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]

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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[Buyer's right to avoid the contract: German court rulings in this case and in other cases]
[Article 49]

In most cases of late delivery, the buyer can avoid the contract only after fixing an additional period for delivery.[188] Only under exceptional circumstances does late delivery constitute a fundamental breach and allow immediate avoidance.[189] An example of exceptional circumstances is the late delivery of fashionable articles. However, in a case involving fashionable articles, the AG Oldenburg in Holstein discussed only Article 49(1)(b) and dismissed the buyer's declaration of avoidance because he had not fixed an additional period for delivery [AG Oldenburg 24 April 1990].[190] Perhaps the court did not sufficiently consider Article 49(1)(a).[191] This result could be correct because, apart from the fact that there may have been no delay at all,[192] the parties indicated the delivery dates with the symbol "+/-." The intended meaning of this symbol could have been that there was no precise time for delivery. If so, the delayed delivery would not have constituted a fundamental breach.

If the buyer receives non-conforming goods or goods of another kind, Article 49(1)(b) is not applicable. Therefore, the buyer can avoid only if the breach is fundamental.[193] However, Article 49(1)(b) is applicable if the buyer demands delivery of substitute goods under Article 46(2) because the substitute delivery is regarded as a delivery under Articles 31-33 and the provisions relating to delivery apply (again) [OLG Düsseldorf (6 U 119/93) 10 February 1994].[194] The buyer can fix a period for substitute delivery and avoid the contract if the seller does not deliver within the fixed period. If the buyer does not fix an additional period, avoidance is possible only if the breach is fundamental.[195] A fundamental breach occurs if the seller declares seriously and definitely (ernsthaft und endgültig) that he will not deliver substitute goods, but does not occur if he only declares that he cannot deliver at the moment [OLG Düsseldorf (6 U 119/93) 10 February 1994].[196]

According to Article 49(2)(b)(i), a declaration of avoidance based on breach other than late delivery must be made within a reasonable time after the buyer knew or ought to have known of the breach. A delay of two [OLG Frankfurt 20 April 1994] [197] or four months [OLG München 2 March 1994] [198] was held to be not reasonable. Of course, a declaration made after one day is timely [OLG Frankfurt 17 September 1991].[199]

Go to entire text of Karollus commentary

FOOTNOTES

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188. Id. art. 49(1)(b).

189. Id. art. 44(1)(a).

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

191. See Enderlein, supra note 134, at 314-15.

192. See supra Part V.5.

193. One of the most controversial CISG issues is the definition of a fundamental breach in respect to defective goods, especially when the defect can be cured by substitute delivery or repair. See Honnold, supra note 1, §§ 184, 296; Michael Will, Article 48, in Commentary on the International Sales Law 347, 356-58 (C.M. Bianca & M.J. Bonell eds.,1987); Aicher, supra note 152, at 136-42; Martin Karollus, UN Kaufrecht: Vertragsaufhebung und Nacherfüllungsrecht bei Lieferung mangelhafter Ware, 1993 Zeitschrift für Wirtschaftsrecht 490; Peter Schlechtriem, Art. 25: Wesentliche Vertragsverletzung, in Kommentar zum Einheitlichen UN-Kaufrecht 207, 217-19 (Ernst von Caemmerer & Peter Schlechtriem eds., 2d ed. 1995); Huber, supra note 128, at 442-45.

194. Judgment of Feb. 10, 1994, OLG Düsseldorf, 1994 RIW at 1051. See Huber, supra note 128, at 449.

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

196. Judgment of Feb. 10, 1994, OLG Düsseldorf, 1994 RIW at 1051.

197. Judgment of Apr. 20, 1994, OLG Frankfurt am Main, 1994 RIW at 595.

198. Judgment of Mar. 2, 1994, OLG München, 1994 RIW at 596.

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

(. . .) [Interest issues: German court rulings in this case and in other cases]
[Article 78]

Article 78 allows for the collection of interest on any monetary arrearage, without prejudice to damages recoverable under Article 74. Unfortunately, Article 78 does not provide for the calculation of an appropriate interest rate. Accordingly, the allowed interest rate must be calculated under national law.[223] The issue is which national law is applicable to determine the interest rate. Most authors [224] and courts [LG Hamburg 26 September 1990; OLG Frankfurt 13 June 1991; OLG Frankfurt 18 January 1994; OLG München 2 March 1994; OLG Koblenz 17 September 1993; OLG Düsseldorf 10 February 1994] [225] have generally agreed that the law applicable to the issue of interest is the Vertragsstatut (the law that governs the contract apart from CISG); in the absence of a choice of law provision in the contract, the applicable law would be the seller's law [OLG Koblenz 17 September 1993; OLG Düsseldorf 10 February 1994].[226] At least one court decided that the creditor's law was applicable [LG Frankfurt 16 September 1991; see also LG Stuttgart 31 August 1989 and KG Berlin 24 January 1994 (Neither decision making clear whether interest was granted according to Article 78 or damages according to Article 74)] [227] and another court did not decide on the question because the results did not differ.[228] In addition, some authors have proposed other solutions, such as application of the law of the debtor's country[229] or of the country which issued the currency specified in the contract.[230] These solutions have not been adopted by the courts. The problem is of considerable importance since interest rates are rather low in some states (four or five percent in Austria and Germany) but much higher in others (ten percent in Italy and more than fifty percent in Bulgaria).[231] The contracting parties should avoid these uncertainties by agreeing on an interest rate or by choosing the applicable law.

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Go to entire text of Karollus commentary

FOOTNOTES

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223. CISG, supra note 4, art. 7(2). Article 7(2) also -- and primarily -- provides for a gap-filling according to general principles. But, in the present case, that does not seem to be possible because the Vienna Conference failed to agree on any principles.

224. See Gert Reinhart, Fälligheitszinsen und UN-Kaufrecht, 1991 IPRax 376 (1991); Herber & Czerwenka, supra note 16, at 347; Karollus, supra note 20, at 227; Piltz, supra note 21, at 280-82; Hermann Eberstein & Klaus Bacher, Art. 78: Zinsen, in Kommentar zum Einheitlichen UN-Kaufrecht 665, 672-73 (Ernst van Caemmerer & Peter Schlechtriem eds., 2d ed. 1995)

225. See Judgment of Sept. 26, 1990, LG Hamburg, 1990 RIW at 1019; Judgment of June 13, 1991, OLG Frankfurt am Main, 1991 RIW at 591-92; Judgment of Jan. 18, 1994, OLG Frankfurt am Main, 1994 RIW at 241; Judgment of Mar. 2, 1994, OLG München, 1994 RIW at 596-97. See generally Judgment of Sept. 17, 1993, OLG Koblenz, 1993 RIW at 938; Judgment of Feb. 10, 1994, OLG Düsseldorf, 1994 RIW at 1051.

226. See Judgment of Sept. 17, 1993, OLG Koblenz, 1993 RIW at 938; Judgment of Feb. 10, 1994, OLG Düsseldorf, 1994 RIW at 1051.

227. Judgment of Sept. 16, 1991, LG Frankfurt am Main, 1991 RIW at 954. See Hans Stall, Inhalt und Grenzen der Schadensersatzpflicht sowie Befreiung con der Haftung im UN-Kaufrecht, im Vergleich zu EKG und BGB, in Einheitlichen UN-Kaufrecht und nationales Obligationenrecht 257, 279-80 (Peter Schlechtriem ed., 1987). See also Judgment of Aug. 31, 1989, LG Stuttgart, 1990 IPRax at 317-18; Judgment of Jan. 24, 1994, KG Berlin, 1994 RIW at 683-84 (neither decision making clear whether interest was granted according to Article 78 or damages according to Article 74).

228. Judgment of June 13, 1991, OLG Frankfurt am Main, 1991 RIW at 591-92.

229. See Hans Stoll, Internationalprivatrechtliche Fragen bei der landesrechtlichen Ergänzung des Einheitlichen Kaufrechts, in Festschrift für Murad Ferid 495, 509-10 (Andreas Heldrich et al. eds., 1988).

230. See Wolfgang Grunsky, Anwendbares Recht und gesetzlicher Zinssatz, in Festschrift für Franz Merz 147, 147-57 (Walter Gerhardt et al. eds., 1992).

231. Perez, supra note 21, at 281-82.

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