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CISG CASE PRESENTATION

Finland 12 April 2002 Turku Court of Appeal (Forestry equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/020412f5.html]

Primary source(s) of information for case presentation: Case text

Case Table of Contents


Case identification

DATE OF DECISION: 20020412 (12 April 2002)

JURISDICTION: Finland

TRIBUNAL: Turku Court of Appeal

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: Unavailable

CASE NAME: Finnish case citations do not generally identify parties to proceedings

CASE HISTORY: 1st instance District Court of Turku (97/1457) 7 January 2000 [affirmed in most particulars]

SELLER'S COUNTRY: Finland (defendant)

BUYER'S COUNTRY: Germany (plaintiff)

GOODS INVOLVED: Forestry equipment


Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(a)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 9 ; 35 ; 49(2)(b)(i) ; 74 ; 78 [Also cited: Articles 45 ; 92 ]

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention (issues excluded): Court stated that "CISG is not applicable in terms of evaluating the reasonableness of the contract or the interest rate because it has no article dealing with enhancing the reasonableness of the contract as does Finnish law, or articles to evaluate the interest rate except Article 78 when evaluating the conclusion of the contract, its fairness, possible mediation and the interest rate, Finnish law is applicable."];

9D1 [Parties bound by applicable usages and practices];

35A ; 35B [Conformity of the goods: quality, quantity and description required by contract; Requirements implied by law];

49B [Buyer's loss of right to declare avoidance after delivery];

74A [General rules for measuring damages];

78B [Interest on delay in receiving price or any other sum in arrears: rate of interest]

Descriptors: Scope of Convention ; Reasonableness ; Exculpatory clauses ; Usages and practices ; Conformity of goods ; Avoidance ; Damages ; Legal costs ; Set-off ; Interest

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Editorial remarks

EDITOR: Sanna Kuoppala

Excerpt from "The Application and Interpretation of the CISG in Finnish Case Law 1997-2005" (April 2009)

TURKU COURT OF APPEAL, S 97/324 (12 APRIL 2002)

8.1   Classification of the issues present
8.2   Background of the case
8.3   Procedural issue
8.4   CISG and warranty terms
        8.4.1   Applicable law
        8.4.2   Formation of the contract
        8.4.3   Interpretation of the warranty clause
                    8.4.3.1   Interpretation of the contract
                    8.4.3.2   Contents of the warranty
                    8.4.3.3   The extent of the warranty
                    8.4.3.4   The effect of the warranty clause
                    8.4.3.5   Notice under the warranty
                    8.4.3.6   Conciliation
        8.4.4   Conclusions
8.5   Decision on the material issues
        8.5.1   Damages
        8.5.2   Avoidance of the contract

[...]

8.1 Classification of the issues present

The case involved a sale of components to be attached to forestry equipment between a German Buyer (the plaintiff) and a Finnish Seller (the defendant). The questions in dispute included the relationship between a warranty term and the provisions of the CISG. See below for English translation of this case by Jarno Vanto. Another commentary of the case is available in Finnish by Soili Nystén-Haarala in Lakimies 4/2004.[478] The decision of the Court of Appeal affirmed the decision of the District Court of Tampere, 97/1457 (7 January 2000) with modifications.

8.2 Background of the case

The Buyer was a German company specializing in selling, designing and manufacturing of forestry equipment. The Seller was a Finnish company specializing in manufacturing forestry equipment. The Seller had sold various components, including spare parts for such components, to the Buyer to be attached to the Buyer's forestry vehicles. The price and delivery terms as well as the guarantee terms of the Seller had been provided to the Buyer in connection with each delivery.

The Buyer demanded that the Seller and the Seller's owner be ordered jointly and severally to pay to the Buyer damages because of the defective forestry equipment in the amount of 314,995.45 Deutsche Mark.[479] The Buyer also demanded the avoidance of the sale of a harvester head delivered on 17 October 1994 as well as the return of the sale price, the amount of 189,382.50 Finnish Mark.[480] In addition, the Buyer demanded that the Seller be ordered to pay damages for losses caused to the Buyer as a result of losing clients, servicing the machines sold and as a result of losing the opportunity to sell more forestry equipment in those regions where the lost clients operated, in the amount of 1,000,000 Deutsche Mark.[481]

The Buyer had consistently given notice to the Seller of the defects when they appeared and the Buyer had made efforts to cooperate with the Seller for the purpose of fixing the defects. In cases where the Seller had taken upon itself to act on the notice, the Seller had asserted willingness to apply its warranty terms according to which the Seller would give a new piece of equipment to replace the defective one. However, these spare parts had been as defective as the already faulty ones.

The Seller and the Seller's owner denied the Buyer's claim on the grounds that the possible defects in the equipment had resulted from design or installation mistakes on the Buyer's side, the use and adjustment of the equipment against the guidelines of the manual, and neglect of service. In addition, the Seller denied liability based on its warranty and the limitations of liability contained in this warranty as well as on the grounds that the Buyer had not specifically given notice to the Seller, as defined in the Seller's warranty terms, in writing and within six months after having detected the defect.

8.3 Procedural issue

In relation to alleged bias of witnesses, the District Court held that the witnesses called by the Buyer, GA and IK, could be heard as witnesses. These witnesses were shareholders of the Buyer. According to the Code of Judicial Procedure -- Chapter 17, Section. 18 -- anyone but a party to the case may be heard as a witness. A conventional way of interpreting this statute had been that what constitutes a "party" includes those who, according to law or their status, have the right to represent the party at the time of the hearing. Consequently, membership on the board of a Finnish company constitutes bias, but mere ownership of shares does not. Referring to the conclusions drawn by the Preparatory Committee on the Finnish Law of Corporations, the Court stated that the GmbH status of the Buyer, was that of a limited company regulated under the under the law of limited liability companies (GmbH Gesetz 1892). Such a corporation is represented by one or more executive officers, not by the shareholders. The shareholders use their decision-making powers at the company meetings. Therefore, a shareholder cannot assume the meaning of a "party"; consequently, a shareholder could be heard as a witness in a case dealing with a company.

8.4 CISG and warranty terms

8.4.1 Applicable law

The District Court stated that because Finland (since 1 January 1989) and Germany (since 1 January 1991) were both CISG Contracting States, the contractual relationship in dispute fell within the scope of application of the Convention, with the exception of Part II of the Convention (Formation of the Contract).[482] The Court also stated that in relation to evaluating the reasonableness of the contract or the interest rate, the CISG was not applicable. The reasoning for the statement was that the CISG did not have an article enhancing reasonableness of the contract and no other relevant articles relating to interest other than Article 78.[483] According to the Act on the Law Applicable to the Sale of Goods of International Character (26 June 1964/387, as amended by the Act 27 May 1988/468), in the absence of a choice of law, the sale shall be governed by the law of the State where the seller had his place of habitual residence when he received the order. The Court also referred to Section 6 of this law, according to which a provision of a foreign law that is manifestly incompatible with public policy ('ordre public') shall not be applied in Finland. Thus, the applicable law in relation to formation of the contract, reasonableness of the contract and the rate of interest was the Finnish law.

Referring to the reasoning of the District Court, the Court of Appeal stated that the law applicable to the contract was the CISG. The Court of Appeal, however, took a modified and detailed view in relation to the relationship between the warranty clause and the CISG than the District Court, which did not specifically discuss the issue. This is further discussed in Chapter 8.4.3 Interpretation of the warranty clause.

8.4.2 Formation of the contract

As stated above, the declaration made by the Nordic Countries under CISG Article 92 not to be bound by Part II of the Convention, i.e. Formation of the Contract, means that in relation to Part II of the Convention, Finland cannot be considered as a Contracting State as provided for in CISG Article 1(1)(a). To determine the applicable law in relation to the formation of the contract, the rules of private international law have to be applied. In the absence of specific choice of law in relation to the formation of the contract, the rules of private international law shall determine the applicable law. According to the Act on the Law Applicable to the Sale of Goods of International Character, Section 4, subsection 2, it should be first determined where the seller or his agent received the order and whether this particular State is where the buyer has his habitual residence or owns a business. The District Court held that in relation to the issues not covered by the CISG the applicable law was the Finnish Law.

The District Court held that, based on the long term business relationship and established practices between the parties, the warranty terms had become part of the contract. The deliveries between the parties were based on an order concerning a single delivery and a confirmation of that order. The basis for these orders was the price list presented to the Buyer annually and the terms of warranty attached to the list. The warranty terms were also often attached to the user manuals sent with the deliveries. The warranty terms had continuously been of the same content. The negotiating individuals had been well aware of the warranty terms. Also the changes in their content, such as extending the warranty period and the compensation of work done within the context of repair under warranty, had been negotiated many times over. The Buyer has admitted that the warranty terms had been negotiated many times.

According to the Finnish law on contracts, the parties to a sale of goods have an extensive freedom of contract and the Finnish law on sales concerning the liability for non-conformity of goods renders it subject to contractual freedom.[484] Between businesses, such as the Buyer and the Seller, this contractual freedom has been emphasized. Consequently, standard terms become part of the contract if they are contained in an accepted offer. The same rule applies also in Germany.

The District Court held that it was undeniable that the Seller had specifically demanded in the negotiations that the warranty terms become part of the contract. The Buyer had not shown that it had not accepted the warranty terms becoming a part of the contract. In connection with breakage of the equipment, the Buyer had made several warranty claims to the Seller and had not, in that context or another, given notice about the warranty clause or its content. Therefore, the terms of the warranty had become part of the delivery contracts between the Buyer and the Seller. This also had a binding effect on the Buyer in relation to the warranty. The Court of Appeal confirmed the reasoning of the District Court.

According to the Finnish law, standard terms can become part of the contract in several ways: the standard terms can be part of the actual agreement signed by the parties, there may be a reference to the standard terms in the signed contract, or the application of the standard terms may be based on the practices between the parties or usage known to a certain trade.[485] Consideration is given also to the contents of the terms, the nature of the terms and the parties to the contract. The other party must have a concrete opportunity to familiarise itself with the terms. On the other hand, if the other party is familiar with the terms, he cannot argue that the terms did not become part of the contract merely with the reference, because he did not have the actual possibility to go through them or that the content of the terms was not explained to him.[486]

8.4.3 Interpretation of the warranty clause

8.4.3.1 Interpretation of the contract

In negotiating the contract, the parties may come to an understanding that some of the issues that might create disagreement are not governed by the Convention or cannot be settled in conformity with the general principles on which the Convention is based. In order to avoid the uncertainty that the rules of private international law may create as to the applicable law, the parties may wish to agree on the applicable gap-filling law needed to resolve those problems but for some reason fail to do so expressly. Of course, prudent business operators would tackle these specific issues that create concern for conflict even prior to the conclusion of the contract expressly or the very least would take the time to settle the issue on applicable law expressly.

In this case, the parties had not specifically agreed upon the applicable law, but the CISG was applicable by way of the basic criterion of CISG Article 1(1)(a). However, even in cases where the parties have expressly agreed that the CISG is applicable, the so-called 'gap-filling' law is not always discussed and decided.[487] The parties had, however, specifically agreed on the distribution of liabity in relation to defects in the goods.

The primary source in determining the relationship between the contracting parties is the underlying contract itself. Article 6 embodies the principle of freedom of contract: "The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions."[488] The normal rules of construction of the contract apply to the question whether the parties have made a modification of the Convention. The modification does not need to be express. However, an implied modification has to be demonstrated by the parties' actual intentions. Most importantly, in determining the parties' actual intentions and the conditions that must be satisfied, regard must be had to the criteria in Article 8.[489] Article 8 provides:

Article 8

(1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.
(2) If the preceding paragraph in not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.
(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.

The basic approach in Article 8 is the subjective approach. However, in practice, most problems of interpretation will be governed by paragraph (2) which follows the objective approach as when where is a conflict it can be hard to determine what was the actual intent of the parties.[490] The second paragraph of Article 8 places the burden on the one who prepares a communication or drafts a contract to communicate it clearly to a reasonable person in the same position as the other party.[491] Paragraph (3) applies to the statements in a contract formulated by both parties. All the relevant circumstances are to be given due consideration in determining the intent of a party or the understanding a reasonable person would have had. Those circumstances include any practices and usages the parties are bound by.

Applicable practices and usages change in time and respond to new circumstances and needs. The Convention recognizes the flexibility of usages and practices. CISG Article 9 gives direct effect to commercial usages and practices of the parties. Article 9 provides:

Article 9

(1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.
(2) The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.

Not only are the parties bound by any usage which they have agreed on explicitly or any practice which they have established between themselves, but also by any usage of which the parties knew and which is internationally recognized. Any applicable practice or usage has the same effect as a contract.[492]

8.4.3.2 Contents of the warranty

In its warranty clause, the Seller had given a guarantee of operational quality with the maximum extent of six months from the delivery or 1,000 hours of operation. In addition, the warranty included the following terms:

   -    The Seller committed to replace the spare parts it has manufactured.
   -    The warranty did not apply to normal wear-and-tear parts and faults caused by wear and tear.
   -    The Seller limited its liability in a manner that work, travel, freight, lay day or other indirect expenses were not to be compensated.
   -    The warranty repairs were required to be made by the manufacturer or a repair person approved by the manufacture.

8.4.3.3 The extent of the warranty

The Buyer had alleged that the warranty clause had to be interpreted in a way that the terms relating to limitation of liability would assume a limited interpretation of only being applied to manufacture defects; thus, they would not concern design or structural defects. The warranty terms of the Seller stated:

"The seller will commit, in a manner stated in these terms, to repair defects either resulting from raw materials or manufacturing in the equipment delivered by the seller which have been acknowledged and accepted by the seller."

The Seller had stated that it had always interpreted the warranty terms in such a way that manufacturing included both the machine-tooling and the design. The Buyer had demanded and received a significant amount of compensation under the warranty from the Seller. In connection with these claims, the Buyer had not specified the defects that it was now calling design and construction defects. Consequently, in the Buyer's compensation claims, the Buyer had interpreted the contractual terms in a manner similar to that of the Seller. The words used in the warranty terms, namely "spare parts produced by the manufacturer" and "factory defects" supported the interpretation brought forward by the Seller.

As a conclusion, the District Court was of the opinion that the Seller's interpretation, the previous practice of the Buyer, and word-for-word interpretation of the warranty terms supported the interpretation that factory defects comprise both defects caused by machine tooling and design and, in connection with these, structural defects. The Court of Appeal confirmed the reasoning of the District Court.

8.4.3.4 The effect of the warranty clause

According to the Finnish contract law and the CISG, the parties are free to agree also on the content of the warranty and its effect on the liability for non-conformity. The content of the warranty clause and its binding effect on the Buyer resulted in circumstances that, where the Seller repaired the defect correctly, the Buyer had no claim for damages unless the damage resulted from or where the defect resulted from willfully or harshly negligent action on the Seller's side. However, the warranty clause did not exclude other forms of judicial protection, such as avoidance of the contract.

The District Court stated that the relationship between the right to repair and the right to declare the contract avoided was problematic. The goods under the contract at issue were sizable machines intended for heavy use and they wore out faster than usual. Therefore, the warranty terms were to be applied in a manner that placed the primary emphasis on the Seller's right to repair. If the Seller did not employ that right or it would cause the Buyer unreasonable nuisance or expenses, the Buyer alternatively had the right to avoid the contract based on fundamental breach.

The Court of Appeal accepted the reasoning of the District Court that the warranty terms had become part of the contract and that they should be interpreted in a way that, in addition to raw-material and manufacturing defects, the warranty included structure and design defects. As to the relationship between the warranty terms and the CISG, the Court of Appeal stated following:

According to Article 6 of the said Convention, the parties may exclude the application of this Convention, or derogate from or vary the effect of any of its provisions. The [Seller] and the [Buyer] had not agreed on such. On the other hand, the UN Sales Law (the CISG) does not contain a provision according to which a warranty clause included in the contract would exclude the possibility to refer to the legal remedies granted in law in case of lack of conformity of the goods. Thus the [Buyer] has an acceptable cause in law to claim damages from the [Seller] for alleged defects on ground of the UN Sales Law despite the warranty clause.

The [Buyer] had presented the claims of damages now at trial on ground of the UN Sales Law. the [Seller], on the other hand, has presented that all the claims relating to the alleged defects must be observed taking into account the agreement on the limitation of risk stated in the said warranty clause. As stated earlier, in this case the warranty clause does not exclude the possibility of damages for defects in the goods by virtue of the UN Sales Law. On the other hand, the claim presented by the [Buyer] based on the said law does not prevent the [Seller] from effectively appealing to the warranty clause that has become part of the contract in relation to the alleged defect that occurred during the warranty period. In relation to the burden of proof, the above mentioned means that the [Buyer] bears the burden of proving that there were defects in the goods delivered by the [Seller] that entitle, according to the UN Sales Law, the [Buyer] to damages. The [Seller], on the other hand, bears the burden of proving that the defects that occurred during the warranty period are not covered by the warranty clause.

In evaluating the claims, the District Court has based its decision on its own opinion as to the significance of the warranty clause on the [Seller]'s liability for defects. Thus the District Court has seen it essential whether the [Seller] has fulfilled its warranty obligations and whether it is also liable for the defects on other grounds. Referring to the above mentioned, in relation to the warranty clause and the UN Sales Law, and referring to the grounds for the [Buyer]'s claim, it is however essential, whether the [Buyer] proves that the said defects are of the nature meant in Article 35 and qualify the Buyer to receive damages under Article 45 from the [Seller], and whether the warranty clause has an effect, partly or in full, to limit the liability of the [Seller].

8.4.3.5 Notice under the warranty

The warranty terms contained a limitation period for warranty claims. According to it, a warranty claim would be processed only if notification was made in writing and delivered to the Seller in case of an occurrence. A warranty claim that would not reach the seller within one month after the date of the occurrence would be outdated. Furthermore, it was required that the damaged parts should be delivered to the manufacturer or its representative together with the claim.

It has been clarified during the evidentiary hearings that the Buyer had not conformed to these requirements when presenting claims, despite many requests by the Seller. The Buyer had not delivered to the Seller the broken parts in connection with the warranty claims before May 1995, when fifteen valve blocks had been delivered. Although the Buyer's actions were inconsistent with the requirements, the Buyer had been compensated in the amount of FM 425,575.00 for broken parts.

Consequently, because the Seller had to a large extent accepted the Buyer's actions, it had to be considered that the Seller could not plead to the limitation period in its warranty terms for its defence. Therefore, the Buyer was not bound by the limitation period but instead the Buyer had a duty laid down in the CISG, to notify the other party about the non-conformity as soon as possible. Additionally, the Buyer had the right to submit the warranty claim within a reasonable period of time. The Court of Appeal did not discuss this specific issue in detail.

As Soili Nystén-Haarala has pointed out in her commentary, it seems unreasonable that by giving extra service the Seller actually extended its liability for defects, even if the conclusion holds from the legal point of view.[493]In international trade, the observance of good faith is essential. Furthermore, the parties had a long business relationship and therefore it seems natural and incentive that both parties try to reach an amicable solution in case of problems.

8.4.3.6 Conciliation

The Buyer also alleged that the warranty terms had been severe and surprising.

The principle of freedom of contract is fairly strong in the commercial setting but a reference has to be made to the notion of fairness and reasonableness provided for in Section 36 of the Finnish Contracts Act.[494] In a case where a contractual term is unreasonable, conciliatory measures aim at rectifying the imbalance of the duties of the contractual parties. However, it is hard to provide circumstances where the term providing for the warranty clauses in question would be held unfair.

The District Court held, taking into consideration the content of both the Seller's and the Buyer's own contractual practices and the content of their warranty terms, the general international contractual jurisprudence, warranty terms and the negotiation between the Buyer and the Seller, that the Seller's warranty terms and the limitation of liability contained therein could not be regarded as either harsh or surprising from the point of view of the contracting parties.

The Court of Appeal confirmed the District Court's position. When considering unreasonableness at the time of the conclusion of the contract, one has to pay attention to the economic status of the parties, their actual and factual contractual freedom and their level of expertise. The Court Appeal stated further that both the Buyer and the Seller were companies manufacturing forestry equipment and that they in part also competed with one another in the area of export trade. In addition, they had a fairly long history of co-operation and the warranty had been the same all the time. The Buyer must have been in possession of reasonable expertise to evaluate the significance of the contractual terms. As a conclusion, the warranty terms had not been unreasonable, even though they had strongly limited the Seller's liability for non-conformities and thus, there was no need for conciliating the contractual terms.

One should also pay attention to the main issue whether conciliation is enforced in the CISG regimen at all. The CISG does not contain a specific provision on conciliation. However, recourse to the domestic law in this respect should be exercised with caution. The problematic is discussed in more detain in section 10.6.8.2. Conciliation in Turku Court of Appeal, S 04/1600 (24 May 2005).

8.4.4 Conclusions

In effect, the Court of Appeal therefore stated that even though the parties had agreed upon the warranty term and that they were part of the contract, the Buyer had a right to claim damages for the defects according to the CISG.

What did the parties actually intend when the warranty clause was included in the contract? The CISG itself gives guidance in relation to the interpretation of the contract in Article 8 and Article 9. However, these Articles were not discussed in the ruling. Nystén-Haarala has pointed out that an opting out from the CISG must be clear and unambiguous.[495] Also Professor Farnsworth stresses this: the drafters of a contract must give special attention as to the meaning of the words and phrases they use in order to protect special needs of their own.[496] The outcome of the case must have come as an unpleasant surprise for the Seller; by acting in accordance with good faith and by respecting the warranty terms even after their period of validity had run out the Seller had subjected itself to extended liability.

8.5 Decision on the material issues

8.5.1 Damages

Forestry machines in which the Buyer had installed equipment provided by the Seller, such as control ventilation, crane and harvester head, had had a lot of breakdowns. In particular, the equipment provided by the Seller had been subject to breakdowns.

As mentioned above, the District Court held that the limitation of liability clause contained in the warranty clause of the Seller had also been binding on the Buyer and further, the delivery contracts between the Buyer and the Seller with their warranty clauses could not be regarded as unreasonable or as necessitating conciliatory measures. Neither had the Buyer established that the Seller had not fulfilled its duties under the warranty nor that the Seller would be liable for the damages claimed by the Buyer on other grounds.

The Court of Appeal stated, on the other hand -- referring to the relationship between the warranty terms and the CISG -- that the most essential question was whether the alleged defects were of such nature as required by Article 35 that would justify the Buyer to claim damages under Article 45 and whether the warranty clause had any effect, partly or in full, on the claim on damages. After extensive evaluation of the witness heard and other evidence, confirming partly the reasoning of the District Court, the Court of Appeal accepted that the Seller was partly liable for breakage of the Buyer's clients machine (compensation amounting to 1,984.13 euros). In addition the Court of Appeal ordered the Seller to compensate the Buyer for broken valves in the amount of 27,548.70 euros. As the amount awarded to the Buyer comprised only a small part of the entire trial and claims presented, the Seller had a right to be awarded compensation for its legal costs in their entirety.

In relation to other claims, the Court of Appeal accepted the reasoning of the District Court. As to indirect loss on lost profit the Buyer failed to establish that it had the right to claim damages from the Seller.

8.5.2 Avoidance of the contract

The Buyer's claim for avoidance of the harvester package that the Seller had delivered to the Buyer on 17 October 1994 was also dismissed. This harvester package was installed to a vehicle and delivered to the Buyer's customer.

After the repair of the broken harvester, the Buyer's client had refused to receive it. According to Article 49(2)(b)(i), in cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so within a reasonable time after he knew or ought to have known of the breach. The repair had been finished on 25 January 1996. However, the request for avoidance had been presented in a written statement of the Buyer on 31 May 1999, meaning more than three years after the Buyer received the information that its client refused to accept the repaired harvester head. The District Court held that in commercial transaction such as the one at issue, a reasonable time for notice is most often very short, at most a few months. The extension of this period would require pressing circumstances indeed. The Court also analysed whether the Buyer had actually proven that the alleged defects were the Seller's responsibility. As a conclusion, the Court stated that the Buyer had not been able to present grounds for avoidance in the harvester head sale and/or any pressing reasons for justifying the extension of the time for the notification. Because the Buyer had not notified the Seller within a reasonable time, the Buyer had lost its alleged right to avoid the contract.

In relation to the reasonable time within which the Buyer should notify about the avoidance, a distinction should be made between reasonableness in notifying about the lack of conformity under Article 39 and in notifying about avoidance under Article 49(2)(b). Of course, in both situations the reasonableness of time must be evaluated taking into consideration all the relevant circumstances of the case such as the nature of goods. In addition, as discussed earlier in relation to Turku Court of Appeal, S 97/324 (12 November 1997), reasonable time ought to be kept separated from the Article 38 time frame, as soon as possible.[497]

On the other hand, all these provisions are related to one another. The examination of the goods after delivery is a prequisite for giving notice of defect as required by Article 39. The emphasis after this is on the fact the buyer loses the right to rely on lack of conformity of the goods if he does not give notice of the defects at the latest within a period of two yars from the date on which the goods were actually handed over to buyer, subject to Article 40, i.e. the seller's knowledge of the defects renders the time limit irrelevant.[498] Professor Will argues that the seller's knowledge of the third-party claim removes the time limits with respect to avoidance of the contract.[499] Although the exemption based on the seller's knowledge of the third party claim as provided for in Article 43(2) refers only to the requirement that the buyer notify the seller of the non-conformity (as contrasted with the decision to avoid the contract), it would be inconsistent to permit such a seller to invoke the limits on avoidance stated in Article 49(2). Professor Honnold sees that Professor Will's argument relates similarly to the Buyer's knowledge of non-conformity.[500] Professor Honnold sees that there is a difference between the nature of the remedies allowed to the Buyer, i.e. damages or the drastic measure of avoidance. In addition, Professor Honnold stresses that the Convention recognises the difference between the reasonable time to give notice of the defects and notice of the avoidance as Article 44 provides a buyer who has a reasonable excuse for failing to give "the notice of defect" the possibility to reduce the price or claim damages. This excuse provision does not permit the Buyer to give notice of avoidance and avoid the contract after a reasonable time has elapsed.[501]

Thus, from the theoretical point of view, the reasonable time for giving a notice and giving a notice of avoidance are different. However, from the literal point of view, both time frames start simultaneously, i.e. when the buyer discovered or ought to have discovered the breach.[502] Does this mean that the time frames are identical? Jari Korpinen has suggested that in fact the starting points for the time frames are not identical, rather in case of the notice of avoidance, the time starts to lapse only when the buyer becomes aware of the fact that the defect, i.e. non-conformity amounts to a fundamental breach of the contract.[503] However, he also acknowledges that from the seller's point of view, the reasonable time frame must be interpreted strictly as it is in the seller's interest to ensure that the executed contract holds.[504]

In this case, the notice of the avoidance was given at least more than three years after the Buyer became aware of the defect.[505] Unfortunately, the Court did not discuss the elapsed time after delivery nor the relevance of the Article 39 time limit. The Court did conclude that there was. however, no proof that the Seller knew or he ought to have known about the defects; thus there was no malice or gross negligence on the Seller's side. The defects in the harveter head were most probably due to non-compatibility between the head and the machine and possibly the lack of maintenance and the use of the equipment. Had there been malice or gross negligence on the Seller's side, would the Court have given relevance to the two-year time-limit set out in Article 39(2)?

[...]


FOOTNOTES

[...]

477. See however also Chapter 8.4.1 Applicable law and Chapter 8.4.3 Interpretation of the warranty clause, including reasoning of the Court of Appeal in relation to the applicable law.

478. Nystén-Haarala 2004, p. 727-738.

479. 161,054.62 euros (exchange rate 1 Deutsche Mark = 0,511292 euros)

480. 31,851.85 euros (exchange rate 1 Finnish Mark = 0.168188 euros)

481. 511,291.88 euros (exchange rate 1 Deutsche Mark = 0.511292 euros)

482. See further Chapter 2.2 Applicable law.

483. Similarly in Gerechtshof's (HOF) Arnhem, 94/305 (22 August 1995). The case involved a sale of live lambs. The buyer alleged that the penalty required by the penalty clause contained in the contract should be diminished in accordance with articles 7, 8(3), and 77 of the CISG. The penalty was inequitable, for it was not proportional to the loss incurred. The Court of Appeals held that neither article 8(3) concerning the interpretation of the declarations of the parties, nor article 77 relative to the obligation to mitigate losses resulting from the infraction of the contract, nor any other clause of the Convention can serve as a foundation for the reduction of the penalty amount. This question must therefore be settled according to the applicable law of the contract, in this case German law for which the reduction is not possible in commercial matters (§ 348, c. com. German).

484. Finnish Sale of Goods Act, Section 3, Freedom of Contract provides: The provisions of this Act are subject to the terms of the contract between the parties, to any practice which has been established between them and to any other usage which is to be considered binding on the parties.

485. Hemmo 2003, p.149-150.

486. Saarnilehto 2002, Saarnilehto 1996, Hemmo 2003, p. 153-156.

487. Ramberg 1998, p. 18.

488. Article 12 provides that the Contracting State may preserve its domestic rules that require writing in the formation or modification of the contract. (CISG Articles 11, 12, 29, 96).

489. Honnold 1999, p. 78, Schlechtriem in Schlechtriem & Schwenzer 2005, p. 88-89.

490. Honnold 1999, p. 117-118.

491. Honnold 1999, p. 118.

492. Honnold 1999, p. 131.

493. Nystén-Haarala 2004, p. 734. Similarly, in Bundesgerichtshof, VIII ZR 259/97 (25 November 1998) the German Court found that the seller could waive its rights not only expressly but also in an implied manner by negotiating as to the amount of damages over a period of 15 months, during which time the seller had not reserved the right to rely on Articles 38 and 39. The Court held that from the buyer's point of view, it could only be understood that the seller would not, at a later point in time, rely on Articles 38 and 39. Discussed also in footnote 277. See further Schmidt-Kessel in Schlechtriem 2005, p. 128.

494. Finnish Contracts Act (13.6.1929/228) Section 36 subsection 1 states: If a contract term is unfair or its application would lead to an unfair result, the term may be adjusted or set aside. In determining what is unfair, regard shall be had to the entire contents of the contract, the positions of the parties, the circumstances prevailing at and after the conclusion of the contract, and to other factors...

495. Nystén-Haarala 2004, p. 735.

496. Farnsworth 1988; see especially chapter II.

497. See Chapter 4.5.4 Time of the notice.

498. Honnold 1999, p. 332-333; Will in Bianca & Bonell 1987, p. 355-366. Similarly on third party claims Article 43.

499. Will in Bianca & Bonell 1987, p. 366.

500. Honnold 1999, p. 332.

501. Honnold 1999, p. 333.

502. Will in Bianca & Bonell 1987, p. 365; Honnold 1999, p. 331.

503. Korpinen 2004, p. In his article Korpinen presents two conflicting cases in relation to the triggering points of reasonable time. In Handelsgericht Zürich, HG920670 (26 April 1995) where the Swiss court interpreted the time frames literally, i.e. both were trigged simultaneously (this case is also discussed in relation to burden of proving the fundamental breach in footnote 110). In Tribunale di Busto Arsizio (13 December 2001) where the Italian court stressed that the time frames are different both in their starting points and their length. The avoidance of contract represents a last resort as compared to all the other remedies available to the buyer. Where the non-conformity has to be notified as soon as it is discovered or ought to have been discovered, avoidance has to be declared only after it appears that the non-conformity amounts to a fundamental breach which cannot be otherwise remedied.

504. Korpinen 2004, chapter 19, 21.

505. Also noted in Nystén-Haarala 2004, p. 736.

[...]

See entire text of Sanna Kuoppala, "The Application and Interpretation of the CISG in Finnish Case Law 1997-2005" (April 2009)

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=939&step=Abstract>

CITATIONS TO TEXT OF DECISION

Original language (Finnish): CISG Nordic website <http://www.cisgnordic.net/020412FI.shtml>

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Larry A. DiMatteo et al., 34 Northwestern Journal of International Law & Business (Winter 2004) 299-440 at n.660 (timeliness of notice of avoidance); Article 78 and rate of interest: Mazzotta, Endless disagreement among commentators, much less among courts (2004) [citing this case and 275 other court and arbitral rulings]; [2005] Schlechtriem & Schwenzer ed., Commentary on UN Convention on International Sale of Goods, 2d (English) ed., Oxford University Press, Art. 49 para. 29 Art. 78 paras. 17, 27

Finnish: Soili Nystén-Haarala, Oikeustapauksia. Kommenttejn. Turin hovioikeus 12.4.2002 NRO 943, S 00/855. Irtaimen kauppaan perustuva vahingonkorvaus. Lakmies (4/2004) 727-738

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Case text (English translation)

Queen Mary Case Translation Programme

Court of Appeal (Hovioikeus) of Turku

12 April 2002

Translation [*] by Jarno Vanto [**]

A. Case history
B. Statements of claim and reply
      1. [Buyer]'s claim
      2. Grounds of [buyer]'s claim
      3. [Seller]'s reply
      4. Grounds of [seller]'s reply
      5. [Buyer]'s request for sequestration order
C. Decision of the Court of First Instance
      1. Bias of witnesses
      2. Ruling on the main issue

a) Applicable law
b) Contractual relationship
c) Binding effect of warranty
d) Delivery non-conformities
e) Conclusions about the deliveries
f) Lost profits
g) Unreasonableness of the contracts and conciliation
h) Conclusions on damages
i) Avoidance
j) Outstanding invoices
k) Legal expenses
D. Judgment of the Court of Appeal
      1. Damages and avoidance
      2. Return of unfounded benefit derived
      3. Legal expenses
      4. Witness expenses

A. Case history

UTC GmbH [buyer] is a German company specializing in selling, designing and manufacturing of forestry equipment. S P Ky [seller] is a Finnish company specializing in manufacturing forestry equipment.

[Buyer] and [seller] had a business relationship since 1994. [Seller] has sold various components to [buyer] to be attached to [buyer's] forestry vehicles. Such components include, but are not limited to, harvesting components, such as harvesting heads, computerized control units, hydraulic control valves and lifts. Additionally, spare parts have been sold for such components.

Previously, [seller] has delivered entire forestry machines to I GmbH, an affiliate of [buyer].

The price and delivery terms of [seller] have been provided to [buyer] in connection with each delivery, of which the first took place in 1994. Also the guarantee terms of [seller] have been provided to [buyer] at the same time.

The business relationship between [buyer] and [seller] came to an end after the year 1996.

B. Statements of claim and reply

1. [Buyer]'s claim

[Buyer] has demanded that:

  1. [Seller] and [seller]'s owner be ordered jointly and severally to pay to [buyer] damages in the sum of DM [Deutsche Mark] 314,995.45 with interest on sums in arrears from 17 February 1997.

  2. The sale by [seller] to [buyer] of a Pika 600 harvester head, delivered on 17 October 1994, be declared avoided and [seller] be ordered to refund to [buyer] the sale price of FM [Finnish Mark] 189,382.50 with interest on sums in arrears.

  3. [Seller] and [seller]'s owner be ordered jointly and severally to pay to [buyer] an outstanding invoice of DM 10,118.42 with interest on sums in arrears in the following manner:

    - to principal amount of DM 1,500.00 from 9 July 1995;
    - to principal amount of DM 3,000.00 from 2 September 1995;
    - to principal amount of DM 1,394.67 from 30 September 1995;
    - to principal amount of DM 4,223.75 from 30 September 1995.

  4. [Seller] and its owner be ordered to pay damages for losses caused to [buyer] in the amount of DM 1,000,000.00 with interest on arrears from 13 February 1998.

  5. [Seller] and its owner be ordered jointly and severally to pay to [buyer] a sum of FM 3,200.00, resulting from a measure taken by [buyer] to secure payment from the [seller].

  6. [Seller] and its owner be ordered jointly and separately to pay the legal fees of [buyer] in the amount of FM 562,202.71 plus expenses resulting from producing evidence and the expenses of witness VS, in the amount of FM 157,490.97 with interest accruing one month after the delivery of judgment.

2. Grounds of [buyer]'s claim

[Buyer] has bought from [seller] forestry equipment, which was subsequently attached to [buyer]'s forestry vehicles with simple assembly mechanisms. Such assembled entities were further sold to [buyer]'s own clients.

The forestry equipment sold by [seller] to [buyer] has been continuously defective. [Buyer] consistently gave notice to [seller] of the defects when they appeared and [buyer] made efforts to cooperate with [seller] for the purpose of fixing the said defects. [Seller] was unwilling to cooperate and finally the defects just kept increasing, leading to an unbearable situation on [buyer]'s side.

[Seller] has consistently denied its responsibility for the defects. According to [seller], the defects have resulted from the assembly work carried out by [buyer] or faulty use or care of the forestry equipment. In cases where [seller] has taken upon itself to act on the notice, it has asserted willingness to apply its warranty terms according to which [seller] would give a new piece of equipment to replace the defective one. The said spare parts have been as defective as the already faulty ones.

Due to several defects in the forestry equipment delivered by [seller], [buyer] has lost seventeen of its clients. In addition to losing its clients, [buyer] has lost significant sums of money due to servicing the machines and providing spare parts. Likewise, [buyer] has lost the opportunity to sell more forestry equipment to those regions where the lost clients operate.

3. [Seller]'s reply

[Seller] and [seller]'s owner have responded to [buyer]'s claims and have demanded that:

  1. The claims of [buyer] be dismissed in their entirety; and

  2. [Buyer] be ordered to pay the legal fees of [seller] in the amount of FM 385,250.59; the legal fees of the [seller]'s owner in the amount of FM 47,200.00; and expenses resulting from providing evidence in the amount of FM 52,016.40 with interest.

4. Grounds of [seller]'s reply

[Seller] denies the [buyer]'s allegation that [seller] had delivered defective forestry equipment to [buyer]. [Seller] alleges that the possible defects in the equipment have resulted from design or installation mistakes on [buyer]'s side, the use and adjustment of the equipment against the guidelines of the manual, and neglect of service.

[Seller] denies liability based on its warranty and the limitations of liability contained in the said warranty. An additional reason for non-liability is that [buyer] has not specifically given notice to [seller], as defined in [seller]'s warranty terms, in writing and within six months after having detected the defect.

Additionally, [seller] denies the outstanding invoice claims defined in section 3 of [buyer]'s statement of claim on the basis of the fact that the said invoices have been set-off; consequently there are no more outstanding invoices between the parties.

5. [Buyer]'s request for sequestration order

In addition to the [buyer]'s above-mentioned claims, [buyer] has demanded that the Court of First Instance place property of [seller] under sequestration in the value of DM 450,000.00 to secure the above-mentioned claims.

[Seller] demanded that such claim be denied.

The Court of First Instance issued a decision on 23 December 1997 stating that [seller]'s property shall be placed under sequestration in order to secure [buyer]'s claim of DM 450,000.00.

The said sequestration order was never executed because [buyer] did not place a security required by the decision or commanded by the executive authority.

C. Decision of the Court of First Instance

1. Bias of witnesses

After hearing witnesses GA and IK, called by [buyer], [seller] and the [seller]'s owner stated that GA and IK should not have been admitted as witnesses because they own some shares in the [buyer]. Because of the fact that [buyer] is a German GmbH - i.e., limited liability company - and comparable to a Finnish Ky, also a limited liability company - it seems that GA and IK are biased and as such they could not act in the capacity of witness. However, [seller] and [seller]'s owner have not produced any evidence as to the content of German law on GmbH companies.

According to the Finnish law of Civil Procedure - Section 17, para. 18 - everyone except the parties to the case can be heard as witnesses. A conventional way of interpreting this statute has been that what constitutes a "party" includes those who, according to law or their status, have the right to represent the party at the time of the hearing. Consequently, membership on the board of a Finnish company constitutes bias, but mere ownership of shares does not.

Due to the fact that no evidence has been presented to the Court of First Instance as to the content of the German law on GmbH companies, the Court of First Instance has referred to the work produced and the conclusions drawn by the Preparatory Committee on the Finnish law of Corporations. Considering the nature of the statement of [seller] and its owner, the said conclusion can be regarded as current and sufficient clarification of the law of a foreign State, as required by the Finnish Law of Procedure.

According to the said conclusion, a GmbH (Gesellschaft mit bescränkter Haftung) is a limited liability company which is regulated under the law of limited liability companies (GmbH Gesetz 1892). GmbH as a form of incorporation is intended for such companies that have a relatively small number of shareholders, provided that they do not intend to trade with the shares of the company. Such a corporation is represented by one or more executive officers. Such a corporation has no Board, but corporations with more than 500 employees must have a Board of Trustees. The Board of Trustees has no right to participate in the daily operations of the company. The shareholders use their decision-making powers at the company meetings. After the registration, the liability of the shareholders is basically limited to their capital input.

According to the conclusion, a GmbH is represented by one or more executives, but not by the shareholders. Therefore, a shareholder cannot assume the meaning of a "party"; consequently, a shareholder can be heard as a witness in a case dealing with a company.

The statement of [seller] and [seller]'s owner is dismissed as groundless.

2. Ruling on the main issue

     a) Applicable law

In this contractual dispute based on a sale of goods and concerning damages, avoidance and demand of payment, the seller has its place of business in Finland and the buyer in Germany.

Finland and Germany have ratified the Vienna Convention of 11 April 1980, namely the Convention for the International Sale of Goods (CISG).

Because Finland and Germany are Contracting States as defined in the Convention, this contractual relationship currently in dispute falls within the scope of application of the Convention, with the exception of Part II of the Convention dealing with formation of the contract to which Finland has submitted a reservation (Art. 92 CISG).

Additionally, CISG is not applicable in terms of evaluating the reasonableness of the contract or the interest rate, because it has no article dealing with enhancing the reasonableness of the contract as does Finnish law, or articles to evaluate the interest rate except article 78.

According to the section 4 of the Finnish law defining the applicable law in international sale of goods, the law of the seller's place of business applies, unless the parties to the contract have agreed on the applicable law. According to section 6, a foreign law that contravenes the principles of Finnish law is not to be applied by the Finnish Courts.

As a consequence of the fact that the parties have not agreed on the applicable law, it is decided that, according to the above mentioned principles, when evaluating the conclusion of the contract, its fairness, possible mediation and the interest rate, Finnish law is applicable.

     b) Contractual relationship

From 1994 until fall of 1996, [seller] delivered harvester heads, control computers, electronic systems, hydraulic control valves and lifts to be attached to forestry vehicles. Additionally, spare parts have been delivered. Already before this - since the end of the 1980's - [seller] had delivered assembled forestry equipment to I GmbH, an associate of [buyer]. Both I F GmbH and [buyer] are owned and operated by Mr. P van S.

The deliveries were based on an order concerning a single delivery and a confirmation of that order. The basis for these orders was the price list presented to [buyer] annually and the terms of warranty attached to the list. The warranty terms were also often attached to the user manuals sent with the deliveries.

Witness TS, who had acted as [seller]'s chief of marketing from the year 1988 until 1998, had negotiated all of the contracts relating to international sales, also the contracts now in dispute. The warranty terms had continuously been of the same content and they had been the same even before TS's arrival at [seller], during the sales to I.

P. van S., who had negotiated the contracts, had been well aware of the warranty terms. The change in their content, such as extending the warranty period and the compensation of work done within the context of repair under warranty, had been negotiated many times over. Also, the [buyer] has admitted that the warranty terms have been negotiated many times. For example, in connection with the sale of equipment to Mr. S.M. there had been negotiations over the extension of the hours of usage under the warranty.

According to the Finnish law on contracts, the parties to a sale of goods have an extensive freedom of contract. The Finnish law on sales concerning the liability for non-conformity of goods renders it subject to contractual freedom. Between businesses, such as [buyer] and [seller], this contractual freedom has been emphasized. Consequently, standard terms become part of the contract if they are contained in an accepted offer. The same rule applies also in Germany.

It is undeniable that [seller] has specifically demanded in the negotiations that the warranty terms become part of the contract. [Buyer] has not shown that it had not accepted the warranty terms becoming a part of the contract. In connection with breakage of the equipment, [buyer] has made several warranty claims to [seller] and has not, in that context or another, given notice about the warranty clause or its content. Therefore, the terms of the warranty have become part of the delivery contracts between [buyer] and [seller]. This also causes the binding effect on the buyer in relation to the warranty.

     c) Binding effect of the warranty

In its warranty clause, [seller] has given a guarantee of operational quality with the maximum extent of six months from the delivery or 1,000 hours of operation. Based on the warranty, [seller] has committed to replace the spare parts it has manufactured and the subcontractor manufactured parts, the latter being subject to limitations in the subcontractor's warranty. The warranty has never applied to normal wear-and-tear parts and faults caused by wear and tear.

In the warranty, [seller] has limited its liability in a manner that work, travel, freight, lay day or other indirect expenses are not to be compensated under the warranty. The prerequisites for obtaining the warranty compensation are that the damage has resulted from operating the machinery in normal use environment, obeying the use and care instructions, and using the original spare parts in service and repair.

Furthermore, it has been required that the warranty repair be made by the manufacturer or a repairer approved by the manufacturer. If the seller fails to perform, the buyer has, according to Article 45 of the CISG, the right to demand performance, price reduction, avoidance or damages. The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies.

In its warranty, [seller] has limited its liability to the limited damages. On the other hand, the warranty does not exclude other forms of judicial protection, such as avoidance of the contract.

According to the Finnish contract law and the CISG, the parties are free to agree also on the content of the warranty and its effect on the liability for non-conformity. The content of the warranty clause and its binding effect on the buyer result in circumstances that where [seller] repairs the defect correctly, [buyer] has no claim for damages unless the damage resulted from or where the defect resulted from willful or harshly negligent action on [seller]'s side. However, other forms of judicial protection have not been limited.

The relationship between the right to repair and the right to declare the contract avoided is problematic. The goods under this contract are sizable machines intended for heavy use and they wear out faster than usual. Therefore the warranty terms are to be applied in a manner that places the primary emphasis on the seller's right to repair. If the seller does not employ that right or it causes the buyer unreasonable nuisance or expenses, the buyer alternatively has the right to avoid the contract based on fundamental breach.

[Buyer] has alleged that the warranty clause has to be interpreted in a way that the terms relating to limitation of liability would assume a limited interpretation of only being applied to manufacture defects; thus, they would not concern design or structural defects.

The warranty terms of [seller] state:

"The seller will commit, in a manner stated in these terms, to repair defects either resulting from raw materials or manufacturing in the equipment delivered by the seller which have been acknowledged and accepted by the seller."

[Seller] has stated that it has always interpreted the warranty terms in such a way that manufacturing consists both the machine-tooling and the design. Witness S has confirmed this in his statement.

[Buyer] has demanded and received a significant amount of compensation under the warranty from [seller]. In connection with these claims, [buyer] has not specified the defects that it is now calling design and construction defects. However, for example, the Pika 33 valves and crane poles which have been subject to many warranty compensation decisions, the sums have included compensation for the alleged design and construction defect. Consequently, in its compensation claims, [buyer] has interpreted the contractual terms in a manner similar to that of the [seller].

The words used in the warranty terms, namely "spare parts produced by the manufacturer" and "factory defects" support the interpretation brought forward by [seller].

Based on what has been mentioned above, the Court of First Instance is of the opinion that the [seller]'s interpretation, the previous practice of [buyer], and word-for-word interpretation of the warranty terms support the interpretation that factory defects comprise both defects caused by machine tooling and design and, in connection with these, structural defects.

[Buyer] has also alleged that the warranty terms have been severe and surprising.

Witness MK, who has worked for the Finnish Steel Producers Union and the Finnish Foreign Trade Association, has been dealing a long time with issues such as drafting contracts for international sales of goods. According to his opinion, the terms used by [seller] are conventional when compared to Finnish and German established practices. Only the warranty period is a little short, since the general trend has been towards longer warranty periods.

[Buyer]'s own warranty terms, which have been applicable also in relation to the equipment delivered by [seller], are similar in content to those of the [seller] in terms of their prerequisites and limitation of liability. The warranty period in [buyer]'s own terms has been either 1,000 hours of operation or one year.

When considering the severity of the warranty terms, it has to be considered that when [seller] delivers equipment to [buyer], [seller] cannot be in possession of detailed knowledge of structure or adjustment solutions employed by [buyer] or the fields of operation or the circumstances in those operations that would possibly fall under the warranty.

Not even when [seller] has knowledge of [buyer]'s client, is the [seller] able to estimate the limits of its liability in a reliable manner. Additionally, the equipment and machines in question are fairly complex, which is a further indication for a need to limit the liability.

The warranty period has been fairly short, as stated by the witness. When evaluating the significance of this, one has to take into consideration the typical use of forestry equipment. According to witness LR, when calculating the operating time of forestry equipment, the assumption is that the use will consist of 16 hours/day in two shifts.

Witness IS has stated that he has bought a Pika forestry machine with his partner from [seller] in 1993. They had used the machine in two shifts for 24h/day. It is typical in the forestry equipment industry, due to many different reasons such as financing of the equipment and felling contracts, that forestry equipment contractors aim at using the equipment up to their maximum capacity as long as this is economically viable.

In the light of the examples mentioned above, it is already apparent, that the 1,000 operating hours will be used up before the six month period has ended. As such, extensions of that period would not bear any significance.

Taking into consideration what has been said above about the content of both [seller]'s and [buyer]'s own contractual practices and the content of their warranty terms, the general international contractual jurisprudence, warranty terms and the negotiation between [buyer] and [seller], it has to be stated that [seller]'s warranty terms and the limitation of liability contained therein cannot be regarded either harsh or surprising from the point of view of the contracting parties.

The warranty terms of [seller] also contain a limitation period for warranty claims. According to it, a warranty claim will be processed only if notification is made in writing and delivered to [seller] in case of an occurrence. A warranty claim that has not reached the seller within one-month after the date of the occurrence is outdated. Furthermore, it is required that the damaged parts must be delivered to the manufacturer or his representative together with the claim.

It has been clarified during the evidentiary hearings that [buyer] has not conformed to these requirements when presenting claims, despite many requests by [seller]. [Buyer] had not delivered the broken parts in connection with the warranty claims to [seller] before May 1995, when fifteen valve blocks had been delivered. Although [buyer]'s actions were inconsistent with the requirements, [buyer] has been compensated in the amount of FM 425,575.00 for broken parts.

Consequently, because [seller] has to a large extent accepted [buyer]'s dealing with the matter, it has to be considered that [seller] cannot draw on the limitation period in its warranty terms for its defense. Therefore, [buyer] is not bound by the limitation period but instead [buyer] has the duty laid down in the CISG, to notify the other party about the non-conformity as soon as possible. Additionally, [buyer] has the right to submit the warranty claim within a reasonable period of time.

     d) Delivery non-conformities

Witnesses VS, DE, GS, GA and IK have stated that forestry machines in which [buyer] had installed equipment provided by [seller], such as control ventilation, crane and harvester head, had had a lot of breakdowns. In particular, the equipment provided by [seller] had been subject to breakdowns.

According to Article 35 of the CISG, the seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract (Art. 35(1) CISG). The goods should be fit for the purposes for which goods of the same description would ordinarily be used and they also should be fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, unless the parties have agreed otherwise (Art. 35(2) CISG).

When estimating whether the damage claims based on the breakdowns fall within the scheme of liability of [seller], either based on the warranty or otherwise, one has to consider the nature of the deliveries. [Buyer] has emphasized that it has bought forestry machine parts from [seller] entirely assembled. The parts have then been attached to the forestry vehicle manufactured by [buyer]. [Seller], in turn, has emphasized that it has delivered machine parts that have passed the initial testing and the compatibility of the parts with [buyer]'s vehicles has to be taken into consideration when designing, manufacturing and adjusting the parts.

Based on the statements made by [seller]'s owner of, witnesses PK and L, it is apparent that constructing forestry machines in a way done by [buyer] is a demanding task. Witness L has stated that, in the 1980's, even Finnish forestry machine manufacturers built forestry machines in the way that [buyer] has done but they switched over to building complete harvesters in the 1990's. This is one of the reasons that the utilization rate of forestry machines was 60-70% in the 1980's and increased to 80-85% in the 1990's. Witness K has also emphasized that specific installation and the first service are very significant in terms of avoiding hydraulic breakdowns. Such breakdowns comprise about 70% of all breakdowns. Dirt damages the hydraulic system. Witness K states that all of the filters, pumps and hoses of the filter system were manufactured by [buyer] in its machines. Additionally, the witness statements provide that the functionality of the parts bought from [seller] has also been affected by the design and manufacturing solutions implemented by [buyer].

Witness L also stated that the Institute for Efficient Forestry (Metsateholaitos), owned and operated by forestry companies and wood refineries, has done research at length on the features of forestry equipment, such as their endurance and reliability. In those studies, it has been detected that the effect of the driver on the profitability amounts to circa 30%. Also the service and the use environment play a significant role in both endurance and profitability. An average time of operation for a harvester head in cost analysis calculations has been 1.5-2 years without fundamental repair, when the harvester head is used in double shifts. Witness L also estimates that spare part and repair expenses for a forestry machine amount annually to tens of thousands of Finnish Marks. Witness K has stated that an economically efficient time of operation for a harvester head is approximately four years, but that some have been known to use them even for seven years.

As to the harvester heads delivered to France, the Court has not been presented with any clarification as to service or use circumstances. None of the operators of the machines have been heard by the Court. Witness E, who had sold the said machines, had not, due to ill health or other reasons, been able to provide to the Court any detailed information as to service or use circumstances.

When considering the deliveries now in dispute, the starting point is the decision made by the Court of First Instance as to the significance of the warranty in relation to the liability for non-conformity. The most essential thing is whether [seller] has fulfilled its duties under the warranty and whether [seller] may have additional duties or liabilities on other grounds.

     e) Conclusions about the deliveries

The most significant damage, both in terms of occurrence and financially, has been the damage caused to Pika 33 control valves. As to the breakage of valves caused to [buyer]'s client M, the Court of First Instance held that the evidence presented did not satisfy the Court in terms of [seller]'s production fault having been the cause of the breakage of the valves. It is apparent that the extensive damage caused to the valves has resulted not from the production fault but the structural solution chosen by [buyer], a solution that was not in conformity with the specific instructions provided by [seller]. Additionally, no specific, detailed clarification has been presented as to the reasons for other types of damage or need for repairs. The need for repairs may have resulted from both the quality of the [seller]'s products and the [buyer]'s design and structure solutions. Additionally, the testing system of [buyer] has been flawed in the sense that not until the end of March 1995 had the forestry equipment been actually tested in their actual use environment, i.e., a forest. The need for repairs has also resulted from the development needs of [buyer] and its clients, also in relation to the parts supplied by [seller]. Furthermore, the need for repairs may have been affected by the expertise of the user of the forestry equipment and the use environment as well as the quality of the service given to the machinery.

[Seller] has accepted such claims under the warranty which, based on the warranty clause, would not otherwise have fallen under it. Insofar as repairs or alterations have been caused by a reason that [seller] had not accepted as falling under the warranty, [buyer] has been unable to prove during the trial that [seller] would have been grossly negligent or had acted in willful misconduct. Therefore, [seller] cannot be held liable for the repair expenses claimed by the buyer more extensively than those falling under the warranty.

     f) Lost profits

The limitation of liability clause contained in [seller]'s warranty clause is also applicable to damages claims resulting from lost profits. [Buyer] is bound by the warranty clause also in this instance and [buyer] has not proved that [seller] had acted in willful misconduct or had been grossly negligent. The warranty clause cannot be regarded as unreasonable or as justifying conciliation between conflicting interests.

[Buyer] has failed to establish that it has the right to claim damages from [seller] based on lost profit.

     g) The unreasonableness of the contracts and conciliation [1]

In a case where a contractual term is unreasonable, conciliatory measures aim at rectifying the imbalance of the duties of the contractual parties.

The dispute at hand does not amount to a situation where after the conclusion of the contract the change in the circumstances would have caused an unreasonable state of affairs in the contractual relationship. When considering the unreasonableness at the time of the conclusion of the contract, one has to pay attention to the economic status of the parties, their actual and factual contractual freedom and their level of expertise.

Both [buyer] and [seller] are companies manufacturing forestry equipment and they in part also compete with one another in the area of export trade. Their cooperation had factually begun already in the 1980's, when [seller] was involved in projects with I GmbH, a party of the same business interests as [buyer]. At that time, [seller] delivered entire forestry machines instead of just parts. The warranty clause had the same content in relation to both [buyer] and I GmbH. Therefore, [buyer] must be in possession of reasonable expertise to evaluate the significance of the contractual terms. Even though business transactions between [buyer] and [seller] have risen to a significant level, it has not been established that [buyer] would not have been able to change the contractual terms, had it so wanted.

Based on what has been said above and also considering what the Court of First Instance has stated about the severity of the contractual terms, the warranty terms have not been unreasonable, even though they have strongly limited [seller]'s liability for non-conformities.

Therefore, [buyer] has not established a need for conciliating the contractual terms.

     h) Conclusions on damages

As mentioned above, the Court of First Instance has held that the limitation of liability clause contained in the warranty clause of [seller] has also been binding on [buyer]. The delivery contracts between [buyer] and [seller] with their warranty clauses cannot be regarded as unreasonable or as necessitating conciliatory measures. Additionally, [buyer] has not established that [seller] had not fulfilled its duties under the warranty or that it would be liable for the damages claimed by [buyer] on other grounds.

     i) Avoidance

The avoidance applies to a harvester package that [seller] delivered to [buyer] on 17 October 1994 and which was consequently installed to a vehicle and then delivered to LR in France. The harvester head was of type Pika 600. After the breakdown of the harvester head, the employees of [buyer] detached the head for repair and delivered it to [buyer]'s factory for fixing. For the duration of repair, a Pika 550-harvester head was installed to LR's forestry machine. After the Pika 600 had been repaired, LR refused to receive it and rather wanted to keep the Pika 550, to which [buyer] agreed. LR had based his refusal on his view that Pika 600 as a type of harvester head would never function properly.

According to Art. 49(2)(b)(i), in cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so within a reasonable time after he knew or ought to have known of the breach.

The harvester head of LR had been repaired and was ready for re-delivery to [buyer] on 25 January 1996. The request for avoidance has been presented in a written statement of the claimant-[buyer] on 31 May 1999, meaning more than three years after [buyer] received the information that LR refuses to accept the repaired Pika 600 harvester head. In this kind of commercial transaction, a reasonable time for notice is most often very short, at most a few months. To extend this period would require pressing circumstances indeed.

Based on the contract between [buyer] and [seller], witness TS had gone to the factory of [buyer] to repair, among other things, LR's harvester head. According to TS's statement, the damage in the equipment had resulted from either faulty handling or wrong adjustments and installation.

Witness S, together with his partner, had bought a forestry machine from [seller] in April 1995, which had a Pika 600 harvester head. The machine had first been used for a period of 2.5 years to harvest wood exported to Japan. S has stated that he is still satisfied with the quality of the machine and has no complaints about it. The harvester head has had some defects, but, according to S, they have been caused by demanding use of the machine and had been repaired in connection with the customary service procedures.

Also, witness SO has stated that harvester heads of the type Pika 600 have had no exceptional repair or service needs.

No clarification has been presented to the Court as to the use environment or the expertise of the operators of the harvester head delivered to LR. The harvester head had been in use for about a year before it was delivered back to [buyer]'s factory.

The period of use has consequently been about half of what witness L has stated as being an economical operating time of a harvester head.

[Buyer] has not established that LR would have had an acceptable reason not to accept the repaired harvester head. Furthermore, [buyer] has not brought forward any detailed clarification as to what financial harm it may have suffered as a result of replacing the harvester head for LR. Thus, [buyer] has not been able to present grounds for avoidance in the harvester head sale and or any pressing reasons for justifying the extension of the time for notification.

Because [buyer] has not notified [seller] within a reasonable time, it has lost its alleged right to avoid the contract.

     j) The outstanding invoices

[Buyer] has demanded that [seller] and [seller's] owner be ordered to pay [buyer] the amount of DM 10,118.42 with legal interest on sums in arrears.

The claim is based on four different [buyer] invoices that [seller] has not paid.

[Seller] and its owner have admitted that the sums in the invoices are correct but have denied that they would owe such sums to [buyer] anymore because they had set-off their claims against those of the [buyer].

Witnesses SI and K have told the Court that they have made an agreement on setting off [buyer]'s invoices against [seller]'s invoices #225 and #248 in September 1995.

Regardless, [buyer] had, in connection with another larger payment procedure, also paid [seller]'s invoices #225 and #248 in October 1995. Witness K has stated that the payment took place because SI had sent a fax message confirming the set-off agreement so late that the payment had already taken place. SI has submitted that [seller] had noticed the payments taking place even though a set-off agreement had been concluded. Regardless, [seller] did not get in touch with [buyer], but instead had unilaterally decided to set-off the payments against other spare part invoicing. According to SI, this had actually taken place even though he was unable to specify the invoices against which the set-off might have taken place. Moreover, witness K has stated that [buyer] has not received a notification about the new set-off and that [buyer]'s bookkeeping does not contain any mention of such transaction having taken place.

A clarification signed by witness SI and a payment request were sent from [buyer] to [seller] on 26 September 1995. On the same day SI had agreed with K on the set-off. K also received a fax message stating that the set-off has taken place. According to payment order of 11 October 1995 signed by K, Bank S has paid invoices #225 and #248 on the same day. Therefore, the payment had taken place two weeks after the sending of the confirmation fax.

A set-off can be carried out either by means of parties' mutual agreement or through a principally unilateral demand placed by the other party based on law that in jurisprudence has been called an obligatory set-off. An obligatory set-off is carried out by means off a set-off notification.

The effects of a set-off commence when the other party is notified of the notification.

The parties to the dispute have unanimously stated that the set-off of invoices #225 and #248 had been agreed between [buyer] and [seller]. Moreover, the parties have not alleged that the contract was void or otherwise without legal effect. The fact that [buyer] has erroneously paid the invoices anew, has not rendered the already performed set-off ineffective. Therefore, [seller] has derived an unfounded benefit from the payment.

The procedure, as described by witness SI, where the payment was set-off against other unspecified invoices would have been acceptable if the claims to be set-off would have been ripe for that purpose. A unilateral set-off requires a notification in which the invoices to be set-off are specified. Such a notification has not been received by [buyer]. [Seller], when denying the existence of a lawful claim on [buyer]'s part, has not been able to specify invoices, against which the set-off would have taken place - even though such information should be easily obtainable from the book-keeping records. Additionally, [seller] has stated during the course of this trial that the set-off had taken place specifically against invoices #225 and #248, which additionally weakens the credibility of witness SI's statement.

Because [seller] has not presented [buyer] with a specified set-off notification or has not submitted to the Court any clarification about the invoices against which the set-off might have taken place, no set-off binding [buyer] has taken place. Therefore, [seller] and its owner will have to return the unfounded benefit derived from the repeated payment.

[Buyer] has demanded interest for the return payment. Because of the fact that the claim is based on a mistaken payment and the benefit derived from such a payment, according to the Finnish law on interest, interest accrues only after one month from the presentation of the claim onwards. Therefore, [buyer] is entitled to legal interest from 17 March 1997 onwards - one month after [seller] was served with summons.

     k) Legal expenses

By and far, [buyer] has lost this case. The part concerning the invoices that [buyer] won comprises only a small part of the entire trial and claims presented, especially when considering the grounds for the claims and the claims in their entirety and therefore is inconsequential in relation to the division of the parties' legal expenses. Therefore, [buyer] has to compensate [seller] and its owner for their legal expenses in their entirety. [Buyer] has admitted the amount to be correct.

D. Judgment of the Court of Appeal

1. On damages and avoidance

The [buyer's] damages claim based on non-conforming goods and indirectly suffered loss of profit and the demand for declaring the contract avoided are denied as unsubstantiated.

2. On returning the unfounded benefit derived

[Seller] and its owner share a joint and several responsibility for the sum of DM 10,118.42, consisting of an unfounded benefit derived from a mistaken payment to [seller] by [buyer], with interest from 17 March 1997.

3. Legal expenses

[Buyer] has to pay to [seller] and [seller's] owner the amount of FM 437,266.99 with legal interest on sums in arrears. Additionally, [buyer] has to pay the owner of [seller] the amount of FM 47,200 with legal interest on sums in arrears, as compensation for work and lost time caused by the trial.

4. Witness expenses

Each of the parties will pay the witnesses they have invited, the fees and expenses they have accrued.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Plaintiff-Appellant UTC GmbH, of Germany, is referred to as [buyer]; Defendant-Respondent S P Ky, of Finland, is referred to as [seller]. Monetary amounts in the currency of Finland (Finnish Mark) are indicated by [FM]; monetary amounts in German currency (Deutsche Mark) are indicated by [DM].

** Jarno Vanto has received his LL.M. from the University of Turku, Finland. The subject of his thesis is Damages under the CISG. He will be teaching International Commercial Transactions at Turku. The second-iteration redaction of this translation was by Dr. John Felemegas of Australia.

1. The Finnish law on contracts having financial value ( OikTL) provides that if a contractual term is unreasonable or its application may read to have unreasonable consequences, the term may be subject to conciliatory measures or it can be altogether disregarded. In evaluating the reasonableness of the term, the entire content of the contract, the parties' circumstances, the circumstances both at the time of the conclusion of the contract and thereafter, and other circumstances have to be considered.

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Pace Law School Institute of International Commercial Law - Last updated January 14, 2014
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