Poland 11 May 2007 Supreme Court of Poland (Shoe leather case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/070511p1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: V CSK 456/06
CASE HISTORY: 1st instance Circuit Court Opole 6 January; 2d instance Appellate Court Wroclaw 17 April 2003 [affirming]; 3d instance Supreme Court 20 April 20054 [reversing and remanding]; 4th instance Appellate Court Wroclaw 15 October 2004 [reversed in part the decision of the 1st instance court]; 5th instance Supreme Court 19 October 2005 [reversing and remanding; 6th instance Appellate Court Wroclaw [reversed in part the decision of the 1st instance court]; 7th instance (this proceeding) Supreme Court 11 May 2007 [reversing and remanding]
SELLER'S COUNTRY: Poland (defendant)
BUYER'S COUNTRY: Germany (plaintiff)
GOODS INVOLVED: Leather to manufacture shoes
POLAND: Supreme Court 11 May 2007
Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/110],
CLOUT abstract no. 1080
Reproduced with permission of UNCITRAL
A Polish seller and a German buyer entered into a contract for the sale of leather for the manufacturing of military shoes for the German Army. The leather was delivered directly to the third party manufacturer in Germany, but the German buyer did not inspect the goods after they were delivered to the manufacturer. Subsequently, the German Federal Bureau for Technical Defense and Supply found that the goods did not conform to the relevant specifications and the buyer notified the seller about the non-conformity. Meanwhile, the German Army returned all manufactured shoe pairs. An additional period of three days was given to deliver substitute goods but the seller refused. The buyer sent a declaration for the avoidance of the contract and the seller sued the buyer for the payment of the purchase price.
The Polish Supreme Court stated that there should not be any distinction between failure to perform and other breaches of the contract. Hence, delivery of non-conforming goods is a breach of contract as per Article 35 CISG. However, it was noted that this non-conformity does not permit a demand for delivery of substitute goods as per Article 46 (2) of the CISG unless there is a fundamental breach of contract under Article 25 CISG.
The Court held, referring to the principle of good faith, the CISG Advisory Council Opinion No. 5, and a ruling of the Austrian Supreme Court, that as a general rule a buyer may withhold payment as a result of non-conformity from Articles 71, 81 (2), 85 and 86 (2) CISG. Further referring to the good faith principle, the Court held that the buyer is not allowed to first request delivery and then purchase substitute good without avoiding the contract. Overall, the Court stated that the buyer, who demanded substitute delivery under Article 46, also had the right to withhold the payment of the price until such time as the seller performed its obligations in conformity with the contract.Go to Case Table of Contents
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
7C21 [Interpretation of Convention (gap-filling): analogous application to areas not expressly
regulated]; 25B [Definition of fundamental breach: substantial deprivation of expectation, etc.]; 35A [Conformity of goods to contract: quality, quantity and description required by contract]; 46B1 [Buyer's right to require substitute goods: remedy only available for fundamental breach]; 71A1 [Anticipatory breach (suspension of performance): grounds for suspension]; 80A [Failure of performance caused by other party (party causing non-performance): loss of rights]
7C21 [Interpretation of Convention (gap-filling): analogous application to areas not expressly regulated];
25B [Definition of fundamental breach: substantial deprivation of expectation, etc.];
35A [Conformity of goods to contract: quality, quantity and description required by contract];
46B1 [Buyer's right to require substitute goods: remedy only available for fundamental breach];
71A1 [Anticipatory breach (suspension of performance): grounds for suspension];
80A [Failure of performance caused by other party (party causing non-performance): loss of rights]
CITATIONS TO OTHER ABSTRACTS OF DECISION
English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=1374&step=Abstract>
CITATIONS TO TEXT OF DECISION
Original language (Polish): Click here for Polish text of case; Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=1374&step=FullText>
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
English: Aleksandra Jurewicz, A Milestone in Polish CISG Jurisprudence and Its Significance to the World Trade Community, 28 Journal of Law and Commerce (Fall 2009) 63-74Go to Case Table of Contents
Case text (English translation) [second draft]
11 May 2007 [V CSK 456/06]
Translation [*] by Aleksandra Marta Jurewicz [**]
On 19 January 2000, the Buyer M. W. D. GmbH & Co KG requested from the Seller a price estimate for 4,400 square meters of a specific type of leather which was to be delivered to a shoe manufacturer in Germany. In response, the Seller submitted an offer for the requested leather for the purpose of manufacturing military shoes for the German army (Bundeswehr). On 24 January 2000, the Buyer accepted the offer and the Seller sent the ordered goods to a third party manufacturer.
The Buyer did not inspect the goods after they were delivered to the manufacturer. After the shoes were manufactured, the German Federal Bureau for Technical Defense and Supply noticed that the goods did not conform to the specifications of the offer. On 12 May 2000, the Buyer notified the Seller that the goods were non-conforming, asked for a quality control certificate and fixed an additional time for the Seller to deliver conforming goods (15 May 2000). In the meantime, the Bundeswehr returned all the shoes (37,130 pairs). The Seller refused to deliver substitute goods and on 17 December 2002, the Buyer sent the Seller a declaration of avoidance of the contract.
In its analysis, the Court assumed that the CISG distinguishes between breach, including fundamental breach, and non-conformity of the goods. The Court stated that common law and civil law differ when it comes to the treatment of breach of contract. However, under the CISG there is no need to distinguish instances of non-performance from other breaches of contract. The Appellate Court ruling in this litigation acknowledged that the Convention provides for less serious legal consequences in the event the party performed but its performance nevertheless amounted to a breach of contract. The Supreme Court disagreed and stated that there should not be a distinction between failure to perform and other breaches of contract. Delivery of non-conforming goods is a breach of contract. This rule stems from Article 35 of the Convention which describes what characteristics goods should have in order to conform to the contract. Failure to fulfill those characteristics amounts to non-conformity. However, mere non-conformity does not entitle the buyer to require delivery of substitute goods under Article 46(2) of the Convention. This remedy is available only if the lack of conformity constitutes a fundamental breach of contract under Article 25.
Scholars agree that Article 25 is one of the most difficult provisions to interpret because it includes numerous undefined terms. At the same time, this article is one of the most important provisions because the matter of a fundamental breach, judged on the circumstances of the contract and expectations of the parties, determines which remedies are available, especially delivery of substitute goods and avoidance of contract without the requirement to give an additional time to perform. Having the freedom to choose remedies, the buyer, however, is bound to the contract and should not, acting in good faith and as a reasonable person, first request delivery of substitute goods and then, not waiting for delivery, declare the contract avoided.
There is no need to explain the whole process of the determination of a fundamental breach. It is enough to note that under Article 25, detriment (meaning a substantial deprivation of a party of what he is entitled to expect under the contract) cannot equal damages as they include all actual and potential negative consequences of a breach of contract. Therefore, a party claiming a fundamental breach of contract does not have to show that he suffered damages or did not receive benefits. Moreover, the notion of reasonable expectations of an obligee is not measured subjectively, but rather requires a full analysis of the text of the contract, any practices which the parties have established between themselves, usages, negotiations and all relevant circumstances of the case. Therefore, the concrete and ascertained legal relationship is crucial for this determination. The burden of proof is placed on the party seeking relief under the Convention.
Legal literature provides that the seller, when the buyer promptly requests substitute goods, cannot demand payment before the goods are delivered. We agree with this view as it follows the general principles of the Convention, including the right to require actual performance and simultaneous exchange of performance (payment against delivery). Indeed, the Convention does not require that the goods delivered perfectly comply with the terms of the contract, but if the buyer is deprived of what he expected (fundamental breach), the seller, upon the buyer's request, should deliver substitute goods. Until the substitute goods are delivered, the buyer is not obliged to pay the price because otherwise the seller would receive performance even though it has not performed under the contract. Thus, it means that the Appellate Court erroneously interpreted Article 46(2).
However, Article 46(2) does not indicate that a request for substitute goods automatically allows a party to wait to pay the price because this provision governs only the right of the buyer to request delivery of substitute goods.
The right to suspend payment is also not based on Article 71. This article regulates the right to suspend the performance of obligations in the case of an anticipatory breach of contract whereby it becomes apparent that the other party will not perform a substantial part of his obligations. The right to suspend performance is possible only after the parties entered into a contract, but before it is performed when it turns out that for certain reasons specified in the Convention, the other party will not perform. The remedy under Article 71 is not available where the goods have been delivered to the buyer. In a situation where a breach of contract becomes apparent after the goods are tendered and the risk shifts, it is difficult to talk about an anticipatory breach of contract.
Summarizing the analysis of Article 71, we conclude that there is no basis to apply this article because there has not been an anticipatory breach of contract. However, we agree that the Appellate Court violated the Convention by not analyzing whether Article 71 can be applied by analogy or whether it establishes a general rule of the Convention fulfilling a gap and giving the party deprived of what he expected under the contract a general right to withhold performance in order to force another party to perform promptly.
The construction of such a rule is not only possible, but also supported by the rules of good faith and righteousness. It is important to note that Opinion No. 5 of the CISG Advisory Council derived the right to withhold the performance of obligations as a result of non-conformity from Articles 71, 81(2), 85, 86(2). This view has been shared by some Contracting States' courts. For example, the Austrian Supreme Court in its opinion of 8 November 2005, 4 Ob 179/05k (Internationales Handelsrecht 2006 No. 2, p. 87) ruling on the issue of nonpayment for non-conforming goods indicated the possibility of deriving a general right of the buyer to withhold its performance from the payment against delivery rule.
Filling in the gaps of the Convention is also possible through analogy. Legal literature allows and does not question the use of analogy for the purpose of interpretation of the CISG.
Article 80 imposes on the parties the duty of loyalty and abstention from any acts that would hinder the performance of the contract. One of the imperative elements of this article is the legal relation (causation) between the obligor's conduct and obligee's performance. It is an objective element independent from the obligor's will. Because of that, the argument that Article 80 has been violated was groundless. Under the circumstances, the failure to pay the price is not a result of lack of mutual performance under the contract but rather a result of the seller's failure to tender goods conforming with the terms of the contract. (...)
Thus, the appeal to the Supreme Court is well grounded on the violation of Articles 46(2) and 71 of the Convention. (...)
The case is remanded and the court can analyze the dispute in light of the good faith rule. The buyer did not inspect the goods after they have been delivered and purchased substitute goods without avoiding the contract. The seller, however, did not show its willingness to work with the buyer to limit the consequences of non-conformity. The seller relied only on its own judgment of the quality of the goods, which could force the buyer to make a cover purchase. All these circumstances may lead to the rule of good faith which does not allow the obligee to receive what he should give to his debtor as compensation of the caused harm.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Plaintiff of Poland is referred to as [Seller] and Defendant of Germany is referred to as [Buyer].
** Aleksandra Marta Jurewicz, Associate, Jones Day; JD 2007, University of Pittsburgh School of Law; LL.M. 2005, University of Pittsburgh School of Law; J.D. (magister prawa) 2003, Jagiellonian University School of Law, Cracow, Poland.Go to Case Table of Contents