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CISG CASE PRESENTATION

Switzerland 24 October 2003 Commercial Court Zürich (Mattress case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/031024s1.html]

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

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Case identification

DATE OF DECISION: 20031024 (24 October 2003)

JURISDICTION: Switzerland

TRIBUNAL: HG Zürich [HG = Handelsgericht = Commercial Court]

JUDGE(S): Jakob Benz (Präsident); Dr. Seidel (Vizepräsident); Handelsrichter Bruno Welti, Peter Meier und Robert Ch. Meyerhofer; Gregor Mercier (Sekretär)

CASE NUMBER/DOCKET NUMBER: HG 010395/U/zs

CASE NAME: M... F... S.r.l. v. A... & P... AG

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Italy

BUYER'S COUNTRY: Switzerland

GOODS INVOLVED: Mattresses


UNCITRAL case abstract

SWITZERLAND: Commercial Court of the Canton of Zurich (Mattress case) 24 October 2003 [HG010395/U/zs]

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/88],
CLOUT abstract no. 889

Reproduced with permission of UNCITRAL

Abstract prepared by Thomas M. Mayer

Under a business relationship of several years' standing, the Italian plaintiff supplied mattresses to the Swiss defendant. A dispute which had arisen over the goods supplied was the subject, in December 2000, of an accommodation agreement concerning the defendant's payment of its arrears and the plaintiff's guarantee obligation. As a result of that agreement, the defendant paid part of its arrears. With regard to the outstanding balance, the defendant maintained that its obligation had been extinguished as the plaintiff had refused to take back the defective mattresses. The plaintiff then claimed that amount before the competent court. As to the defective mattresses, the plaintiff stated that it was not liable for the defects in them but that they were attributable to harmful handling by the defendant or its customers, and that, in a conciliatory gesture, it had even supplied new mattresses, without any acknowledgment of liability on its part.

The court examined the agreement concluded between the parties in the light of the CISG, interpreting it in accordance with its article 8. On the basis of the contents of the agreement and the custom and practice between the parties, the court concluded that the plaintiff's guarantee obligation included a duty not only to supply new mattresses free from defects but also to take back the defective mattresses. The court nevertheless rejected the applicability of one clause of the agreement, according to which a delay by the seller in exchanging defective goods would cause any unsettled instalment payments to be forfeited. On the basis of the criteria set out in article 25 CISG, the plaintiff had in effect honoured its essential obligations since the non-performance related solely to a minor and ancillary duty. The principle of good faith as established in article 7 (1) CISG did not allow the defendant to rely on the aforementioned clause. However, the defendant was justified in refusing to pay the outstanding balance until the defective mattresses had been taken back by the plaintiff.

A counterclaim by the defendant seeking damages for the replacement of defective mattresses supplied to its customers between 1997 and 2002 was rejected. The court interpreted a settlement clause in the agreement as meaning that it excluded any claims for damages. Also, the defendant, despite an order by the court, did not sufficiently demonstrate its loss.

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Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 7 ; 8 ; 9(1) ; 25 [Also cited: Articles 3 ; 6 ; 29(1) ; 59 ; 74 ; 82(1) ]

Classification of issues using UNCITRAL classification code numbers:

7A3 ; 7C22 [Observance of good faith; Recourse to general principles on which Convention is based];

8C [Interpretation of party's statements or other conduct: interpretation in light of surrounding circumstances];

9C [Practices established by the parties];

25B [Definition of fundamental breach: substantial deprivation of expectation, etc.]

Descriptors: General principles ; Good faith ; Intent ; Usages and practices ; Avoidance ; Fundamental breach

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language CISG-online.ch website <http://www.cisg-online.ch/cisg/urteile/857.pdf>

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

Commercial Court (Handelsgericht) of the Canton of Zurich

24 October 2003 [HG010395/U/zs]

Translation [*] by Veit Konrad [**]

Edited by Institut für ausländisches und internationales
Privat- und Wirtschaftsrecht der Universität Heidelberg
Daniel Nagel, editor
[***]

CLAIMS

I. PLAINTIFF [SELLER]'S ORIGINAL CLAIM

Initially [Seller] claimed

   -    Payment of Deutsche Mark [DM] 83,255.00 plus 5% interest since 28 December 1998;
 
   -    Payment of DM 60,000.00 plus 5% interest since 1 July 2001; and
 
   -    Litigation fees in the amount of Swiss francs [CHF] 467.00.

II. [SELLER]'S AMENDED CLAIM

Subsequently [Seller] amended its claim as follows:

"1. Defendant [Buyer] is liable for payment of Euros [EUR] 42,567.60 plus 5% interest since 28 December 1998, and of EUR 30,677.50 plus 5% interest since 1 July 2001, plus litigation fees in the amount of CHF 467.00;

"2. [...];

"3. [Buyer] has to bear the costs of the proceedings"

III. [BUYER]'S COUNTERCLAIM

[Buyer] brought the following counterclaim:

"1. [...];

"2. [Seller], who is Defendant to the Counterclaim, is liable for damages in the amount found appropriate by the Court after considering the submitted evidence, at least to the amount of CHF 175,032.00;

"3. [Seller] has to bear the costs of the proceedings "

REASONING

I. COURSE OF THE PROCEEDINGS

      1. Plaintiff [Seller], who is also Defendant against the [Buyer]'s counterclaim, lodged its claim on 26 October 2001. [Buyer] filed its defense and its counterclaim on 5 February 2002. Thereafter [Buyer] provided the required deposit in the amount of CHF 13,000.00. On 18 April 2002, both parties were summoned to attend a hearing before the judge. However, they could not agree on a settlement of the dispute. Consequently, on 22 April 2003, continuation of the trial by way of written proceedings was ordered by the Court. On 26 August 2003, [Seller] submitted its reply to [Buyer]'s defense and its own defense to [Buyer]'s counterclaim. By rejoinder submitted on 19 November 2003, [Buyer] responded to both. After further submissions of [Seller], the hearings were ended on 10 March 2003.

      2. The case is ready for decision.

II. FACTS OF THE CASE

      1. [Seller], a limited liability company established under Italian law in 1997, produces and sells mattresses. [Buyer], a public company, was established in 1992. It engages in national and international trade with goods of all kind, as well as in the consulting of corporations and other entrepreneurs in the respective field of business.

      2. The parties had established business relations over several years. During that time, [Buyer] had placed several orders for the delivery of mattresses. To overcome differences that had occurred in the course of their business relations, the parties concluded the following Settlement Agreement through their respective authorized agents on 4 and 7 December 2003:

"In May and September 1998, M [Seller] delivered on A's [Buyer]'s order various mattresses to A & Partner Inc. in Florida (USA) for the total amount of DM 83,255.00.

"In 1999 and 2000, [Seller] delivered more mattresses for the amount of DM 121,861.00 in total, pursuant to [Buyer]'s order directly to [Buyer]'s place of business in Glattbruck.

"Concerning payment of the aforementioned outstanding purchases, the Parties have reached the following Settlement Agreement:

-    1. On condition that both Parties will sign and adhere to this contract which shall not have any prejudicial effect, [Seller] reduces the payable amount to DM 121,861.00. In turn, [Buyer] hereby expressly acknowledges that it owes payment of the said due amount of DM 121,861.00.
 
-    2. [Buyer] agrees to payment by installments according to the following payment plan:
 
Until 15 December 2000 at the latest: DM 31,861.00
In exchange for replacement of 70 deficient mattresses by M:   DM 31,000.00
Until 30 June 2001 at the latest: DM 30,000.00
Until 31 December 2001 at the latest: DM 30,000.00
 
-    3. [Seller] agrees to provide [Buyer]'s customers with substitute goods as replacement for deficient mattresses over the full 12-year-term of warranty.
 
-    4. Payments shall be processed to the clients account ("Klientengelder-Abwicklungskonto") of CMS (...) at UBS-Löwenplatz, P/O Box, Zurich.
 
-    5. In case of default concerning one of the aforementioned installments, all outstanding payments shall become due with immediate effect. Furthermore, [Seller] may then pursue its claim for payment of DM 83,255.00 for deliveries to the US before a court.
 
-    If [Seller] fails to provide replacement for deficient goods within a period of 15 days, any claim for payment of remaining installments shall be forfeited.
 
-    6. Both parties declare that by execution of this agreement any mutual claims - per saldo -shall be settled.
 
-    7. This Settlement Agreement shall be governed by Swiss law. The Commercial Court of the Canton of Zurich shall have exclusive jurisdiction over any dispute arising from, or related to this agreement."

The parties complied with their obligations under clause 2 of the Settlement Agreement: [Buyer] paid a total amount of DM 61,861.00 to [Seller]. [Seller] replaced 70 deficient mattresses. By note of 12 April 2001, [Buyer] asked for replacement of other deficient mattresses. [Seller] denied its liability in this matter, but in the further course of correspondence, on 14 May 2001, announced the delivery of twelve new mattresses "solely as an act of goodwill without acknowledging any legal obligation and without prejudice." However, [Seller] refused to take back the twelve supposedly deficient items. By letter of 17 May 2001 [Buyer] declared its duty to pay the remaining DM 60,000.00 forfeited under clause 5 paragraph 2 of the Settlement Agreement because [Seller] had refused to take back the deficient goods after a fifteen-day period, which had commenced on 2 May 2001, had expired.

      3. [Seller] mainly demands payment of the open amount of DM 60,000.00 based on clause 5 para. 1 of the Settlement Agreement as well as payment of DM 83,255.00.

[Buyer] seeks the dismissal of [Seller]'s claim. [Buyer]'s counterclaim concerns damages for deficient deliveries. [Seller] pleads for the dismissal of [Buyer]'s counterclaim.

      4. Further relevant submissions of the parties are discussed in the following sections.

III. AMENDMENT OF [SELLER]'S CLAIM

      1. In its reply, [Seller] amended its claim to the extent that it now seeks payment of Euro amounts equivalent to DM 83,255.00 and DM 60,000.00 based on the applicable official exchange rate of 1.95583 DM per Euro.

      2. According to Para. 61(1) of the Swiss Code of Civil Procedure (Zivilprozessordnung; ZPO), a plaintiff may amend its claim within the jurisdictional scope of the venue, or put forward additional claims, provided that these claims are closely connected to the plaintiff's original claim. The competent court may refuse such amendment if it has a fundamental impact on the defendant's legal position or its rights, respectively, or if it causes undue delay of the proceedings.

The amendments [Seller] made became necessary because of the currency transition from Deutsche Mark to the Euro. [Seller] correctly based its conversion on the official exchange rate. Such amendment as a mere formality is generally admissible.

IV. MAIN SUBJECT OF THE [SELLER]'S CLAIM

      1. a) [Seller] submits the following: [Buyer] had not paid the third installment of DM 30,000.00 until 30 June 2001. As a consequence, the fourth installment and the amount of 83,255.00 became due as stated under clauses 2 and 5 para. 1 of the Settlement Agreement. Concerning the twelve mattresses which had been the subject of [Buyer]'s complaint of 12 April 2001, [Seller] denies its liability: The claimed defects did not fall within its responsibility, but resulted from damages caused by [Buyer], respectively, its customers. Moreover, the liability [Seller] had assumed under warranty clause 3 of the Settlement Agreement only concerned deliveries that had taken place in 1999 or 2000. However, the goods in question had been sent before that time, and thus, pursuant to clause 6 of the Settlement Agreement, were excluded from the contractually attained liability. In any event, the twelve-year warranty which anyway, only referred to a guarantee of the durability and un-deformability of the mattresses. Also, [Buyer] had failed to give timely notice of the claimed defects and therefore had forfeited any right to compensation.

In eventu, the Court assumed [Seller]'s liability for the defects, [Seller], however, points out that: Its delivery of twelve replacement products had been solely an act of goodwill. [Seller] was under no legal obligation to take back the mattresses that [Buyer] deemed deficient. Such duty could not be derived from the Settlement Agreement, nor from any previous deliveries, nor had such duty been established by way of common trade usages. But even if such duty existed, its violation, under the principle of good faith, could never amount to consequences as stipulated under clause 5 para. 2 of the Settlement Agreement.

            b) [Buyer] denies that it defaulted on clause 5 para. 1 of the Settlement Agreement, as [Seller] had not sent the necessary remainder. However, in the event the court assumed that [Buyer] was in default, [Buyer] submits that the twelve mattresses, which were subjects of its complaint, had indeed been deficient: Some were moldy, others had broken seams, or handles torn out. Due to their vacuum-sealed wrapping, examination of the goods had first become possible when the goods had been delivered to [Buyer]'s customers, at their final destination. In its immediate complaint of 12 April 2001, [Buyer] had recorded and specified every single defect for each mattress. Also, [Buyer] argues that the warranty [Seller] had assumed under clause 3 of the Settlement Agreement was by no means confined to a shorter period of time, or to particular circumstances. Hence, under the Settlement Agreement complaints could be made within the twelve-year period. But even on the assumption of a two-year warranty, [Buyer] had not lost its rights to damages as concerns the deliveries of 22 February 2000, as [Buyer] submitted its first letter to take legal action in this matter on 5 February 2002. In any event, [Seller] would not be able to rely on clause 6 of the Settlement Agreement, as this regulation excluded further claims only in the event of the Settlement Agreement's proper execution.

[Seller]'s replacement delivery of twelve new mattresses could not be considered as merely an act of good will, as [Seller] had been legally obliged to do so under clause 3 of the Settlement Agreement. According to the wording of the clause, and in compliance with the established practices among the parties, this duty also obliged [Seller] to take back the defective mattresses. Such duty was also established by common usages within the mattress industry. Therefore, [Seller] was in default concerning its contractual duty of replacement of deficient goods, as it refused to take back deficient goods, albeit [Buyer] by letter of 2 May 2001 had requested [Seller] to do so within a period of fifteen days. Hence, [Buyer]'s obligation to pay the remaining amounts would be forfeited pursuant to clause 5 para. 2 of the Settlement Agreement.

      2. In clause 7 of the Settlement Agreement, the parties subjected themselves to Swiss law as the applicable law to govern the contract, which according to its caption should settle open claims related to the order and delivery of mattresses. This leads to the application of the CISG: Switzerland is a Contracting State to the Convention, which as an international body of harmonization regulations prevails over the national Swiss Law of Obligations (Obligationenrecht; OR) (Keller / Siehr, Kaufrecht, 3d ed., 1995, p. 158). The parties have never excluded the application of the CISG as provided for under Art. 6 CISG. The Settlement Agreement entails sales and trade law provisions that regulate the duty of payment and liability for defective goods. It thus modifies previously concluded sales contracts in the sense of Art. 29(1) CISG (Schlechtriem / Schlechtriem, supra, Art 29 note 3). Both parties presuppose the application of the Convention.

      3. The Court needs to decide whether [Seller]'s title to payment has indeed expired pursuant to clause 5 para. 2 of the Settlement Agreement. The related question of [Buyer]'s default will be considered subsequently subject to further necessity.

            a) [Seller] relies on its assumption that, with regard to the twelve mattresses subject to [Buyer]'s complaint on 12 April 2001, [Seller] had neither been liable under the contractual warranty, nor had [Buyer] complied with its duties to examine the goods and to give timely and specified notice. The Court does not need to decide whether this was actually the case. Unquestionably, [Seller] sent [Buyer] twelve new mattresses on 14 May 2001. Irrespective of the fact that [Seller] explicitly denied being under a legal obligation to do so in its letters of 3 May and of 17 May 2001, there is no reason why the provisions of the Settlement Agreement that govern the replacement of goods should not apply to this case at issue. In one of its briefs [Seller] itself presumed that by providing the replacements it had complied with its contractually attained liability. This corresponds with the fact that [Seller] first refused to take back the goods, but then in its response to [Buyer]'s letters agreed to deliver twelve new mattresses as a replacement.

            b) aa) Due to the parties' controversy on the question of whether [Seller] had been obliged to take back the mattresses under the contract, the Court must find the true interpretation of the relevant provisions of the Settlement Agreement.

According to Art. 8(1) CISG, 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. If Art. 8(1) CISG is not applicable, statements made by or 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, Art. 8(2) CISG.

                  bb) Due to the fact that the parties have not made any submissions, the Court is unable to determine the true intent the parties may have had when agreeing on clause 5 para. 2 of the Settlement Agreement. [Buyer] merely submitted that, within the course of preliminary negotiations to the Settlement, it had pointed out that the duty to provide replacement would include the duty to take back defective deliveries. However, [Buyer] did not submit anything as to what [Seller]'s reaction to this matter was. Hence, the Court has to find out the objective meaning, i.e., the understanding a reasonable person would have had.

[Seller] refers to the wording of clauses 3 and 2 of the Settlement Agreement, which literally would only provide that deficient mattresses shall be replaced. However, [Seller] acknowledges that, in its exact, wording clause 3 states that [Seller] shall provide "substitute goods (that are not defective) as replacement for deficient mattresses." This corresponds to the provision in clause 5 para. 2 of the Settlement Agreement requiring the exchange of deficient goods, an expression that by its natural understanding implies the taking back of deficient goods. Equally, Art. 82(1) CISG, dealing with the delivery of substitute goods, entails the duty to take back defective goods. Under Art. 206(1) of the Swiss Law of Obligations, substitute goods shall be delivered in exchange for handing back the defective goods (Giger, Berner Kommentar, Art. 206 OR, N 25).

The consideration of the clear wording of clause 5 para. 2 of the Settlement Agreement must be given priority over all other criteria of interpretation according to Art. 8(3) CISG (Witz / Salger / Lorenz, International Einheitliches Kaufrecht - Praktiker-Kommentar und Vertragsgestaltung zum CISG, 2000, Art. 8 note 11) . This must be concluded given that the Settlement has been signed by two attorneys seated in Zurich. Therefore, it is irrelevant whether the parties have discussed the duty to take back deliveries during their negotiations. Neither party has submitted facts as to the content of these negotiations or, as to the intent of the agents acting on behalf of both sides.

The usage the parties had established in similar previous cases where deficient goods had been delivered, is of crucial relevance to the case at hand. [Seller] admitted that prior to and after the conclusion of the Settlement Agreement, it had always taken back singular defective goods when providing [Buyer] with substitutes. For instance, this had been the case when [Seller] replaced the seventy mattresses that were mentioned under clause 2 of the Settlement Agreement. The same happened when [Seller] replaced twenty-five mattresses in January 2001. [Seller] points out that in these cases the mattresses had been taken back as a mere gesture of goodwill while it had not acknowledged any legal obligation therewith. Thus, the parties had -- voluntarily -- established a usage which is equally relevant for the case at hand, where replacement had been provided voluntarily as well according to [Seller]. According to Article 9(1) CISG, [Seller] was bound to this usage. This adherence to established usages is derived from the principle of good faith and shall prevent a party from suddenly acting inconsistently within an established business relationship (Schlechtriem / Junge, supra, Art. 9 note 7). The German Federal Supreme Court (Bundesgerichtshof; BGH) held on this account that acts of mere goodwill that are not explicitly pointed out as such may have binding contractual effects pursuant to CISG regulations (Decision of 25 November 1998 in: NJW 1999 pp. 1260 et seq.). [Seller] itself does not allege having pointed out to [Buyer] on all previous occasions of defective deliveries that the substitutes were meant to be delivered merely on a goodwill basis.

Therefore, the Court does not need to decide whether the collection of deficient mattresses was customary within the parties' industry. Both the objectively existing consensus between the parties and the established practice according to Art. 3 and Art. 9(1) CISG shall be given prior consideration over the usages of the relevant industry (Witz / Salger / Lorenz, supra, Art. 8 note 12; Schlechtriem/Junge, supra, Art. 9 note 7). In any event, it has to be noted that, under CISG regulations, it falls within the [Seller]'s responsibility to provide substitute deliveries and to organize and account for the costs of taking back deficient goods (Schlechtriem / Huber, supra, Art. 46 note 53 et seq.).

Originally, [Seller] itself presumed to be obliged to collect the twelve defective mattresses, but then, however, refused to take back the goods after receiving [Buyer]'s letter of 2 May 2001. Thereafter, [Seller] -- in response to [Buyer]'s letter of 9 May 2001 -- offered a "replacement delivery."

                  cc) Considering all this, it must be concluded that the duty to provide replacement goods stated under clause 5 para.2 of the Settlement Agreement entails the duty to take back defective goods.

      4. a) Concerning the twelve mattresses that had been the subject of its complaint, [Buyer] asked [Seller] to "provide for their collection within a period of fifteen days as according to clause 5 para. 2 of the Settlement Agreement" by letters of 2 May 2001 and of 9 May 2001. However, [Seller] only provided for the substitute delivery of new mattresses on 14 May 2001. As regards the collection of the old items, as required under clause 5 para.2 of the Settlement Agreement, the deadline set by [Buyer] had expired. Hence, [Seller] defaulted on its contractual obligations wherefore pursuant to clause 5 para. 2 of the Settlement Agreement all title to further payments shall forfeit. The same would have had to be concluded if one assumed that the fifteen days period began to run after [Seller] had received [Buyer]'s letter dated 9 May 2001, as [Seller] had argued in its response letter of 17 May 2001. In any event, the fifteen-day period expired before 30 June 2001, the payment date of the third installment.

            b) aa) [Seller] argues that the legal consequences of its default that were stipulated under clause 5 para 2 of the Settlement Agreement in the particular circumstances of the case at hand meant undue hardship. Such case has not been provided for in the Settlement Agreement. Therefore, the Agreement must be amended on this point. [Buyer], on the other hand, denies this and refers to the conflicting interests of the parties.

                  bb) The CISG does not provide for a seller's default on taking back defective goods in case of a replacement delivery (respectively, in case of the avoidance of the contract). Such cases are to be decided by taking into account the reasonable interests of both parties in the particular case (Schlechtriem / Leser / Hornung, supra, Art. 81 note 19a). For the case at hand, the Court finds that it would be unreasonable if [Seller]'s default resulted in the forfeiture of all rights to further payments.

This can be drawn from Art. 25 CISG, which defines a fundamental breach of contract (that may justify the avoidance of the contract as provided under Art. 49, 51 and 64 CISG), as a breach resulting in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract. Whether this is the case will be decided considering the nature of the mutually agreed obligations as well as the particular circumstances of the case (Schlechtriem, supra, Art. 25 CISG notes 4 et seq, and 24). By way of the Settlement Agreement, [Buyer] and [Seller] intended to settle the differences that had occurred on several occasions since 1998 about the liability of [Seller] for defective deliveries. As the caption of the contract indicates, the Settlement Agreement mainly regulates the issues of the [Buyer]'s obligation to payment. This corresponds with [Seller]'s duty to provide replacement for deficient mattresses. Essentially, this duty under clause 3 and clause 5 para. 2 of the Agreement requires the delivery of new non-defective mattresses as substitutes. The duty to take back the defective goods is not essential to the Agreement. If the [Seller] fails to comply with this duty, the [Buyer] may take measures on its own initiative and dispose of the deficient goods. [Buyer] rightfully argues that this may mean some personnel costs and financial effort on its side. However, as the case at hand only concerned the collection of twelve deficient mattresses, [Buyer]'s effort can be regarded as inconsiderable. From an objective perspective, the interest in the collection of the old mattresses that could have reasonably been involved on [Buyer]'s side cannot be regarded as sufficiently substantial to constitute more than a mere accessory obligation.

Given all this, [Seller]'s failure to take back the mattresses should not amount to the same consequences as a default on the delivery of substitutes -- as the essential part of the duty to provide replacement -- would have amounted to. This conclusion also holds true under the principle of good faith in international trade, as stated in Art. 7 CISG.

            c) Refusing to take back the twelve mattresses, [Seller] breached its obligations under the Settlement Agreement, and thus came in default. Only, due to the insignificance of this breach of contract, it may not amount to further consequences as stipulated under the Settlement Agreement. [Buyer]'s obligation to pay the two remaining installments of DM 30.000,00 on 30 June and 31 December 2001 remains.

      5. [Buyer] relied on [Seller]'s refusal to take back the twelve mattresses, arguing that [Seller] had thus forfeited its right to payment. Therefore, [Buyer] refused to pay the two remaining installments. Based on clause 5 para. 1 of the Settlement Agreement, [Seller] claims that [Buyer] has been in default as concerns the payments of the remaining installments (1.), and that therefore [Seller] would be entitled to claim further DM 83,255.00.

            a) According to clause 2 of the Settlement Agreement, the first of the installments relevant to the case at hand was due "on 30 June 2001 at the latest." Pursuant to the arrangement in clause 2 and clause 5 of the Settlement Agreement, which is compliant with Art. 59 CISG, [Buyer] became in default when failing to comply with its duty to pay (see Schlechtriem / Hager, supra, Art. 59 note 2). Hence, the Court has to decide whether [Buyer] was obliged to pay until 30 June 2001 as stated under the Settlement Agreement, despite [Seller]'s breach of contract, i.e., its refusal to take back deficient mattresses, for which [Seller] would have normally forfeited its right to payment, and/or whether [Buyer] had the right to refuse the payment of the installment.

            b) As explained above, clause 5 para. 2 of the Settlement Agreement stipulates that [Seller] shall forfeit its rights to payment of the remaining installments, if being in default on its duty to replace of deficient goods after the expiry of a period of fifteen days. Thus, the replacement of deficient goods was of substantial importance to the parties' agreement: compliance with this obligation was a condition for the right to receive payment. Concerning the refusal to take back the twelve mattresses, the Court has assumed that [Seller] defaulted on its obligations in the sense provided for under clause 5 para. 2 of the Settlement Agreement. Only due to the fact that the issue at hand concerned merely twelve mattresses and that [Seller] had actually delivered substitute goods, the Court found that [Seller] had not forfeited its rights to payment. [Seller]'s breach of contract, thus, is neither denied nor has it been approved or remedied. Only its sanction has been suspended. However, if [Seller] came in default for a breach of contract, that was irrelevant if considered separately, but nevertheless concerned a duty to which compliance has been important and indeed a condition for payment, [Buyer] could not possibly default on its duty to pay the installments (see also Schlechtriem / Hager, supra, Art. 58 note 13).

            c) This holds true under the following considerations. According to the principle of good faith laid down in Art. 7 CISG, the sanction for [Seller]'s breach of contract, i.e., the forfeiture of [Seller]'s rights to payment of the two remaining installments, may only be suspended. However, the sanctioned breach of contract may not be interpreted in a way that [Buyer]'s reaction, which at the time had been adequate, would ex post appear as default in the sense provided under clause 5 No. 1 of the Settlement Agreement, with all its detrimental consequences. This would mean an undue advantage to [Seller], as [Seller] would not only suffer no disadvantage, but would positively receive a benefit from its non-compliance with the Settlement Agreement, to the [Buyer]'s detriment.

      6. [Seller] neither submitted nor substantiated that it had taken back the twelve mattresses meanwhile, or that it had provided for their removal. Hence, [Seller] is in a state of permanent breach of contract. This entitles [Buyer] to hold back the payment of the remaining installments of DM 30,000.00, each, which would have been due on 30 June 2001 and on 31 December 2001. [Buyer]'s refusal to pay must not be considered as a default in the sense of clause 5(1) of the Settlement Agreement. [Seller] is not entitled to payment of DM 83,255.00. Hence, its claim has to be dismissed.

V. [BUYER]'S COUNTERCLAIM

      1.  a) [Buyer] claims CHF 175,032.00 for expenses that accrued in the context of the replacement of the said mattresses.

[Buyer] submits that from July 1997 to January 2002 it had provided 936 replacements for its customers in total. In each case [Buyer] had given sufficiently specified and timely notice of the defect. Even when [Seller], in some cases, had provided substitute items, [Buyer] had been left with the costs for back carriage, storage, and disposal of the defective goods. Furthermore, [Buyer] had suffered non-material damages to its reputation. Finally, [Buyer] argues that its risk to be held further liable under warranty had to be taken into account. The provisions under clause 6 of the Settlement Agreement would not exclude its claim. These would only take effect after the proper execution of the contract. Until then, the parties had reserved their rights to raise further claims.

            b) [Seller] disputes these submissions and claims that [Buyer] had not sufficiently substantiated its facts. [Seller] points out that in many of the mentioned cases of defective deliveries, [Buyer] had indeed failed to give notice of the claimed defect at all. [Seller] also submits the following: The rate of CHF 2.50 per kilometer, which had been used by [Buyer] as a basis for its calculations, would be far too high. [Buyer]'s claim would be excluded by clause 6 of the Settlement Agreement, which would not cease to be effective in singular cases of default on provisions of the Settlement Agreement, respectively, disputes thereon. Therefore, [Buyer] would not be entitled to raise claims which have not been mentioned in the provisions in clause 6 of the Settlement Agreement.

      2. Clause 6 of the Settlement Agreement must be interpreted in the same manner as set out above (under IV 3.b) ).

[Buyer] does not submit anything in respect to its own intent or that of [Seller]. Objectively, the parties chose a common phrasing that did not entail any reservations. They declared that there should be no further claims by and against either of them if the Settlement Agreement has been executed. The respective mode of execution is set out under clause 2, clause 3, and clause 4 of the Settlement Agreement, whereas clause 5 stipulates the consequences of default on the contract.

The contractual provisions do not indicate or support [Buyer]'s interpretation of the contract, i.e., that all possible claims between the parties should be reserved until the Settlement Agreement has been fully executed. The Agreement itself defines which obligations shall remain between the parties and how and when they shall be fulfilled. Commonly, a set-off clause is meant to exclude further claims if both parties comply with their mutual contractually-defined duties to perform. Yet, as clause 5 provides for cases of defaulted performance and defines the parties' rights and obligations in such cases, it must be concluded that the Agreement was not meant to become entirely void in the event of any default. Adjacent to the provisions of clause 5, the Agreement provides for set-offs in clause 6. This indicates that the regulations in clause 6 shall have effect in cases of defaulted performance provided for under clause 5, as well. This holds true irrespective of the fact that under clause 3 [Seller] can still be held liable until the guarantee period expires. According to the clear wording of the Agreement, [Seller] shall only be liable to provide replacement, but not to damages of any kind.

      3. a) Furthermore, [Buyer] has indeed failed to sufficiently substantiate its claim for damages. [Buyer] needed to submit all facts that indicated the occurrence of damages, and the extent of the suffered loss, as far as it could reasonably be expected (Frank / Sträuli / Messmer, Kommentar zur zürcherischen Zivilprozessordnung, 3d ed. 1997, 113 ZPO note 3 et seq.). As a general principle, the parties have to submit the facts of a case. Civil proceedings are based solely on the parties' submissions of facts (Para. 54(1) of the Swiss Code of Civil Procedure (Zivilprozessordnung)). Such submissions must be comprehensive and sufficiently substantiated. A party may also submit facts in respect to allegations made by the other party (Para. 113 et seq. ZPO)). If the claimant does not provide compressive and substantiated facts for its claim, the defendant will not be capable to respond to these allegations (ZR 1967 No. 35). In particular, a party must not confine itself to mere general and vague allegations, assuming that a subsequent taking of evidence will support its claim. On the contrary, the taking of evidence presupposes and requires the comprehensive and specified submission of facts (ZR 1996, No. 62. p. 190 et seq., see also: ZR 2003 No. 15 p. 68 and Decision of the Federal Court of 7 October 2002, ibid. p. 72).

            b) On 18 April 2002. the Court advised [Buyer], pursuant to Para. 55 ZPO, that it needed to substantiate every single position, i.e., every collection of defective mattresses, in detail. Yet, [Buyer] has failed to do so.

[Buyer] listed all warranty cases that had occurred in five different time frames. [Buyer] also provided the total number of incidents for each time frame together with the total mileage for each frame. Based on a rate of CHF 2.50 spent per kilometer [Buyer] calculated the amount of its total loss, and reduced this amount by due to the fact that in addition to the defective goods that are the subject of this case, other goods have also been delivered as well. However, [Buyer] does not submit the specific details of each collection, e.g., the destination of each carriage. [Buyer]'s calculations, moreover, are not based on actual expenses, and thus must be considered inadequate to determine the amount of compensation that [Buyer] may be entitled to. As [Buyer] itself mentioned, it would have incurred the claimed expenses, only if it had commissioned a professional carrier to undertake the collections. [Buyer] did not submit any facts or calculations, respectively, as concerns the costs for storage and disposal as well as the other positions, and failed to indicate why doing so would be unreasonable or impossible.

The documents [Buyer] submitted as attachments to its pleadings cannot make up for its insufficient submission of facts. In these pleadings, [Buyer] only vaguely refers to attached documents. As a general rule, the documents that are attached to a brief may count as pieces of evidence. However, they can only be considered a submission of facts, if the party makes specific reference to a particular document, or parts of it, in its pleading in a way that shows the party's clear intention that the content of this document shall be seen as a submission of facts. A merely general resort to a document together with the note that the content of all attachments shall be considered as a submission of facts does not satisfy these requirements (ZR 1998 No. 87, see also Decision of the BG 108 II p. 338 et seq). The parties have been advised on this point during the proceedings.

      4. According to the Court's interpretation of the set-off provision in clause 6 of the Settlement Agreement, [Buyer]'s claim for damages is not justified. Furthermore, it has not been substantiated. Therefore, it must be dismissed.

VI. COSTS

The decisions on costs is based on paras. 64(2) and 68(1) of the Swiss Code of Civil Procedure (Zivilprozessordnung; ZPO). Under these provisions, the defeated party bears the costs of the proceedings. The values of [Seller]'s claim and [Buyer]'s counterclaim, which do not stand in contradiction to each other, must be added (Para. 19(2) ZPO). [Seller]'s claim is valued at CHF 108,014.00 (DM 143,255.00 * 0.7540 [official exchange rate as of 26 October 2001, as the day the claim became pending]), [Buyer]'s counterclaim is valued at CHF 175,032.00. Both amount to a sum of CHF 283,046.00. Based on this total amount, [Seller] lost the dispute by a rate of 3/8; [Buyer] by 5/8.

JUDGMENT

      (1)   The [Seller]'s claim is dismissed.
      (2)   The [Buyer]'s counterclaim is also dismissed.
      (3)   The Court fees amount to: CHF 15,900.00
Other expenses are:
     CHF 877.00  Correspondence
     CHF 798.00  Fees for servicing documents
     CHF 120.00  Fees for summoning parties
      (4)   [Seller] bears 3/8 and [Buyer] bears 5/8 of the sum of these amounts.
      (5)   [Buyer] has to compensate [Seller] to the amount of CHF 5,600.00.
      (6)   [...]
      (7)   [...]

FOOTNOTES

* All translations should be verified by cross-checking against the original text. For the purposes of this translation the Plaintiff and Defendant of the counterclaim is referred to as [Seller], the Defendant and Plaintiff of the counterclaim is referred to as [Buyer]. Amounts in the uniform European currency (Euro) are indicated as [EUR]; amounts in the former currency of Germany (Deutsche Mark) are indicated as [DM]; amounts in the currency of Switzerland (Swiss francs) are indicated as [CHF].

** Veit Konrad has studied law at Humboldt University, Berlin since 1999. During 2001-2002 he spent a year at Queen Mary College, University of London, as an Erasmus student.

*** Ph.D. candidate Daniel Nagel has studied law at the University of Heidelberg and at the University of Leeds.

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Pace Law School Institute of International Commercial Law - Last updated December 10, 2009
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