Hungary 22 November 2007 Judicial Board of Szeged [Appellate Court] (Clothing case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/071122h1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: Gf.I.30.372.2007/3
CASE HISTORY: 1st instance Congrád County Court 6 June 2007
SELLER'S COUNTRY: Germany (plaintiff)
BUYER'S COUNTRY: Hungary (defendant)
GOODS INVOLVED: Clothing items
APPLICATION OF CISG: Yes [Article 1(1)(a)]
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
78B [Rate of interest]
78B [Rate of interest]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (Hungarian): Click here for Hungarian text of case; see also <http://www.birosag.hu/engine.aspx?page=anonim>
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
22 November 2007 [No. Gf.I.30.372/2007/3]
Translation [*] by Andrea Vincze [**]
IN THE NAME OF
THE REPUBLIC OF HUNGARY
In the lawsuit between Plaintiff ___ [Seller], represented by dr. András Tuller, Attorney (1055 Budapest, Balassi Bálint u. 25. fsz.5.) and Defendant ___ [Buyer], represented by dr. László Varga, Attorney (6721 Szeged, Tisza Lajos krt. 7-9., II/1.), relating to payment of purchase price, in the appeal by [Seller] (under no. 13) and [Buyer] (no. 14) against the first-instance judgment made by the Csongrád County Court on 6 June 2007 under no. 2.G.40. 08/2007/12, in second-instance proceedings performed as a result of the appeals, the Judicial Board of Szeged made the following
The Judicial Board did not deal with the part of the first-instance judgment that was not appealed, and partially modifies the appealed part to the extent that [Buyer] must pay interest on the damages ordered, for the entire period between 28 September 2006 and the date of payment, at the European Central Bank rate plus 8 percent, in force on the last day before the respective calendar term [of six months].
In other terms, the first instance judgment is confirmed.
The Court orders [Seller] to pay [Buyer] the costs of the second-instance proceedings, i.e., HUF 20,000 (twenty thousand Hungarian Forints), within 15 days.
This judgment cannot be further appealed.
The litigating parties concluded a sales contract under which [Seller] delivered goods in the amount of EUR 13,277 from 9 September 2002 until the first quarter of 2004. [Seller] sent the relating invoices to [Buyer] but the buyer failed to pay the purchase price.
In its modified claim, [Seller] requests payment of the purchase price of EUR 13,277.65, EUR 2,191.48 in costs, and a default interest on the latter amounts, determined based on the EURIBOR rate continuously determined by the European Central Bank. [Seller] argues that it had incurred procedural fees in the amount of EUR 450 during collection of the outstanding purchase price, evidenced by the invoice issued by the German-Hungarian Chamber of Industry and Commerce, and it had incurred EUR 1,741.48 as agency fee that was paid to the German company employed for collection of the monies. [Seller] argues that German law is applicable to the dispute, as a result of the provision in Art. 25(a) of Law Decree No. 13 of 1979, pursuant to which sales contracts shall be governed by the seller's law, i.e., law of the German [Seller] in this case. As both Germany and Hungary are signatories of the Vienna Sales Convention, promulgated in Hungary with Law Decree No. 20 of 1987, therefore, the Convention applies.
[Buyer] had acknowledged the claim regarding EUR 10,934.85, and requested the Court to reject the claim regarding the remaining amount. [Buyer] argued that the parties had concluded a consignment contract rather than a sales contract, therefore, the Vienna Sales Convention is not applicable. [Buyer] did not object to the amount of the purchase price but raised a set-off claim regarding the unsold goods in its possession as well as the safekeeping costs thereof.
The first-instance judgment ordered [Buyer] to pay EUR 13,277.65 and interest at a rate equaling the current German central bank prime rate plus 8 (eight) percent from 28 September 2006 until the date of payment, as well as HUF 360,000 as costs of the proceedings. Regarding EUR 10,934.85, the judgment was to be enforced by provisional measures without regard to any appeal. In excess of the latter sum, the Court rejected [Seller]'s claim. The Court of First Instance stated that it had to decide, first and foremost, on the issue of applicable law. The Court examined provisions of the Vienna Sales Convention as to whether the transaction in dispute is covered by the Convention. The Court found that, at the time of conclusion of the sales contract, it was already known that the contracting parties have their places of business in different States; therefore, the Vienna Sales Convention is applicable to the sales contract. Pursuant to Art. 62 of the Convention, the seller may request the buyer to pay the purchase price, and pursuant to Art. 78, interest is also due. Accepting [Seller]'s argument that German law applies to the dispute, the Court determined the rate of interest under Art. 288(2) of the German Civil Code (BGB). The Court rejected [Buyer]'s set-off claim.
Both [Seller] and [Buyer] appealed the first-instance judgment.
[Seller] requested partial modification of the first-instance judgment and requested to raise [Buyer]'s payment obligation by EUR 2,191.48 and to order payment of the related fees. Second, [Seller] argued that the procedural costs awarded should also be raised. [Seller] argued and supported its statements by documents that it had incurred costs concerning collection of [Buyer]'s debt, the out-of-court settlement, and enforcement of the claim in that way. [Seller] also requested to raise the attorneys' fees which were disproportionately low in the first-instance judgment.
In its appeal, [Buyer] requested modification of the first-instance judgment by decreasing the default interest rate to the one included in the Civil Code of Hungary. [Buyer] argued that Hungarian law applied to the transaction, and that [Seller] failed to prove why the Vienna Convention is applicable. [Buyer] argued that it was not known at the time of contract conclusion that the places of business of the parties are located in different States; in addition, the Vienna Sales Convention does not apply either because [Seller] had sold the goods with retaining property of the goods, and such transactions are out of the scope of the Convention (Art. 21). As the Court of First Instance found that the Vienna Sales Convention governs the transaction, it erred in determining the interest rate under German law, yet, as the Vienna Convention is not applicable, the interest rate shall also be determined by Hungarian law. With regard to the proportions of winning and losing, [Buyer] requested the court to decrease the procedural costs to HUF 290,000.
[Seller]'s appeal is unfounded, and [Buyer]'s appeal is partially founded.
The Court of First Instance correctly determined the applicable law, as the present dispute must be adjudicated under German law. As both Germany and Hungary are signatories to the Vienna Sales Convention, provisions of the Convention apply regardless of which party's law is applied. It is a fact that [Buyer] failed to pay the purchase price, it was late with payment, and thereby committed a breach of contract.
As an objective sanction of the obligor's default, [Buyer] must pay interest (Art. 78), and such default interest serves as liquidated damages, and generally compensates in full for all losses incurred due to the breach. The Convention applies the principle of full compensation, i.e., the breaching party must pay actual damages as well as lost profits. On the other hand Art. 74 limits compensation for damages arising out of the breach by application of the foreseeability doctrine. The breaching party must compensate for damages that the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. This provision limits the risk of the contracting party relating to any breach of contract to damages known or discoverable and foreseeable by such party at the time of contract conclusion. The Convention determines unforeseeable damages those which a reasonable person of the same kind in the same circumstances would not have foreseen (Art. 25).
In its appeal, [Seller] referred to damages which were costs arising out of judicial settlement of the claim. Pursuant to Art. 75(1) of the Code of Civil Procedure of Hungary, procedural costs are costs incurred by the parties concerning practicable and good faith litigation either before or out of court (e.g. costs of preliminary negotiations). The Court had to decide within the issue of procedural costs upon [Seller]'s costs regarding its preliminary request for information from the German-Hungarian Chamber of Industry and Commerce, since [Seller] intended to resolve the dispute out of court. On the other hand, costs incurred by [Seller] due to employing another German company for collection of the debt, do not qualify as procedural costs. In addition to costs incurred as a result of adjudication of the claim by a lawsuit ("collection"), no other collection costs can be taken into consideration, as that would result in double evaluation.
As the Court of First Instance made a correct ruling concerning the applicable law, the default interest rate also had to be determined by German law. General and specific contract provision of Act No. 4 of 1959 on the Civil Code of Hungary are applicable solely to legal relationships covered by the Act, therefore, if German private law is applied, default interest provisions of the Civil Code of Hungary cannot be applied. Pursuant to Art. 288 (2) BGB, in case of late payment regarding commercial transactions, the interest rate shall be the central bank prime rate plus 8 percent. German law implemented Council Directive 2000/35/EC on combating late payment in commercial transactions. Pursuant to this Directive, the level of interest for late payment ("the statutory rate") shall be the sum of the interest rate applied by the European Central Bank to its most recent main refinancing operation carried out before the first calendar day of the half-year in question ("the reference rate"), plus at least seven percentage points ("the margin"), unless otherwise specified in the contract.
The Judicial Board finds that, regardless of the law of which country is applied, if the payment obligation must be fulfilled in foreign currency, the central bank prime rate does not mean the prime rate determined by the central bank of the respective country but its equivalent in the foreign currency, i.e., the interest rate determined by the central bank of the country issuing the currency of the debt. In case of member states of the Euro Zone already participating in the third stage of establishing the economic and financial union, the latter results that central bank prime rate is the interest rate of the European Central Bank. As German law provides for payment of default interest at this rate plus 8 percent, the Judicial Board accordingly modified [Buyer]'s duty to pay interest.
The Judicial Board remarks that even if [Buyer]'s argument were to be accepted entirely, the interest had to be calculated under the same principles if Hungarian law is applied. The currently applicable interest rate provision of the Civil Code of Hungary was determined by Act No. 36 of 2002 which implemented the above Directive into Hungarian law, i.e., that included implementation of Art. 3(1)(d) as well on the default interest rate (Art. 689 (c) of the Civil Code of Hungary). Hungarian law provides for payment of a default interest at the central bank prime rate plus 7 percent. In accordance with that, the question has already arisen in practice whether the statutory rate applied solely to interest to be paid in HUF or also if interest must be paid in other currency.
In a judgment made in accordance with the old law, the Supreme Court stated that in case of late payment of a debt in a foreign currency, the interest rate specified in the Civil Code of Hungary cannot be applied because the interest rate set out in the Civil Code applies solely to debts or awards in Hungarian currency, as this can be established from the entire Hungarian legal system and the system of the Civil Code of Hungary (Supreme Court judgment No. 2000/1/195). After the new law entered into force, the Civil, Economic and Administrative Chamber of the Csongrád County Court issued its opinion No. 4/2006 (X.27.), according to which, in legal relationships subject to the Civil Code of Hungary, when determining interest in payments to be made in foreign currency, the applicable interest rate ("reference rate") specified by the central bank of the country issuing such currency must be applied. If the payment must be made in EUR, the applicable interest rate is the one applied by the European Central Bank (opinion issued in Vol. 2007/1 of the Collection of Judgments).
The Judicial Board agrees with the latter opinion. Financial sovereignty of a State means that the issuing State is entitled to make law about any important issues regarding the respective currency, including the default interest rate payable upon use of such currency. Other states are not allowed to issue any legal provisions in this regard. The interest rate specified by the central bank of the country issuing the respective currency must be considered as the applicable interest rate because that is what represents the features of the currency specified in the contract, such as inflation. The interest rate determined by the Hungarian Central bank (central bank prime rate) is an indirect tool of monetary policy. It is indirect because it is suitable for influencing interest (and the amount of money in circulation), it determines the latter indirectly rather than directly. The central bank prime rate determined by the Hungarian Central Bank is the interest paid by the central bank to commercial banks for their two-week deposits with the latter. The central bank prime rate is determined by the Monetary Council as a body, based on the condition of the Hungarian currency and economy. Decisions of the Hungarian Central Bank, as central bank, cannot be connected to other currencies of other countries, therefore, in case of an award in foreign currency, the central bank prime rate, as determined in Art. 301 and 301/A of the Civil Code of Hungary, shall always mean the central bank prime rate of the country issuing the respective currency. In case of an award in EUR, German and Hungarian law differ only slightly regarding the interest rate, as under German law, the obligor must pay the European Central Bank prime rate plus 8 percent, while under Hungarian law, the European Central Bank prime rate plus 7 percent must be paid.
The appeals regarding procedural costs are unfounded. Compared to the original claim of HUF 5,051,230, [Seller] proved to win only to a proportion of 67%, therefore, it shall be entitled to receive 67% of the court fees (HUF 203,000), as well as the proportionate attorneys' fees. (HUF 205,000). Regarding [Buyer]'s attorneys' fees (HUF 1,651,230), HUF 100,000 [is due]. After setting off the latter sums, [Seller] shall receive HUF 308,000 as procedural costs. In addition, the Judicial Board rules that HUF 52,000 shall be accepted as reasonable costs out of the expenses incurred prior to the lawsuit; therefore, modification of the first-instance award to [Seller] in the amount of HUF 360,000 is not necessary.
Based on the above arguments, the Judicial Board did not deal with the part of the first-instance judgment which the parties did not appeal, and modified the appealed part to the extent that [Buyer] shall pay interest on the awarded sum, at the European Central Bank prime rate plus 8 percent (Art. 253(2) of the Code of Civil Procedure of Hungary). In other respects, the Judicial affirmed the first-instance judgment.
[Seller]'s appeal was unsuccessful, [Buyer]'s appeal was partially successful, therefore, pursuant to Art. 81 of the Code of Civil Procedure of Hungary, the Judicial Board ordered [Seller] to pay [Buyer] the costs of the proceedings on second instance, and determined the attorneys' fees pursuant to Art. 3(2)(a) and 3(5) of the Decree of the Minister of Justice No. 32/2003 (VII.22.).
Szeged, 22 November 2007
Chair of the Council
Judicial Board Judge
* All translations should be cross-checked against the original text. For purposes of this translation, Plaintiff of Germany is referred to as [Seller] and Defendant of Hungary is referred to as [Buyer]
** Andrea Vincze is a Fellow of the Institute of International Commercial Law of the Pace University School of Law. She received her law degree from the University of Miskolc, Hungary, and her LL.M. at Pace Law School. She is working on her Ph.D. on ICSID arbitration, and is researching international commercial law and ADR.Go to Case Table of Contents