Case text (English translation)
Queen Mary Case Translation Programme
Austrian Supreme Court (Oberster Gerichtshof )
12 February 1998 [2 Ob 328/97t]
Translation by Dr. Peter Feuerstein [*]
Translation edited by Ruth M. Janal [**]
On 20 May 1995, the Commercial Court Vienna granted the predominant part of the [seller's] claim (docket no. GZ 17 cg 168/94a-28). Upon the [buyer's] appeal, the Vienna Court of Appeals affirmed the decision of the Commercial Court on 25 October 1996 (docket no. GZ 3 R 167/96t).
The Supreme Court, acting as the final appellate court, and composed of its President Dr. Angst as presiding judge and Dr. Niederreiter, Dr. Schinko, Dr. Tittel and Dr. Baumann as accompanying judges, sitting in a non-public session over the matter of Plaintiff U..., Czech Republic, [seller], represented by Boller, Langhammer, Schubert, Law Offices in Vienna, versus Defendant E... GmbH [buyer], represented by Weiss-Tessbach, Law offices in Vienna, over a residual amount of DM [Deutsche Mark] 268,500, has rendered the following
Decision
Regarding the [buyer’s] exceptional appeal:
The appeal is granted and the appealed judgment is set aside. The decision of the Court of First Instance remains unchanged with respect to the unappealable part, i.e., regarding its dismissal of the claim where it exceeded an amount of DM 268,500 plus 5% interest on DM 52,000 since 19 March 1993, DM 45,500 since 16 March 1993, DM 51,300 since 17 March 1993, DM 74,100 since 19 March 1993, and DM 45,600 since 25 March 1993. The other part of the decision is set aside; to this extent the matter is remanded for a new hearing and decision to the Court of First Instance.
The costs of the appeal proceedings are to be treated as additional litigation costs.
Reasons
The [seller] requested from the [buyer] the payment of DM 345,750 for the delivery of umbrellas during the period August 1992 until March 1993.
The [seller] submits that the deliveries were made on time and accepted without objections. Should it be proven that deliveries were not executed, then [seller] claims it had a right to act in this manner. After several years of smooth cooperation, the [buyer] stopped paying for the deliveries. For this reason, the [seller] was entitled to an inconnex retention. Upon the [seller's] enquiries, it learned that the [buyer], having presented itself at the time of the conclusion of the sales contract as a flourishing and stable firm with sufficient financial means, had encountered considerable financial difficulties. This deteriorated financial condition was not known to [seller] at the time of the conclusion of the contract. By the end of 1992, there was a balance of payments due to [seller] in the amount of DM 128,169, which -- apart from an amount of DM 254 -- resulted from invoices issued in the year 1992. Because [buyer] was in default of payment, [seller] itself had been unable to pay its suppliers, which led to a stop in deliveries. Already prior to the start of the deliveries for 1993, the [buyer] was informed that the balance due to [seller] had to be settled prior to a delivery. In February 1993, [buyer] requested [seller] to technically alter the already manufactured umbrellas. Due to the default in payment and because of this request for a modification of the contract, [seller] decided not to deliver. As the [buyer], in spite of many promises, did not pay the amount due from 1992, it was [seller's] understanding that the [buyer] was unable to effect payment. On 24 February 1993, [seller] was incorrectly informed by the [buyer] that there was an already executed bank payment order in favor of the [seller]. [Seller] therefore made further deliveries. The payment order, however, was not executed, because the [buyer] had revoked it. As far as notices of non-conformity were raised, they referred to deliveries from the year 1992; but these disagreements had been settled. The [buyer] had acknowledged the amount in dispute; the first complaints were made on 4 March 1994.
The [buyer] raised the objection that it bought umbrellas on 18 December 1992 and that the sales contract was a firm bargain, but the [seller] did not adhere to the time for delivery. Therefore, [buyer] had to make substitute purchases and had to pay transportation costs and a penalty. In addition, it suffered a loss of profit. Thus, the [buyer] makes a counterclaim for DM 622,197.18. At the conclusion of the contract in December of 1992 concerning the deliveries for the year 1993, it had been agreed that the [seller] would waive alleged claims of DM 60,685, while the [buyer] would pay DM 86,616; the parties proceeded in the agreed manner. In the beginning of 1993, the [seller] requested an advance payment of DM 200,000 without a legitimate contractual basis. The payment was supposed to finance the production, because the [seller] was experiencing financial difficulties. As [seller] had threatened to stop deliveries, a compromise between the parties was reached on 28 February 1993, whereby clause 1.1 of the agreement of December 1992 was altered in such a way that the [seller] would deliver a total of 1,500 umbrellas. The [buyer] agreed to an increase of the following delivery to 4,000 pieces. Due to an envisaged privatization and the [seller's] financial situation, the [seller] terminated the agreement on 23 February1993; whereas the [buyer] objected to this measure. Out of the initial 1,500 umbrellas ordered, 800 were delivered on 26 February 1993, and another 700 on 1 March 1993. In accordance with the order of 23 February 1993, 3,000 pieces were delivered to a Czech firm in order to exchange the pole tops of the umbrellas. Due to the unjustified termination, [buyer] informed the [seller] that the damage [buyer] itself sustained exceeded the [seller's] previous invoices and that [buyer] therefore refused to pay the invoices due. Apart from the damages resulting from non-delivery, damages were also caused by the defective delivery of the last mentioned umbrellas, which had wooden poles that were too thin. The announcement of the bank transfer had been made to keep the [seller] from declaring an unjustified rescission of the contract; it was correct that the bank transfer was not executed.
The decision of the Court of First Instance
The Court of First Instance held that [seller's] claim for DM 268,500 was justified, whereas the [buyer's] counterclaim was not justified. It consequently handed down judgment against the [buyer] for payment of DM 268,500 plus interest and rejected the other parts of the claim.
Thereby the following findings were made:
Already in the year 1992 the [seller] (having its place of business in the Czech Republic) sold to the [buyer] (having its place of business in Austria) market umbrellas which the [buyer] resold. Complaints pertaining to these umbrellas were received from the [buyer's] customers. These complaints were settled by the parties in such a way that the [seller], on the one hand, exchanged the umbrellas delivered to the [buyer's] customers and, on the other hand, granted the [buyer] a price reduction in the beginning of December 1992. With payment of DM 86,616 by the [buyer] on 9 December 1992, the parties had agreed that both the [seller's] invoices for the deliveries from 1992 and the complaints raised until then were settled.
By agreement dated 7/18 December 1992, the [seller] undertook to deliver the umbrellas specified in this document. For the delivery of 800 pieces, February 1993 was agreed upon as the date of delivery; for the subsequent installments certain time periods between 15 and 25 days were agreed upon. Furthermore, the following was stated under clause 4.1 of the contract:
"Dates of delivery. The stated dates of delivery have to be met unconditionally, as they are exclusively for sales promotion purposes, for which in each case approximately 5,000,000 prospectuses will be distributed. Should the delivery dates not be met, both parties agree that the seller (apparently what was meant is: the buyer acting as a re-seller of the umbrellas) recoups all [of its] incurred costs from the seller. This includes penalties and other costs, with which the buyer will be burdened with by its customers, as well as consequential damages and costs arising through substitute transactions. The seller agrees that these costs can be set-off immediately after the presentation of the relevant documents."
The payment date was stipulated as 15 days after delivery. If this payment date was not met, [buyer] was supposed to pay the [seller] 1 pro mille interest for each working day; a specification of what the term "working day" referred to was missing.
Already prior to the signing of the contract on 18 December 1992, the managing directors of the parties discussed a prefinancing of the contracted umbrella production, which should be effected by the [buyer's] customers' acceptances; an agreement to that effect did not materialize. Soon after the written fixation of the agreement, the parties agreed that contrary to the agreement, the [seller] would initially deliver a total of 1,500 umbrellas directly to one of [buyer's] customers. With a letter of 22 February 1993, the [buyer] gave specific instructions for the shipment of these umbrellas. The [seller] followed these instructions and sent the [buyer's] customer 800 umbrellas on 26 February 1993 and another 700 on 1 March 1993. Concerning the 800 umbrellas sent on 26 February 1993, the [seller] had already issued invoices which were sent to the [buyer]; for the umbrellas sent on 1 March 1993 other invoices were issued. Already with fax of 19 February 1993, the [seller] had requested in broken German "a confirmation when the 1,500 umbrellas would be paid for".
By letter of 23 February 1993, the [seller] terminated the contract of 7/18 December 1992 with immediate effect, because of the financial situation and the prepared privatization of its company. Later on the same day [seller] received another order via phone for 4,000 umbrellas, to which it responded by fax of 24 February 1993. Therein [seller] confirmed the delivery of 3,000 umbrellas, but urgently requested payment for the already delivered 1,500 umbrellas and a confirmation of the payment for the additional 3,000 announced umbrellas. After having learned the delivery address via fax, dated 1 March 1993, the [seller] sent the other 3,000 umbrellas between 2 and 10 March and issued according invoices.
Apparently as a reaction to the [seller's] urgent request for a confirmation of payment for the already delivered and the imminent delivery of a total of 4,500 umbrellas (total value: DM 268,500), the [buyer] sent to the [seller] on 25 February an international bank payment order given to [buyer's] bank. The order was in favor of the [seller]; on it was affixed an entry stamp of the instructed bank. Without informing the [seller] previous to the delivery of the 3,000 umbrellas, the [buyer] revoked this payment order. The [seller] consequently did not receive payment for any of the umbrellas delivered in the year 1993 up to the present date.
Instead, the [buyer] sent the [seller] an invoice for damages of DM 622,197.18 on 4 March 1994. The invoice concerned damages which arose from the [seller's] non-performance of the contract, which the [buyer] now alleged; this sum also included costs for complaints regarding the deliveries made in the year 1992. Furthermore, starting from 24 March 1993 the [buyer] sent the [seller] additional orders for umbrellas, while referring to the agreement of 7/18 December 1992. The [seller] was unable to manufacture and deliver these umbrellas due to the liquidity problems on account of the non-performance of the payment order. A conversation on 26 August to settle the matter was unsuccessful.
In the agreement of 30 June 1995, the parties stipulated that "disputes arising from the present contractual relationship are to be solved under Austrian law".
As a matter of law, the Court of First Instance was of the opinion that the [seller], due to the revocation of the payment order by the [buyer], should have noticed that the [buyer] was unwilling to comply with its payment obligations. The [seller] was thus correct in refraining from further deliveries. [Seller] could not be accused of breaching the contract; therefore, the damages objection raised by the [buyer] did not have a legal foundation. As the [seller] was not in delay with its delivery, the Court did not need to determine whether a firm deal had been agreed to. The parties had settled the claims in arrears for the year 1992 and the balance had been paid by the [buyer], so that the [seller] could only request payment for the deliveries executed in the year 1993. The contractual stipulation regarding default interest was so incomprehensible that the only option consisted in awarding the legal interest rate. Due to [parties'] agreement Austrian law was to be applied.
The decision of the Court of Appeals
The [buyer] appealed the decision of the Court of First Instance regarding the part in which the [seller's] claim was granted. The Court of Appeals affirmed the judgment of the Court of First Instance to this extent and declared that an orderly final appeal was not permissible. The Court of Appeals held that the [seller's] avoidance of contract of 23 February 1993 had been premature, as at this point in time a delivery had not yet been effected for the year 1993. Consequently, the notice of avoidance could not have any effect. It was undisputed that at the time of the intended payment dates, the deliveries for the months February and March 1993 had not been paid for, especially since the payment order had subsequently been revoked. Furthermore, the fact that the [seller], in spite of its termination notice, had accepted further orders on the same day and had complied with these, made it clear that [seller] itself did not want to be bound by its notice of termination (which had been issued prematurely).
The Court of Appeals held that according to Art. 1(1)(a) and (b) CISG, the rules of the Convention had to be applied to the present installment contract. [Seller] and [buyer] had their places of business in different Contracting States and Austrian law was applicable because of the determined choice of law. Art. 73(2) CISG entitles one party to an installment contract to declare the contract avoided for the future, if one party's failure to perform any of its obligations in respect of any installment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future installments.
According to Art. 7(2) CISG, questions concerning matters governed by the Convention which are not expressly settled in it are to be decided in conformity with the general principles on which the Convention is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. Consequently, the provisions of the Convention were to be supplemented by the rules of Austrian civil law, as the law chosen by the parties. Under these rules for installment contracts, the objection of a non-fulfilled contract could not only be raised against the immediate corresponding installment, but had to be granted extensively. The seller who is to perform first may retain the next mature installment if the preceding one has not been paid for, as the exchange relationship relevant to the objection not only exists between the corresponding installments, but between the entirety of the reciprocal obligations. Due to the [buyer's] default in payment, the [seller] was entitled to hold back further installments, which was why the Court could not find [seller] at fault. This, however, was a prerequisite for a successful claim of damages by the [buyer]. The Court did not allow an orderly appeal on points of law due to the lack of a legal interest in accordance with § 502(2) ZPO ( = Austrian Civil Procedure Act).
The findings of the Supreme Court
The [buyer's] exceptional appeal on points of law against the judgment of the Court of Appeals is admissible, for there is no existing case law by the Supreme Court on the question whether the objection of an insecurity suspension may be based on national law in the sphere of the application of the CISG. The appeal is justified regarding the secondary motion to set aside the appealed decisions.
The [buyer] submits in its appeal that Art. 73(2) CISG grants the other party only a right of avoidance, of which the [seller] did not make proper use, as its notice of avoidance was premature. [Buyer] holds that there was no reason to grant the [seller] a right of retention contrary to the wording of Art. 73(2). By taking recourse to Art. 7(2), the Court circumvented the requirement to give an explicit notice of avoidance. Furthermore, the Court of Appeals did not examine whether the payment for the umbrellas delivered between 25 February until 10 March 1993 could have been expected from the [buyer] and whether the future performance of the contract was unreasonable for the [seller] following the default in payment. [Buyer] submits that it did not revoke the payment order without reason, but because the [seller]:
a) On 2 February 1993 requested -- contrary to the parties' agreement -- payment of DM 200,000 combined with a threat to stop the production;
b) After failure of this threat, invoiced its -- not even delivered -- dead stock with invoices of 6 January and 11 February;
c) After failure of this step, terminated the contract prematurely on 23 February;
d) After failure of this step, requested advance payment on 24 February 1993 for the first actual delivery of the umbrellas; and
e) Forced on the [buyer] its dead stock, which did not comply with the specifications of the contract, by threatening to otherwise deliver nothing.
Admittedly, the [buyer] had breached the contract by failing to pay for the first delivery of 25 February 1993. However, at this point in time it was already obvious to its that it would suffer immense damages, as it was clearly visible after the [seller's] last deliveries that it would not be able to deliver goods in conformity with the contract. The [buyer] submits that its claims for damages were therefore principally legitimate and that the lower instances would have had to make findings concerning the matter.
The Supreme Court considered as follows
The Court of Appeals was correct in its finding that the CISG is the applicable law for the assessment of the obligations resulting from the sales contract between the parties, respectively the consequences of a breach of contract. The parties have their respective places of business in different States. Even though the sales contract was concluded prior to the ratification of the CISG in the Czech Republic on 1 January 1993 (see Posch in Schwimann, Kommentar zum ABGB, 2d ed., vol. 5, Introduction to the CISG, n. 11), Art. 1(1)(b) CISG states that the Convention is also to be applied when the rules of private international law lead to the application of the law of a Contracting State (see SZ [*] 69/26). Thereby, it has to be noted that § 35 in connection with § 11 IPRG [Austrian Code on Private International Law] also constitute rules of private international law as addressed by Art. 1(1)(b) CISG. If the parties, as in the present case, choose the law of a member State of the CISG, the CISG is to be applied even without an express statement that the parties wish to apply it (Posch, op. cit., Art. 1 CISG n. 20).
As the Court of Appeals correctly stated, the [seller's] avoidance of contract on 23 February 1993 was premature, as at this point in time a delivery for the year 1993 had not yet been effected. However, contrary to the opinion of the Court of Appeals, the legal consequences of the (subsequent) default in payment of the [buyer] are not to be determined under Austrian law. Irrespective of the right to avoid individual installments of an installment contract, Art. 71 CISG offers a right of suspension (cf. Schneider/Straub in Honsell, Kommentar zum UN-Kaufrecht, Art. 73 n. 105). According to this rule, a party has the right to suspend the performance of its obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of its obligations, as a result of (a) its serious deficiency in its ability to perform or its creditworthiness, or (b) its conduct in preparing to perform or in performing the contract (Art. 71(1) CISG). Art. 71 CISG excludes all legal remedies of the applicable national law, which are envisaged for the situation that -- subsequent to the conclusion of the contract -- serious doubts arise whether the other party is able to perform its obligations. A recourse to broader retention rights of the national law is therefore excluded (cf. Magnus in Staudinger, Kommentar zum BGB, vol. 13, Art. 71 CISG n. 40; Herber/Czerwenka, Internationales Kaufrecht, Art. 71 n. 16). The right of suspension according to Art. 71 CISG exists independent of the right to avoid an installment contract pertaining to individual installments; the aggrieved party may choose between exercising one or the other legal remedy (cf. Schnyder/Straub, op. cit., Art. 73 n. 105).
According to Art. 71 CISG, all "serious" circumstances that put the orderly performance at risk may be considered as indicators that the performance is jeopardized, as well as economic difficulties including a lack of creditworthiness (Art. 71(1)(a) CISG). Furthermore, a risk may result from the debtor's conduct in performing or preparing to perform the contract (Art. 71(1)(b) CISG). A serious lack of creditworthiness, as alleged by the [seller], is present if insolvency proceedings have been opened regarding the debtor's property or if the debtor has stopped its payments or deliveries (cf. Magnus, op. cit., Art. 71 CISG n. 25, Leser in von Caemmerer/ Schlechtriem, Kommentar zum einheitlichen UN-Kaufrecht, 2d ed., Art. 71 n. 11). Singular delayed payments or a sluggish mode of payment are normally not sufficient to show a serious loss of creditworthiness (cf. Magnus, op. cit., Art 71 CISG n. 25; Leser, op. cit., Art. 71 CISG n. 11; Pilz, Internationales Kaufrecht, § 4 n. 252). The Court of Appeals held that the [seller] possessed a right to retention under § 1052 AGBG [Austrian Civil Code], due to the [buyer's] default in payment of the deliveries from the February and March 1993. These grounds are not sufficient to legitimize a right of suspension according to Art. 71 CISG. Furthermore, the revocation of the payment order does also not show a serious lack of creditworthiness on the part of the [buyer] with high probability -- such a degree is necessary in order to establish a right of suspension according to Art. 71 (Karollus, UN-Kaufrecht 87; Magnus, op. cit., Art. 71 n. 18; Leser, op. cit., Art. 71 n. 17).
It follows that the reasons enlisted by the lower courts to support a right of suspension on the part of the [seller] are not suited to grant such a right under Art. 71 CISG. Consequently, the [buyer's] counterclaim cannot be simply dismissed. However, the [seller] has also alleged that it learned through its inquiries that the [buyer], which supposedly presented itself as a flourishing and stable company at the time of the conclusion of the sales contract, had encountered considerable financial difficulties. This allegation was submitted with regard to § 1052 AGBG. The submission will need to be discussed with the parties during the continued proceedings on the basis of the above-mentioned principles regarding Art. 71 CISG. If required, the necessary facts will have to be established.
If the [seller] did not possess a right to suspend its performance, the [buyer] would be entitled to seek damages according to Arts. 45(1), 74 to 77 CISG. However, the established facts do not reveal whether the [seller] failed to perform its obligations under the contract, because the content of the agreement between the parties has not been determined.
The Court feels compelled to note in this context that the [buyer] also claims damages for a non-conforming performance. This claim may be legitimate, as the Convention requires that the aggrieved party be put in the same position that it would have been in if the other party had not committed an objective breach of its contractual obligation, but effected an orderly performance (SZ [*] 69/26 with further reference). However, the [seller] also raised the objection that the [buyer's] notice of lack of conformity was belated. According to Art. 38 CISG, the buyer must examine the goods or cause them to be examined within as short a period as is practicable in the circumstances. According to Art. 39(1) CISG, the buyer loses the right to rely on a 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 it has discovered it or ought to have discovered it. The legal consequences of a failure to notify the seller of a lack of conformity, respectively the failure to give an orderly notice, is that the buyer loses all legal remedies pertaining to the respective lack of conformity. This is, unless the seller acted in faulty manner in the meaning of Art. 40 CISG and unless the buyer possesses a reasonable excuse for its failure to give the required notice (Art. 44 CISG; cf. Karollus, op. cit., 127). In such a case, the buyer loses all claims for damages derived from the non-conformity of the goods, if it does not have a reasonable excuse for its failure to give the required notice (Karollus, op. cit.). On the basis of the facts established by the Court of First Instance the Supreme Court cannot determine whether the goods delivered by the [seller] were defective, whether the notice of non-conformity was given in time and whether and which damage the [buyer] suffered as a result of the defective goods. Therefore, the Court had to set aside the judgments of the lower instances. The Court of First Instance is directed to supplement the proceeding in the manner discussed.
The ruling on the costs is based on § 52(1) ZPO [Austrian Code on Civil Procedure].
FOOTNOTES
* All translations should be verified by cross-checking against the original text. For purposes of this translation, the Czech Plaintiff-Respondent is referred to as [seller], the Austrian Defendant-Appellant as [buyer]. Monetary amounts in German currency (Deutsche Mark) are indicated as [DM].
Translator's note on other abbreviations: SZ = Entscheidungen des österreichischen Obersten Gerichtshofes in Zivilsachen [Official Reporter on the decisions of the Austrian Supreme Court in Civil Matters]
** Peter Feuerstein is an International Legal Consultant. He conducted his post graduate studies at Cambridge University, England, where he researched at Clare College in preparation of his Doctoral Dissertation. He received his Dr. jur. from Philipps-University of Marburg, Hessia, Germany, in 1977.
*** Ruth M. Janal, LL.M. (UNSW) is a Phd candidate at Albert-Ludwig-Universität Freiburg.
Pace Law School
Institute of International Commercial Law - Last updated February 7, 2007
Comments/Contributions
Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography