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CISG CASE PRESENTATION

Finland 31 May 2004 Hovioikeus / hovrätt [Appellate Court] Helsinki (Crudex Chemicals Oy v. Landmark Chemicals S.A.) [Editorial analysis available]
[Cite as: http://cisgw3.law.pace.edu/cases/040531f5.html]

Primary source(s) of information for case presentation: Jarno Vanto

Case Table of Contents


Case identification

DATE OF DECISION: 20040431 (31 May 2004)

JURISDICTION: Finland

TRIBUNAL: HO Helsinki [HO = Hoviokeus / hovrätt = Appellate Court]

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: S 01/269

CASE NAME: Crudex Chemicals Oy v. Landmark Chemicals S.A.

CASE HISTORY: 1st instance District Court of Espoo (S 96/7875) 3 November 2000 [affirmed]

SELLER'S COUNTRY: Finland (plaintiff)

BUYER'S COUNTRY: Switzerland (defendant)

GOODS INVOLVED: Chemicals


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 8 ; 9 ; 25 ; 26 ; 35 ; 36 ; 38 ; 39 ; 49 ; 74 ; 77 ; 82 ; 84 ; 86 ; 88 [Also relevant: Articles 30 ; 58 ; 67 ]

Classification of issues using UNCITRAL classification code numbers:

8A ; 8B ; 8C [Interpretation of party's statements or other conduct: intent of party making statement or engaging in conduct; Interpretation based on objective standards ; Interpretation in light of surrounding circumstances];

9B ; 9C [Implied agreement on international usages, standards; Practices established by the parties];

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

26A [Notice of avoidance: effective declaration of avoidance];

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

36A2 [Time for assessing conformity of goods (conformity determined as of time when risk passes to buyer): seller responsible when lack of conformity becomes apparent later];

38A [Buyer's obligation to examine goods: time for examining goods];

39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

49A1 [Buyer's right to avoid contract (grounds for avoidance): fundamental breach of contract];

74A [General rules for measuring damages: loss suffered as consequence of breach]:

77A [Obligation to take reasonable measures to mitigate damages];

82A [Avoidance and buyer's inability to return goods in same condition];

84A ; 84B [Upon avoidance, restitution of benefits received];

86A11 [Buyer's duty to preserve goods (buyer who has received goods and intends to reject): obligation to take reasonable care (deposit in warehouse)[;

88A1 [Party obliged to preserve goods may sell them when other party unreasonably delays]

Descriptors: Intent ; Usages and practices ; Fundamental breach ; Avoidance ; Conformity of goods ; Examination of goods ; Lack of conformity notice, timeliness ; Damages ; Mitigation of loss ; Restitution ; Storage of goods ; Resale of goods

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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)

HELSINKI COURT OF APPEAL, S 01/269 (31 MAY 2004)

9.1   Classification of the issues present
9.2   Applicable law
9.3   Contents of the contract
        9.3.1   Seller's claim
        9.3.2   Buyer's reply
        9.3.3   Decision on the contents of the contract
        9.3.4   Decision on the contents of the contract analysed
9.4   Conformity of the goods
        9.4.1   Undisputed issues
        9.4.2   Decision on the binding force of the shipping instructions
        9.4.3   Decision on the shipping instructions analysed
        9.4.4   Quality of the phenol
                    9.4.4.1   Parties' claims
                    9.4.4.2   Decision on the quality of the goods
                    9.4.4.3   Decision on the passing of the risk
                    9.4.4.4   Decision on the quality of the goods analysed
9.5   Examination of the goods and the avoidance of the contract
        9.5.1   Seller's claim
        9.5.2   Buyer's reply
        9.5.3   Decision on the examination of the goods
        9.5.4   Decision on the avoidance of the contract
        9.5.5   Decision on examination and avoidance analysed
9.6   Preservation of the goods
        9.6.1   Facts of the case
        9.6.2   Decision on the preservation of the goods
        9.6.3   Decision on the preservation of the goods analysed
9.7   Damages
        9.7.1   Facts of the case
        9.7.2   Decision on damages
        9.7.3   Decision on damages analysed
9.8   Conclusions

[...]

9.1 Classification of the issues present

The case involved a sale of phenol from the Finnish seller (the plaintiff in the District Court) to a Swiss buyer (the defendant in the District Court). The questions in dispute included:

   -    What had been agreed upon regarding the quality of the phenol?
   -    Was the delivered phenol in conformity with required contract standard?
   -    Was the Seller responsible for the alleged non-conformity of the phenol?
   -    Had the Buyer examined the goods and given notice of the non-conformity in a proper way?; and finally
   -    Did the Buyer have a right to declare the contract avoided?

The decision of the Court of Appeal affirmed the decision of the District Court of Espoo, S 96/7975 (3 November 2000) on its main conclusions. The amount the Buyer was ordered to return to the Seller from the purchase price withheld excessively was however increased. Another commentary of the case is available in Finnish by docent Tuula Ämmälä in Oikeustieto 1/2006.[506]

9.2 Applicable law

There was no dispute on the applicable law. As the parties had their places of business in different Contracting States, the CISG was the applicable law (Article 1(1)(a)). In Finland the CISG came into force on 1 January 1998 and in Switzerland 1 March 1991. However, as Finland has made a declaration as provided for in Article 92; Part II of the Convention on Formation of the Contract does not apply. Thus in relation to the formation of the contract, the Finnish Contracts Act was the applicable law. This was specifically stated in the decision of the District Court.

In addition, the parties had agreed on the Incoterms 1990 Free on Board (FOB) -term in relation to the passing of risk. It was specifically stated in the reasoning of the District Court that there was no dispute that the FOB- term was agreed by the parties. In respect of the passing of risk, the District Court also stated that Article 67(1) confirms the FOB-rule on the passing of risk. As there was no dispute whether the FOB-term was applicable, this seems unnecessary. The parties are always free to agree on the terms of their contract (Article 6).

The Court of Appeal did not make any reference to the applicable law but simply confirmed the reasoning of the District Court.

In relation to the formation of the contract, more detailed analyses would have been appropriate. The Finnish Contracts Act was simply applied. By virtue of Article 1(1)(b), Part II of the Convention could have also been applicable law. According to the Finnish conflict of law rules applicable to international sales of goods, 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's business is situated. As the Seller was a Finnish company, the applicable law was the Finnish law on formation of the contract. Nevertheless, a reference to the conflict of law rules ought to have been made even though the right solution was reached.[507]

9.3 Contents of the contract

9.3.1 Seller's claim

The Seller claimed that it had offered to deliver to the Buyer phenol that fulfilled the normal quality requirements, i.e. that the colour would be maximum 20 and the water contents 0.05 pct (the unit for water contents being pct i.e. percentage/0.05 pct = 500 ppm, particles in million). The written evidence "Phenol Specification" send to the Buyer on 20 April 1995 after oral negotiations had been commenced supported this. The Seller demanded that the Buyer be ordered to pay the remaining amount of the agreed purchase price, with interest and legal costs.

9.3.2 Buyer's reply

The Buyer demanded that the claim be dismissed. After the initial negotiations the Seller had sent the Buyer a specification on 20 April 1995. The Buyer had notified the Seller immediately that the quality offered did not fulfil the quality requirements the Buyer had, rather the colour of the phenol was required to be less than 5. The Seller then informed that the phenol to be delivered to the Buyer was stored in Finland and was of the best quality. The Buyer confirmed that the said phenol met the Buyer's quality requirements. Examinations were conducted and the contract was concluded on 27 April 1995. On the same day, the Buyer sent to the Seller a confirmation of the contract. In relation to the quality of the phenol, the confirmation stated that the normal quality requirements applied, i.e. that the purity grade would be more than 99.9, the colour would be less than 5, the water contents 155 ppm. In addition, the confirmation stated that it confirmed the final and binding contract. The Seller had not responded to this confirmation in any way.

The parties renewed their claims and demands in the Court of Appeal.

9.3.3 Decision on the contents of the contract

The Finnish Contracts Act was applied in relation to the formation of the contract. The District Court held that the parties had agreed on delivery of phenol in accordance with the confirmation of the contract sent on 27 April 1995, i.e. that the Buyer had required colourless phenol.

After evaluating written evidence presented to the Court and testimonies of the witnesses heard, the District Court held that the Buyer had become aware of the Buyer's intention to buy colourless phenol. Further, the Seller had given an impression that it would deliver colourless phenol to the Buyer. The Court's opinion was based on the fact that the Seller had made no objections to the confirmation of the order send on 27 April 1995, such as that the Seller could not guarantee the colourlessness of the phenol or that the colour would be under 5. Had the Seller seen any inconsistencies or flaws in the quality requirement set out in the confirmation, it would have notified the Buyer about them. This notification or reclamation was required by the Finnish Contracts Act Section 6, paragraph 2,[508] as well as by the prevailing custom in the trade concerned that was supported by the witnesses' testimonies.

When evaluating the contents of the contract and the intention of the parties and the parties' understanding of the contract, the District Court considered the Buyer's witness' statement reliable even though it had some inconsistencies in it. The said witness had represented the Buyer in the negotiations. The District Court had taken into consideration that the negotiations were held orally and that the Seller had not presented any evidence to support its claim that the Buyer ought to have understood that the colour of the phenol would possibly change fairly quickly in a short period of time; other than that the phenol was of Russian origin.

The Seller had indeed shown that phenol was a substance that could easily change colour for different reasons or even without any specific reason. In addition, phenol originating from Russia was produced in facilities where standards differed and the phenol was often stored and handled in various circumstances different from the standards in respect of western phenol. This alone, however, did not show that the Buyer ought to have understood to assume the risk that the colour of the phenol would increase when buying Russian phenol. When deliberating, the Court took into consideration that even though the parties had made several mutual contracts, this was the first time that Russian phenol was for sale. The Seller had not shown and it had not otherwise appeared that at the time of the sale the Buyer had or ought to have had such particular or empirical information about the quality of the Russian phenol that the Buyer should have understood without any additional information that the phenol it had bought would change colour within few weeks in a way that it could no longer be considered as colourless.

The witnesses heard on behalf of the Buyer had also shown that in world trade it was considered highly exceptional that phenol would change colour during long-term transportation or storage without any specific reason, even though this had occurred every now and then.

The fact that the Buyer had sold the phenol in question further on the CIF-term (Cost, Insurance and Freight) and with the same quality specifications as required by the contract between the Seller and the Buyer supported the view that the Buyer had understood it had agreed upon delivery of the colourless phenol and had no reason to question the quality of the phenol delivered to the Buyer in relation to its colour.

The Court of Appeal confirmed the decision and the reasoning of the District Court. According to the confirmation of the contract, the parties had agreed on colourless phenol on 27 April 1995.

9.3.4 Decision on the contents of the contract analysed

When determining the contents of the contract, the Court based its decision on the evidence presented and the testimonies of the witnesses heard. The applicable law in relation to the formation of the contract was held to be the Finnish Contracts Act.

No reference was made to the CISG rules on interpretation of the statements and conduct of the parties as provided for in Article 8. The reservation the Nordic countries [509] -- among them Finland -- have adopted in relation to Part II of the Convention as provided for in Article 92 means that, in relation to Part II, these countries cannot be considered as Contracting States. Only if the rules of private international law lead to the application of the law of a Contracting State, can Part II of the Convention also be applicable. As the CISG can be applicable in relation to Part II of the Convention even when the reservation under 92 is exercised, there has been understandable criticism of the adoption of the reservation.[510] Further, despite the reservation under Article 92, Article 8 is binding on the Nordic Countries as well. Finland has not made a reservation in relation to Article 8, not that it could have.[511]

Article 8 applies equally to the interpretation of the unilateral acts of each party, i.e., communications in respect of the proposed contract, the offer, the acceptance, notices, as well as of the contract itself, when the contract is embodied in a single document.[512] Thus the rules on interpretation of the offer and acceptance are also extended to the subsequent statements after the formation of the contract.[513] In effect, Article 8 excludes recourse to domestic rules of interpretation.[514]

Interpretation according to the actual intent of the party requires that the party to whom the statement or the other conduct is addressed to have knowledge of other party's intent or could not have been unaware of such intent.[515] As the standard under Article 8(1) is subjective and arouses problems as to the proof, the objective approach under Article 8(2) is said to be the principal standard of interpretation in the Convention's sphere.[516] Under the objective approach, the statements and the conduct of a party are interpreted according to a hypothetical reasonable person of the same kind as the other party.[517]

In determining the intent of the party or the understanding a reasonable person would have had, Article 8(3) makes also a reference to any practices, which the parties have established between themselves, usages and any subsequent conduct of the parties. Article 9(1) further provides that the parties are bound by any agreed usage or by any practices, which they have established between themselves. Article 9(1) in effect affirms the rule provided for in Article 8.[518] According to Article 9(2), a widely known and regularly observed usage in international trade can be applicable even impliedly.

What is the relationship between the domestic rules of interpretation and the rules of interpretation provided in the CISG? In the international sphere of the CISG, there ought to be no recourse to the domestic rules of interpretation that would endanger the uniformity of the application of the CISG. The Court specifically stated that the rules on formation of the contract as provided for in the CISG were not applicable in this particular case but did not specifically state whether it applied the domestic rules of interpretation or the rules provided for in the CISG when determining the parties' intent and understanding of the offer and acceptance. There are no written rules on interpretation in the Finnish law, but the rules on interpretation are drawn from legal practice and from legal literature. The legal principles on interpretation applicable in Finland do not differ from the rules of interpretation provided for in CISG Article 8.[519] Nevertheless, the Court ought to have given some consideration to the applicable rules in respect of interpretation.

When determining the contents of the contract, due consideration was given to the statements and conduct of the parties during the negotiations and the previous contracts between the parties. The emphases seemed to have been on the Buyer's understanding what had been agreed upon. The Buyer ought not to have understood to assume the risk of change of colour nor can the Buyer be said to have had such information that would have alerted the Buyer to the risk. Further, the Seller had in any case become aware of the Buyer's intention to buy colourless phenol. If the Court's reasoning is compared to the wording of CISG Article 8, it is seems that the Court considered the proof to be sufficient and applied the interpretation according to the intent of the parties (Article 8(1)).

The Buyer had, in its reply to the District Court, noted that the contract between the parties was not an oral contract. It was a custom that the Buyer always sent a written confirmation of the contract. The parties had concluded several written contracts before the sale in question. The Buyer further stated that if CISG Article 9 was applicable when evaluating the contract between the parties, it must be concluded that the parties had followed a practice, which they had established between themselves. The second paragraph of Article 9 applies only if the first paragraph cannot be applied. There is no such usage that is widely known to and regularly observed according to which the contracts should be oral.

As noted above the Court made no reference to Article 8. Neither was Article 9 discussed in the reasoning. What effect ded the practices established between the parties have on the formation of the contract? The silence or inactivity of a party cannot itself constitute an acceptance of an offer neither under CISG Article 18(1) nor under the Finnish Contracts Act Section 8.[520] However, the circumstances may be such that the other party is alerted to the duty to inquire.[521] The Buyer stressed that it was an established practice between the parties that the contract was confirmed by a written confirmation, thus the contract could not have been based only on the oral negotiations held between the parties. Like Article 8, which is applicable to the contents of the contract as well as to the conduct or statement of the parties, in a similar manner Article 9 is not limited to the contract's content but also applies to the formation of the contract. Practices from earlier contracts can also apply to contract formation.[522] There may also be an applicable usage according to which a contract can be based on an implied acceptance.[523] The Buyer had sent a confirmation of the contract to the Seller to which the Seller had not objected. The Court stated that had the Seller been opposed to the confirmation it should had given a notice of the alleged inconsistencies. This was supported by the Finnish Contracts Act [524] and by the prevailing usage in the trade concerned. As no reference to CISG Articles was made in this respect in the reasoning of the Court, it is not clear whether the Court even paid attention to the Buyer's reference to Article 9.

The effect of the confirmation of the contract should have been analysed in more detail. Silence as a response to confirmation may range from setting the contract terms to treating the writing as a mere means of proof or interpretation aid, especially if the binding usage is drawn on the basis of Article 9(2).[525] In the case in question, the confirmation had a contract forming effect. Furthermore, the definition of a binding usage differs in the Finnish Sale of Goods Act and the CISG. According to Section 3 of the Finnish Sale of Goods Act, the Act is 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. Thus an applicable usage becomes binding whether or not the parties acting in a certain field of commerce were familiar with the usage.[526] Under CISG Article 9, the mere existence of a usage does not make it applicable to the contract. The actual knowledge of usage is not required under the CISG, but the usage must be widely known to and regularly observed by parties to contacts of the type involved in the particular trade concerned.[527]

Part II of the CISG can be applicable even when the reservation under Article 92 has been exercised. Because of this, there has been understandable criticism of the adoption of the reservation.[528] The relationship between General Provisions of Part I of the Convention and the Formation of the Contract increase the criticism of the reservation.

9.4 Conformity of the goods

9.4.1 Undisputed issues

The disputed issues included whether the phenol sold met the quality requirements agreed by the parties and whether there already was a defect in the goods when the risk passed to the Buyer. In addition, there was a dispute whether the Seller had delivered all the required documents referred to in the contract. The Seller claimed that it had delivered conforming goods as required by the contract at the time risk passed to the Buyer and that, according to commercial usage, the Buyer had no right to withhold the payment until the certificate of the country of the origin was delivered. The Buyer contested the Seller's claims.

The District Court stated. firstly, that the following issues were undisputed:

   -    The documents relating to the sale were the following: an invoice, a survey report by an independent examiner, a bill of lading, a certificate of the country of origin.
 
   -    Incoterms 1990 were applicable.
 
   -    The parties had agreed on the examination of the goods. The examination would be conducted in the port of dispatch by an examiner pointed by the parties. The costs would be shared.
 
   -    The appointed examiner - the SGS - had taken a sample from a tank number 16 on 25 April 1995. The colour was 5 and the water contents 155. The report was sent to the Seller and the Buyer on 25 April 1995.
 
   -    The SGS had supervised the loading and had taken a new sample from tank number 16 on 9 May 1995. The colour was 5 and the water contents 210. The report was sent to the Seller and the Buyer on 10 May 1995.
 
   -    1,202.121 tonnes of phenol were loaded on 10 May 1995.
 
   -    On 10 May 1995 the SGS took
A)  two samples from tank number 16 before the loading
B)  one sample from the end of the loading pipe at the beginning of the loading
C)  one sample from the ship's tank 2P at the beginning of the loading
D)  two samples from the ship's tanks 2P and 4S when loading was finished.

 
   -    Samples 1xA and 2xD were given to the ship superior. Other samples remained in the possession of SGS Finland.
 
   -    The Seller billed the Buyer with an invoice number 95-00174. The date of expiry was 17 May 1995 and the price 799,410.47 USD (1,202.121 tonnes of phenol, 665 USD per tonne).
 
   -    The Buyer gave reclamation on the invoice on 17 May 1995 notifying that it will not pay until the certificate of the country of origin was delivered.
 
   -    The Seller answered on 22 May 1995 demanding payment. The Seller also gave information about the certificate of the country of origin and notified that the original certificate would be delivered later. The Seller also pointed out that the Buyer could withhold 3% from the purchase price until the certificate was delivered.
 
   -    If the certificate of the country of origin is missing, the Customs will withhold 3% from the purchase price. The 3% is returned to the importer when the certificate is presented.
 
   -    The Seller delivered the certificate of the country of origin to the Buyer on 6 June 1995.
 
   -    The Buyer's representative sent a fax to the Seller on 24 May 1995 informing that SGS Antwerp had analysed the phenol and it not meet the quality requirements in relation to the colour and the water contents before the loading.
 
   -    The Buyer sold the phenol further on 3 July 1995 and received 588,793.96 USD as a sales price. The Buyer paid the Seller 335,483 USD on 9 August 1995 and 1.410 USD on 2-3 October 1995.

9.4.2 Decision on the binding force of the shipping instructions

Firstly, the District Court referred to the meaning of the FOB-term. According to the FOB-term, the seller is responsible to deliver goods conforming with the contract, an invoice and any other necessary proof required by the contract confirming that the delivery meets the requirements of the contract. The Seller is liable for any defects that occur before the goods pass over the ship's rail.

It was held that the shipping instructions were given to the Seller and that the instructions confirmed that the following documents were to be delivered to the Buyer's representative: an original bill of lading with copies, an original certificate of the country of origin drafted and signed by the Chamber of Commerce, a form drafted and signed by the Chamber of Commerce and an original survey report by an independent examiner with two copies (including a receipt of the samples taken from the goods). Based on the written evidence presented by the Buyer (Certificate of Sampling 11 May 1995 and Sampling receipt 10 May 1995), it was held undisputable that the samples were not delivered as required by the Buyer. As the sale was agreed on as FOB-term, the shipping instructions were binding on the Seller even though someone else took care of the practical matters.

Because the date of expiry was agreed to be seven days after the receipt of the documents and the form A was specifically required to be original, the Buyer had a right to withheld payment until the documents were delivered.

The Court of Appeal confirmed the decision of the District Court in relation to the obligatory nature of the shipping instructions for the Seller. The Buyer had a right to withhold the purchase price until the form A was delivered.

9.4.3 Decision on the shipping instructions analysed

According to CISG Article 30, the seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and the Convention. The basic principle of freedom of contract as provided for in Article 6 also applies in this respect. As the parties had agreed on the application of Incoterms, no reference to CISG Article 30 was needed.

In relation to the Buyer's right to withhold a payment until the all the proper documents had been delivered, the Court simply confirmed that the Buyer had such right. According to CISG Article 58, if the buyer is not bound to pay the price at any other specific time, he must pay it when the seller places either the goods or documents controlling their disposition at the buyer's disposal in accordance with the contract and the Convention. The parties had agreed that the date of expiry was seven days after the receipt of the documents and the form A was specifically required to be original. The decision of the Court follows the set of rules provided for in Article 30.

9.4.4 Quality of the phenol

9.4.4.1 Parties' claims

The Buyer had argued that it was apparent that the phenol did not meet the quality requirements at the time of the loading. The Buyer had informed the Seller of its position on the matter on 29 May 1995 due to the reclamation the Buyer itself had received from its client.

The Seller, on the other hand, claimed that there were no defects in the goods. This was supported by the fact that the sample taken from the shore tank on 29 May 1995 had been of good quality even thought the phenol tested included 400 tonnes of phenol stored in the tank prior to the consignment in question. The Seller also argued that the sample taken from the shore tank on 25 April 1995 had simply identified the product. That sample did not define absolute quality requirements and thus was not to be considered a sample as required by the CISG, but the parties had agreed on the delivery of the identified consignment of phenol. The testing conducted in Finland on 24 April 1995 determined whether the goods conformed with the contract.

9.4.4.2 Decision on the quality of the goods

The test conducted on 18 July 1995 on the samples taken from the shore tank on 9 May 1995 supported the Buyer's claim. According to the test results, the colour of the phenol had been 35-40; a more specific valuation of the colour could not be provided as the colour was "off hue". The Buyer also referred to a survey report by an independent inspection company. These inspections were conducted in order to determine whether the cause for the defects was such that the insurance company would be liable for the damages. The results however showed that there was no causality between the defects in the goods and the transportation. The cause for the defects must have existed before the transportation.

The District Court held that the colour of the phenol had been 20 or more when it arrived at Antwerp. Such phenol could not be considered colourless and it could not be distributed further as colourless. It was also held that only colourless phenol could be used for all the purposes phenol was normally used. The purpose of use of the coloured phenol was more limited than that of the colourless phenol. Thus the phenol sold by the Seller did not meet the agreed quality requirements when arriving at Antwerp.

The Court of Appeal confirmed the decision of the District Court. The Court of Appeal firstly stated that, according to the test results on the samples taken before the loading, the colour of the phenol had met the requirements of the contract before the loading. However, the test results on the samples taken after the transportation showed that the colour and the water contents had changed. Further, the evidence showed that the degradation of the phenol in the tank located in Antwerp had continued in a way that by the end of June 1995 the colour was 350 and by the end of July 1995 the colour was over 500.

The Court of Appeal held that, based on the analyses made in Antwerp on 21 - 23 May 1995, it was proven that the colour of the phenol of the samples, of the phenol in the ship's tanks and of the phenol in the shore tank in Antwerp had darkened. The phenol did not fulfil the agreed requirement of colourlessness. As the phenol did not meet the agreed quality of the colour, there was a defect in the goods.

9.4.4.3 Decision on the passing of the risk

The District Court referred to the wording of the FOB-term, i.e. that the seller is liable for any defects that occur before the goods pass over the ship's rail. The Court also noted that this rule was confirmed by CISG Article 67(1).

The test results taken before the loading showed that at that time the phenol had met the quality requirements. However, the evidence supported the conclusion that the degradation of the phenol was not linked to the transportation as all the samples changed colour independently. There must have been an unknown substance in the shore tank already on 9 May 1995 that caused the phenol to change colour. It was also proven that even though phenol does change colour eventually, normally six weeks was not enough time for the colouring to occur.

The Seller bore the burden of proof that the phenol was without the defects when delivered. This burden of proof included the responsibility to prove that the loading pipe was free from defects when the loading took place. The Seller had not provided direct proof on this matter. The Buyer had, however, provided proof that there was a substance in the tank that caused the colouring relatively fast already on the shore tank and thus, the phenol did not meet the quality requirements reasonably expected by the Buyer. Thus, according to CISG Articles 35 and 36, the Seller was liable for not delivering goods that were of a quality required by the contract, as there was a defect in the goods already when the risk passed to the Buyer.

The Court of Appeal confirmed the decision of the District Court. The sale was made on FOB-term. The risk for accident or any other exterior damages transfers to the Buyer when the goods pass over the ship's rail. If the Buyer can show that there was a defect in the goods before the risk passed to the Buyer, the Buyer can rely on the defect even if it comes apparent later.

The written evidence provided no proof that the transportation conditions from Kotka to Antwerp had caused the colouring. The transportation ship had been inspected by an independent examiner and also the samples stored in Finland had changed colour, i.e. the transportation could not have caused the colouring. The Buyer had proved with sufficient certainty that the change in the colour was not due to the conditions on the ship. The evidence also supported the conclusion that the phenol had been exposed for colour changes considerably more when the phenol was at the Seller's risk rather than at the Buyer's risk. The Court of Appeal held that the Buyer had provided sufficient proof that the reasons that caused more rapid changes in the phenol than normally could be expected were in the phenol already when the phenol was at the Seller's risk. The Buyer had also a right to expect, especially when the sale was from the both parties respect an intermediate sale, that the quality of the goods would not change during the normal transportation.

9.4.4.4 Decision on the quality of the goods analysed

According to CISG Article 35, the seller must deliver goods which are of the quantity, quality and description required by the contract. The characteristics of the goods that are laid down expressly or impliedly in the contract by means of quantitative and qualitative descriptions are the starting point.[529] Whether the discrepancies in the goods have an effect on the usability or values of the goods is irrelevant when determining the conformity of the goods. These effects have only relevance in determining the fundamentally of the breach. Further, not all discrepancies constitute a lack of conformity in the goods but also the established customs of the certain trade sector must be taken in account when determining the conformity of the goods.[530]

Article 35(2) sets out a list of objective criteria to be used in order to determine the conformity of the goods in cases where the contract is silent on the issue. Firstly, the goods must be fit for the purposes for which goods of the same description would ordinarily be used (Article 35(2)(a)). However, if the particular, intended purpose is made known to the seller, the goods must posses the qualities required for this intended purpose (Article 35(2)(b)). Article 35(2)(c) provides that the goods must posses the qualities of goods which the seller has held out to the buyer as a sample or model. Paragraph (d) deals with adequate packaging.

It is not clear whether the District Court based its decision on Article 35(1), i.e. that the goods must confirm with a contractual description of the goods under Article 35(1) or to the requirements that the goods must be fit for the purposes for which goods of the same description would ordinarily be used as provided for in Article 35(2)(a). The content of the contract was clarified by using the following rules of interpretation: the parties had agreed on colourless phenol, the purity grade more than 99.9, the colour less than 5 and the water contents 155 ppm. In addition, it was held that the Seller had become aware of the Buyer's intention to buy colourless phenol. Only colourless phenol is fit for the purposes for which phenol is ordinarily used. In order to fulfil the purposes for which the goods are ordinarily used, they must be fit for commercial purposes, i.e. it must be possible to resell them in a view of a person in the trade sector concerned.[531] The Buyer had indeed provided evidence that the coloured phenol had no established market and the use of coloured phenol was very restricted. The Buyer's own customer to whom it had sold the phenol further had immediately rejected the goods. The Seller had been aware of the fact that the phenol was to be sold further by the Buyer to the end-user. However, recourse to the second paragraph of Article 35 is needed only if the contract does not contain any details or contains only insufficient details of the requirements to be satisfied by the goods for the purposes of Article 35(1).

According to Article 35(3), if the buyer at the time of the conclusion of the contract knew or could not have been unaware of the lack of conformity, the seller is not liable under the objective criteria provided for in paragraph (2). As Professor Honnold has noted, the case that will fall most clearly within paragraph (3) is the sale of a specific, "identified" object that the buyer inspects and then agrees to purchase.[532] The Seller did refer in its claim to fact that the sale was not a sale by sample and that the sample taken on 25 April had only identified the goods. The Courts did not make an analysis of what was the meaning of this sample taken in April. In this case, the contract description did not conflict with the result taken from this sample; the problems related to the issue: when did the defects in the goods occur and on whose responsibility these defects were. The sample taken on April simply provided support for what had been agreed between the parties and what was the content of the contract.[533]

The burden of proof in relation to the conformity of the goods is on the buyer from the time the buyer takes over the goods. If the buyer has accepted the goods without objection, it is for him to prove that defects already existed at the time when risk passed to him. However, if the buyer rejects the goods or gives immediate notice on receipt of the goods to the seller, it is for the seller to prove that the goods conformed with the contract at the time when the risk passed.[534]

Article 36(1) provides that the seller is liable in accordance with the contract and the Convention for any lack of conformity, which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time. Thus the seller is also liable for latent defects existing at the time risk passes to the buyer even though these latent defects come recognizable only later. This does not mean that the seller's liability is extended to those defects that become apparent only after the risk has passed but are not resulting from his sphere of risk. For example, as long as the goods are in conformity at the time when the risk passes, subsequent external influences to the goods do not confer extra rights to the buyer.[535]

According to Article 36(2), the seller is also liable for any lack of conformity which occurs after the time when the risk passes to the buyer and which is due to a breach of any guarantee that for a period of time the goods will remain fit for their ordinary purpose or for some particular purpose or will retain specified qualities or characteristics. Under Article 35, the seller is already liable for the fitness of the goods for their usual purpose or for a particular purpose made known to the seller. If the goods do not satisfy a warranty of durability given by the seller, the defects have usually existed already at the time when the risk passed to the buyer, thus already Article 35 treats the seller's liability.[536]

The decisive moment in determining the conformity of the goods is when the risk passes to the Buyer; i.e. in this case when the goods pass over the ship's rail as required by the agreed FOB-term. The District Court referred to the burden of proof on two occasions. Firstly, the District Court stated that the Seller had to prove that the loading pipe was free from defects when loading took place. Further down in its reasoning, the District Court stated that the Seller bore the burden of proof that the phenol was without the defects when delivered. The District Court continued that, while the Seller had not provided direct proof on this matter, the Buyer had provided proof that there was a substance in the tank that caused the colouring relatively fast already on the shore tank and thus that the phenol did not meet the quality requirements reasonably expected by the Buyer. The Court of Appeal stated that the Buyer had proved with sufficient certainty that the change in the colour was not due to the conditions on the ship and further, that the Buyer had provided sufficient proof that the reasons that caused more rapid changes in the phenol than normally could be expected were at the phenol already when the phenol was at the Seller's risk. The Buyer had also a right to expect, especially when the sale was from both parties respect an intermediate sale that the quality of the goods would not change during the normal transportation.

The reasoning of the Court of Appeal is more logical. The Buyer had the burden of proving that the goods did not confirm with the contract and that the defect in the goods existed already when the risk passed to the Buyer. After the Buyer had provided sufficient proof on these matters, it was for the Seller to provide counter-evidence. As the Seller was not able to provide any proof to support its claim that the goods did conform with the contract at the time risk passed to the Buyer, the issue was decided for the Buyer.

9.5 Examination of the goods and the avoidance of the contract

9.5.1 Seller's claim

The ship Crystal Amethyst left the Kotka port on 11 May 1995. The ship arrived in Antwerp where the phenol was transferred to a tank located on the shore on 21 May 1995.

The Seller admitted that the Buyer's representative had sent a fax to the Seller on 24 May 1995 stating that the laboratory in Antwerp had analysed the phenol on 23 May 1995 and that the phenol did not meet the quality requirements in relation to the colour and the water contents even before the loading. Also the Buyer had sent a fax to the Seller on 29 May 1995 stating that the phenol did not fulfil the quality requirements before the loading.

On its own behalf, the Seller stated that it had sent a fax to the Buyer on 29 May 1995 informing that the phenol did fulfil the quality requirements and demanded immediate payment from the Buyer. A corresponding message was sent to the Buyer's representative on 1 June 1995. Also in the Court of Appeal the Seller simply argued that the Buyer had examined the goods and given notice of the defects too late. The main argument to support this claim seems to have been the Seller's statement in the District Court that the Buyer's representative had informed on 24 May 1995 that he would state his legal position on 26 May 1995. However, no legal position had been presented at that time.

9.5.2 Buyer's reply

The Buyer stated that when the ship arrived in Antwerp on 21 May 1995 it was discovered that the phenol had darkened. The tests were conducted on 23 May 1995 and the Seller had been informed about the test results on 24 May 1995 and on 29 May 1995 as admitted by the Seller. The discussions on re-testing and payment of the purchase price were continued until the Buyer notified the Seller on 12 June 1995 that it had become clear that the Seller had delivered defective goods and thus had acted contrary to the contract term. The Buyer also informed that the Buyer would place the phenol at the Seller's disposal to be used in Antwerp and that the Buyer would demand damages. In effect, the Buyer made a declaration of avoidance.

Some tests on the samples taken on the loading day were conducted on 18 July 1995. The test results showed that the colour of the phenol was 30-40 and that the change of colour was "off hue", i.e. the change in the colour indicated that the phenol had had contact with non-permissible substance. Based on these test results, the Buyer's representative sent a letter to the Seller on 27 July 1995 stating that the evidence proved that at the time risk passed the phenol had not met the agreed requirements. On 29 June 1995, the Seller answered and notified that it did not see any reason to redeem the goods and that the Buyer was liable for selling the goods in order to mitigate the damages.

The Buyer saw that after informing the Seller on 12 June 1995 and on 27 June 1995 that the goods were at the Seller's disposal in Antwerp and the Buyer had in effect informed the Seller about the avoidance of the contract on 12 June 1995.

9.5.3 Decision on the examination of the goods

The District Court stated that the phenol had arrived in Antwerp on 21 May 1995. The test on the colour had commenced immediately. The Buyer had shown that it had examined the phenol as soon as it was possible. As the notice of the defects was given on 29 May 1995, it was given within a reasonable time. Based on this and as no contrary evidence was given, the Court concluded that the Buyer had given notice of the defects appropriately. The Court of Appeal confirmed the conclusions and the reasoning of the District Court.

According to Article 38, the buyer must examine the goods within as short a period as is practicable in the circumstances. This examination is a perquisite for the notice under Article 39 which must be given to the seller within a reasonable time after the buyer discovered or ought to have discovered the defect.[537] Taking into consideration that the Seller himself had acknowledged the facts, i.e. that the examination took place on 23 May 1995 (two days after the delivery) and the first notice was given on 24 May 1995 (one day after the examination) and the second on 29 May 1995 (six days after the examination) and that the examination of the chemical substance requires laboratory test to be conducted, the Seller's argument of late examination and notice thereof seems totally unfounded.

The Seller did state in its claim that that the Buyer had not informed about its legal position on the issue on 26 May 1995 even though the Buyer had so promised. According to Article 49, the buyer may declare the contract avoided within a reasonable time after he knew of ought to have known of the breach. This time limit has no relevance to the timeliness or the contents of the notification about the defects. Even after notifying about the defect, the buyer has a right to examine his possibilities.[583] Under Article 39, the notice of non-conformity must only specify the nature of the lack of conformity.

9.5.4 Decision on the avoidance of the contract

Firstly, the District Court stated that the Buyer had already on 12 June 1995 informed the Seller that the Buyer considered the situation clear: the delivered goods had not confirmed with the contract and the Seller had breached the contract. Secondly, the District Court referred to and gave a summary of the following CISG Articles: Article 49, Article 51, Article 81, Article 82 and Article 86.

As to the substance of the case, the District Court held that the Seller and the Buyer had agreed on the sale of colourless phenol. There had been a defect in the goods before the goods were handed over to the Buyer even though the defect was not noticeable at that time. It had been shown that the purposes of tge use of colourless and coloured phenol were different and that there was no demand for coloured phenol in the market. Further, the price for the coloured phenol was lower than for the colourless phenol. The defect in the goods amounted to a fundamental breach of the contract and the Buyer had a right to declare the contract avoided. The fact that the Seller did not know on what terms the Buyer had sold the phenol further had no relevance as it was customarily known that the use and the selling of coloured phenol was more restricted.

In relation to the fax sent on 12 June 1995, the District Court held that it qualified as an avoidance of the contract. The case involved a situation referred in CISG Article 82 where the buyer has received the goods but it is impossible for him to make restitution of the goods substantially in the condition in which he received them at port of loading and the impossibility is not due to his act or omission. The Buyer had informed the Seller that it would place the goods at the Seller's disposal as long as the Seller would compensate for the Buyer's damages and expenses. According to CISG Article 86, the Buyer had been entitled to retain the goods until he had been reimbursed for its reasonable expenses by the Seller. The Buyer had also had a right to withhold the payment of the purchase price. Based on the above, the District Court held that the Buyer had declared the contract avoided on 12 June 1995 by sending a fax to the Seller. The Buyer had also had a right to retain the goods, as the Seller had not reimbursed the Buyer's reasonable expenses.

The Court of Appeal confirmed the conclusions and the reasoning of the District Court.

9.5.5 Decision on examination and avoidance analysed

From the start, the Seller's claim was not clearly defined and especially not clearly and thoroughly reasoned. The reference and the summary of CISG Articles in the decision of the District Court also seem unnecessary and arbitrary as no reference to Article 25 on fundamental breach was made.

For a breach to be fundamental it must cause a substantial detriment to the injured party. In addition, the relevant detriment is limited to what the party in breach foresaw or should have foreseen. The determination whether the injury is substantial in the reference of Article 25 must be made naturally in the light of the circumstances of each case. For a breach to be considered a fundamental breach, it must nullify or essentially depreciate the aggrieved party's justified contract expectations.[539]

The Seller had become aware of the Buyer's intention to buy colourless phenol. The Seller also knew (or at least ought to have known) that the coloured phenol could not be used in as versatile a way as the colourless phenol. This was supported by the fact the price for colourless phenol was clearly higher than for coloured phenol. The reasoning of the Court applied the rules provided for in Article 25 even though no reference to Article 25 was made.

The Court also stated that though it was impossible for the Buyer to make restitution of the goods substantially in the condition in which the Buyer received them, the Buyer had not lost the right to declare the contract avoided. The situation fell under Article 82(2)(a) which provides that if the impossibility of making restitution of the goods or of making restitution substantially in the condition in which the buyer received them is not due to his act or omission, the buyer retains his right to declare the contract avoided. This exception to the basic rule that the contract may avoided only if the goods are in unimpaired condition applies in cases where the goods have deteriorated owing to a defect existing upon the delivery.[540] The defect in the goods that caused phenol to change colour rapidly was held to be in the goods already before the risk passed to the Buyer.

The only interesting question seems to be whether the Buyer had effectively declared the contract avoided on 12 June 1995 in a proper way. The Court did not make a reference to Article 26 according to which a declaration of avoidance is effective only if made by notice to the other party. As noted above, the notice of the non-conformity must be distinguished from the notice of the avoidance.[541] Avoidance of the contract is a different and much more drastic remedy. The avoidance of the contract means that the buyer will not accept or keep the goods, and that the seller has the responsibility to take over their disposition.[542] The Buyer had informed the Seller on 26 June 1995 that it had become clear that the Seller had delivered defective goods and thus had acted contrary to the contract term. The Buyer also informed that it would place the phenol at the Seller's disposal to be used in Antwerp and that the Buyer would demand damages. In effect the Buyer made a declaration of avoidance. This declaration of avoidance was seen as sufficient by the Court.

Further, and though not discussed specifically, it can be concluded that it was given within a reasonable time after the Buyer knew of the breach as required by Article 49(2)(b)(i). When determining the reasonable time, the nature of the goods, the possibilities for usage and sale of, the possible market changes in the price and such should be borne in mind.[543] The delivery took place on 21 May 1995 and the first test results indicating that the goods did not confirm with the contract came to the Buyer's awareness at the latest on 24 May 1995. The declaration of avoidance was made one month later after these events. The time frame corresponds to the international case law.[544]

9.6 Preservation of the goods

9.6.1 Facts of the case

The Buyer stated that it had been obligated to mitigate the damages caused by the Seller's breach of contract. Because the Seller had refused to accept the Buyer's declaration of avoidance and considered that it was not responsible for the phenol stored in Antwerp, the Buyer had commenced the sale of the phenol on the Seller's behalf. The Buyer tried to get the Seller's approval for the sale as the responsibility had returned to the Seller after the avoidance. The Seller had however informed that it did not consider itself responsible. Because of this, the Buyer had sold the phenol to Perstorp-Barbiers on 3 July 1995. The company was one of the few companies that were able to use coloured phenol. The buyer Perstorp-Barbiers had been able to dictate the purchase price. When the phenol was sold to Perstorp-Barbiers the colour of the phenol was already over 300. Thus the sale price was not too low.

The Seller claimed that it had constantly insisted that the goods conformed with the contract and had demanded payment. Nor had the Buyer acted reasonably in selling the phenol further. The sale of the phenol took place too late in relation to the fact that the world market price had declined at that time and the colour of the phenol had darkened continually. The effect was that the sales price was even lower.

9.6.2 Decision on the preservation of the goods

The Buyer had informed the Seller that the goods were at the Seller's disposal as long as the Buyer would be reimbursed its reasonable expenses. The Buyer had such right to retain the goods under Article 86 provided that the Buyer took reasonable steps in the circumstances to preserve them. In general this obligation means that the Buyer must store the goods and protect them against harmful influences.[545] Additional obligations of the Buyer due to the nature of the goods are related to Article 88.

Firstly, the District Court summarized CISG Article 88. On the substance of the case, the District Court held that the evidence supported the Buyer's claim that the Seller had not admitted that the contract was avoided and was not willing to co-operate. The Buyer had proven that it had thoroughly investigated possibilities to sell the coloured phenol starting from the end of June 1995. In addition, the Buyer had proved that the coloured phenol had no established price level and that one tries to get rid off it as soon as possible. The list of prices for phenol by ICIS presented by the Seller did not refer to coloured phenol and one could not draw conclusions based on those as to the price of the coloured phenol. The Seller had not presented any counter-evidence supporting the claim that the phenol could have been sold faster and for a better price than it was actually sold for in order to mitigate the damages.

Based on the above, the District Court held that the Buyer had acted reasonably in selling the phenol further. The Court of Appeal confirmed the conclusions and the reasoning of the District Court.

9.6.3 Decision on the preservation of the goods analysed

According to Article 88(1), a party who is bound to preserve the goods may sell them by any appropriate means if there has been an unreasonable delay by the other party in taking the goods back or in paying the cost of preservation, provided that reasonable notice of the intention to sell has been given to the other party. If the goods are subject to rapid deterioration the party who has possession of the goods is even obliged to sell the goods (Article 88(2)).

The unreasonable delay is determined case-by-case. A party's definite refusal to perform as agreed is to be treated in the same way as his unreasonable delay.[546] Under the right to sell as provided for in the first paragraph, the selling party must give a reasonable notice of the intention to sell to the other party. Under a duty to sell as provided for in the second paragraph, prior notice of the intention is required only if possible. The notice requirement is to ensure that the other party can still act so that the perhaps unnecessary and unprofitable sale can be avoided.[547] In case of an emergency sale under the second paragraph, the deterioration of the goods may be of such nature that there is no time to give a notice without causing even extra expenses.[548]

An emergency sale under Article 88(2) is required if the goods are subject to rapid deterioration, i.e. the sale involves perishable foodstuffs. The economic deterioration of the goods seems not to be covered by the wording of the Convention.[549] The fall of the market price may however satisfy the unreasonable delay in taking the goods back under the first paragraph more easily. Furthermore, an emergency sale is required also if the preservation of the goods involves unreasonable expenses, for example, when the storage cost becomes higher than the value of the goods.[550]

The performance of the sale is defined with flexible terms: the goods may be sold by any appropriate means. No other solution could be supported as the variety of the goods involved in international trade and the circumstances of the cases are endless. Therefore, there is no special requirement as to form but simply, the terms of the sale must be reasonable.[551]

The Court held that the Buyer had acted reasonably in selling the goods further. As the coloured phenol had no established market, the Buyer had a right to sell the goods on the best terms available. The Court held that the list prices on colourless phenol were not applicable to the case. The same conclusion could have been reached by stating that the Buyer had provided enough evidence to support the exception on the established list prices.[552]

The party who relies on a breach of contract has also a general duty to mitigate damages resulting from the breach under Article 77. The Court did not specifically make a reference to Article 77. The text of the Secretariat Commentary indeed provides that Article 77 is only one of the Articles which create a duty to the injured party towards the party in breach. Provided that the requirements of Article 88 are fulfilled, the injured party has already by means of that Article an obligation to preserve the goods and even an obligation to sell them if the second paragraph is applicable.[553] The duty to mitigate the damages does not mean that extraordinary effort is required but only reasonable measures in the circumstances must be taken. The wording and the meaning corresponds to Article 88. Under Article 88, only reasonable measures to sell the goods by appropriate means must be taken. As under Article 77, determination of the reasonable measures and appropriate means is done case-by-case -- by reference to a prudent business person in the trade concerned and by taking into account any relevant practices and usages applicable.[554]

The third paragraph of Article 88 gives the selling party the right to retain from the proceeds of sale his reasonable expenses of preserving and selling the goods. This issue is disused further below in conjunction with the damages.

9.7 Damages

9.7.1 Facts of the case

The Buyer presented written evidence to the Court to support its claim for damages. The Buyer had bought the phenol at 799,410.47 USD. The Buyer claimed that the degradation of the phenol amounted to 238,862 USD (the difference between the original purchase price and the sales price the Buyer received from the phenol) and that the additional costs amounted to 223,665 USD, i.e. altogether the damages amounted to 462,517 USD; the amount the Buyer had deducted from the purchase price demanded by the Seller.

The Seller claimed that it could respond to the Buyer's claim only after the Buyer had individualized the claim more precisely. The only proof the Buyer had presented was a one-page summary without any grounds for the damages. Nor could have the Seller foreseen all the damages caused to the Buyer at the time of the conclusion of the contract, such as the freight costs, the demand for the interest and part of the unspecified storage costs. Also the decline of the market price after the breach of contract was not foreseeable to the Seller. The Seller argued that Buyer had not acted in accordance with the CISG in order to mitigate the damages.

In addition, the Seller pointed out that the difference between the Seller's original claim for the unpaid purchase price 462,517 USD and the Buyer's original claim for damages 432,990.58 USD amounts to 29,562.42 USD. This outstanding debt of 29,562.42 USD had been acknowledged and was without question unpaid for. Despite this, the Buyer had demanded that the entire claim should be dismissed.

9.7.2 Decision on damages

Firstly, the District Court referred to CISG Article 74. The damages for breach of contract must be foreseeable at the time of the conclusion of the contract. Further, the Court stated that in relation to the effects of the avoidance, Article 84 provides that the buyer must account to the seller for all benefits which he has derived from the goods or part of them. In those cases where the goods are not returned but sold further, according to Article 88(3) a party selling the goods has the right to retain out of the proceeds of sale an amount equal to the reasonable expenses of preserving the goods and of selling them. He must account to the other party for the balance.

As to the substance of the case, the District Court held that there was no evidence that the Buyer had accounted to the Seller for the balance. The Buyer's written evidence number 29 showed that the Buyer's attorneys had presented to the Seller a statement on damages and losses on 14 March 1996, in which the amount of damages was 432,991 USD. No direct proof however had been presented in relation to the cost incurred by the Buyer. In the letter it had been admitted that the outstanding account to the Seller was 29,526.42 USD.

During the court proceedings, the Buyer had claimed that the Seller had no outstanding debts from the Buyer. The Buyer had presented a brief summary of its damages and expenses, where the damages had been estimated to be approximately 50,000 USD. Otherwise, the Buyer had referred to his written evidence number 29 and to the calculation and the invoices attached to it. It was not shown whether the invoices had been paid for or not. No receipts of payment had been presented. In relation to the storage costs, a witness had given testimony about the average costs for storage. The Seller had denied the Buyer's claim in general and in specific terms. The Seller had also demanded that the Buyer be ordered to pay certain amounts that the Buyer had unjustifiably withheld to itself.

The Buyer had not clarified the calculation on which it based the withholding of the purchase price due to a quality defect. The Seller, on the other hand, had presented sufficient evidence that the outstanding debt from the Buyer amounted to 29,526.42 USD even after the damages and lost of profit demanded by the Buyer had been deducted from the debt. Thus the District Court decided the case in favour of the Seller and held that the Buyer had unjustifiable withheld 29,526.42 USD from the purchase price payable to the Seller.

In relation to the other costs withheld by the Buyer such as the freight costs, custom duties, the financing cost and other expenses, the District Court held that the Buyer had not provided enough evidence to support its claim. In relation to the storage cost, the Court District held that the Buyer had proven that it had suffered storage costs. However, as not enough proof as to the amount of the costs had been provided, the District Court estimated the costs. The judgement of the District Court was as follows:

The purchase price claimed by the Seller amounts 29,526.42 USD more than the damages claimed by the Buyer on 14 March 1996. In addition, the Buyer had unjustifiable withheld the freight costs 2,764.88 USD, the SGS invoice 714.68 USD, the customs duties 17,173 USD, the financing costs 12,879.87 USD, the storage costs 47,414.10 USD and the interest 5,229.21 USD. Thus the Buyer had unjustifiable withheld 115,702.16 USD from the purchase price payable to the Seller.

...

The Buyer ought to have accounted to the Seller for the balance and ought to have provided clarification as to the grounds and the amount of the Seller's debt. The Buyer had presented its demand to the Seller on 14 March 1996. The Seller had specifically demanded the amounts withheld unjustifiable on 29 March 1996 and 11 April 1996. Thus the interest for the purchase price in arrears start to run from 29 April 1996 (one month after the first demand), the interest rate being the agreed 16%.

The Court of Appeal confirmed the conclusions and the reasoning of the District Court partly. In relation to the storage costs, the Court of Appeal held that the storage costs were foreseeable to the Seller and that the Buyer provided sufficient proof on the costs. The costs in question had been reasonable, justifiable and real. Due to this (among the corrections with spelling) the decision of the District Court was amended as follows:

The judgement of the District Court is amended in relation to the excessively withheld purchase price 47,414.10 USD. The Buyer is ordered to pay the Seller 68,288.06 USD as excessively withheld purchase price with interest of 16% from 29 April 1996.

In relation to the legal costs, the District Court ordered the Buyer to compensate the Seller's legal costs in relation to the plea of venue lost by the Buyer (decision given in a separate judgement not discussed herein). On the main issues, as several claims had been made in the case and some of them had been decided in favour of the Seller and some in favour of the Buyer, the District Court held that otherwise the parties were liable for their own legal costs.

The Court of Appeal held that the plea of venue had only little significance to the case and thus the Buyer was not liable for the Seller's legal costs in that respect. Otherwise, the Court of Appeal confirmed the decision of the District Court in relation to the legal cost. It also reached the same conclusion in relation to the legal cost incurred in the Court of Appeal. The Seller had won the plea in venue but the Buyer had, for the most parts, won the claims on the main issues. The parties were liable for their own legal costs.

9.7.3 Decision on damages analysed

According to Article 74, damages for breach of contract consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages must be foreseeable to the party in breach at the time of the conclusion of the contract.[555] Although not directely mentioned, the burden of proof as to the damages lies on the party making the claim.[556] The party claiming damages must prove that he has suffered loss and that the loss was caused by the breach. In addition, the aggraviated party must also prove the amount of loss he has suffered. Only concretely provable and definable losses may be taken into account.[557]

No reference to the foreseeability of the costs claimed by the Buyer was done except in relation to the storage costs. The Buyer's claim was dismissed on evidentiary reasons, no sufficient proof on the damages was provided by the Buyer. In Helsinki Court of Appeal, S 00/82 (26 October 2000) the District Court took the stand that the burden of proof was a procedural issue and covered by the Finnish rules on procedure [558] Whether the Court in this case applied Finnish rules on evidence or the burden of proof as defined in the CISG is unclear. The general rule that a party who wants to derive beneficial consequences from a legal provision has to prove the existence of the factual prerequisite of that provision is embodied also in the Finnish Code of Judicial Procedure Chapter 17, Section 1. Thus it can be concluded that the Court would have reached the same conclusion despite of the law it applied, i.e. that the burden of proof in relation to the existence of the damages and the amount of the damages was on the Buyer. The clarification of the issue would have, however, served not only the academics but also the uniform application of the CISG in the international arena.

Avoidance of the contract releases parties from their obligations under it, subject to any damages which may be due (Article 81(1)). As noted above, the fact that the Buyer was not able to make restitution of the goods substantially in the condition in which the Buyer received them did not preclude the Buyer from avoiding the contract as the impossibility was not due to the Buyer's act or omission (Article 82(2)(a)). As to the effects of the avoidance Article 84(2) provides that the buyer must account to the seller for all benefits which he has derived from the goods or part of them when making the restitution. The buyer must account to the seller for all the benefits also where the restitution is impossible. The impossibility of restitution of the actual goods may be caused by use of the goods or by resale of the goods. The restitution by means of monetary surrogate under Article 84(2)(b), however, requires that the resale occurred before the buyer became aware of the lack of conformity.[559] After the buyer has become aware of the lack of conformity and his right to avoid the contract because of fundamentality of the breach, he comes also aware of possible restitution.[560] After coming aware of the defects the buyer cannot claim that he sold the goods further during the normal course of business but he must simply preserve the goods as required by Article 86. The buyer's obligation to preserve the goods is limited by Article 88.[561] If the seller is unreasonably delayed in taking the goods back and is informed of the buyer's intention to sell the preserved goods, the resale is justifiable even if the goods would take a long storage time.

In these cases where the goods are sold further, according to Article 88(3) the party justifiable in selling the goods further has the right to retain out of the proceeds of sale an amount equal to the reasonable expenses of preserving the goods and of selling them. He must account to the other party for the balance. It is uncertain whether any other claims such as damages can be retained out of the proceeds of the sale.[562] In Hanseatisches Oberlandesgericht (OLG) Hamburg, 1 U 31/99 (26 November 1999)[563] the court stated that the CISG governed the issue of set-off as long as the set-off concerns claims arising under the CISG by way of a general principle within the meaning of Article 7(2). Thus the buyer would be entitled to set-off for damages under articles 45 and 74; although article 88(3) expressly mentions only a selling party's right to deduct reasonable costs of preserving and selling the goods from the sale proceeds. However, towev er, tHhe court left open the question on whether the buyer's right to keep the benefit of the resale could be directly inferred from the CISG or whether this issue was governed by the applicable German law, according to which set-off was also admissible.[564]

Had the Buyer provided sufficient evidence on its losses and expenses, it seems clear that these could have been deducted from the proceeds of the resale of phenol. Part of the expenses rejected by the Court, such as storage costs (approved by the Court of Appeal) fall within the preservation costs but also expenses and losses due to breach of contract and not directly attributable to the preservation or reselling of the goods were claimed, such as loss of profit. If it is concluded that there is no general principle of set-off in the CISG regimen and even a domestic law applicable by virtue of private international law rules would not provide any rules on set-off, the situation could become questionable.[565]

9.8 Conclusions

Whether it the complexity of the facts of the case or the composition and the reasoning of the decision, the current case is hard to hold together. The reasoning of the courts should be understood if not by a layperson but at least a practicing lawyer. An academic point of view may find problems in places where there are not any but in relation to this case I believe this fear is justifiable.[566]

[...]


FOOTNOTES

[...]

506. Ämmälä 2006, p. 2-8.

507. See for example Lookofsky 2000, p. 175.

508. Section 6 provides:

A reply that purports to be an acceptance but which, due to an addition, restriction or condition, does not correspond to the offer, shall be deemed a rejection constituting a new offer.

However, the provision in paragraph (1) shall not apply if the offeree has considered the reply to correspond to the offer and the offeror must have understood the same. If the offeror in that case does not wish to accept the reply, he/she shall, without undue delay, notify the offeree thereof; otherwise a contract shall be deemed concluded on the terms contained in the reply.

509. Denmark, Norway, Sweden. See further Chapter 2.2.4 CISG and the Nordic Countries.

510. Lookofsky 1996, p. 128.

511. Ämmälä in Saarnilehto et al. 2001, p. 896; Routamo, Ramberg 1997, p. 30-31.

512. Text of Secretariat Commentary on article 7 of the 1978 Draft (draft counterpart of CISG Article 8); Lookofsky 2000, p. 55; Farnsworth in Bianca & Bonell 1987, p. 95-96, 97-98.

513. Honnold 1999, p. 115-116, specifically footnote number 1.

514. Schmidt-Kessel in Schlechtriem & Schwenzer 2005, p. 112.

515. Schmidt-Kessel in Schlechtriem & Schwenzer 2005, p. 118.

516. Honnold 1999, p. 118; Schmidt-Kessel in Schlechtriem & Schwenzer 2005, p. 119; Honnold 1999, p. 118.

517. See further Schmidt-Kessel in Schlechtriem & Schwenzer 2005, p.. 120.

518. Schmidt-Kessel in Schlechtriem & Schwenzer 2005, p. 141-142.

519. Ämmälä in Saarnilehto et al. 2001, p. 896, 898.

520. Section 8 provides: "If the offeror has stated that an express acceptance is not required or if the circumstances indicate that he/she does not expect one, the offeree shall, nevertheless, upon request, let the offeror know whether he/she accepts the offer; otherwise the offer shall be deemed to have expired."

521. In relation to the CISG see further Schmidt-Kessel in Schlechtriem & Schwenzer 2005, p. 127-128.

522. Schmidt-Kessel in Schlechtriem & Schwenzer 2005, p. 142.

523. Hemmo 2003, p. 565.

524. Finnish Contracts Act Section 6, paragraph 2. See above Chapter 9.3.3.Decision of the contents of the contract.

525. Schmidt-Kessel in Schlechtriem & Schwenzer 2005, p. 151.

526. Routamo-Ramberg 1997,p. 36. Ämmälä in Saarnilehto et al. 2001, p. 846.

527. Professors Routamo and Professor Ramberg criticize the requirement that the usage ought to widely known to and regularly observed by in international trade. These requirements influence the determination whether the parties ought to have known about the usage, but if the parties in fact knew about the existence of the usage and were familiar with it, the usage should nevertheless be applicable even if not widely observed by. See further Routamo-Ramberg 1997, p. 37.

528. Lookofsky 1996, p. 128.

529. Schwenzer in Schlechtriem & Schwenzer 2005, p. 413.

530. Schwenzer in Schlechtreim & Schwenzer 2005, p. 414.

531. Schwenzer in Schlechtriem & Schwenzer 2005, p. 416-417.

532. Honnold 1999, p. 260; Schwenzer in Schlechtriem & Schwenzer 2005, p. 427.

533. See also Schwenzer in Schlechtriem & Schwenzer 2005, p. 424.

534. Schwenzer in Schlechtriem & Schwenzer 2005, p. 432, 439. Note that in case of the guarantee, if the buyer proves that a defect has occurred within the guarantee period, the seller must show that the defect is due to a cause outside his sphere of responsibility. It has been argued that the mere notification of the defects under Article 39 does not however shift the burden of proof to the seller, but the seller must have actual possibility to examine the goods before the buyer gives notice to the seller. See further Schwenzer in Schlechtriem & Schwenzer 2005, p. 432-433.

535. Schwenzer in Schlechtriem & Schwenzer 2005. p. 435.

536. Schwenzer in Schlechtriem & Schwenzer 2005, p. 437.

537 For the examination see Chapter 4.4 Examination of the goods and for the notice Chapter 4.5 Notice of non-conformity.

538. Müller-Chen in Schlechtriem & Schwenzer 2005, p. 589.

539. The concept of fundamental breach is discussed in more detail in Chapter 2.4.3 Fundamental breach of the contract.

540. Hornung in Schlechtriem & Schwenzer 2005, p. 869, 871; Lookofsky 2000, p. 169.

541. See also Korpinen 2004. The differences between the notice of non-conformity and the notice of avoicance is discussed Chapter 8.5.2 Avoidance of the contract.

542. Honnold 1999, p. 214.

543. Müller-Chen in Schlechtriem & Schwenzer 2005, p. 86-87; Honnold 1999, p. 331.

544. See further UNCITRAL Digest 2004, Article 49, Period of time for declaration of avoidance of delivered goods (Article 49(2). In Oberlandesgericht (OLG) Koblenz, 2 U 31/96 (31 January 1997) the German court held that notice given after 8 weeks was not reasonable. A Dutch seller, plaintiff, delivered acrylic blankets to a German buyer, defendant. As to the sale being conditional upon compliance with an exclusive distributorship agreement, the court stated that, if any such condition existed, which the buyer had failed to prove, the buyer had lost its right to declare the contract avoided as he failed to do so within a reasonable time (article 49(2)(b)(i) CISG). The period of time considered reasonable must be determined in the light of the seller's interest in certainty and whether the seller has to arrange for alternative use of the goods. Even taking into account the time required for consideration, to obtain legal advice, and for negotiations between the parties, eight weeks was held to be unreasonable. These considerations also would apply to the time period within which the buyer could declare the contract avoided due to the lack of conformity of the goods. The decision was appealed to the Supreme Court. In Oberlandesgericht (OLG) Oldenburg 11 U 64/94 (1 February 1995) the German Court held that the avoidance within 5 weeks was reasonable. The Austrian seller, a furniture manufacturer, agreed to manufacture a leather seating arrangement for the German buyer. The buyer sold the furniture to one of his clients, who discovered that the furniture did not conform with the contract. The buyer required the seller to remedy the lack of conformity by repair. Yet, even after the furniture had been repaired, the buyer still found the furniture not to conform with the contract and declared the contract avoided. The seller demanded payment including interest amounting to 13%. It was held that the seller did not have a payment claim against the buyer since the repaired furniture did not conform with the contract and this amounted to a fundamental breach of the contract which gave the buyer the right to declare the contract avoided (CISG Article 49(1)(a)). In addition, the appellate court found the buyer to have declared the contract avoided within a reasonable time (article 49(2)(b) CISG), even though approximately five weeks had elapsed between the delivery of the repaired furniture and the declaration of avoidance. The seller alleged that according to his general terms and conditions of trade the buyer was obliged to declare avoidance within five days. However, the appellate court found that the seller's general terms and conditions of trade did not apply when a repair had already taken place.

545. Hornung in Schlechtriem & Schwenzer 2005, p. 906, 899.

546. Bacher in Schlechtriem & Schwenzer 2005, p. 913. In Hanseatisches Oberlandesgericht (OLG) Hamburg, 1 U 31/99 (26 November 1999) the German court authorized the sale by the buyer after the seller had refused to take the defective goods back. A Brazilian seller, the plaintiff, delivered jeans to a German buyer, the defendant. When inspecting the delivered jeans the buyer found the quantity to be incorrect. The buyer declared the contract avoided and placed the jeans at the seller's disposal. When the seller refused to take the jeans back, the buyer sold them. The case is discussed further in Chapter 9.7.3 Decision on damages analysed in relation to the set-off and damages.

547. Bacher in Schlechtriem & Schwenzer 2005, p. 911.

548. Bacher in Schlechtriem & Schwenzer 2005, p. 913; text of the Secretariat commentary on article 77 of the 1978 Draft (draft counterpart of CISG Article 88).

549. Text of the Secretariat Commentary on article 77 of the 1978 Draft (draft counterpart of CISG Article 88); Bacher in Schlechtriem & Schwenzer 2005, p. 912-913. See however Graf in Bianca & Bonell 1987, p. 630, who while in referring to the Text of the Secretariat commentary on article 77 of the 1978 Draft (draft counterpart of CISG Article 88) supports the view that by interpreting the concept of rapid deterioration broadly, Article 88(2) also applies in the case of loss.

550. Bacher in Schlechtriem & Schwenzer 2005, p. 913.

551. Bacher in Schlechtriem & Schwenzer 2005, p. 912. In Iran-United States Claims Tribunal, 370 (429-370-1) (28 July 1989) the Tribunal reached its decision based on the applicable domestic law but also referred to the CISG Article 88. The tribunal found that the seller proved he had made reasonable efforts in reselling the goods by showing that he had sought buyers all over the world and by offering a reasonable explanation for why the goods did not fetch as much as the original contract price. The seller also demonstrated that he had used his best efforts to resell the goods by showing that the part of the equipment the seller decided to scrap could not be resold. With respect to notice, the seller had informed the buyer of his intention to resell. Although he had not notified the buyer of his intention to scrap some equipment, the buyer had never responded to the sales notices and thus it was clear that the buyer was not genuinely interested in receiving delivery of the goods and had not been prejudiced.

552. See also Bacher in Schlechtriem & Schwenzer 2005, p. 912.

553. Text of the Secretariat commentary on article 73 of the 1978 Draft (draft counterpart of CISG Article 77).

554. Stoll-Gruber in Schlechtriem & Schwenzer 2005, p. 790.

555. See further Chapter 4.7.2 General clause on damages.

556. Text of Secretariat Commentary on article 70 of the 1978 Draft (draft counterpart of CISG Article 74); Stoll-Gruber in Schlechtriem & Schwenzer 2005, p. 771-772. See also UNCITRAL Digest 2004, Article 74, Burden and standard of proof.

557. Stoll-Gruber in Schlechtriem & Schwenzer 2005, p. 761.

558. Chapter 7, see especially Chapter 7.4 Damages.

559. Hornung in Schlechtriem & Schwenzer 2005, p. 892-893.

560. Hornung in Schlechtriem & Schwenzer 2005, p. 871-873.

561. Bacher in Schlechtriem & Schwenzer 2005, p. 900.

562. Bacher in Schlechtriem & Schwenzer 2005, p. 914.

563. See footnote 546.

564. See also UNCITRAL Digest 2004, Article 88, Article 88(3): disposition of the proceeds of sale; UNCITRAL Digest 2004, Article 74, Set off .

565. For example: The buyer justifiably avoids the contract because a fundamental defect in the goods. Because the goods are very easily perishable the buyer sells the goods for the best price available as provided for under Article 88. Luckily neither storage costs nor other expenses in relation to the sale were incurred. However, the buyer suffered extensive loss of profit that was foreseeable to the seller. The buyer was able to resell the defect goods for 50% of what he would have gotten had the goods confirmed with the contract, lets say 50.000 . The loss of profit however accumulated to 40.000 . Without any support for set-off, is the buyer under an obligation to account the balance of the sale under Article 88 entirely to the seller and after words claim for damages? By way of set-off the balance would amount to only 10.000 and the buyer would have simply been compensated for what he is entitled to. Of course foreseeable profit of such magnitude is unlikely to occur; if the seller was aware of extensive, possible profit at the time of the conclusion of the contract the price would have been renegotiated to reflect the situation.

566. See also Nystén-Haarala 2004. In relation to Turku Court of Appeal, S 97/324 (12 April 2002) Nystén-Haarala criticises that the reasoning of the Courts ought to be understood by anyone - not only by a specialized lawyer.

[...]

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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Finnish: Tuula Ammala, Kommentoituja oikeustapauksia hovioikeuksista Kansainvälinen Kauppa. Tavaran virhe. Oikeustieto (1/2006) 2-8

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