CISG CASE PRESENTATION

Reasoning of the Court

Aside from a part of the interest claim, the claim is well-founded on the basis of the motion for alternative relief, because the [seller] has a right to the asserted purchase price in Italian currency pursuant to CISG, Article 53.

The sales contracts concluded by the parties to the action in 1991 are governed by the CISG pursuant to Articles 1 and 100(2) of the Convention. Both Italy and Germany are parties to the Convention (Herber/Czerwenka,[5] Internationales Kaufrecht [International Sales Law] 1991, before Article 1, Rn.[6] 16). The Convention came into force on January 1, 1991 in Germany and on January 1, 1988 in Italy.

The claim is based on two invoices . . . for the supply of women's shoes. The [seller] is suing the [buyer] . . . for the residual purchase money. The conclusion of the sales contract, the delivery of the shoes and the proper calculation of the purchase price are uncontested.

The [buyer] is committed to pay the purchase money only if it did not effectively declare the contract avoided (CISG, Article 49). The avoidance of the contract releases both parties from their contractual obligations subject to any damages that may be due (CISG, Article 81(1)).

Insofar as the [buyer] maintains that the shoes had not been delivered within the stipulated time period, the [buyer] does not have any right to avoid the contract, since it is not established that the [seller] failed to perform within a fixed additional period of time (CISG, Articles 49(1)(b), 47(1)).

The [buyer] also does not succeed in showing that the delivered shoes have been predominantly non-conforming.

According to the Convention, the defectiveness of goods does not qualify as non-delivery, but is a breach of contract, which has to be distinguished as to whether or not it is a fundamental one. Avoidance of contract is only available as a remedy in those cases in which non- performance of the seller's duties under the contract or under the agreement is a fundamental breach of contract (CISG, Article 49(1)(a)).

Contrary to German national sales law, which except for insignificant deviations in principle grants the right to cancellation of the contract on grounds of a defect, under the Convention, the buyer is expected to accept to a considerable extent even non-conforming goods and to invoke different remedies (reduction of price, damages) to compensate for the defect(s). For example, it is possible that there is no fundamental breach in cases in which the buyer eventually can make some use of the defective goods (von Caemmerer-Huber,[7] Kommentar zum Einheitlichen UN-Kaufrecht -- CISG [Commentary on the Uniform UN Law of Sales -- CISG], 1990, Article 46, Rn. 64, Article 49, Rn. 27; Piltz,[8] Internationales Kaufrecht [International Sales Law], 1993, § 247). An examination [by the court] of this kind also is compelled in cases in which the non-conformity consists in a lack of correspondence between the goods and a sample or model presented at the conclusion of the contract (CISG, Article 35(2)(c)). Consequently, the buyer normally is required to report explicitly on the defects and the unacceptability of any further use, since otherwise the examination [by the court] would not be possible as to whether or not there had been a fundamental breach as is required for avoidance.

The allegations by the [buyer], however, overall preclude the required examination [by the court].[9]

The [buyer] has only testified that . . . [the shoes] were "defective in all makings". Thus, the material had shown defects. The manufacturing had been "varying", "sometimes" the shoes had been "stitched", others had been "folded up". In all, they did not correspond to the original sample. It is not possible to draw from these submissions the precise defects alleged. As to the deviation from the sample, the evidence given by the [buyer] is not sufficient to determine whether or not she could reasonably be expected to use the shoes . . .

The [buyer] . . . also complains about the shoes being made of the material "S. Oro" instead of "Metallic Leather Gold" which caused the shoes not to be smoothly manufactured but to have heavy wrinkles. These [allegations] do not allow for any judgment as to whether or not the shoes were -- apart from the different material and consequently different appearance -- defective and unfit for use. . . .

[...] [10]

During the oral proceedings the court[11] granted the possibility to the [buyer] to substantiate its several claims. Supplementary allegations have not been presented.

[...] [12]

The [seller] does not have the principal claim to payment in German currency, because the purchase price had been stipulated in Italian currency (Piltz,[13] § 4, Rn. 124). Therefore the suit had to be dismissed with respect to the principal claim.

The interest claim is well-founded only to the extent of 10%.

The claim is justified on grounds of CISG, Article 78. Pursuant to this article, the contracting party in default either as to payment of the purchase price or any other amount due has to pay interest rates for the sum owing (von Caemmerer-Eberstein,[14] Article 78, Rn. 9, 10; Herber/Czerwenka,[15] Article 78, Rn. 3; Asam RIW[16] 1989, 942, 945). Under CISG, Articles 58 and 59, the date of payment for the shoes which were delivered no later than October 19, 1991 was even prior to the dates given by the [seller]. Nothing has been submitted as to any other agreement concerning the due date.

Since the amount of recoverable interest has been left unregulated in CISG, Article 78 (as opposed to EKG [ULIS] Article 83 [17]), according to the predominant legal opinion, pursuant to German international private law, the domestic German Law is applicable (see comments in Senat, Urt. v. 13. Juni 1991 -- 5 U 261/90 -- NJW 1991, 3102[18]).

In the case before the court, pursuant to Article 28(2) EGBGB [19], Italian law is applicable to the claim for the purchase price and it also governs the accompanying interest claim. According to the isolated deviating opinion by Stoll (Festschrift für Ferid, 1988, 495, 509f.; similar: von Caemmerer-Leser,[20] Article 84, Rn. 13 on the obligation to pay interest under CISG Article 84(1)), the legal rate [of interest] has to be determined by the domestic sales law of the debtor. Whether or not Stoll's opinion has to be followed did not have to be decided in the [previous] ruling of this court rendered on June 13, 1991,[21] because in that case the [seller] at the very beginning limited her interest claim to 5%, a rate that is justified both under German and under French Law.[22] In this case, however, the court has to decide according to the prevailing legal opinion. Since the amount of interest intentionally is not prescribed in the Convention, the answer can only be taken from the rules of international private law. Absent any point of reference, no principle can be derived from the Convention such as saying that the domicile of the debtor would be decisive, because the duty to pay interest was aimed at preventing the withholding of money from being advantageous to the debtor (Stoll as referred to above [Festschrift für Ferid, supra]) who still has the possibility to use or invest the funds as compared to payment. Furthermore, this argument is not persuasive, since it is not guaranteed that the domestic legal rate [of interest] fully compensates for (see § 352 HGB)[23] the advantage of non-payment and any other calculation of interest would erase the dividing line [between interest and] damages.[24] The practical disadvantage of eventually being obliged to investigate foreign law to calculate the interest has to be accepted because of the partial incompleteness of the Convention arising from unsettled disputes during the negotiation process (Herber/Czerwenka,[25] Article 78, Rn. 1). Besides, disadvantage can be diminished by the availability of adequate charts (Piltz,[26] § 5, Rn. 415).

Pursuant to Article 1284 Codice Civile[27] as of December 16, 1991 (Statute No. 353 of November 16, 1990) the interest rate amounts to 10% (Piltz,[28] § 5, Rn. 415; Kindler[29] RIW 1991, 304 f.).

The [seller's] claim for default interest at an amount of 13.5% could not be awarded. CISG, Article 78 does not bar a claim for damages under CISG, Article 74 to recover additional loss resulting from finance charges (Herber/Czerwenka,[30] Article 78, Rn. 8). However, the [seller] has no shown evidence of any further loss caused by using credit (as to the burden of proof: von Caemmerer-Stoll,[31] Article 74, Rn. 41). The submitted certificates issued by the Banca d'ltalia only refer to the discount [rate] fluctuations.

FOOTNOTES

1. United Nations Convention on Contracts for the International Sale of Goods, U.N. Conference on Contract. for the International Sale of Goods, Final Act, U.N. Doc. A/CONF.97/18 (1980) [hereinafter "CISG" or "Convention"], reprinted in S. Treaty Doc. No. 9, 98th Cong., 1st Sess. and in 17 INT'L LEGAL MAT. 668 (1980). All footnotes in the following material were supplied by the author/translator, and did not appear in the original material.

2. The German term for the Court of Appeal is Oberlandesgericht [hereinafter referred to as "OLG"]. The OLG has exclusive jurisdiction over civil appeals from, inter alia judgments of the Landgericht. The OLG may, in some circumstances, act as a court of first instance. For a more complete account of German appellate procedure, see TIMOTHY KEARLY & WOLFRAM FISCHER, CHARLES SZLADITS' GUIDE TO FOREIGN LEGAL MATERIALS: GERMAN 16-29 (2 ed. 1990) [hereinafter SZLADITS].

3. This Journal of Law & Commerce case translation was prepared by Eva Diederichsen (Law studies at the University of Bielefeld, 1985-87 and the University of Freiburg, 1987-91; First State Examination, 1991, University of Freiburg; Second Statc 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 in preparing these materials. Any reader who intends to rely on this case must consult the original text, a copy of which can be obtained from the Journal of Law & Commerce. [For Internet access to this text, see: "http://www.jura.uni-freiburg.de/ipr1/cisg"]

4. "International private law" is the translation for Internationales Privatrecht, the German legal term for rules of conflict of law.

5. The court here cites to a commentary on the law to support its position. ROLF HERBER & BEATE CZERWENKA, lNTERNATIONALES KAUFRECHT n.l6 (1991).

6. "Rn." is the abbreviation for Randnummer -- i.e. marginal note.

7. KOMMENTAR ZUM EINHEITLICHEN UN-KAUFRECHT-CISG, Article 46, Rn. 64; Article 49, Rn. 27 (Ernst von Caemmer [sic] & Peter Schlechtriem eds., 1990) [hereinafter VON CAEMMERER & SCHLECHTRIEM].

8. PILTZ, INTERNATIONALES KAUFRECHT, § 5. Rn. 247 (1993).

9. I.e., because of the insufficiency of its allegations, the [buyer] failed to meet the statutory requirement for avoidance of the contract.

10. A paragraph dealing in depth with the nature of the defects is omitted.

11. The original German wording here is "der Senat," which refers to a certain division or panel of the court.

12. Another paragraph dealing in depth with the nature of the defects in the goods is omitted.

13. PILTZ, supra note 8, at § 4, Rn. 124.

14. VON CAEMMERER & SCHLECHTRIEM, supra note 7, at Article 78, Rnn. 9 & 10.

15. HERBER & CZERWENKA, supra note 5, at Article 78, Rn. 3.

16. Herbert Asam, UN-Kaufrechtsübereinkommen im deutsch-italienischen Rechtsverkehr, RIW, 942, 945 (1989). "RIW" is the abbreviation for Recht der Internationalen Wirtschaft [Law of International Commerce], a monthly journal on international trade law and practice.

17. "EKG" is the abbreviation for Einheitliches Gesetz über den internationalen Kauf beweglicher Sachen vom 17. Juli 1973 [Uniform Law on International Sale of Goods (ULIS)of July 17, 1973]. This was the German Law which implemented the 1964 Hague Convention on the International Sale of Goods into German national law. [ULIS] ceased to be in force on December 13, 1990 when the CISG went into force and, pursuant to Article 99 of CISG, Germany denounced the 1964 Hague Convention.

18. The opinion refers here to a ruling of the court of June 13, 1991, filing number 5 U 261/ 90. "NJW" is the abbreviation for Neue Juristische Wochenschrift [New Weekly Law Journal], a law journal covering all fields of law. It contains mainly court rulings and commentaries by lawyers and scholars. For the meaning of "Senat," see supra note 11.

19. "EGBGB" is the abbreviation for Einführungsgesetz zum Bürgerlichen Gesetzbuch [Introductory Law on the Civil Code]. This introductory section to the Civil Code contains the German rules on conflict of laws. See Szladits, supra note 2, at 65-66.

20. VON CAEMMERER & SCHLECHTRIEM, supra note 7, at Article 84, Rn. 13.

21. [OLG Frankfurt 13 June 1991, 5 U 261/90.]

22. A German court only has to discuss a deviating scholarly opinion if the discrepancy would have an impact on the outcome of the case.

23. "HGB" is the abbreviation for Handelsgesetzbuch [Code of Commercial Law].

24. In Germany, statutory interest is not classified as damages.

25. HERBER & CZERWENKA, supra note 5, at Article 78, Rn. 1.

26. PILTZ, supra note 8, at § 5. Rn. 415.

27. The Codice Civile is the Italian Civil Code.

28. PILTZ, supra note 8, at § 5, Rn. 415.

29. Kindler, Zur Anhebung des Gesetzlichen Zinssatzes in Italien, RIW, 304 (1991).

30. HERBER & CZEWENKA, [sic] supra note 5, at Article 78, Rn. 8

31. Von Caemmerer & Schlechtriem, supra note 7, at Article 74, Rn 41.

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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.[1] 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.[2] 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.[3]

The decision by the OLG Frankfurt highlights two areas that are crucial to international sales: the avoidance of a contract on grounds of 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 [seller] 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.[4] 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.[5]

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.[6]

From the perspective of both German national sales law and the CISG, the prerequisite for termination is defective performance of the contract 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.[7] 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.[8] This is true for German sales law, in which the defect has to be significant.[9] 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.[10] 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.[11] 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.[12] 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.

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.[13] Although the decision of the OLG appears correct in its outcome, it would have been helpful had the court made clear that the [seller] 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,[14] 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.[15] An understanding on the rate, however, failed since this is an area of political and economic importance.[16] In particular, a reference to the corresponding domestic law was rejected.[17]

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, 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.[18] 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.[19] 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.[20] 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.[21] 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.

* 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.

FOOTNOTES

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

6. Id.

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.