Germany 15 May 2006 Appellate Court Stuttgart (Tissue machine case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060515g1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: 5 U 21/06
CASE HISTORY: 1st instance Landgericht Stuttgart (40 O 35/04) 23 November 2005 [reversed]
SELLER'S COUNTRY: Germany (defendant)
BUYER'S COUNTRY: Russian Federation (plaintiff)
GOODS INVOLVED: Machine for production of refreshing tissues in the medical sector
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
8C [Interpretation of party's statements or other conduct: interpretation in light of surrounding circumstances]
8C [Interpretation of party's statements or other conduct: interpretation in light of surrounding circumstances]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (German): Click here for German text of case
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
Case text (English translation) [second draft]
Queen Mary Case Translation Programme
15 May 2006 [5 U 21/06]
Translation [*] by Jan Henning Berg [**]
1. Upon appeal filed by Defendant [Seller], the judgment rendered on 23 November 2005 by the District Court (Landgericht) of Stuttgart, 40th Chamber for Commercial Matters, case docket 40 O 35/04 KfH will be amended as follows:
Plaintiff [Buyer]'s action is dismissed as inadmissible.
2. [Buyer] bears the costs of the proceedings in both instances.
3. The judgment can be preliminarily enforced by [Seller] in relation to costs. [Buyer] may avert enforcement by providing assurances of 110% of the sum subject to enforcement, unless [Seller] previously furnishes assurances in the same amount.
4. The value of the appellate proceedings is set at EUR 25,564.59
1. [Buyer] is a private limited partnership seated in Perm, Russia and demands from [Seller], a limited liability corporation domiciled in the Federal Republic of Germany, reimbursement of an initial payment of EUR 25,564.59 (DM [*] 50,000) that had been made to [Seller] on the basis of a sales contract concluded between the parties on 29 August 1997 (no. 13/1/97) in both Russian and English language. Under that contract, [Seller] was obliged to deliver to [Buyer] a machine for the manufacture of medical refreshing tissues (to be produced by Company V.) for a total purchase price of DM 132,000. The contract remained in effect until 31 December 1997. Item 8 of the contract contained an arbitration clause, the English version of which stated as follows:
2-4 "8. Arbitration
"The Seller and the Buyer, hereinafter referred to as Parties, will take measures to settle amicably all disputes and differences which may arise under the present Contract or in connection with it. If Parties cannot agree upon an amicable settlement then all disputes and differences are to be submitted without resource [sic] to the ordinary court to Stockholm, Sweden.
"The Award of the Arbitration Commission will be final and binding upon both Parties."
5. After conclusion of the contract, there was disagreement between [Buyer] and [Seller] about a possible defect of the machine. The duration of their contract had been extended. [Seller] did not effect delivery because the residual purchase price remained unpaid. Rather, according to [Seller]'s own submissions, it finally sold the machine to a different buyer while maintaining its willingness to deliver a similar machine to [Buyer]. After oral negotiations between the parties at the beginning of 1999, they concluded two further written contracts on 1 and 3 February 1999 (original contracts p. 177, translation K 4), containing the same arbitration clause (item 8 and 5 of the contracts).
POSITIONS OF THE PARTIES IN FIRST INSTANCE
Position of [Buyer]
6. [Buyer] has argued that, by virtue of one of these two contracts, a new contract of sale had been concluded (heading: "Additional Agreement No. 1 to Contract No. 13-1/97"). Thereby, [Seller] was obliged to deliver a used machine for production of refreshing tissues at a price of DM 50,000, which was paid in full by [Buyer]'s payment of 25 September 1997. Delivery was due on 3 March 1999.
7. By way of the second contract of 3 February 1999, the parties had concluded a service contract for technical works, packaging services, etc., against payment of DM 82,000, payable in monthly installments of DM 5,000 as of 25 March 1999.
8. It is [Buyer]'s position that, since [Seller] -- contrary to the delivery date stipulated in para. no. 9 of the contract for sale of the used machine -- had not delivered the machine within the required time to Perm, Russia, [Seller] is obliged to return the purchase price of DM 50,000 that [Buyer] had paid to the [Seller].
9. The arbitration clause was invalid on the grounds of indeterminateness. In particular, it was not clear to which legal disputes it referred to and which of the arbitration courts located in Stockholm, respectively, which ordinary courts should have jurisdiction. Instead, the District Court (Landgericht) Stuttgart had jurisdiction.
Position of [Seller]
10. Prior to submitting its substantive plea in defense, [Seller] had already raised the defense of existence of an agreement to arbitrate (Einrede der Schiedsvereinbarung) by memorandum dated 17 February 2004. At least from the relevant English version of the contract, [Seller] alleges that it was sufficiently determinable that the parties had conferred jurisdiction on the arbitration court of Stockholm, Sweden to settle all disputes and disagreements under exclusion ordinary court's competence. It is [Seller]'s position that:
|-||The arbitration clause referred to the international court of arbitration, the "Arbitration
Institute of the Stockholm Chamber of Commerce".
|-||Moreover, the additional contracts of 1999 were mere bogus contracts which had the sole purpose of circumventing Russian customs laws by partitioning the total purchase price of DM 132,000 into one sum of DM 50,000 and into another sum of DM 82,000
for alleged services.
|-||The intention of the parties remained to impose an obligation for delivery of a new
machine for production of refreshing tissues at a price of DM 132,000 instead of a used
|-||Failing performance by [Buyer] of the [Buyer]'s obligation to make advance payment of the purchase price, [Seller] did not deliver the machine.|
11. Concerning further details, reference is made to all of the memoranda of the parties and their exhibits in the First Instance and to the facts established in the judgment of the District Court (Landgericht) of Stuttgart (§ 54(1) No. 1 ZPO [*].
JUDGMENT BY THE COURT OF FIRST INSTANCE
12. The District Court (Landgericht) of Stuttgart has -- in its judgment of 23 November 2005 -- allowed [Buyer]'s action for repayment and dismissed the additional action for a declaration in relation to damages, mainly by reasoning that the District Court had jurisdiction under both Russian and an English translations of the arbitration clause made by an interpreter because the arbitration clause was invalid.
|-||The Russian translation came to the result that the arbitration court should be
competent only to deal with disputes and disagreements that did not fell within the
jurisdiction of the ordinary courts which means that it would not encompass the present
|-||The English version, however, provided that the parties were entitled to petition the ordinary court in Stockholm in case of no amicable settlement.|
In the light of these differences, the arbitration clause could not be interpreted to determine any common intention of the parties.
Furthermore, [Buyer] was entitled to seek reimbursement of the purchase price without being faced by any set-off claim in favor of [Seller].
POSITIONS OF THE PARTIES ON APPEAL
13. With its appeal [Seller] continues to demand dismissal of [Buyer]'s action following the arguments set out already in the First Instance proceedings. [Seller] alleges that the action was not admissible for adjudication by ordinary German courts because a valid arbitration agreement had been reached by the parties. Particularly, the content of the clause was sufficiently determinable in a way that the parties -- contrary to the wrong translations by the interpreters in the First Instance -- had agreed to settle their legal disputes and disagreements before the arbitration court in Stockholm, thereby excluding the jurisdiction of ordinary courts. Only one internationally well-known arbitration court existed there. Apart from the wording, this conclusion was supported by the parties' understanding, since [Buyer]'s attorney on 8 October 2003 declared to [Seller]'s attorney before the filing of the action that they assumed "to settle the legal dispute -- as contractually agreed -- before the arbitration court in Stockholm". Moreover, any claim on the part of [Buyer] expired on the basis of [Seller]'s counterclaims from set-offs arising from useless expenses (hotel costs, reduced cover sale price of the machine).
14-15. [Seller] therefore requests the Court to reverse the judgment rendered by the District Court (Landgericht) of Stuttgart on 23 November 2005, case docket 40 O 35/04 KfH and to dismiss [Buyer]'s action.
16-17. [Buyer], in turn, has requested the Court to dismiss [Seller]'s appeal.
18. Reference is made to all memoranda and the submitted documents concerning the further submissions by the parties in the Second Instance proceedings.
19. In order to achieve further clarification of the content of the arbitration clause, the Court obtained additional statements by the Russian and the English interpreter by way of evidence order of 22 March 2006 pursuant to § 358a ZPO [*].
REASONING OF THE APPELLATE COURT
20. [Seller]'s appeal is well founded because a valid arbitration agreement by the parties contained in item 8 of the contracts of sale renders the action inadmissible before ordinary German courts (§ 1032(1) ZPO).
21. [Seller]'s defense of the existence of an arbitral agreement, which was raised in First Instance prior to submission of its plea in defense by memorandum of 17 February 2004 (p. 73), must also be considered in the appellate proceedings. § 513(2) ZPO only refers to territorial, functional and subject-matter jurisdiction of courts among the entirety of state courts. Art. 17 GVG [*] governs the jurisdiction of state courts in relation to the legal nature of the dispute. The defense of existence of an arbitration agreement of § 1032(1) ZPO, however, refers to the separation of private courts (courts of arbitration) from state courts. This is why that question is neither embraced by § 513(2) ZPO nor by Art. 17 GVG. In a case in which the defense of existence of an arbitration agreement has been validly raised, any corresponding action commenced before ordinary state courts will not be admissible (Zöller/Geimer, Kommentar zur ZPO, 25th ed., § 1032 para. 7). The issue of validity of the defense of existence of an agreement to arbitrate -- and therefore the question of admissibility of an action -- must be considered in each instance of proceedings (Stein/Jonas/Schlosser, Kommentar zur ZPO, 22th ed., § 1032 para. 20).
22. [Seller] had raised the defense of existence of an arbitration agreement before the start of the oral hearing on the merits in the First Instance, also alleging the existence of a valid agreement by the parties to arbitrate (§ 1029 ZPO). The requirement for written form (§ 1031 ZPO) has been complied with and an interpretation according to Art. 8 CISG (in conjunction with Arts. 1(1)(b), 4 CISG) under consideration of the real intention of the parties leads the Court to be convinced that the parties had agreed by virtue of item 8 of the sales contracts to submit all disputes and disagreements to the conciliation / arbitration commission in Stockholm, Sweden and to exclude jurisdiction of the ordinary courts in the absence of an amicable settlement. The decision by that commission should be definitive and binding upon both parties.
23. Having made reference to the arbitration commission, the Court is convinced that only and exclusively the permanent Stockholm arbitration court of the "Arbitration Institute of the Stockholm Chamber of Commerce" could be meant -- an institutional arbitration court with its own arbitration rules in effect as of 1 August 1988.
24. a) The determination of the real intention of the parties must primarily follow the wording of the arbitration clause in item 8 of the sales contracts. The clause was drafted in both the Russian and English language. The Russian Interpreter B. made the following translation of the arbitration clause during proceedings in the First Instance (sentence no. 2):
|25.||"In case the parties fail to reach an amicable settlement, all questions in dispute and disagreements will be referred for decision in Stockholm, Sweden, except for the jurisdiction of the ordinary courts" (p. 183). (original German wording of the translation:
"Im Fall, dass die Parteien auf gütlichem Wege sich nicht einigen können, warden alle strittigen Fragen und Meinungsverschiedenheiten, mit Ausnahme der gerichtlichen Zuständigkeiten der allgemeinen Gerichte, zur Entscheidung in Stockholm, Schweden unterbreitet.")
26. Even upon evidentiary order by the Court of 22 March 2006, the Russian interpreter adhered to this translation on 27 March 2006 (pp. 304-307), and especially to the passage "except for the jurisdiction".
27. However, the Court has obtained information from the Langenscheidt Russian/German dictionary that this word can have several meanings: disqualification, exclusion, exception (original German wording of the judgment: Ausschließung, Ausschluss, Ausnahme). In German, the word "exception" (Ausnahme) can likewise have the meaning "to be excluded or excepted from something".
28. Interpretation of the wording of a contract falls within the exclusive competence of the Court. This applies not only to imperfectly clear or linguistically erroneous texts in German, but also to those drafted in a foreign language. Thus, the intention of the parties must be determined -- insofar as it is supported by the wording --, under application of a teleological interpretation. In this case, not only the wording of the Russian version of the contract supports a meaning of "excluding" (mit Ausschluss) instead of "except for" (mit Ausnahme), but a sensible translation can be made only by understanding the words in question as "excluding, or, by exclusion of" (mit / unter Ausschluss). If -- according to the interpreter -- disputes and disagreements between the parties could be brought before the arbitration court in Stockholm only insofar as they do not fall within the jurisdiction of the ordinary courts ("except for the jurisdiction of the ordinary courts"), the parties' agreement to arbitrate would hardly be of any substance. Contrary to [Buyer]'s assertions, it is difficult to think of any sort of disputes which could ever fall within the jurisdiction of the arbitration court. Financial, social and administrative disputes are hardly conceivable and are not being litigated between the parties.
29. Even both [Buyer] and [Seller] have understood the arbitration agreement in the sense that all disputes and disagreements should be brought before the arbitration court in Stockholm by exclusion of any jurisdiction of the ordinary courts. According to the Court this clearly follows from the letter by [Buyer]'s attorney dated 8 October 2003. [Buyer]'s attorney addresses [Seller]'s attorney:
"Of course, we will once again consult our client, but despite its statements we assume that legal action shall be commenced within due course. Therefore, we urge you indicate until 20 October 2003 whether this probably inevitable legal dispute should be litigated before the District Court (Landgericht) of Stuttgart or before the arbitration court in Stockholm. Should we not receive your statement until the date proposed, we assume that the dispute should be litigated -- as contractually agreed -- before the arbitration court in Stockholm."
30. This interpretation is further supported by the translation of 19 December 2001 furnished by [Buyer] itself (exhibit K4, pp. 36-37), which it unjustifiably challenges as wrong and which it has substituted by a translation produced by Interpreter B., dated 19 November 2003 (exhibit K3, p. 27).
31. The Court's interpretation of the arbitration agreement further corresponds with the proper meaning of the English version of the contract. Indeed, the English Interpreter A. (p. 182) proposed in the First Instance proceedings once again another possible interpretation, according to which the passage in question meant:
|32.||"Should the parties not reach an amicable settlement, the ordinary court in Stockholm must be petitioned without any recourse." (original German wording of the judgment:"Sollten die Parteien zu keiner gütlichen Einigung gelangen, so ist ohne Regress das ordentliche Gericht in Stockholm anzurufen")|
33. However, even an unprejudiced view of the English version of the arbitration clause (contract item 8) by a person with average English skills demonstrates that this suggested translation is highly questionable. The decisive passage in item 8(1)(2) of the contract reads in English:
"If Parties cannot agree upon an amicable settlement then all disputes and differences are to be submitted without resource to the ordinary court to Stockholm, Sweden."
Apart from a spelling mistake, it is apparent that the interpreter replaced the word "resource" (in German: Quelle, Ressourcen) by the English word "recourse" (in German: Regress). In that respect, it was not considered that the English words "are to be submitted" bear a reference to the words "to Stockholm, Sweden" and do not refer to the insertion "without resource to the ordinary court". The word "to submit" is always accompanied by the preposition "to". Therefore, the word "to" before the word "Stockholm" forms part of the verb "submitted" and, consequently, cannot have the words "ordinary court" as its object of reference.
34. The above reasoning leads to the correct interpretation that the arbitration court shall have jurisdiction, without any possibility to access the ordinary courts. The proposed English translation is not sensible because the paragraph's caption "Arbitration" and the sentence immediately following the passage in question demonstrate that an arbitral tribunal is supposed to be competent, something which would have been actually excluded by the stated translation. It is, furthermore, hardly sensible to stipulate that disputes between a Russian and a German company should be litigated before the ordinary court in Stockholm, to which the dispute at hand bears no connection.
35. b) Given the above interpretation of the arbitration agreement by the Court, it is also sufficiently determinable since it refers only to one arbitration court located in Stockholm, which is the "Arbitration Institute of the Stockholm Chamber of Commerce". It is an institutional court of arbitration and has its own arbitration rules in effect since 1 January 1988 (cf. Schwab/Walter, Schiedsgerichtsbarkeit, 6th. ed., ch. 41 para. 17, where the Stockholm Arbitration Institute as a body within the International Chamber of Commerce of Stockholm is expressly referenced as an institutional court of arbitration). Apart from the court of arbitration located in Paris, this constitutes one of the most well-known international courts of arbitration. For the purposes of international commerce, it is known to parties and, consequently, it has been properly referred to even without embracing the correct and entire denomination.
36. The alternative suggested by [Buyer] that reference was made to the Court of Arbitration of the German-Swedish Chamber of Commerce cannot be considered by the Court as the intention of the parties in this case of a contract between a German and a Russian company. According to § 1(1) of its rules of arbitration (exhibit B12), this arbitration court is available only to companies which have embarked upon commerce between Germany and Sweden.
37. c) Indications have neither been properly substantiated nor are any apparent for a finding that [Seller]'s appeal in relation to the arbitration agreement was made in violation of good faith. The defense of existence of an arbitration agreement can be struck down by a counter-defense based on an alleged abuse of rights only in exceptional cases; none of which is given here. For instance, in proceedings before a state court a defendant cannot rely on the existence of an arbitration agreement if it had already challenged the validity of the arbitration agreement in previously initiated arbitral proceedings, thereby causing the arbitral tribunal not to render a substantive judgment, or, if the defendant has shown some general willingness to embark upon abusive conduct during proceedings (cf. Geimer, § 1032 para. 20).
38. Insistence on the mutually stipulated court and thereby on the agreed "legitimate" judicial body is not abusive, and is furthermore not an abuse if the ordinary court at the domicile of the defendant is petitioned. The contrary opinion would lead to a right to chose on part of the plaintiff which could not be reconciled with the agreement to arbitrate.
39. [Seller] has effectively relied on the defense that an arbitration agreement existed. Consequently, [Buyer]'s action must be dismissed as inadmissible according to § 1032(1) ZPO [*].
40. The decision on costs follows from § 91 ZPO. The decision on preliminary enforceability follows from §§ 708 No. 11, 711(2) ZPO.
41. Further appeal on legal grounds (Revision) is not admissible. The present dispute has neither fundamental importance nor would the development of law or the unity and consistency of jurisprudence require a judgment by the Federal Supreme Court.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Plaintiff-Appellee of the Russian Federation is referred to as [Buyer] and Defendant-Appellant of Germany is referred to as [Seller]. Amounts in the uniform European currency (Euro) are indicated as [EUR]. Amounts in the former currency of Germany (Deutsche Mark) are indicated as [DM].
Translator's note on other abbreviations: GVG = Gerichtsverfassungsgesetz [German statute on court organization]; ZPO = Zivilprozessordnung [German Code on Civil Procedure].
** Jan Henning Berg has been a law student at the University of Osnabrück, Germany and at King's College London. He participated in the 13th Willem C. Vis Moot with the team of the University of Osnabrück. He has coached the team of the University of Osnabrück for the 14th Willem C. Vis and 4th Willem C. Vis (East) Moot.Go to Case Table of Contents