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Reproduced, with permission, from 14 Journal of Law and Commerce 177-181 (1995)
The CISG has been in force in Germany since 1991. However, even before that time German courts had to apply the Convention in cases in which German international private law led to the application of foreign law and the foreign country was a party to the Convention, causing the CISG to be part of that country's substantive law. Looking at the decisions rendered by German courts so far is helpful in identifying where problems in application and interpretation of the CISG are most likely to arise and how they can be dealt with. Those problems are largely due to the character of the Convention, which can be described as a compromise embracing widely differing legal systems. Nevertheless, despite this compromise character, the most important function of the CISG is to harmonize the various legal systems with respect to transnational sales contracts in order to provide to the business world a legal background on which it can rely when operating on an international level. Therefore, consideration has to be given to court decisions in the various countries concerning the interpretation of the CISG which, however, because of its incompleteness is not yet a uniform law but rather offers a basis for the development of uniform international understanding.
The decision by the OLG Frankfurt highlights two areas that are crucial to international sales: the avoidance of a contract on grounds of [page 177] non-conformity of the goods, and the amount of interest recoverable under CISG, Article 78.
The OLG decided the issue of non-conformity according to the rules of burden of proof. Stating that a non-conformity of goods has to amount to a fundamental breach of contract, the court decided that the plaintiff had not met this burden because the evidence was not sufficient to establish a breach of a fundamental degree. What is not clear, however, is the court's conception of what breach might qualify as a fundamental one under CISG. Furthermore, the court's mode of reasoning--contrasting the CISG and German domestic law--does not suffficiently stress the policies and principles of CISG, but rather narrows the issue to differences with regard to domestic law. The application of the CISG to international legal contexts, however, requires an interpretation mindful of its international significance in order to create the uniform application required by CISG, Article 7.
In its reasoning the OLG contrasts the CISG provisions with German national sales law. For a party to avoid a contract on grounds of non-conformity of goods, German law requires a defect that makes impossible or impairs the ordinary or contractually stipulated use of the goods, provided the defect is significant. According to the court's opinion, from this prerequisite the consequence can be derived that under German sales law there is in principle the right to terminate the contract in case of defectiveness of goods whereas under CISG there has to be a "qualified" defectiveness: that is to say, a fundamental breach.
The difference between German sales law and the CISG provisions, however, is not correctly described by the court, as becomes clear by referring to the definition of fundamental breach in CISG, Article 25. It is remarkable, indeed, that the court does not even mention Article 25. This provision states that a breach of contract is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. From the perspective of both German national sales law and the CISG, the prerequisite for termination is defective performance of the contract [page 178] of such weight that the stipulated contractual purpose can no longer be reached, provided this possibility could be foreseen by the parties to the agreement. In fact, today most legal systems agree on the most important condition for allowing the aggrieved party to terminate the contract: that the non-performance complained of must be of a serious nature. This is true for German sales law, in which the defect has to be significant. A careful reader of the court's opinion will not have missed the words "except for insignificant deviations." International sales law expresses the same idea by distinguishing "fundamental" breaches from other breaches of contract. To what extent, if at all, is the CISG peculiar in approach and distinguishable from German sales law?
The term "fundamental breach" is used throughout the text of the CISG in various settings. One of its most important appearances is Article 49(1)(a), which permits the contract to be avoided whenever non-performance by the seller of "any of his obligations" constitutes a "fundamental breach." The key to a correct understanding of fundamental breach is CISG, Article 81(1), which states that "[a]voidance of the contract releases both parties from their obligations under it, subject to any damages which may be due." Every breach, no matter how trivial, calls for compensation in damages under Article 74. Termination of the contract, though, completely alters the parties' obligations and thus calls for special justification. The special circumstances of international trade, including significant transportation costs and the often large scale of international contracts, have to be taken into account in deciding whether a particular breach justifies avoidance. In approaching this issue, care must be taken not only to reach a just allocation of risks between the parties and to avoid unexpectedly serious consequences in situations where defects in performance are trivial, but also to fashion a remedy that accounts for pragmatic considerations.[page 179]
The broad term "fundamental breach" leaves enough room for considering all the circumstances mentioned above. The right of avoidance therefore incorporates a test based on the degree of harm arising from the breach, and focusing on whether the aggrieved party especially needs this remedy--as opposed to damages--in light of all the facts, to compensate for the impairment. This balancing approach based on a flexible system of remedies is peculiar to the CISG. Although the decision of the OLG appears correct in its outcome, it would have been helpful had the court made clear that the plaintiff has to show his need for avoidance--rather than damages--under the special conditions prevailing in international trade relations.
The second issue in the case before the OLG is the determination of the amount of recoverable interest. The legal basis for an interest claim is found in CISG, Article 78. Article 78, however, gives no guidance whatsoever as to the calculation of the interest rate. Interest was a very controversial matter in the negotiations leading to the Convention, and here the CISG suffers from the inability of the parties to reach consensus. The parties to the Vienna Conference at which the text of CISG was approved could agree only upon the provision in CISG, Article 78 stating a basic right to recover interest. An understanding on the rate, however, failed since this is an area of political and economic importance. In particular, a reference to the corresponding domestic law was rejected.
Adoption of a general provision on interest was necessary to avoid serious divergences in the application of the Convention. The various legal systems differ as to whether or not interest is recoverable as damages. For those countries that classify interest as a part of damage assessment, the conclusion would have been likely that, absent express reference in the rules for damages, interest was barred from being recovered. Alternatively, absent a specific provision dealing with interest,[page 180] differences in application could occur by each country reading Article 74 as allowing for its own position on interest.
German courts until now have almost always determined the amount of interest by reference to the national law applicable according to the rules of conflict of laws. If the foreign law provided for a certain rate, German courts would award that amount under CISG, Article 78. Further interest might be awarded as a matter of damages under CISG, Article 74. This approach has led to reasonable results because, under German conflict of law rules, the law applicable to the contract is that of the country with which the contract is deemed to have the most significant connection. Thus the reasonable expectations of the parties are probably met under this rule. Without provision for a uniform interest rate under CISG, Article 78, furthermore, the only possibility in practice was to fall back upon national rates. Reliance upon domestic rules of conflict of laws, however, does not advance the uniform interpretation and application of the Convention as required by CISG, Article 7. Instead of referring to national conflict of law rules, one might follow the reasoning of the Argentinean court that invoked CISG, Article 9 and determined the amount of interest payable according to the relevant trading customs. Such an approach avoids the difficult problem of determining which domestic law applies, and it finesses the sensitive issue of whether the applicable domestic law--once determined--contradicts policies of the Convention. In any case, as long as this issue has not been settled either by statute or court decisions, parties to international sales transactions should avoid uncertainty by negotiating appropriate contractual interest rate provisions and procedures to trigger the accrual of interest.[page 181]
* Law studies at the University of Bielefeld, 1985-87 and the University of Freiburg, 1987-91; First State Examination, 1991, University of Freiburg, Second State Examination, 1994, Stuttgart. The author wishes to thank Professors Ronald Brand, Vivian Curran and Harry Flechtner of the University of Pittsburgh School of Law for their kind assistance.
1. U.N. Convention on Contracts for the International Sale of Goods, Final Act, U.N. Doc. A/CONF. 97/18 (1980) [hereinafter CISG], reprinted in S. Treaty Doc. No. 9, 98th Cong., 1st Sess. and in 17 INT'L LEGAL MAT. 668 (1980). The CISG has been in force in the United States since January 1, 1988. See 52 Fed. Reg. 46014 (1987). For general information on the entry into force in the various countries, see 14 J.L. & COM. 237 (1995).
2. See Volker Behr, Commentary to Journal of Law & Commerce Case 1; Oberlandesgeright, Frankfurt Am Main, 12 J.L. & COM. 271, 271-72 (1993).
3. Accordingly, CISG, art. 7 reads: "regard is to be had to its international character and to the need to promote uniformity in its application..."
4. Bürgerliches Gesetzbuch [Civil Code], § § 459, 462 [hereinafter BGB]. See TIMOTHY KEARLY & WOLFSON FISCHER, CHARLES SZLADITS' GUIDE TO FOREIGN LEGAL MATERIALS: GERMAN 61-72 (2d ed. 1990) [hereinafter SZLADITS].
5. CISG art. 25
7. CISG art. 49(1)(a); art. 25
8. See U.N. CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS ANNOTATED 49-7 (Grant R. Ackerman ed., 1993).
9. BGB, supra note 4.
10. Ulrich Drobnig, General Principles of European Contract Law, in INTERNATIONAL SALE OF GOODS: DUBROVNIK LECTURES 305, 327 (Petar Sarcevic & Paul Volken eds., 1986).
11. See, e.g., CISG arts. 49(1)(a), 64, 73.
12. See CISG arts. 49(1)(a) and 64(1)(a) (providing for avoidance for buyers and sellers following a fundamental breach).
13. Cf. Harry M. Flechtner, Remedies Under the New International Sales Convention: The Perspective From Article 2 of the U.C.C., 8 J.L. & COM. 53, 54 (1988).
14. See ALBERT H. KRITZER, GUIDE TO PRACTICAL APPLICATIONS OF THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS 498 (1989); JOHN HONNOLD, UNIFORM LAW FOR INTERNATIONAL SALES UNDER THE 1980 UNITED NATIONS CONVENTION § 420 (copyright reprint 1987).
15. See HONNOLD, supra note 14, § 420.
16. On religious grounds or for reasons of public policy, some parties (Muslim countries, for example) either forbid the charging of interest or impose a limit on the rate. See KRITZER, supra note 14.
17. See HONNOLD, supra note 14, § 421.
18. There is only one deviating court opinion by the Landgericht Göttingen, which applied German law without even invoking German rules of conflict of laws. LG Göttingen, 3 O 100/92, Nov. 19, 1992. This decision was not supported by any scholars or other courts. See Piltz, Neue Entwicklungen im UN-Kaufrecht [New Developments in UN Sales Law], NEUE JURISTISCHE WOCHENSCHRIFT [NJW] 1101, 1105 (1994).
19. Einführungsgetz zum Bürgerlichen Gesetzbuch [hereinafter EGBGB], art. 28, § 2. The EGBGB is the most important supplementary law to the German Civil Code. See SZLADITS, supra note 4, at 65-66.
20. Judgment of October 23, 1991, Nacional de Primera Instancia en lo Commercial No. 10 Buenos Aires (Arg.).
21. See HONNOLD, supra note 14, § 421.
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