Under the context of increasingly complex international economic and trade relations, the normal international trade order is increasingly being challenged, and the risks and disputes in contract performance are also increasing. In international trade, when a party commits a serious breach of contract, the United Nations Convention on Contracts for the International Sale of Goods (CISG, hereinafter the “Convention”) provides a unique remedial mechanismfor the injured party—avoidance of the contract. This mechanism is functionally similar to the termination of the contract under the Civil Code of the People’s Republic of China(hereinafter the “Civil Code”). This article aims to clarify the key issues and considerations in applying the Convention’s avoidance rule within the Chinese legal context, through a comparative analysis of its legal consequences.
Although the term in Chinese “无效” is commonly translated as “invalidity”, it is important to note that the concept of “avoidance” under the CISG carries a distinct legal meaning. According to Article 4 of the CISG, the Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. Issues concerning the validity of the contract or any of its provisions fall outside the scope of the CISG.
Article 81 of the CISG stipulates that once a contract is declared avoided, the parties are released from their primary contractual obligations, namely the seller’s duty to deliver the goods and the buyer’s duty to pay the price. However, the same article makes clear that avoidance does not affect any claim for damages that may be due under the contract or under other provisions of the Convention. In other words, avoidance of the contract does not preclude the aggrieved party from seeking compensation for losses resulting from the breach.
A parallel rule exists in Chinese law. Article 566 of the Civil Code of the People’s Republic of China provides that upon termination of a contract, obligations that have not yet been performed shall cease, and obligations already performed may be restored to their original state, or subject to other remedial measures, with the right to claim damages retained. Where termination arises from a breach of contract, the non-breaching party is also entitled to pursue liability for breach. This reflects a shared legal principle between the CISG and Chinese domestic law: namely, that the end of a contractual relationship does not negate the right to restitution or compensation, and that the avoidance of a contract under the CISG is functionally comparable to the termination of a contract under Chinese law. This interpretation has been endorsed in Chinese judicial practice, including in the Shanghai Pudong New Area People’s Court’s 2020 white paper on commercial adjudication involving foreign-related and foreign-invested enterprises (Case No. (2020) Hu 0115 Min Chu 42206).
More broadly, the legal effects of avoidance under the CISG encompass three interrelated functions: (1) termination of the contractual obligations; (2) restitution of benefits conferred, and (3) continued liability for breach of contract. This design prevents unjust enrichment upon termination and ensures that the breaching party remains accountable for the consequences of its non-performance. In this regard, the avoidance mechanism under the CISG reflects a conceptual alignment with the structure and rationale of contract-related regulations under Chinese law.
It is particularly important to emphasize that avoidance under the CISG is predicated on the occurrence of a fundamental breach. Article 25 of the CISG imposes a stringent standard: a breach is considered fundamental only if it results in such detriment to the other party as substantially to deprive them of what they are entitled to expect under the contract, and such detriment was foreseeable to the breaching party at the time of the contract’s conclusion (or would have been foreseeable to a reasonable person of the same kind under the same circumstances). Specifically, the notion of “entitled expectations” must be objectively inferred from the express or implied terms of the contract and serves as the benchmark for evaluating the breach. The concept of “substantial deprivation” refers to the actual impairment of such expectations and is the standard by which the severity and consequences of the breach are assessed.
This approach is exemplified by Guiding Case No. 107, issued by the Supreme People’s Court of China in 2019. In that case, the court engaged in a systematic analysis of whether the seller’s conduct constituted a fundamental breach under the CISG. Although the goods delivered did not meet the contractual specification, the remaining six quality indicators conformed to the contract, and the goods retained their industrial utility. Moreover, the buyer was able to resell the goods at a price not lower than the prevailing market rate, indicating that the goods remained commercially viable. Drawing on foreign jurisprudence, the court observed that where the buyer can still use or resell the goods without unreasonable inconvenience and does not suffer substantial detriment, the breach, despite a deviation in quality, typically does not meet the threshold of a fundamental breach. On this basis, the court held that although the seller had breached the contract, the breach was not fundamental. Consequently, the buyer was not entitled to declare theavoidance of contract, and the legal consequences under Article 81 of the CISG did not apply.
This case highlights the high threshold for avoidance of contract under the CISG and underscores the Convention’s careful balancing of transactional certainty and the protection of the aggrieved party’s legitimate interests in the context of international sales.
This case indicates that when resolving disputes under international sales contracts governed by the Convention, the parties should carefully evaluate the consequences of the breaching party’s behavior. Where the breach fundamentally deprives the aggrieved party of what it was entitled to expect under the contract, invoking the remedy of avoidance in a timely and substantiated manner is essential to safeguarding its legal interests. At the same time, the aggrieved party must take proactive steps within a reasonable period—such as assessing the condition of the goods and arranging for return, resale, or interim storage—to prevent escalation loss and minimize potential adverse consequences.
In light of the evolving global trade landscape and the superimposition of unilateral tariff barriers imposed by the United States, the risk of non-performance in international contracts has increased. The contract avoidance mechanism provided under the CISG, when applied in conjunction with China’s domestic rules on contract termination, provided legal basis for cross-border trade disputes. Enterprises should take into account their own business needs and flexibly apply these provisions in foreign trade contracts to protect their legitimate rights and commercial interests.
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