Reproduced with permission from the Cornell Review of the Convention on Contracts for the International Sale of Goods (1995) 51-94

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[Fundamental breach: analysis of German court rulings]
[Article 25]

Several decisions have dealt with the question of fundamental breach. It is interesting that this question has arisen only in the context of the buyer's right of avoidance.[119] Other CISG provisions that require a fundamental breach have not yet been considered by the German courts.[120]

In one case, an Italian seller promised to deliver shoes within a particular geographic area exclusively to the German buyer [LG Frankfurt 16 September 1991].[121] The seller delivered shoes to another merchant whose main place of business was outside the area reserved to the buyer but who had a place of business within the reserved area. The second buyer sold the shoes within the restricted area and in competition with the first buyer. Apparently, the seller did not intentionally violate his contractual obligation because the sale to the second buyer was organized by a commercial agent. The agent either intentionally violated the contract or was unaware that the second buyer had a secondary place of business in the area reserved for the first buyer.

Because the first buyer did not receive exclusive deliveries as promised, he declared the contract void under CISG Article 49(1)(a). However, the LG Frankfurt am Main held that the breach was not fundamental (presumably, the court would deny that there was a breach of contract at all).[122] The court argued that the Italian seller could not have known where his German buyers had places of business, and that the knowledge of the commercial agent could not be imputed to the seller. These arguments are not convincing.[123] A seller who has promised exclusive delivery to the buyer is obliged to organize his distribution such that it meets his contractual obligations.

Of course, the seller is not liable for the acts of his other buyers. The seller must, however, impose contractual duties on other buyers to prevent them from selling the goods in the area reserved for the first buyer, and he must stop further deliveries if they do not comply. In any case, the seller is liable if he enters into contracts with other buyers who would foreseeably sell the product in the reserved area. The result is not different if the commercial agent alone can foresee the interference, since a seller who engages commercial agents is liable for their actions under CISG Article 79(2) to the extent they concern his obligations.

In a second case, an Italian manufacturer promised to manufacture shoes with a trademark ("Marlboro") [OLG Frankfurt 17 September 1991].[124] The manufacturer was allowed to use the trademark only with special permission from the buyer. Nevertheless, the manufacturer displayed the shoes with the trademark during a fair at Bologna and did not remove them upon demand of the buyer. The buyer declared the contract void under CISG Article 49(1)(a). The OLG Frankfurt am Main decided that the manufacturer had committed a fundamental breach because his actions severely shook the buyer's confidence in the manufacturer's contract fidelity.[125] The court held that violation of additional obligations could amount to a substantial breach. Therefore, the buyer could not be expected to cooperate further with the manufacturer. While this decision seems correct, it does not answer the question of how to distinguish the fundamental character of a present breach from expected future breaches. As to an expected breach, the requirements of Article 72 go beyond those of Article 25 and should take precedence.

The buyer in a third case argued that the shoes delivered were not merchantable due to their lack of conformity [OLG Frankfurt 18 January 1994].[126] The OLG Frankfurt am Main held that this statement alone was not sufficient because it did not give the court enough details to decide whether the breach was fundamental.[127] Accordingly, the court regarded the buyer's declaration of avoidance under Article 49(1)(a) as ineffective, and the buyer had to pay for the shoes. This raises the question of how a buyer can convince the court that the goods are not saleable. In my opinion, it should be sufficient for the buyer to specify the non-conformity and the reasons why it is likely that the goods will not be saleable.[128] The buyer should not be forced to wait until his customers reject the goods, which seems to be the result of the strict requirments stated by the OLG Frankfurt am Main. From this perspective, these requirements seem too severe. Nevertheless, the result is correct, because the buyer did not state exactly why the shoes lacked conformity.

Finally, the OLG München decided as to a contract for the sale of coke that the alleged breaches -- minor lack of conformity and a direct sale to the contracting partner of the buyer -- were not fundamental [OLG München 2 March 1994] [129] (in fact, it was not proven that the seller had committed a breach of contract at all). I agree as far as the minor lack of conformity is concerned. If exact conformity is a special requirement of the buyer, then the contract should contain an appropriate clause. As far as the direct sale is concerned, I do not agree with the OLG München. The direct sale should be regarded as a fundamental breach even if it did not cause present prejudice to the buyer. In effect, the seller tried to interfere with the business relations of the buyer. This is a severe breach of confidence and it is reasonable to expect further interferences in the future. There is no reason to treat this breach of confidence differently from the impermissible use of the "Marlboro" trademark.[130]

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FOOTNOTES

* Professor of Law at the University of Bonn, Germany, from 1992 to February 1995. Currently, Professor of Law at the University of Linz, Austria. Address: Institut für Handels-und Wertpapierrecht, Universität Linz, A-4040 Linz-Auhof, Austria, Europe.

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119. See CISG, supra note 4, art. 49(1)(a).

120. See, e.g., id. arts. 46(2), 64(1)(a), 70.

121. Judgment of Sept. 16, 1991, LG Frankfurt am Main, 1991 RIW 952.

122. Id

123. See Karollus, supra note 20, at 169.

124. Judgment of Sept. 17, 1991, OLG Frankfurt am Main, 1991 RIW 950.

125. Id. at 950-51.

126. Judgment of Jan. 18, 1994, OLG Frankfurt am Main, 1994 RIW 240. See CISG, supra note 4, art. 35.

127. Id. at 241.

128. See Ulrich Huber, Art. 46: Recht des Käufers auf Erfüllung oder Nacherfüllung, in Kommentar zum Einheitlichen UN-Kaufrecht 428, 441 (Ernst von Caemmerer & Peter Schlechtriem eds., 2d ed. 1995).

129. Judgment of Mar. 2, 1994, OLG München, 1994 RIW 595.

130. See supra notes 124-25 and accompanying text.

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[Declarations of avoidance: German court rulings]
[Article 26]

For a declaration of contract avoidance to be effective, Article 26 requires that it is made by notice to the other party. One of the main issues under Article 26 is the required content of the notice. Generally, the notice has to make clear to the other party that the contract is avoided. However, the degree of clarity required in the notice is unsettled.[131] This question is very important because a notice of avoidance not meeting the requirements of Article 26 will not be effective, and the party may subsequently lose the right to avoid the contract under Articles 49(2) or 64(2).

According to the OLG Frankfurt am Main, the declaration of avoidance is effective if the avoiding party unmistakably tells the other party that the contractual relationship will be terminated [OLG Frankfurt 17 September 1991].[132] In one case, the AG Oldenburg in Holstein stated that the buyer's refusal to take delivery would suffice as an Article 49 declaration of avoidance [AG Oldenburg 24 April 1990].[133] This is especially true in the cases of late delivery where the refusal to accept delivery has a clear meaning.[134] On the other hand, the meaning would not be clear if the buyer rejects defective goods, because the rejection could be understood as a demand for substitute delivery under Article 46(2).

According to the LG Frankfurt am Main, a buyer who sends back one part of the goods and demands credit but declares that he will pay for the other part which he has already resold has not made an effective declaration of avoidance [LG Frankfurt 16 September 1991].[135] The court held that, although the seller had committed a fundamental breach which allowed the buyer to avoid the contract under Article 49, the buyer did not make explicit his desire to avoid the contract as required by Article 26.[136] This is not convincing. The return of the goods and the additional demand for a credit entry unmistakably show that the buyer did not want substitute delivery, but instead wanted to terminate the contract. The buyer's actions should have been understood as a partial avoidance under Article 51(1). The issue should have been whether a partial avoidance was possible in those circumstances.

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FOOTNOTES

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131. For discussion of the contents of contract avoidance notices, see, e.g., Enderlein et al., supra note 15, at 105; Hans G. Leser, Art. 26: Aufhebungserklärung, in Kommentar zum Einheitlichen UN-Kaufrecht 221, 223-24 (Ernst van Caemmerer & Peter Schlechtriem eds., 2d ed. 1995); Karollus, supra note 20, at 151.

132. Judgment of Sept. 17, 1991, OLG Frankfurt am Main, 1991 RIW at 951.

133. Judgment of Apr. 24, 1990, AG Oldenburg in Holstein, 1991 IPRax at 338.

134. Fritz Enderlein, Die Verpflichtung des Verkäufers zur Einhaltung des Lieferzeitraums und die Rechte des Käufers bei dessen Nichteinhaltung nach dem UN-Übereinkommen über Verträge über den internationalen Warenkauf,1991 IPRax 313, 315.

135. Judgment of Sept. 16, 1991, LG Frankfurt am Main, 1991 RIW at 953.

136. Id.

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[Comments on damages under Article 74]

Article 74 allows only monetary damages for breach of contract; compensation in kind is not permitted.[213] Nevertheless, the OLG Düsseldorf held that a buyer of defective goods who became liable to a second buyer could demand discharge from his liability as a seller of defective goods to the second buyer from the original seller [OLG Düsseldorf 2 July 1993].[214] Although this holding is arguably incorrect,[215] I agree. As soon as the first buyer paid damages to the second buyer, he could recover the sum paid from the original seller. There is no reason why the original seller should not pay directly the second buyer.[216]

The recovery of interest under CISG Article 78 is only a minimum, allowed "without prejudice to any claim for damages." For example, the seller can recover damages if his sales are prefinanced and he has to pay interest for any delay in payment [LG Aachen 3 April 1990],[217] or if he has to pay interest for other credit obtained as a necessary consequence of a delayed payment [OLG Koblenz 17 September 1993].[218] However, the courts do not agree on the showing required for such consequential damages. Two decisions have held that the seller has to specify and prove his loss exactly, and that it is not sufficient for the seller to declare generally that he is working on credit as a consequence of delayed payment [LG Frankfurt 16 September 1991; OLG Frankfurt 18 January 1994].[219] In another decision, however, the court tried to moderate these burdens [LG Hamburg 26 September 1990].[220] Although the seller did not prove that he had to obtain credit because of payment delay, the court granted damages based on the discount rate in the seller's country.

According to the second sentence of Article 74, damages suffered as a consequence of a breach of contract are recoverable only if such damages were foreseeable to the party in breach at the time the contract was concluded. No German court has yet barred a claim for damages because of this provision. A court has held that the buyer's liability to third parties was foreseeable when the goods were not timely delivered [LG Aachen 14 May 1993],[221] and in another case that the buyer could foresee that non-payment would force the seller to obtain credit [OLG Koblenz 17 September 1993].[222]

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FOOTNOTES

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213. See Victor Knapp, Article 74, in Commentary on the International Sales Law 538, 540 (C.M. Bianca & M.J. Bonell eds., 1987); Hans Stoll, Art. 74: Umfang des Schadenersatzes, in Kommentar zum Einheitlichen UN-Kaufrecht 623, 635-36 (Ernst von Caemmerer & Peter Schlechtriem eds., 2d ed. 1995); Enderlein et al., supra note 14, at 235; Karollus, supra note 20, at 213.

214. Judgment of July 2, 1993, OLG Düsseldorf, 1993 RIW at 845-46.

215. See Peter Schlechtriem, Kurzkommentar, 1993 EWiR 1075 (1993).

216. See also Stoll, supra note 213, at 635-36 (arguing that a party who has suffered damages from the other party's breach should be discharged from liability under the contract when the extent of damages is not calculable).

217. Judgment of Apr. 3, 1990, LG Aachen, 1990 RIW at 492.

218. Judgment of Sept. 17, 1993, OLG Koblenz, 1993 RIW at 936-37.

219. Judgment of Sept. 16, 1991, LG Frankfurt am Main, 1991 RIW at 954; Judgment of Jan. 18, 1994, OLG Frankfurt am Main, 1994 RIW at 241.

220. Judgment of Sept. 26, 1990, LG Hamburg, 1991 IPRax at 403 (referring to Herbert Asam & Peter Kindler, Ersatz des Zins-und Geldentwertungsschadens nach dem Wiener Kaufrechtsübereinkommen vom 11.4.1980 bei deutsch-italienischen Kaufverträgen, 1989 RIW 841, 844-45 (1989)).

221. Judgment of May 14, 1993, LG Aachen, 1993 RIW at 761.

222. Judgment of Sept. 17, 1993, OLG Koblenz, 1993 RIW at 937.

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