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CISG CASE PRESENTATION

Germany 8 January 1997 Appellate Court Köln (Tannery machines case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970108g1.html]

Primary source(s) for case presentation: Case text


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Case identification

DATE OF DECISION: 19970108 (8 January 1997)

JURISDICTION: Germany

TRIBUNAL: OLG Köln [OLG = Oberlandesgericht = Provincial Court of Appeal]

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: 27 U 58/96

CASE NAME: German case citations do not identify parties to proceedings

CASE HISTORY: 1st instance LG Aachen 19 April 1996 [reversed in part]

SELLER'S COUNTRY: Netherlands (plaintiff)

BUYER'S COUNTRY: Germany (defendant)

GOODS INVOLVED: Tannery machines


Case abstract

GERMANY: Oberlandesgericht Köln 8 January 1997

Case law on UNCITRAL texts (CLOUT) abstract no. 311

Reproduced with permission from UNCITRAL

A Dutch seller, plaintiff, delivered tannery machines "ex works on lorry" to a German buyer, defendant. The seller recovered the tannery machines in order to adjust parts of the equipment, with the promise to return them within an agreed period of time. As the seller did not return the machines within such period of time, the buyer contracted a third party for treating its leather goods. When asked to apply the purchase price, the buyer counterclaimed compensation for its expenses. The seller claimed the right of retention of the machines.

The appellate court held that the first instance court had jurisdiction under article 5(1) of the European Communities Convention on Jurisdiction and Enforcement of Judgements in Civil and Commercial Matters, according to which, jurisdiction is determined at the place where the obligation which is the basis of the claim was, or should have been, performed. The court further held that while the parties stipulated "ex works on lorry" in the contract, they had in fact agreed that the buyer's place of business in Germany would be the place of performance, as the seller delivered the machines at the buyer's business address (article 31 CISG).

The court partially allowed the counterclaim under article 45 CISG and article 74 CISG. It held that the seller was obliged to return the machines in accordance with its agreement with the buyer, as the seller had no right of retention, neither under the seller's general business conditions nor under article 71 CISG. The seller had engaged itself unconditionally to return the tannery machines after adjustment, which meant that the parties had excluded the right of retention. The court held that article 45 CISG applied to any failure of performance by the seller, including lack of performance of secondary obligations. The court ruled that article 74 CISG included also the buyer's reasonable expenses to mitigate the loss, as it was forced to contract a third party due to the seller's failure to return the machines within the agreed period of time.

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Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 7 ; 9 ; 25 ; 30 ; 31 ; 39(1) ; 45(1) ; 71(1) ; 74 ; 77 [Also cited: Articles 1(1) ; 3(1) ; 35 ; 53 ; 78 ; 80 ] [Also relevant: Articles 6 ; 61 ]

Classification of issues using UNCITRAL classification code numbers:

7A33 [Application of good faith standards (conditioning previously negotiated modification agreement upon payment of prior indebtedness held lacking in good faith)];

25B [Fundamental breach (definition of): can apply to breach of secondary obligation (agreement to modify and redeliver goods)];

30A [Seller must deliver the goods as required by the contract];

31B1 [Place for delivery: goods to be placed at disposal at known place (buyer's business address)];

39A2 [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

45A [Remedies available to buyer for breach of contract by seller: applicable to any failure of performance by seller, including breach of secondary obligations];

71A1 [Suspension of performance: grounds for suspension];

74A11 ; 74B [Damages (loss suffered as consequence of breach): includes loss of profit; Foreseeability of loss];

77A [Obligation to take reasonable measures to mitigate damages: expenses associated with]

Descriptors: Delivery ; Jurisdiction ; Conformity of goods ; Lack of conformity notice, timeliness ; Fundamental breach ; General principles ; Good faith ; Suspension of performance ; Damages ; Foreseeability of damages ; Mitigation of loss

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=232&step=Abstract>

CITATIONS TO TEXT OF DECISION

Original language (German): cisg-online.ch <http://www.cisg-online.ch/cisg/urteile/217.htm>; Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=232&step=FullText>

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Larry A. DiMatteo et al., 34 Northwestern Journal of International Law & Business (Winter 2004) 299-440 at n.543; CISG-AC advisory opinion on Examination of the Goods and Notice of Non-Conformity [7 June 2004] (this case and related cases cited in addendum to opinion); Article 78 and rate of interest: Mazzotta, Endless disagreement among commentators, much less among courts (2004) [citing this case and 275 other court and arbitral rulings]; [2005] Schlechtriem & Schwenzer ed., Commentary on UN Convention on International Sale of Goods, 2d (English) ed., Oxford University Press, Art. 8 para. 56 Art. 31 paras. 78, 94 Art. 39 para. 7 Art. 45 para. 23 Art. 71 para. 25 Art. 74 paras. 15, 16, 18, 41 Art. 80 para. 6; CISG-AC advisory opinion on Calculation of Damages under CISG Article 74 [Spring 2006] n.35 (related cases cited in addendum to opinion)

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Case text (English translation)

Queen Mary Case Translation Programme

Court of Appeals (Oberlandesgericht) Köln

8 January 1997 [27 U 58/96]

Translation [*] by Ruth M. Janal [**]

Translation edited by Camilla Baasch Andersen [***]

REASONING OF THE COURT

The [buyer]'s appeal is admissible and partially successful.

I. The Court of First Instance, LG [*] Aachen, also possessed the international jurisdiction to decide upon the counterclaim. The matter of jurisdiction needs to be examined by the Appellate Court, as 512a ZPO [*] (which provides that the affirmation of the local jurisdiction by the Court of First Instance cannot be reviewed by the Court of Appeals), does not apply to the question of international jurisdiction (cf. BGH [*] GSZ 44, 46). However, the Court of First Instance was correct in assuming its jurisdiction.

[The Appellate Court rejects the application of Art. 18 Brussels Convention]

The jurisdiction of the Court of First Instance does not result from Art. 18, sent. 1, Brussels Convention [*], which was ratified by both the Federal Republic of Germany and The Netherlands (cf. Zöller/Geimer, ZPO, 20th ed., Art. 1 Brussels Convention n. 1), and which therefore principally applies to the present dispute. According to this provision, a court of a Contracting State before whom a defendant enters an appearance shall have jurisdiction. Under Art. 18, sent. 2, Brussels Convention, this rule does not apply where appearance was entered solely to contest the jurisdiction. If the defendant appears and contests the jurisdiction, it may at the same time make alternative pleadings regarding the substantive law without losing its objection to the jurisdiction (cf. ECJ [*] NJW [*] 1984, 2760). The party objected to the international jurisdiction of the Court of First Instance during the first instance proceedings and therefore did not lose its right to contest the jurisdiction by making alternative pleadings regarding the substantive law.

The international jurisdiction of German courts over the [buyer]'s counterclaim was not validly excluded by the [seller]'s standard terms and conditions. Clause 17 of the German version of these standard terms provides:

"Exclusive forum for all disputes arising out of the legal relationship between the parties is for both parties the court to which the district Tilburg [Netherlands] belongs at the time of the delivery. We do, however, reserve the right to bring an action before the court of the other party's domicile or place of business."

[The Appellate Court interprets the prorogation clause]

This clause also excludes the international jurisdiction of German courts over counterclaims against the [seller]. Whether the prorogation of a foreign jurisdiction also encompasses the derogation of the German jurisdiction over a counterclaim needs to be determined through an interpretation of the forum selection agreement (cf. Schumann in Stein/Jonas, ZPO, 20th ed., 33 n. 41; Zöller/Geimer, Art. 17 Brussels Convention n. 16, 17). The interpretation of a forum selection clause in the present form is controversial.

Following one scholarly opinion, it does not correspond to the typical intention of the parties to exclude the possibility of a counterclaim action at the derogated forum, even in the case that the party bringing the counterclaim is being sued at that place. Thus, the possibility of bringing a counterclaim at the derogated forum can only be excluded by explicit stipulation (see Zöller/Geimer, Art. 17 Brussels Convention n. 17).

The Appellate Court does not side with this opinion, instead it follows the opposing view held by the Federal Supreme Court of Germany (BGH) [*]. The starting point of the BGH's view is the principle that a derogation may occur by ways of a positive forum selection agreement, if the interpretation of the clause leads to the conclusion that all other jurisdictions - including the one for the counterclaim - are intended to be excluded by the agreement (BGH NJW-RR [*]). The derogation of the counterclaim forum is also not precluded by the fact that the plaintiff [seller] brought its action originally before a court without jurisdictional competence (BGH NJW [*] 1981, 2645; NJW-RR 1987, 229). Thus, even if the plaintiff [seller] had brought its action before a court that did not possess jurisdiction, [seller] would still be entitled to object to the jurisdiction of that very court regarding the [buyer]'s counterclaim.

The prorogation of a foreign jurisdiction by way of a contract clause such as no. 17 of the [seller]'s conditions includes the derogation of the German jurisdiction for the counterclaim. If, under the forum selection clause, the [seller]'s customer is only able to bring an action before a foreign court, this includes the counterclaim. A restrictive interpretation of the contract, to the extent that the counterclaim does not fall under that clause, is excluded by a comparison of the parties' interests. A forum selection clause contained in the general conditions of one party is supposed to favor the party who incorporated the standard terms into the contract. An interpretation of the clause which deviates from its wording to that party's disadvantage needs to be justified with important considerations. Such reasons are nonexistent in the present case. The customer is under no circumstances being treated unfairly if [buyer] is precluded from suing the [seller] in the court in which the original claim is pending. The party who relies on the general conditions is acting in its customer's interest by suing [seller] at the customer's place of business. The customer may not benefit further from this concession in the way that the party relying on the general conditions would now also be obliged to have [seller] sued at the customer's place of business (BGH NJW 1969, 1537; see also BGH NJW 1972, 1671; NJW 1981, 2645). Therefore, clause 17 of the [seller]'s standard terms precludes the [buyer]'s possibility to sue the [seller] on a counterclaim before a German court.

[However, the Appellate Court finds that the forum selection clause was not validly agreed upon]

Nevertheless, the [seller] cannot successfully rely on its general terms and conditions for the matter of international jurisdiction, as the forum selection clause in its standard terms was not validly incorporated into the contract.

The requirements for the inclusion of a forum selection clause under Art. 17 para. 1, sent. 2, Brussels Convention are not met in the present case. There is no indication that the parties have established between themselves a form [of practice] for an agreement conferring jurisdiction (Art. 17 para. 1, sent. 2(b), Brussels Convention). Furthermore, it is neither apparent nor submitted by the [seller] that an international trade usage exists which could lead to the validity of the forum selection clause (Art. 17 para.1, sent. 2(c), Brussels Convention).

The requirements of Art. 17 para. 1, sent. 2(a), according to which an agreement conferring jurisdiction shall be either in writing or evidenced in writing, are also not met. Admittedly, the two pieces in writing of 10 December 1993, that are described as "confirmation of order" and are signed by both parties, are evidenced in writing. However, the further "confirmation of order" of the same day regarding the delivery of a hide stripping device and a used leather tacking machine was signed solely by the [seller] and constitutes a written confirmation of an oral contractual agreement in the meaning of a document "partially in writing" (cf. BGH [*] NJW [*] 1994, 2700).

The requirements of Art. 17 Brussels Convention are met by these order confirmations insofar as the wording of the contract itself explicitly refers to the forum selection clause in the [seller]'s standard terms (cf. ECJ [*] NJW 1977, 494; BGH NJW 1994, 2700). However, this fact alone is not sufficient for an incorporation of the forum selection clause into the contract. It rather needs to be established that the standard terms were in fact available to the other party at the time of the conclusion of the contract (ECJ, op. cit.; BGH op. cit.). The [seller] did not explicitly deny the [buyer]'s objection that the [seller]'s standard terms were not made available to [buyer] with respect to the contracts at issue, and the [seller] offered no proof to that effect. [Seller] relies solely on the contention that the [buyer] had received [seller]'s general terms in the process of an earlier transaction in the year 1990. This, however, would not be sufficient to validly incorporate the forum selection clause into the contracts at issue.

An agreement regarding a forum selection clause contained in general conditions is - with regard to the principle of good faith - also assumed to be formed, if the contract was concluded orally in the framework of continuous business relations between the parties and if it is clear that these relations in their entirety underlie certain standard terms which contain a clause conferring jurisdiction (ECJ NJW 1977, 495; BGH NW 1994, 2700). These prerequisites are not met in the case at hand. A "continuous business relationship" can certainly not be assumed if there was only one previous order [OLG [*] Köln, RIW [*] 1988, 557; Zöller/Geimer, Art. 17 Brussels Convention no. 11). The [seller] solely submits one previous order by the [buyer] on 11 June 1990. Admittedly, the [buyer]'s submission that "there have been previous business dealings between the parties, such as in June 1990" leads one to conclude that the earlier relations between the parties were not restricted to a single order. However, the [seller] did not communicate any further details. Furthermore and above all, the Appellate Court cannot assume a "continuous relationship" between the parties with respect to the intervals of time concerned. At the time of the conclusion of the contracts at issue, the previous contract formation in June 1990 - as submitted by the [seller] - would already have been 3 years ago. It needs to be taken into account that the prerequisites stated in Art. 17 Brussels Convention for the validity of forum selection clauses must be interpreted restrictively (EuGH NJW 1977, 494; BGH NJW 1994, 2699), due to the possible consequences of an agreement conferring jurisdiction over the parties' position during the legal proceedings.

It has, moreover, not been established that the [buyer] did indeed receive the [seller]'s standard terms and conditions in connection with the contract concluded in June 1990. The [seller]'s letter of 11 June 1990 contains the remark: "All transactions are subject to our attached General Conditions". However, the onus of proof is on the [seller] to contradict the [buyer]'s objection that [buyer] did not receive the [seller]'s standard terms. It is not sufficient that the [seller]'s letter was made ready for mailing - as the witness S. testified. Admittedly, the [seller] is correct in raising the question whether the [buyer] was not obliged to have informed the [seller] that - contrary to the remark in [seller]'s letter of 11 June 1990 - [seller]'s general conditions had not been attached to the letter, and whether [buyer] is not barred by the principle of good faith from relying on its lack of knowledge of the content of the terms. Then again, the principle of restrictive interpretation of Art. 17 Brussels Convention might make it necessary to deny that question. In the end, this matter does not need to be decided, as there is definitely no continuous relationship between the parties.

[The Appellate Court affirms the German courts' jurisdiction over the counterclaim, under Art. 6(3) Brussels Convention]

The international jurisdiction therefore results from the provisions of the Brussels Convention, according to which the Court of First Instance correctly affirmed its competence. Under Art. 6(3) Brussels Convention, a party domiciled in a Contracting State may also be sued on a counterclaim arising "from the same contract or facts on which the original claim was based," in the court in which the original claim is pending.

The Appellate Court need not decide the controversy in this context, whether the jurisdiction under Art. 6(3) Brussels Convention only exists if the jurisdiction over the original claim was given under the Brussels Convention (cf. Gottwald, in: Münchener Kommentar zur ZPO, Art. 6 IZPR no. 11), or whether the action on the counterclaim may also be brought if the Brussels Convention was not relevant for the original claim (see for this opinion Schumann in Stein/Joans, 33 n. 43). The jurisdiction of the Court of First Instance regarding the original claim results from the fact that the [buyer] entered an appearance before the Court of First Instance (Art. 18 Brussels Convention).

However, there is also a controversy regarding the question how the requirement "from the same contract or facts on which the original claim was based" is to be interpreted. Some voice the opinion that the preconditions for the counterclaim are intentionally worded restrictively (Schumann, op. cit., n. 42), and that the counterclaim is not admissible to the same extent as it would be under 33 ZPO [*]. The opposing view interprets the coherence requirement in Art. 6(3) Brussels Convention extensively (cf. Zöller/Geimer, Art. 6 Brussels Convention, n. 4), and argues that the possibility to bring a coherent counterclaim serves the aim of a procedural equality in force (Geimer, NJW [*] 1986, 2993). If one applies the principles of 33 ZPO, the Court of First Instance without doubt possessed jurisdiction, as a "connection" between the [seller]'s claim and the [buyer]'s counterclaim clearly exists. Such a connection already exists if the different claims result from the same legal relationship; the legal basis for the claims need not be completely identical (Zöller/Vollkommer, 33 n. 15). The [seller]'s claim is for payment of the remaining purchase price and the [buyer]'s counterclaim is for damages resulting from the same delivery contracts. It is irrelevant that the [seller] bases its claim for the outstanding purchase price on an intermediate settlement reached in the beginning of December 1994; a settlement generally does not modify the initial relation between the obligations in the way that the original debt is extinguished and replaced by a new claim (cf. BGH [*] NJW-RR [*] 1987, 1427). Furthermore, the [buyer]'s counterclaim before the Court of First Instance was also admissible under the more restrictive interpretation of Art. 6(3) Brussels Convention discussed above. This applies independently of the fact that the claim was not really based on the contractual relationship between the parties, but on the intermediate settlement closely connected with that relationship. At least the counterclaim is based on "the same ... facts". All claims raised in the present proceedings are based on the delivery of the machinery in dispute and the unwinding of the underlying sales contracts. These uniform facts of life meet the requirements of Art. 6(3) Brussels Convention and thus lead to the jurisdiction of the Court of First Instance.

[The Appellate Court also affirms its jurisdiction based on Art. 5(1) Brussels Convention]

Apart from the jurisdiction under Art. 6(3) Brussels Convention, the competence of the Court of First Instance results from the legal aspect that a counterclaim is also admissible if the Court of First Instance possessed jurisdiction over the counterclaim under the Brussels Convention in case the action was brought independently (Gottwald, op. cit., Art. 6 IZPR n. 12). In the present case, Art. 5(1) Brussels Convention applies, according to which a person domiciled in a Contracting State may be sued in another Contracting State on matters relating to a contract in the courts for the place of performance of the obligation in question. Decisive for the determination of the international jurisdiction of the court for the place of performance is the performance that is at the issue of the claim If the plaintiff requests damages for breach of contract, the relevant obligation is the one which allegedly has not been correctly performed (cf. ECJ [*], NJW [*] 1977, 491; ECJ NJW 1987, 1132; BGH NJW 1994, 2700). As the defendant-counterclaiming [buyer] basically claims damages for a non-performance or mal-performance of the plaintiff [seller]'s obligation to deliver the goods, the jurisdiction follows the place of performance for the delivery obligation. The place of performance is to be determined following the substantive law. The substantive law, in turn, needs to be determined according to the rules of private international law of the place where the action was brought, that is, according to the German rules of private international law (ECJ NJW 1977, 491; ECJ NJW 1995, 183; BGH NJW 1988, 1467; BGH NJW 1994, 2700; OLG [*] Köln, RIW [*] 1988, 557).

Under Art. 27(1) sent. 1 EGBGB [*], the contract is governed by the law chosen by the parties. Clause 17 of the [seller]'s standard terms provides that the legal relationship between the parties is governed by the standard terms and conditions and furthermore by Dutch law. The formation and validity of a choice of law agreement underlie the law chosen by the parties - Art. 27(4), 31(1) EGBGB, which also applies to choice of law clauses in standard terms (cf. BGH NJW 1994, 262; BGH NJW 1994, 2700; Palandt/Heldrich, BGB [*], 55th ed., Art. 27 EGBGB n. 8). The Appellate Court can leave open the question whether the [seller]'s standard terms were validly incorporated into the contract under Dutch law. If the [seller]'s standard terms apply, regard is to be had to the special clause no. 5, according to which the delivery is to be effected at the contractually agreed place of performance. Details regarding the place of performance are specified in the [seller]'s "confirmations of orders." How those specifications are to be interpreted must in any case be assessed under the United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980 (CISG), which both the Federal Republic of Germany and The Netherlands have ratified (Palandt/Heldrich, Art. 28 EGBGB [*] n. 7). The application of the CISG was not generally excluded by the [seller]'s standard terms.

The [buyer]'s place of business is the place of performance for the [seller]'s delivery obligation. The place of delivery under Art. 31 CISG corresponds to the place of performance under 269 BGB [*], and therefore may be referred to for the determination of the jurisdiction under Art. 5(1) Brussels Convention (Herber/Czerwenka, Internationales Kaufrecht, Art. 31 n. 2).

It must be noted that in the cases cited by Art. 31 CISG, the place of performance is not identical with the [buyer]'s place of business. This is also true for Art. 31(a) CISG, which constitutes an obligation to dispatch the goods (Huber in: v.Caemmerer/Schlechtriem, Kommentar zum einheitlichen UN-Kaufrecht, Art. 31 n. 26). However, the legal consequences of Art. 31 CISG only come into play if the seller is "not bound to deliver the goods at any other particular place." A different "particular place" is specified, i.e., if the parties have agreed on a delivery "free domicile." In such a case, the buyer's place of business is stipulated as the place of delivery and the delivery obligation consists in handing over the goods to the buyer (Huber, op. cit., Art. 31 n. 4, 91, 92). This applies to the [seller]'s confirmations of orders from 10 December 1993 regarding the sale of tanning barrels as well as a hydraulic stretching, smoothing and ironing machine, which specify a delivery "free domicile Selfkant Tüddern, loaded on lorry."

The [seller] was also obliged to hand over to the [buyer] at the [buyer]'s place of business the automatic hide skinning device as well as the used leather tacking machine referred to in the further confirmation of order of 10 December 1993. Admittedly, the term "ex works" used in the confirmation generally does not constitute a variation of the delivery place under Art. 31 CISG (Huber, op. cit., Art. 31 n. 4). However, the delivery specifications contain the remark "loaded onto lorry". In the absence of any different indicators, it can be assumed that the [seller] itself conducted the deliveries. This assumption is supported by the fact that the [seller] transported goods on its own lorries in connection with the later complaints of lack of conformity, i.e., the [seller] declared in its fax of 6 December 1994 that its employee would collect the queried leather tacking machine. Under these circumstances, the [buyer]'s place of business is also the place of delivery for the hide skinning device and the used leather tacking machine.

In this context, the Appellate Court may leave open the question whether the application of Art. 31 CISG is already excluded because the seller's "own people" are not "carriers" in the meaning of Art. 31 CISG (as is the opinion of Herber/Czerwenka, Art. 31 n. 6) or whether it is irrelevant for the question of carriage of the goods whether the seller undertakes the transport itself or commissions an independent carrier (for this opinion cf. Huber, op. cit., Art. 31 n. 27). Even if one follows the latter opinion, the place where the seller is to deliver the goods is considered "any other particular place" in the meaning of Art. 31 CISG, if it has been contractually stipulated that the seller is to deliver the goods to the buyer's place by its own means (Huber, op. cit., Art. 31 n. 50). Therefore, for all of the [seller]'s delivery obligations, the place of performance in the meaning of Art. 5(1) Brussels Convention is the [buyer]'s place of business. Consequently, the Court of First Instance also possessed jurisdiction under the aspect that the jurisdiction over a counterclaim may result from the jurisdiction given if the counterclaim were raised independently.

II. [Buyer's counterclaim for damages granted partially]

The [buyer]'s counterclaim is partially justified. The [buyer] is entitled to claim damages from the [seller] in the amount of DM [Deutsche Mark] 16,948 under Arts. 45, 74 CISG.

      1. [Buyer's damages granted]

The [seller] must reimburse the [buyer] for the costs incurred by commissioning company S. with the tanning of the hides in the period from 7 November till 2 December 1994. It had become necessary to let the hides be treated by a third party because the [seller] had retained the three tanning barrels originally delivered by it after [seller] had taken them back to convert them. It is disputed between the parties whether the [seller] was obliged to deliver barrels equipped with beams instead of barrels with taps, and whether the [seller] was therefore contractually required to re-equip the tanning barrels accordingly. In the end, the question does not influence the [buyer]'s right to claim damages. Following the parties' concurring submissions, the [seller] at least gave the [buyer] a binding assurance that the taps of the tanning barrels delivered would be exchanged for beams and that the barrels would be returned to the [buyer] after the conversion. The [seller] accordingly undertook - and breached - a contractual obligation. It is irrelevant whether the parties - as the [buyer] alleges - reached an oral agreement regarding the length of time required for the conversion and fixed a period of time for the return of the barrels. A corresponding agreement at least results from the correspondence between the parties before litigation; in the end, the [seller] itself does not deny that it promised the [buyer] to return the barrels that had been collected for conversion.

After the [seller] had announced by fax of 18 October 1994 that it would collect the tanning barrels on 24 October, the [buyer] told the [seller] by fax of 21 October 1994 that [seller]'s manager had informed [seller] that the conversion of the tanning barrels would take one and a half days per barrel. The [buyer] further noted that the barrels, which were urgently needed by the [buyer], had to be returned by the end of the 43rd calendar week. Without objecting to that letter, the [seller], picked up the tanning barrels on 24 October 1994 at the [buyer]'s place of business, in accordance with its earlier announcement. [Seller] thus undertook an obligation to return the barrels to the [buyer] by the end of the 43rd calendar week, i.e., by Saturday 29 October 1994.

The [seller] did not live up to this contractual agreement. The [seller] is liable for this breach of contract, even if one considers the [seller]'s submissions regarding the further correspondence with the [buyer], which are contained in the [seller]'s brief of 22 November 1996 and were not admitted by the Appellate Court due to delay. This is also true for the [seller]'s contention that the [buyer] demanded an impossible task from the [seller], because the re-equipment of the barrels including the dismantling and reconstruction took at least six and a half days. Apart from the fact that the [seller] did not object to the [buyer]'s confirmation of 21 October 1994, [seller]'s submission could only lead to a prolongation of the fixed period of time regarding the return of the barrels for a couple of days until the beginning of the following 44th calendar week. At least at this point in time, the [seller] was obliged to return to the [buyer] the tanning barrels that had been converted in the meantime. However, it is undisputed that this did not happen.

The [seller] unsuccessfully tries to rely on a right of retention. This is quite independent of the question whether the [buyer] was obliged to pay the [seller] for the remainder of the purchase price. It is also irrelevant whether the [seller]'s standard conditions were incorporated into the contract and whether [seller]'s clause 13 applied, according to which the [seller] is entitled to take back the goods as long as its customer has not completely paid the contractually agreed amounts.

Neither this clause nor Art. 71 CISG entitled the [seller] to retain the goods. Under Art. 71 CISG, a party may suspend the performance of [seller]'s obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of its obligations. Regarding the return of the tanning barrels, the parties - at least implicitly - excluded the [seller]'s right of retention by individual agreement. The [seller] committed itself to return the barrels after their conversion within a short period of time, without reserving the right to retain the goods if the purchase price is still outstanding. As the parties had previously already argued about the [buyer]'s remaining obligation to pay the purchase price, the [buyer] was entitled under good faith to trust that the [seller], who had promised the return of the barrels unconditionally, would not refuse the return of the goods by relying on a right of retention.

The Appellate Court does not follow the [seller]'s point of view regarding the right of retention under Art. 71(1)(b) CISG, which the [seller] submits in the brief that was not admitted by the Appellate Court due to delay. Contrary to the [seller]'s opinion, the parties' correspondence after the [buyer]'s fax of 21 October 1994 does not allow the conclusion that the [seller] merely announced its right of retention, connected with its willingness to negotiate the matter, and that the [buyer] was unjustified in declaring the avoidance of contract without any further cause before the return of the goods was due. The [seller]'s letter of 27 October 1994 contained [seller]'s unequivocal refusal to return the tanning barrels before payment of the outstanding purchase price had been effected; the last paragraph of that letter clearly expresses this intention. Therefore, the [seller] breached the contract by relying on an unjustified right of retention prior to the [buyer]'s reaction by fax on 29 October 1994. The subsequent settlement negotiations, on which the [seller] relies in its inadmissible brief, could not change the earlier breach of contract and its legal consequences.

The examination of whether the requirements of Art. 71 CISG are met fall in the sphere of risk of the party relying on the right of retention. In the absence of those preconditions, the retaining party commits a breach of contract (Leser in v.Caemmerer/Schlechtriem, Art. 71 n. 25). The [seller]'s standard conditions do not provide for the legal consequence of such a breach of contract and do not exclude the provisions of the CISG. Under Art. 45 CISG, the buyer may claim damages as provided in Arts. 74 to 77 if the seller fails to perform any of its obligations under the contract or under the Convention.

Inter alia, Art. 45(1) CISG applies if the seller fails to perform any other obligation under the contract or the Convention (Huber in: v.Caemmerer/Schlechtriem, Art. 45 n. 10). Whether the obligation breached is a primary or a secondary obligation is only of importance regarding the question of the existence of a fundamental breach of contract (Herber/Czerwenka, Art. 45 n. 2). Without doubt, the [seller]'s contractual obligation to return the tanning barrels to the [buyer] is fundamental.

Under Art. 74 CISG, damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Costs incurred by reasonable efforts to mitigate the loss resulting from the breach may also be compensated (Leser, op. cit., Art. 74 n. 14). The sum paid by the [buyer] to the company S. constitute such reasonable expenses. According to the invoice of 31 December 1994, company S. tanned 240 hides a day during the period from 7 November till 2 December 1994 at an overall amount of DM 16,946. The [seller] does not expressly dispute that the [buyer] did in fact commission company S. with the tanning of hides to the extent submitted. The [seller]'s defense consists solely of the objection that the [buyer] had claimed in their correspondence before litigation that [buyer] tanned 480 hides daily, whereas the [seller] only estimated half of that amount - and even that estimation was allegedly too high. The [seller] furthermore disputes with ignorance that the prices in the invoice were appropriate and usual. The Appellate Court does not regard these submissions as a clear challenge to the [buyer]'s contention that [buyer] commissioned company S. with the tanning of the hides. Insofar as the [seller] tried to make up for its omission in the brief that was not admitted by the Appellate Court, the Appellate Court does not see sufficient cause to follow this - possibly - new submission by re-opening the oral proceedings.

The [seller] does not succeed with its objection that the prices demanded by company S. were neither appropriate nor usual. It is sufficient for the compensation claim under Art. 74 CISG if the breach of contract forces the damaged party to incur expenses, and if these expenses are reasonable (Leser, op. cit., Art. 74 n. 13, 14). Under German law, it is sufficient if a reasonable person in the position of the damaged party was entitled to assume that the expenses were reasonable (BGH [*] NJW [*] 1976, 1198; BGH NJW 1990, 2062). The same is true in the application of Art. 74 CISG. Art. 74 para. 1, sent. 2, CISG only restricts the compensation in the way that damages may not exceed the loss which 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 [seller] then knew or ought to have known, as a possible consequence of the breach of contract. It was evident to the [seller] that the [buyer] would have to have the hides tanned by a third company if the [seller] did not return the barrels. This already results from the [buyer]'s explicit request in its fax of 21 October 1994 to keep to the return schedule at any rate, as the [buyer] urgently required the tanning barrels.

The losses incurred in the amount of DM 16,948 are not reduced under the aspect that the [buyer] possibly saved its own expenses during the relevant time period. Specific grounds for such savings have neither been submitted by the [seller], who does not rely on this aspect, nor are they self-evident.

The statute of limitations invoked by the [seller] during the proceedings before the Court of First Instance does not apply to the [buyer]'s claim for damages for the retention of the tanning barrels. The short period of limitations, which applies to remedies for non-conformity of the goods, does not apply to the damages claim for losses incurred by the retention of the barrels, because the [seller]'s obligation to return the goods is based on a contractual agreement with the [buyer], which, while connected with the sales contract, is separate from that agreement.

      2. [Buyer's further damages not granted]

The [buyer] is not entitled to any further damages.

The [buyer] does not conclusively submit compensation claims for non-conformities of the leather tacking machines delivered by the [seller]. The [seller] correctly noted that the [buyer]'s initial submissions regarding the tacking machines were confusing and not comprehensible. Only in [buyer]'s last brief before the oral proceedings did [buyer] clarify which tacking machines its explanations referred to. According to that submission, the [seller] delivered one tacking machine for trial purposes, which was to be connected to a dust removal fan and a die-casting machine. [Seller] sold to the [buyer] a further tacking machine, which was installed behind an ironing machine and was taken back by the [seller] following the [buyer]'s complaints. However, the [buyer] still fails to substantiate its submissions regarding the defects those tacking machines were supposed to have had. The [buyer]'s allegation that the tacking machines were incorrectly adjusted to the extent that they tore the hides does not sufficiently specify the queried lack of conformity in order to form the basis for the taking of evidence.

The [buyer]'s claim for damages regarding the leather tacking machines is inconclusive also for other reasons. The [buyer] pleads that it incurred losses in the amount of DM 6,600 because the tacking machine installed behind the die-casting machine did not function properly and that the [buyer]'s production came to a standstill for a period of two days. However, the [buyer] is not entitled to claim damages for defects of the tacking machine connected to the dust removal fan and the die-casting machine.

It is undisputed that the [seller] delivered this tacking machine to the [buyer] for trial purposes. Since the [buyer] returned the machine to the [seller], the parties ultimately did not conclude a sales contract regarding this machine. This results from 495(1) BGB [*], if German substantive law is applied. The matter does not need to be assessed differently with respect to the CISG, as the provisions of the CISG presuppose the formation of a sales contract and do not contain specific rules for a test sale. The [seller] was not obliged to remedy non-conformities of machinery that did not become the subject of a valid sales contract. This is also true if one applies the [seller]'s standard terms and conditions. As the Court of First Instance correctly held, the [seller] also would not be liable for damages incurred under the German rules for lending contracts. A person who hires out goods at no charge is only liable for defects if [seller] maliciously conceals the defect ( 600 BGB [*]. There are no indications of such a willful deceit on the part of the [seller]. It has neither been submitted by the [buyer], nor is it in any way evident that the application of Dutch law would lead to a different result.

Regarding the [buyer]'s further claim for damages in the amount of DM 3,190-, it is problematic that - according to the [buyer]'s submissions - those losses were incurred by both tacking machines. In its brief arguing the appeal, the [buyer] explicitly noted that the two tacking machines delivered by the [seller] had torn hides and had made it necessary to repair overall 100 hides at a cost of DM 3,190. For the reasons explained above, the [seller] is not liable for defects of the tacking machine that had been delivered for trial purposes. Therefore, the [buyer] would have had to make more substantiated submissions as to the kind of damage the (used) tacking machine connected to the ironing machine had caused. The [buyer]'s contention, in its brief of 11 December 1996, that only the tacking machine connected to the die-casting machine was defective cannot be considered, because it contains an inexplicable contradiction to [buyer]'s earlier submissions.

The [buyer] is also not entitled to damages for the incorrect construction of the Dynavac-machine. The [buyer] claims expenses in the amount of DM 2,170.30 as well as DM 823.60. [Buyer] argues that the [seller] incorrectly welded on the telescope, so that the guide rails broke off. [Buyer] further submits that it had to commission a third party with the repair of the machine after the [seller] had refused to remedy the non-conformity.

Again, the Appellate Court can leave open the question whether the [seller]'s standard terms and conditions were validly incorporated into the contract, or whether solely the provisions of the CISG apply. Under clause 8(a) of the [seller]'s standard terms, the [seller] is only liable for a non-conformity of the goods if the confirmation of order expressly provides for a guarantee, which is not the case for the (used) Dynavac-machine. Apart from that, the [seller]'s liability under clause 8(e) of its standard conditions is restricted to the delivery of spare parts free of charge.

The [buyer]'s claim for damages is also unfounded if one applies the provisions of the CISG. Under Art. 39(1) CISG, the buyer loses the right to rely on the lack of conformity of the goods if it does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after buyer has discovered it or ought to have discovered it. Therefore, the [buyer] should have notified the [seller] that the guide rails of the Dynavac-machine had broken off before [buyer] commissioned a third company with the repair. The [seller] denies that the [buyer] gave a timely notice specifying the non-conformity. Despite this submission, the [buyer] solely maintained until the final oral hearing before the Court of First Instance that [buyer] had to have the ironing machine repaired twice during the course of the year 1995, after the [seller] had unequivocally refused to remedy the defect. Regarding the alleged lack of conformity of the guide rails, this submission is not specific enough and no proof has been offered.

[...]

Therefore, the [buyer] is left with a claim for damages in the amount of DM 16,948. Contrary to the [seller]'s view expressed in its brief not admitted by the Appellate Court, the [buyer]'s claim was not extinguished by [buyer]'s declaration of a set-off in the amount of DM 3,750 during the first instance proceedings. In its brief of 13 December 1995 which, inter alia, contained the declaration of a set-off, the [buyer] claimed damages in an amount that exceeded the sum in dispute during the appellate proceedings by far more than DM 3,750. Furthermore, the [buyer] has by now moved away from the set-off and claims the amounts in question by way of a counterclaim.

The [seller] itself has also not declared a set-off against the counterclaim with a claim for an outstanding purchase price, which the [seller] is possibly still entitled to.

The [buyer] is entitled to interest granted at a rate of 5% since the time the counterclaim was served, independent of the question whether the interest rate is to be determined under German law ( 352 HGB [*]) or under Dutch law - which provides a higher rate of interest following the [seller]'s own submissions.

The decision on costs is based on 92(1) ZPO [*]; the decision on the provisional enforceability is based on 708 no. 10 ZPO.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, the Plaintiff/Appellee of The Netherlands is referred to as [seller]; the Defendant/Appellant of Germany is referred to as [buyer]. Amounts in German currency (Deutsche Mark) are indicated as [DM].

Translator's notes on other abbreviations: BGB = Bürgerliches Gesetzbuch [German Civil Code]; BGH = Bundesgerichtshof [Federal Court of Justice, the highest German Court in civil and criminal matters]; Brussels Convention = EC Convention of 27 September 1968 on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters; ECJ = European Court of Justice; EGBGB = Einführungsgesetzbuch zum Bürgerlichen Gesetzbuche [German Code on Private International Law]; HGB = Handelsgesetzbuch [German Commercial Code]; LG = Landgericht [German District Court]; NJW = Neue Juristische Wochenschrift [German law journal]; NJW-RR = Neue Juristische Wochenschrift Rechtsprechungs-Report Zivilrecht [German law journal]; OLG = Oberlandesgericht [German Court of Appeals]; RIW = Recht der Internationalen Wirtschaft [German Law Journal]; ZPO = Zivilprozeßordnung [German Code on Civil Procedure].

** Ruth M. Janal, LL.M. (UNSW), is a PhD candidate at Albert-Ludwigs-Universität Freiburg. The second-iteration redaction of this translation was by Dr. John Felemegas of Australia.

*** Camilla Baasch Andersen is a Lecturer in International Commercial Law at the Centre for Commercial Law Studies, Queen Mary, University of London, and a Fellow of the Institute of International Commercial Law of the Pace University School of Law. She is currently finishing her PhD thesis on uniformity of the CISG at the University of Copenhagen.

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