3. How should damages be calculated?

CISG Article 74 establishes the general measure of damages: the sum equal to the loss suffered as a consequence of the breach, subject to the foreseeability limitation. [3]

4. Were the claimed losses foreseeable at the time of contracting?

Under the foreseeability limitation of Article 74, damages may not exceed the loss that the breaching party foresaw or ought to have foreseen at the time of contracting as a possible consequence of the breach. The tribunal assessed whether the specific losses claimed fell within this foreseeability cap. [4]

5. Did the aggrieved party fulfill its duty to mitigate losses?

CISG Article 77 requires the party relying on the breach to take reasonable measures to mitigate the loss. Failure to do so may result in a reduction of damages by the amount that could have been mitigated. The tribunal examined whether the claimant took appropriate steps to minimize its losses. [5]

6. Was the aggrieved party entitled to interest on sums in arrears?

CISG Article 78 provides that if a party fails to pay the price or any other sum in arrears, the other party is entitled to interest, without prejudice to any claim for damages. The tribunal considered the applicable interest rate and period. [6]

Tribunal Reasoning

The tribunal determined that the Swiss seller's failure to perform its obligations under the contract constituted a fundamental breach within the meaning of CISG Article 25. The breach was not a minor or technical shortfall — it went to the core of the contractual bargain and substantially deprived the Chinese buyer of its legitimate commercial expectations.

Having established fundamental breach, the tribunal confirmed the buyer's right to avoid the contract under Article 49(1)(a). The tribunal noted that the buyer had also set an additional period for performance under Article 47, which the seller failed to meet, further supporting the right to avoidance. The tribunal then turned to the assessment of damages.

The tribunal assessed the damages suffered by the buyer and awarded compensation consistent with Article 74, taking into account the foreseeability limitation and the evidence presented regarding the actual losses incurred. The tribunal also examined whether the buyer had fulfilled its duty to mitigate under Article 77, and adjusted the damages award accordingly.

Practical Takeaways for International Businesses

1. Define breach thresholds and performance deadlines with precision. CIETAC applies the Article 25 "fundamental breach" standard rigorously. In borderline cases, the outcome depends on how the contract defines essential expectations. Include explicit provisions that specify which failures constitute grounds for avoidance, and set clear deadlines with consequences for non-performance.

2. Document your mitigation efforts from the moment a breach occurs. CISG Article 77 requires the aggrieved party to take reasonable steps to mitigate loss. CIETAC tribunals scrutinize whether the claimant acted promptly and reasonably. Keep records of all substitute purchases, communications with alternative suppliers, and decisions made to limit damage. Failure to mitigate can significantly reduce your award.

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Footnotes

[1] CISG Art. 25 — fundamental breach. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[2] CISG Art. 47 — Nachfrist (additional period for performance). Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[3] CISG Art. 49 — buyer's right to avoid the contract. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[4] CISG Art. 74 — damages (general measure). Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[5] CISG Art. 77 — mitigation of loss. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[6] CISG Art. 84 — restitution obligations. Paraphrased from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). Full text available at uncitral.un.org.

[*] Case data sourced from the Pace-IICL CISG Database (iicl.law.pace.edu).

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This case insight is published by China Legal Hub (www.chinalegalhub.com) for informational purposes only and does not constitute legal advice.

Source: Pace-IICL CISG Database | CISG/1994/10

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