Judgment: Civil dispute
Issued at: The office of the Court Clerk on 11th of June at 13.00 95/11481
Claimant: EP S.A., A Swiss corporation [Seller]
Defendant: FP Oy, A Finnish corporation [Buyer]
Matter at issue: Damages based on contractual breach and collection of outstanding debts
[ - Seller's claims: summarized]
The statement of claims:
The [seller] has placed a demand in its statement of claims against the [buyer] that the [buyer] should be made to pay the [seller] primarily:
1. 774,224.20 Finnish Marks, 22,771.60 Swiss Francs and 19,800 German Marks; or
2. According to an alternative calculation of damages 263,787.50 German Marks and 130,000.46 Swiss Francs with lawful interest on arrears added thereto.
Additionally the [seller] has placed a demand that the [buyer] should be made to pay the legal fees of the [seller] added with lawful interest on arrears after six months of the issuance of judgment onwards.
[ - Seller's claims: particularized]
As grounds for the statement of claims the [seller] has presented the following:
The specification of the primary demand; the calculation of damages and the grounds for these damages:
1/1. Damages of 654,250.90 FIM due to unlawful avoidance of a sale of goods with specific qualities based on order of 26 February 1992, acceptance of 5 March 1992 and shipment order of 15 September1992.
Concerning the primary claim, the [seller] has requested the court to confirm that the [buyer] has unlawfully cancelled an order he placed on 26 February1992, on the basis of which the [seller] gave his acceptance on 5 March 1992 and a contract was formed, and that because the [buyer] was not entitled to refuse to accept the delivery, the [buyer] has to pay the purchase price and manufacturing costs totaling 671,450 FIM as agreed and to accept the delivery and to fulfill his duty of paying damages to the [seller].
In case the [buyer] is not required to pay the agreed purchase price, the claim 1/1 consequently assumes the meaning to the [seller] of being a cancellation of an order and respectively an unlawful avoidance of the contract resulting in damages of 654,250.90 FIM.
In case the [buyer] is required to accept the goods involved in the sale, [seller] will drop the claim concerning the expenses resulting from destroying the goods. If the goods remain in the possession of the [seller] to his loss, the [buyer] has to be made to pay for the expenses of destroying the goods.
The purchase price of the Order #10/92 was 604,900 FIM, as agreed in the contract dated 5 March 1992, subject to the reservation that the price was in force until 30 June 1992. After [buyer's] inquiry concerning new prices on 11 May 1992, the [seller] had given the [buyer] the price information on 12 May 1992 as requested. Had the delivery been allowed to take place, the purchase price concerning Order 10/92 would have been 654,250.92 FIM.
Due to the fact that the purchase price included seller's expenses resulting from CIP-term which were saved because of the avoidance of the contract, the value of these expenses has to be deducted from the purchase price. The [buyer] has to pay the [seller] the remaining sum of 654,250.90 FIM.
1/2. The unilateral postponement of issuing an order of shipment, a part of buyer's duty to contribute to the sale, resulted in a loss of 66,196 FIM. Throughout the fall of 1992 the [buyer] had been informed of the loss resulting from the postponement of the order of shipment when the [buyer] had notified that due to "bookkeeping" the delivery could not take place before the beginning of 1993. The loss was brought to the attention of the [buyer] in a calculation dated 31 December 1993.
The exchange rate of the Finnish Mark in relation to the Swiss Franc developed in the following manner according to Schweizerische Kreditanstalt:
July, the 2nd half 100 FIM = CHF 32.67
October, the 2nd half 100 FIM = 28.83
January 1993 100 FIM = 27.29
The [seller] is entitled to compensation for the loss suffered by him as a result of [buyer's] actions. It is noteworthy, that the exchange rate of the currency of payment has decreased in relation to the currency of the [seller's] country.
1/3. A restitution covering storage costs of the seller for 41 palettes from the period 1 May 1992 - 31 December 1994, the cost for each palette being 7 CHF per month, totaling 9,184 CHF.
1/4. Annual interest on capital mentioned in items 1 - 3 from the following periods; 7 August 1992 - 31 December 1994:10.8 %; 1 January 1993 - 31 December 1993: 9.5%; and from 1 January 1994 until the date of the payment: 7%.
1/5. Necessary expenses resulting from arrangement of a coverage sale, collection of outstanding claims and preparation of mediation, totaling 13,587.60 CHF added with interest on arrears from one month after the issuance of the judgment onwards.
1/6. Expenses resulting from destruction of goods no longer eligible for sale, totaling 19,980 DM added with 7% interest on arrears one month after the issuance of judgment has expired.
- An alternative calculation of [seller's] claim 1/1
As an alternative calculation of damages concerning claim 1/1 the [seller] has demanded compensation for:
2/1 acquisition costs totaling 523,657.45 FIM; and
2/2 administration costs totaling 115,204.74 FIM
- More specific grounds for [seller's] claims
The issue in this case has been goods manufactured for the buyer and packed according to the instructions provided by the buyer. First, the [buyer] had postponed the delivery and then later, after issuing an order of shipment, declared the contract avoided in circumstances in which the goods had already been manufactured and samples of the goods had been accepted.
Due to the fact that the place of business of the seller who accepted the order is in Switzerland, Swiss law is applicable to the contract. There was no agreement between the parties on applicable law.
[Buyer] had placed an Order #10/92 concerning manufacturing and acquisition of five Avecos- product line skin care products on 26 February 1992. [Seller] had accepted the order on 5 March 1992 at the same time when he had accepted an Order #9/92 of the same proportion. Due to these circumstances, a binding contract had been formed between the parties.
The purchase price in the Order 10/92 was 604,900 FIM. The seller, however, had reserved himself the right to increase the prices from 1 July1992 onwards. The term of payment was 60 days from delivery.
According to a marking in the order, the term of delivery was to be agreed upon at a later point in time (no more than three weeks from L's request). In a letter dated 26 February 1992 accompanying the order, the [buyer] had encouraged the [seller] to expediently deliver all of the packaging materials.
The sale assumed a nature of an order sale, where it was the duty of the seller to manufacture the goods for the buyer.
According to the terms of the sale, samples of products were to be delivered to VTT (National Scientific Research Center) for checking purposes. After the samples had passed the checking procedure, the buyer was supposed to give an order of shipment, after which the seller would deliver the goods on term CIP-Vantaa. In his fax messages dated 24 April 1992, 30 April 1992 and 6 May 1992, the [buyer] had informed the [seller] that the samples had passed the VTT checking before shipment.
The [seller] consequently had to produce and deliver the skin care products. In order for the [seller] to be able to fulfill his duty to deliver, the buyer's duty was to inform the seller about when the goods were allowed to be shipped. [Seller's] receipt of the purchase price depended on the time of the delivery.
There was a specific order concerning bottling and packaging of the products in packages suitable for retail sale. It was the task of the [seller] to attach labels naming the marketer of the products to bottles, cans and product packages serving as vessels for the said skin care products.
- [Buyer's] breach of contract: his negligence in
fulfilling buyer's duty to contribute to the sale
After the sample goods were accepted at VTT, the [buyer] did not issue an order of shipment. In his message dated 9 July 1992, the [buyer] told the [seller] specifically not to deliver the goods in the beginning of August 1992. At that point, the second consignment of the Order 9/92 postponed by the [buyer] was supposed to arrive in Finland.
In his message dated 15 September1992, the [buyer] had finally notified that "the goods can be shipped in December, so that they arrive in Finland at the earliest on 1 January 1993".
According to the contract the [seller] could reasonably assume that the buyer, soon after the sample goods were checked, would issue an order of shipment. This state of affairs resulted from the following circumstances:
- After placing an order on 26 February 1992 the representative of the [buyer] had confirmed by phone that the deliveries will be received during the months of May and August 1992. When the representative of the [seller] had reminded the representative of the [buyer] of this, he had not denied that. Instead, he had stated that the term of delivery was "Auf Abrub innerhalb 1992", which was not supported by any documents.
- When placing the order the buyer had specifically encouraged the seller to acquire the packaging materials as soon as possible. The packaging materials came with product information, markings naming the manufacturer and the marketer (H Oy L) and information on ingredients, as requested by the [buyer].
- The goods had to be produced quickly in order to obtain sample goods; additionally the [buyer] had requested the [seller] to pay attention to the delay caused by the checking procedure at VTT.
- Due to the fact that the order required the goods to be produced from one and the same raw material, the acceptance of the sample goods required that production of the goods be already finished before the checking of the goods at VTT.
- Because the goods were originally not packed for retail sale, the goods had to be bottled and packed after VTT checking. Due to the fact that the delivery term required the delivery to take place after three weeks following L's request, the product packages with L's name on them had to stand ready for shipment while waiting for the order of shipment.
- The buyer knew that the manufacturing of the goods takes a while, at least ten weeks. The buyer also knew that even though the goods in question can be preserved relatively long, at least thirty months, vitamins, perfumes and some other ingredients in skin care products are under a constant process of transformation and decomposition. As time passes the materials go through different kinds of decomposition and maturation phenomena, which are parts of certain maturation process of the product. Even though these features of skin care products are generally well known, it can be said that the other person representing the [buyer] presumably is a chemist.
- The [buyer] had informed the [seller] on 22 January 1992 of the changes affecting the products already after a few months. These changes could not be avoided. Because the parties were mutually aware of these circumstances and because they wanted to avoid maturation of the products in [seller's] warehouse, there were grounds to assume that the [buyer] would soon enough send an order of shipment to the seller. Because the delivery of the Order #9/92 was to take place on week 18, there was no reason for the [seller] to assume that the [buyer] would delay issuing of the order of shipment concerning Order #10/92 further than the end of May 1992.
- These circumstances had forced the [seller] to quickly produce the goods in order to fulfill his contractual duties. The sale represented a significant sum to the [seller]. The [buyer] was aware of this. The [seller] was obliged to finance production, bottling and packaging with a bank loan. This had caused interest and other financing expenses.
Later after issuing the shipment order on 15 September 1992, the [buyer] had not allowed immediate shipping as defined in the terms of the sale. The [buyer] had demanded, that the shipment of the goods should not take place until December 1992, meaning at least three months later. According to a notice of the [buyer], the goods were to arrive in Finland at the earliest on 1 January 1993.
As a consequence of the refusal to accept the delivery on 9 July 1992, [seller] suffered additional storage expenses. These could not have been anticipated by the [seller] while drafting the contract. In addition, the capital tied to the production of the goods had needed some looking after, which caused interest expenses.
The postponement of the order of shipment from the point of time which [seller] could have seen as being a probable point of time for issuing the order, considering all the relevant circumstances and specially the guidelines given by the [buyer] in the order, was in itself grounds for breach of contract.
Because the [buyer] on 15 September 1992 had single-handedly placed additional terms for the time of shipment and delivery, according to which the goods were not to be shipped before the end of December and the goods were not to arrive in Finland before 1993, it was a question of terms contravening the terms of the contract of 5 March 1992 and consequently [buyer's] breach of contract.
[Buyer's] actions were unanticipated and in breach of the contract. The following circumstances were a direct consequence of [buyer's] actions:
- [seller's] storage costs;
- because the term of payment was simply "60 days" and according to usage applied by the parties this was meant to be understood as meaning 60 days from the point of time when the seller had transferred the goods to the possession of an independent freight liner, the interest on capital tied to production had increased because of non-payment;
- the losses caused by depreciation of the agreed currency of payment, Finnish marks.
Due to these circumstances the [buyer] has to compensate the [seller] for expenses and losses caused by [buyer's] breach of contract.
- [Buyer's] unlawful avoidance of the contract
Roughly two months from the date of the order of shipment, the [buyer] cancelled all undelivered orders on 10 November 1992.
Since the middle of October 1992, the [buyer] had let it be known, that the amounts of Vitamin A in the goods delivered on the basis of Order #9/92 had significantly decreased in comparison to what they were in spring and below the amount of what they had been in April when sample goods had been checked. This was shown in the VTT study carried out on behalf of L.
[Buyer] had received the goods checked in October on 7 August 1992. This was notified by the [buyer] on 15 December 1992. The splitting in two of that delivery and the postponement of the second delivery until August 1992 were based on [buyer's] request. In connection with neither of the deliveries, was any notice whatsoever given of the non-conformity of the goods with the checked sample goods. Instead, the [buyer] had notified on 22 October 1992 about the goods received in August. The notice concerned the results of the checking carried out on behalf of L, according to which the vitamin content had dropped below the amount where it should have been in April 1992 when checking the goods.
Cancelling the order and avoidance of the contract on 10 November 1992 was unfounded due to following reasons:
- The goods subject to cancellation were in conformity with the sample goods checked and accepted at VTT in April 1992. The [buyer] had never even stated that the goods would be non-conforming.
- When issuing the order, the [buyer] knew that the A-vitamins would be absorbed into liposomes. In a similar manner, the [buyer] knew about chemical and other transformations taking place in materials with vitamin content. On the basis of the results of tests carried out by VTT, the [buyer] knew about the vitamin content being within the range agreed on in the contract. As mentioned before, [buyer] had conveyed information based on L's experience that already within a few months liposomes absorb a noticeable share of the vitamins amounting to 20 - 30% of A-vitamins. Being aware of the characteristics of the vitamins and the goods in general, the [buyer] did not want to attach any markings on the product packages stating the vitamin content of the products.
- The seller is not liable for the alleged non-conformity of the goods, of which the buyer was aware when drafting the contract.
It had been clear from the beginning, that the longer the [buyer] postponed the time of allowing the goods to arrive in Finland, the longer the liposomes would absorb vitamins and the vitamin content of the goods would decrease. The goods had been in Germany ready for shipment since the spring and from then on the time of delivery had been postponed based on [buyer's] orders.
In skin care products, as in many cosmetics and health care products, chemical changes take place as time goes by. For example, some perfumes, vitamins and chemicals may decompose slowly. These changes are characteristic to these products and such changes connected to the maturation process of the products, generally known in the field, do not reduce the usability of the products to their normal purposes.
Knowing that these changes cannot be prevented and that they cannot be regarded as non-conformity, the [buyer] had requested the [seller] to increase the vitamin content in his letter of 22 January 1992. The [seller] had complied with the request and when the sample goods had passed VTT checking, the [buyer] had issued the order of shipment concerning Order # 9/92.
The [seller] had not committed himself to, or been aware of, the contractual terms between the [buyer] and L Oy and this contract does not bind the [seller].
The [buyer] has not given the [seller] any reason as to why the vitamin A content should remain on a particular level.
In any case, the decrease of vitamin content in two products could not amount to a fundamental breach of the contract.
Additionally, it was not clear at the time when the [buyer] had declared the contract avoided that the [seller] would be liable for a fundamental breach of contract within the specified time of delivery, meaning the beginning of January 1993. If it was a question of two separate orders, as notified by the [buyer], an anticipated breach of contract as defined in CISG Art. 73 is not applicable. Even if it was held that this was a matter of delivery in installments, the buyer had no grounds to assume that the forthcoming partial delivery would amount to a fundamental breach of contract. The [buyer] should have had to consider the chance that the non-conformity, as alleged by the [buyer], meaning the preservation of vitamin content, could be fixed before the time of delivery specified by the defendant. The [seller] had notified the [buyer] on 28 October 1992 that he would do everything in his power to satisfy the customer, i.e., the [buyer], meaning that the [seller] had been prepared to fix the products of Order #9/92 and additionally to deliver the goods of Order #10/92. The [seller] had the right to fix concerning Order #10/92 even after the delivery of the goods. At the time the [seller] had a method in his use with which the amount of vitamin A could be maintained on a level requested by the [buyer].
Even if it was held that the [buyer] fulfilled his duty to give prior notice, he still was not entitled to declare the contract avoided because the parties had reached an agreement concerning removal of the unsatisfactory state of affairs as experienced by the [buyer].
Neither was there a basis to declare the contract avoided on grounds that the declaration of avoidance had not taken place within a reasonable time from the point where the [buyer] should have carried out the acceptance inspection and to notice the alleged non-conformity. The [buyer] had not been entitled to cancel the order based on a matter which could have been clarified when checking the sample goods.
After the [buyer] had called for a replacement delivery on 16 October 1992 and on 22 October 1992, the [seller] had replied on 28 October 1992 requesting the [buyer] to notify L a.s.a.p. that the [seller] will make the goods to withstand oxidization. [Seller] had been prepared for far-reaching concessions so that the sale, which was expensive for the [seller], would not fail.
After the [seller] had on 12 November 1992 represented the said offer, the [buyer] had repeatedly refused to accept it on 13 November 1992. It was included in the offer that the seller would replace two product in the consignment, namely Avecos Tagescreme and Liposomengel, with product that would maintain their vitamin A content in the best manner possible allowed by the current state of science.
[Seller's] reply on 28 October 1992 to [buyer's] request on 22 October 1992 calling for actions to be taken was based on elimination of a defect in the products. The [buyer] was not entitled to breach the reached agreement.
The [buyer] had refused to accept [seller's] efforts to reach an amicable solution
which would have led to acceptance of the delivery.
Consumer protection laws had no relevance because it was not a question of a consumer sale.
The [buyer] had referred to his message of 21 December 1990, where it was stated that "Shelf-life of our products is not shorter than 30 months". In his reference to the mentioned citation, [buyer] had brought out that the [seller] had guaranteed not only the shelf-life of the products but also the preservation of vitamin content in connection with an order over a year later where the said content was strictly specified while checking the sample goods. There was no agreement between the [seller] and the [buyer] on whether the vitamin content of Avecos - skin care products should be permanent in nature. What is meant by shelf-life is that a product can be preserved when kept with due care in normal or reasonably anticipated circumstances and without causing any danger to health and at the same time being suitable for its original purpose. The notion does not contain any reference to maintenance of vitamin levels for the shelf-life period.
- Consequences of [buyer's] declaration of avoidance
The [seller] could not have anticipated [buyer's] actions declaring the contract of 5 March 1992 avoided. This course of action caused direct harm to the [seller]. The [buyer] should have understood the consequences of his actions to the [seller].
The [buyer] has to pay damages for unlawful avoidance of the contract, including both loss of agreed price and loss of restitution, resulting from the fact that repeated postponements of the order of shipment in breach of the contract had caused the payment of the sale price to take place at a time when the currency of payment, due to floating of the currency, had devaluated seller's currency by over 20%, meaning that this is a matter of paying damages due to a loss caused by buyer's breach of contract.
Because the seller had to attach markings to the skin care product bottles and product packages stating that the marketer of the products is H Oy L, it was not possible to reduce seller's losses through compensatory sales. The only way to get rid of the products in seller's storage was to destroy them. This caused following losses:
- sale price of the products (including but not limited to production and manufacturing costs, selling costs including seller's coverage) less expenses of which the seller is responsible for according to CIP-term amounting to 4,200 CHF;
- the loss caused by devaluation of currency because of delay on buyer's side in issuing the order of shipment;
- the expenses resulting from maintenance of the goods including storage costs;
- the expenses caused by seller's efforts to arrange coverage sale, to collect outstanding claims from the buyer and costs of mediation caused to the seller;
- the expenses resulting from destroying the goods.
- Relevant laws
Article 35(3) of the CISG contains a confirmation of the principle that the buyer can not
demand remedy for non-conformity based on such qualities of the goods as determined
on the basis of sample goods, if at the time of the conclusion of the contract the buyer
knew or could not have been unaware of such lack of conformity. This rule does not
concern only factual information but also circumstances that the buyer could not have
been unaware of. What is meant by the addition is a situation where it is very likely that
the buyer was aware of such a circumstance but no clear evidence can be presented.
If the buyer does not notify the seller about the non-conformity within a reasonable time
after detecting it or after he should have detected it and does not specify the nature of
non-conformity, he loses his right to claim non-conformity (CISG Art. 39)
Article 53 of the Convention places two kinds of duties upon the buyer. The buyer must
pay the price for goods and take delivery of them. It may often follow from the contract
between the buyer and the seller that the buyer also has other duties. The content of
these duties is not regulated in the Convention. Instead, rules concerning buyer's breach
are also applicable to other duties which have been agreed on or which can be regarded
as agreed on.
According to Article 60 CISG, the buyer's obligation to take delivery consists of doing
all the acts which could reasonably be expected of him in order to enable the seller to
make delivery. This buyer's duty to contribute to the sale also involves other
procedures he must carry out so that the goods can be delivered to him.
If the terms of the sale indicate that the buyer has to give a signal or some other
indication of the time when the goods can be shipped or otherwise delivered in order to
facilitate seller's performance, this procedure initiating the shipment belongs to buyer's
duty to contribute. Other procedures included in buyer's duty to contribute can be
guidelines and acceptances the buyer has to give to the seller while manufacturing the
goods.
What is meant in Article 60 CISG is such contribution that takes place before the
delivery and which is a prerequisite to seller's ability to perform. This kind of
contribution is usually needed when the goods involved in the sale are to be
manufactured or ordered based on buyer's order.
According to Article 61 CISG, the seller can claim damages based on Articles 74 - 77
when the buyer fails to fulfill his contractual duties or his duties under the Convention.
If the seller has demanded the buyer to perform, according to Article 61 CISG the seller
does not lose his right to claim damages. The seller is entitled to rely on the contract
and to demand that buyer perform.
According to Article 74 CISG, the 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.
[Buyer's] reply
The [buyer] has denied the statement of claims in its entirety as to its grounds and to its
amount in a manner appearing below.
Additionally, the [buyer] has demanded that the [seller] should be made to pay the legal
expenses of the [buyer] with interest on sums in arrears added thereto.
The [buyer] has stated, as did the [seller], that the CISG is applicable to the case.
- The alleged delay in issuing the order
[Seller's] allegation that [seller] had grounds to assume that soon after checking of the
sample goods the buyer would issue an order of shipment is unfounded and the [buyer]
had not caused any delay in the delivery of the goods.
Orders # 9/92 and #10/92 were totally separate orders. The [seller] has based most of
his allegations to circumstances connected to Order #9/92.
In the Order #10/92 which the [buyer] made to the [seller], the time of delivery had
been purposefully left open because [buyer's] partner L was at the time unable to
estimate the sale of the goods. Because there was no agreement whatsoever of the time
of delivery, the [buyer] could not have been liable for a delay in issuing the order of
shipment, as alleged by the [seller]. The [buyer] bears no responsibility in relation to the
[seller] for [seller's] own misjudgments and the expenses those misjudgments may have
caused.
The [seller] had through his own initiation, against [buyer's] original aim and without
[buyer's] awareness of it, manufactured goods for the Order #10/92 beforehand,
together with the goods for the Order #9/92. At that moment, the [seller] had taken a
risk concerning possible storage and capital costs resulting from his actions and
consequently is responsible for his own expenses. The [buyer] cannot be liable for these
expenses under any contractual duty.
The [buyer] could not have known that the [seller] had to finance the manufacturing of
the goods by means of a bank loan. Financing of production is not a responsibility of a
contracting party; neither is it a risk such party might assume. The [buyer] did not know
that the orders had represented a significant sum to the [seller].
It was a purpose of two separate orders that the goods could be manufactured
separately. It was not clear to the [buyer] until the reception of a fax on 30 June 1992
that the [seller] had already in the summer of 1992 manufactured the product for both
orders. The product for the second order should not have been manufactured before 15
September 1992 when an order of shipment was issued.
In a phone call of 26 February 1992 there was no agreement on the exact time of
delivery on [buyer's] behalf. The hastening of packaging material concerned only Order
#9/92. The raw material mixture was naturally meant to be order-specific. The ten week
delivery time as demanded by the [buyer] concerned only Order #9/92. Not even the
circumstances in general had obliged the [seller] to manufacture goods for the Order
#10/92 quickly. Concerning Order #10/92, the [buyer] had taken all measures required
to deliver the goods.
- Non-conformity of the goods
The second consignment of the Order #9/92 arrived in Finland in August 1992.
The test results from VTT were received on 8 October 1992.
Based on the results it was apparent that vitamin A content had decreased significantly
below the lowest level agreed, that being 1000 IU/g. Of the five products, two had
qualities which did not conform with what had been agreed on in the contract.
The vitamin A content of the products was a central quality of the products.
Consequently, the products did not posses qualities they should have possessed
according to the seller. The products were not fit for their purpose if they lacked
necessary vitamin A content.
On the basis of order documents, correspondence and phone calls, the [seller] had to
understand that the [buyer] regarded vitamin content as being the central quality of the
products.
Because the [seller] had guaranteed that the shelf-life of the products is at least thirty
months, the [buyer] had grounds to assume that what was meant by shelf-life was that
the products would preserve their essential qualities for at least thirty months.
The [seller] had misled the [buyer] by manufacturing products which, when tested
beforehand, fulfilled the quality requirements but which quickly began losing their
qualities. The [seller] had not acted out [buyer's] requirements to add vitamin A in order
to assure necessary vitamin content.
Vitamin A content should have been within range 1000 - 3000 IU/g. The range was this
wide because the [buyer] had allowed for the fact that vitamin A content would
decrease about 20 - 30%.
The ointments and gels delivered by the [seller] did not conform with what had been
agreed on in the contract. Instead the delivered goods were non-conforming because
they did not conform with the quality requirement laid down in the contract concerning
minimum vitamin content and because the said non-conformity could be regarded as
fundamental.
Vitamin A and E contents were the only quality features of the products specifically
agreed on in the contract.
The [seller] had manufactured the goods for the Order #10/92 already the same year in
April when he had manufactured the goods for the Order #9/92 using the same mixture
of ingredients. After the test results from VTT came on 8 October 1992, it was clear
that also the goods for the Order #10/92 were non-conforming in a manner similar to
goods for the Order #9/92. The goods were meant to be delivered to the [buyer]
towards the end of the same year, when it was already clear that vitamin A content of
the ointments would have dropped below the tested levels. Due to these circumstances
it was clear that goods for the Order #10/92 would not conform with the quality
requirements laid down in the contract. Consequently, the [buyer] notified the [seller]
on 10 November 1992 that he would declare the contract avoided in relation to Order
#10/92. The [buyer] has given prior notice of this to the [seller], as required by CISG
Article 72.
It is the understanding of the [buyer] that also Article 72(2) CISG is applicable in this
case. Through non-conforming delivery, the [seller] has given the [buyer] grounds to
assume that also the forthcoming deliveries in installments would constitute a
fundamental breach of contract. The [buyer] was clearly entitled to declare the contract
avoided as defined in CISG Article 73. Giving of prior notice of avoidance is not
required in Article 73. Because the said non-conformity was a result of a lack of
essential quality features in the products, [seller's] breach of contract clearly fulfils the
preconditions for fundamental breach of contract as defined in Article 25 of the
Convention. It is also clear that the [seller] understood that the goods are non-conforming on the basis of the test results. However, it is apparent that the [seller] had
not seriously even aimed at manufacturing products which could fulfil the set quality
requirements.
The circumstances of the case did not allow the [buyer] to give the [seller] an
opportunity to fix the sale instead of declaring the contract avoided. It took years of
efforts to reach the agreed quality requirements. Still the [seller] failed to meet all the
expectations. The [buyer] had no grounds to assume that the [seller] could or seriously
would aim at fulfilling the quality requirements. The [seller] offered to alter the product
just after having received a prior notice of avoidance of the contract on 22 October
1992. The [seller] could not have been capable of fixing the goods in a manner required
by Article 37 of the Convention without causing the [buyer] excessive harm or
uncertainty. It would not have been reasonable to oblige the [buyer] to accept the
uncertainty connected with allowing the [seller] to fix the goods.
A new composition of the goods would have required new testing of at least thirty
months. The [buyer] could not have accepted untested products.
The [buyer] had given notice of the defects appearing from the test results as soon as he
had received information of the said defects. He had also requested additional
clarification concerning the defects and on 16 October 1992 had requested a substitute
delivery for the delivery of Order #9/92. At this stage, the [buyer] and L had hoped that
the [seller] could be able to deliver goods which would meet the quality requirements.
At the time avoidance of the contract did not seem necessary. The [buyer] had given
prior notice of avoidance concerning the Order #10/92 on 22 October 1992. The
[buyer] had confirmed the avoidance on 10 November 1992, because avoidance of the
contract was the only reasonable way for the [buyer] to react. The parties would have
been unable to reach a mutual agreement because the [seller] had no substitute for the
non-conforming goods. In connection with the checking of the goods in April/May of
1992, the [buyer] had grounds to assume that the [seller] had managed to manufacture
conforming goods in terms of vitamin content and total wastage. Consequently, issuing
the order of shipment on 15 September 1992 was a natural act because the test in May
gave flawless results. The [buyer] had no grounds to assume that the quality of the
products would decrease in comparison to the test results in May. The non-conformity
could not have been detected during acceptance inspection.
- [Buyer's] statement concerning the required sums
Concerning the sums mentioned in the statement of claims, the [buyer] represents the
following:
- claims 1/1 and 1/2 have been admitted as to their sum total;
- claim 1/3 is in dispute, because no clarification has been received as to whether
expenses concerning Order 9/92 were not included and because the manner in which
the palettes were counted was not disclosed;
- the [buyer] has not disputed the claim for interest in the claim 1/4 as to its amount;
- the [buyer] has admitted the claim 1/5 totaling 10,307.60 CHF;
- the [buyer] has disputed the claim 1/6 as to its amount, because the goods had not
been destroyed and because no clarification of the expenses has been represented;
- the [buyer] has disputed claims 2/1-2 as to their amount, these being unclarified.
Grounds [Ruling of the Helsinki Court of First Instance]
- Alleged delay in issuing the order of shipment concerning Order #10/92
As to the alleged negligence of the [buyer] in contributing to the sale on grounds that
the [buyer] had delayed in issuing the order of shipment for Order #10/92, the Court of
First Instance holds that the orders were made using two separate documents. In the
Order #9/92 the time of delivery was precisely determined ("latest week 18/92") and in
the Order #10/92 it was left open ("will be agreed later on"). Furthermore, it can be
stated that according to the wording used on the first page of both orders, the [buyer]
asks the [seller] to hasten the ordering of packaging material in order to facilitate a
quick delivery of the first order.
The [seller's] reply to both of these orders has, however, been given in the same
document. On those grounds, and considering also the correspondence between the
parties during the summer of 1992, one cannot draw a conclusion that the term
concerning time of delivery for the Order #10/92 could have changed from what it had
been in the order letter of 26 February 1992. In the said [seller's] reply, one talks about
two separate deliveries. As far as the second delivery is concerned, there is a mention of
a point of time until which a delivery can take place with the old price. Based on the
reply, and considering the product amounts mentioned in it, it is clear that it did not
concern only the Order #10/92 even if there was a reference in the reply to that order.
Consequently, the [seller's] reply did not contain any changes to the terms of delivery in
relation to Order #10/92 to which the [buyer] should have reacted in some manner.
On the basis of wording of the order documents concerning manufacturing of the
products using same ingredients, the [seller] could not have drawn a conclusion that the
production of the goods for both orders should have been finished already before the
VTT tests. This is because statements concerning the mixture of ingredients have been
written down separately on both orders and, as a consequence, it cannot be interpreted
as meaning more than that the goods for the order in question had to be manufactured
using a single mixture of ingredients. Additionally, it has to be considered that the time
of the tests was not determined in the orders and consequently one cannot draw a
conclusion that the tests concerning both orders should have been carried out
simultaneously.
Considering the conflicting testimonies of B and R, there is no evidence that R would
have confirmed by phone to B the time of delivery for the second order as being August
1992 or other specified point of time.
Based on the statements of R, N and A, it can be held that at the time of making the
order, the [buyer] and L had been unable to estimate the sale of the products in a
manner that would have allowed the determination of an exact time of delivery for the
second order.
Considering that the Order #10/92 was preceded by the delivery of Order #9/92, the
Court of First Instance holds, that the order of shipment for the Order #10/92 was
issued within a reasonable time because it was issued within a year after the contract
was concluded.
Based on the above mentioned circumstances, the Court of First Instance holds that the
[buyer] is not liable for [seller's] willingness to interpret the time of delivery of the
Order #10/92 as being earlier than what the [buyer] has factually committed himself to
or what he can reasonably be regarded as obliged to.
- The alleged non-conformity of the goods
It is undisputed in the case, that in his Orders #9/92 and #10/92, the [buyer] had
required that the sample goods tested at VTT should possess the vitamin A content
indicated by the order documents. It is also undisputed that the vitamin A content in the
goods tested at VTT on 4 May 1992 was within the required range in all the five
products.
The [seller] has regarded the central qualities of the products as being their suitability
for skin care and their inclusiveness of the ingredients mentioned in the list of
ingredients. The evidence submitted on behalf of the [buyer] by R, N and A supports
the view that the [buyer] had specifically wanted to order vitamin ointments and no
other skin ointments, which L already had plenty of in his product selection. Based on
the statements of the said persons and submitted documents, it is also clear that the
[seller] knew that L Oy was the final buyer and that the orders took place under its
guidance. In terms of seller's liability, the information given to consumers or drugstores
by L Oy or the [buyer] without seller's knowledge bears no significance.
Vitamin A and E content was the only quality requirement included in the order
documents. The fax message from the [seller] to the [buyer] on 13 August 1991,
concerning a delivery in 1991 and [buyer's] fax message to the [seller] on 22 January
1992, where the [buyer] has drawn [seller's] attention to both the absorption of vitamin
and the need to add vitamins, indicate that the [buyer] has already earlier drawn
[seller's] attention to the vitamin content of the products.
Based on vitamin A content required in VTT tests and other above mentioned evidence
the Court of First Instance holds that the [buyer] regarded vitamin A content as a
central quality of the products and that the [seller] has to have become aware if this.
In response to the issue whether some requirements concerning preservation of vitamin
A have become parts of contracts governing Orders 9/92 and 10/92, it can be stated,
that the [buyer] has appealed to [seller's] fifteen-part reply dated 21 December 1992
concerning [buyer's] inquiry and especially to part 2 of that reply where the [buyer] has
told that the shelf-life of his products is at least thirty months. As such, it cannot be
excluded, that all the products may have preserved some of their vitamin A content for
thirty months. It can also be held as clarified, that the products would have remained
suitable for skin care throughout the duration of their shelf-life.
The [seller] regards the term "shelf-life" as meaning that the product is preserved when
duly kept in normal or reasonably anticipated circumstances and that the product fulfils
its original purpose without causing any danger to health.
According to the [seller], announcing the shelf-life of the product did not contain
announcement of preservation of vitamin content throughout the said period. The
[buyer] has regarded that announcing the time the product stays preserved means that
the product meets the central requirements throughout the whole period of shelf-life.
No evidence has been submitted concerning the content of the notion "shelf-life" under
Swiss Law or practice.
As a witness to the [seller] M, a German citizen, has told as his view on the content of
the notion in Switzerland, that during the announced shelf-life the product may not
change in terms of its preservation or qualities. During further questioning, M has
submitted that a product meets the shelf-life requirement if it is suitable for its original
purpose even when it is supposed to contain an undetermined amount of vitamins.
Witness M has stated as his understanding that what is meant by shelf-life is the time
that all the central qualities of the product are preserved and the announcement of
which is based on tests carried out by the manufacturer.
Witness A has stated as his understanding that announcing the time the product is
preserved concerns physical, microbiological and chemical preservation. Consequently,
according to A, announcing the shelf-life as being at least thirty months has also meant
that the product maintains its vitamin A content at least for the duration of the shelf-life
of the product.
Furthermore, A has stated that it is typical for the trade that shelf-life announcement of
cosmetics concerns all the qualities of the products.
A is responsible for the product development of L Oy and he must have been aware of
the international content of the shelf-life concept. On the basis of A's statement and
because the [seller] has not represented sufficient evidence to the contrary, the Court of
First Instance holds that the declaration given in [seller's] fax message of 21 December
1990 concerning thirty month preservation has also concerned the vitamin A content of
the products.
Because the [seller] has not even alleged having given any other information concerning
the shelf-life of his products, the Court of First Instance holds that through the shelf-life
declaration, the [seller] had committed himself to delivering products whose vitamin A
content would remain within the range required by the [buyer] throughout the shelf-life
period. The [buyer] has alleged that also the [seller] should have understood that
preservation of vitamin A content is a central requirement to the [buyer]. The fact that
the [seller] has been unable to bring forward sufficient grounds as to why the [buyer]
would have been satisfied with vitamin A content appearing in the tests before the
deliveries and not paying attention to maintenance of vitamin A content on the same
minimum level during the time of use of the product supports [buyer's] allegation.
Statements by R, N and A bring additional support to the allegation in the sense that,
according to them, products with vitamin content are more expensive than regular skin
care products.
Considering especially the statements by N and A, the Court of First Instance does not,
only on the basis of M's statement, hold that it would not have been possible to
manufacture products that would have preserved the minimum amount of vitamin A
throughout the shelf-life.
Additionally, the range was so wide and even the [seller] had managed to manufacture
such products on the part of three products in the product series.
Considering the range allowed, not even the fact that vitamin A decomposes during
time, which was known by the [buyer] and was also generally known in the field, bears
no significance in this case. Not even the fact, that no requirement as to announcing the
vitamin content in the list of ingredients had been made had significance, when a
conclusion can be drawn on the basis of A's and R's statements that the vitamin content
is usually not announced but only the ingredients of which the product is composed are
announced qualitatively.
Based on the above and when considering the [seller's] assurances that it is able to reach
the required levels of vitamin content, it was not the business of the buyer to find out as
to how the seller will take care of the manufacturing. This being the case, it appears that
the buyer counted on the seller's expertise in terms of how the seller reaches the
required vitamin A content and how the required preservation is carried out.
The vitamin content of two products subject to the contract, namely day creme and
liposome gel, had dropped according to the VTT test results of 8 October 1992 in a
manner that vitamin A content of day creme was only 750 IU/g and liposome gel had
only 340 IU/g of vitamin A. Consequently, it can be held that concerning these
products, the goods were non-conforming and that the said products had not been fit
for the special purpose as required by the [buyer], which was known by the [seller] with
sufficient clarity.
The so-called minimum rule connected to law of property is not applicable in this case
because based on what has been mentioned above there is no dispute as to what has
been agreed on in this case.
The level of vitamin A being under the agreed level has not even partly been [seller's]
fault, because on grounds mentioned above the [buyer] cannot be held as having
delayed in carrying out the Order #10/92 in breach of the term concerning time of
delivery.
Because the vitamin A content had to do with central qualities of the products and
because the vitamin A content of the mentioned two products was significantly below
the required minimum content and because according to submitted evidence here it was
a question of a product series required by drugstores to be sold together as a single
entity, the Court of First Instance holds that the [seller] is liable for fundamental breach
of contract.
When the test results in October 1992 indicated that the goods were in non-conformity
with what had been agreed on and when in July 1992 the [buyer] had been informed
that also the Order #10/92 had been made out of the same mixture of ingredients, the
[buyer] had concluded that under CISG Article 73 he had grounds to assume that also
the Order #10/92 would be non-conforming.
Even if the said Article concerning successive deliveries was held inapplicable, the
[buyer] is of the opinion that it was clear in a manner required by Article 72 that the
[seller] would be unable to deliver goods by the beginning of January 1993 that would
conform with the order of 14 September 1992.
In his fax message of 28 October 1992, the [seller] has notified the [buyer] of his ability
to reach and maintain an optimal level of vitamin A with help from H-La R and by
changing the recipe. According to M, the changing of recipe would have meant that the
product had exactly the same chemical composition with the exception of a different
form of vitamin A. Furthermore, M has stated that changes brought about by the
change of a recipe are marginal in nature. The tests required by such changes can,
according to M and B, be carried out within a few days.
However, based on what has been said above the products should have preserved the
minimum level of vitamin A throughout the whole shelf-life period. Based on the
statements of R, N and A, a conclusion can be drawn that guaranteeing the preservation
of vitamin A would have meant tests lasting almost the whole shelf-life period.
According to N, the time of testing can be shortened by testing in higher temperatures.
Even then the tests would last at least fifteen months. M's statement does not support
the view that with the time the [seller] had in his hands he would have been able to
manufacture new goods or change the old goods so that the preservation of vitamin A
would have been guaranteed. Neither [seller's] fax of 28 October 1992 nor other
circumstances gave any guarantees to the [seller] that the [seller] would be able to
deliver conforming goods at the end of the year 1992 or to be able to guarantee the
preservation of vitamin A within the agreed range. The [seller] had no reason to assume
that the [seller] would be able to deliver conforming goods within the agreed time. Due
to these circumstances, the Court of First Instance holds, that in a manner required by
Article 72 CISG, it was clear already before the delivery of the Order #10/92 that the
[seller] will be liable for fundamental breach of contract. Because the fax of 28 October
1992 has not given the [buyer] any guarantees of [seller's] ability to deliver, it could not
have meant an agreement between the parties either.
- The procedure of avoidance of the contract
The submitted documents indicate, that the [buyer] had first informed the [seller] of the
results of the tests carried out by VTT during the fall. Then he had asked the [seller] for
a substituting delivery concerning the Order #9/92 and furthermore on 22 October 1992
had notified that L demands disclosing of the vitamin content of the goods intended for
the next delivery within the near future. Furthermore, in the fax of 22 October 1992 the
[buyer] has informed the [seller] that if the vitamin content of the products is not on the
required level, L will cancel the order and demand damages.
As mentioned above, based on the circumstances of the case the [seller] has been aware
of the fact that L Oy was the final buyer and that the orders were to take place under its
guidance. Taking this into consideration and the content of the fax of 22 October 1992,
the Court of First Instance holds that the [buyer] had notified the [seller] in a reasonable
manner of his intention to declare the contract avoided, as required by Article 72 of
CISG. Due to this and because the [seller's] inability to deliver conforming goods was
evident, it bears no significance whether it was a question of successive deliveries as
defined in Article 73 of CISG in relation to orders 9/92 and 10/92.
- The duty to examine the goods and to give notice
It is of utmost importance in evaluating the acceptability of declaring the contract
avoided in relation to Order #10/92 to think whether the [buyer] should have taken
action already earlier in order to make sure that the goods for both of the orders would
be conforming. This is particularly important considering that in the tests that took
place in the spring, the vitamin content of the liposome gel had been 1200 IU/g and the
respective content in day-creme was 2400 IU/g and that towards the end of June it had
become clear to the [buyer] that the products for both of the orders had been
manufactured using the same ingredients. Additionally, it has to be considered that in a
fax message of 22 January 1992 the [buyer] had notified the [seller] that liposomes
absorb 20 - 30 % of the vitamins within a few months, when vitamin A becomes less
discernible in tests and that the [buyer] had also otherwise notified that vitamin A
decomposes at a rate of 20 - 30%. It is also of significance that, to the [buyer],
preservation of vitamin content was a central quality of the products. The question here
is then, whether based on the information he had received at the end of June 1992
the [buyer] should have checked the goods immediately after he had received the 2nd
consignment of the Order #9/92 and whether he should have notified the [seller].
As to this, we can state that referring to the non-conformity of the goods the buyer has
relied on seller's expertise in terms of how the seller would reach the required vitamin
content and the preservation of that content.
Furthermore, based on VTT tests of spring 1992, the [buyer] had had no reason to
doubt that the vitamin content of the day creme would drop below the agreed minimum.
As far as the liposome gel is concerned, a 20 - 30% drop in vitamin content after the
tests would have meant that vitamin A content would have dropped 40 - 160 IU/g
below the agreed level. In a fax of 22 January 1992, L's request to add vitamins is
mentioned. N, who has undersigned the said fax, has witnessed that notification of 20 -30% absorption of vitamin was not based on studies but on a rule of thumb and that the
[buyer] had presumed that the [seller] knew how this was. Furthermore, the said fax
was not connected to the orders of the year 1992 but to the order in 1991. In addition,
based on what has been presented in the case, there are so-called inhibitors which slow
down the decomposition of vitamins.
On these grounds and especially because the task of the [seller] as a manufacturer of the
product was to attend to the vitamin content remaining within the agreed range and
because the [buyer] had had to rely on [seller's] ability to carry out this task one way or
the other and because the [buyer] could have presumed that the [seller] had other means
in his possession to guarantee the preservation of vitamin content than just adding
vitamins, the Court of First Instance holds, that only on the basis of very low level of
vitamins in the liposome gel sample the [buyer] had no reason to take random samples
right after a partial delivery of the Order #9/92 on 7 August 1992, because the levels
were above the allowed minimum level in the tests of the spring. This being the case,
the Court of First Instance holds that the [buyer], in a fax message of 15 October 1992,
has given notice within a reasonable time because the test results from VTT indicating
the low vitamin levels only arrived on 15 October 1992.
Based on the above mentioned grounds, the Court of First Instance holds, that the
[buyer] was entitled to declare the contract avoided in relation to the Order #10/92 and
that this avoidance was not against CISG rules.
- Ruling of the Court of First Instance
The action is dismissed. The [seller] is ordered to pay the legal expenses of the [buyer]
amounting to 162,185.50 FIM added with interest on arrears from one month after the
issuance of the judgment onwards. The interest on legal expenses is 7% over the
currently enforced interest rate of the Bank of Finland.
- The applicable laws
CISG Articles 35, 49 and 72
Law on legal procedure § 21 section 1
PROCEEDING BEFORE THE HELSINKI COURT OF APPEALS 30 JUNE 1998
The judgment on appeal: Helsinki Court of First Instance, Dept. 5. 11 June 1995 no.
19067 (95/11481)
- The appeal
[Seller] has renewed its statement of claims and has placed a primary demand that the
Court of Appeals confirm that [buyer] has unlawfully cancelled an order it placed on 26
February 1992 and that [buyer] be made to accept the delivery and to pay the price of
671,450 FIM.
[Seller] placed a secondary demand that if [buyer] is not directed to pay the price,
[buyer] be made to pay damages of 654,250.90 FIM; or, on the basis of an alternative
calculation of damages in Part 2 in the judgment of the Court of First Instance.
523,657.45 FIM as acquisition costs and 115,204.74 FIM as administrative costs.
Additionally, [seller] has demanded that [buyer] should be made to pay the amounts
mentioned in parts 1/2 to 1/6 of the judgment of the Court of First Instance. In case that
[buyer] is required to accept the goods, [seller] is willing to give up the claim
concerning destruction costs amounting to 19,980 FIM, which was mentioned in part
1/6 of the judgment of the Court of First Instance.
Additionally, [seller] has demanded that [buyer] be required to pay [seller's] legal
expenses from the Court of First Instance, amounting to 279,740.68 FIM, and from the
Court of Appeals amounting to 24,100 FIM.
- Reply
[Buyer] has replied and demanded compensation for expenses resulting from the reply,
which amount to 13,908 FIM.
- Additional statements
[Seller] has produced two additional statements to the Court of Appeals on 17 July
1996 and on 18 July 1997. In the later letter it has requested that on oral hearing should
be carried out in order to hear witnesses.
[Buyer] has replied to this and demanded 27,084 FIM for expenses resulting from the
reply.
- The judgment
The said additional statements have been received by the Court of Appeals after the
time limit for appeal has expired. There is no special reason to take them into account.
Therefore these statements and their attachments are disregarded, with the exclusion of
clerical errors mentioned in the letter of 17 July 1996 and carrying out of an oral
hearing mentioned in the letter of 18 July 1997.
Because no such information is available which would necessitate hearing witnesses, the
request for an oral hearing is denied.
There is no reason to change the judgment of the Court of First Instance. Therefore, the
judgment of the Court of First Instance remains unchanged.
[Buyer] is directed to pay [seller] a reasonable amount of 8,000 FIM to compensate for
the expenses resulting from the replies to the Court of Appeals. Interest on arrears is to
be paid after one month after the issuance of the judgment onwards. The annual interest
on arrears is the currently enforced interest rate of the Bank of Finland with 7% added
thereto.
- Right to appeal
This judgment can be appealed to the Supreme Court if the Supreme Court grants a
writ of certiorari.
FOOTNOTE
* Jarno Vanto is an LL.M. student at the University of Turku, Finland. He is currenly
working on his thesis on Damages under the CISG. All translations should be verified by cross-checking against the original text.
Matter at issue: Damages for contractual breach
Appellant: EP S.A. Switzerland [Seller]
Defendant: FP Oy, Espoo [Buyer]
Pace Law School
Institute of International Commercial Law - Last updated December 2, 2005
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