Source: http://cisgw3.law.pace.edu/cases/970701h1.html
Timestamp: 2019-04-18 10:32:32+00:00

Document:
The [seller], a German company, sold to the [buyers], two Hungarian companies, used timber machinery. One of the [buyers] opened a letter of credit in favour of the [seller] for the payment of part of the price, the balance to be paid in installments. However, the issuer did not pay upon demand and presentation of the necessary documents on the ground that the documentation was defective and when the defect was cured the letter of credit had expired.
The [seller] asserted a claim against both [buyers]. One of the [buyers] contested the claim on three grounds: error, lack of conformity of the goods to the contract terms and disproportionate value of the obligations between the opposing parties.
On the one hand, the court decided on the questions of error and disproportionate value of the obligations on the basis of the Hungarian Civil Code since those issues are not covered in the CISG. On the other hand, the court decided the question of lack of conformity pursuant to article 36 CISG.
The court held that only one of the [buyers] was liable for payment for the used timber machinery.
The court obliges Defendant no. 1 to pay to Plaintiff [Seller] Deutsche Mark [DM] 300,000 to within 15 days and an annual interest of 5% thereon in German currency as due from 1 May 1995 until payment.
The court rejects the claim concerning Defendant no. 2 [Buyer].
Relating to [Seller] and Defendant no. 2 [Buyer], the court omits determination of the costs of proceedings.
The court obliges Defendant no. 1 to pay [Seller]'s legal representative Hungarian Forints [HUF] 2,000,000 partial costs of proceedings within 15 days.
[Seller], seated in Germany, and Defendant no. 2, having its place of business in Hungary, concluded a sales contract in Germany on 22 October 1994. In that contract, the parties stated that [Seller] is owner of a veneer peeling facility and agrees to sell the machines in its facilities to Defendant no. 2 as Buyer. Parties agreed that the machines and accessories thereof are in a condition suitable for use. At the time of inspection of the machines, Buyer was accompanied by an expert and the condition of the machines was made sure. It was also expressed by the parties that [Seller] sells the machines and accessories thereof without a warranty. However, if Seller has any warranty claim against the manufacturer, it shall be transferred to Buyer [Defendant no. 2]. Buyer accepted such assignment of warranty and it was agreed that the machines and accessories should be handed over between 15 December 1994 and 15 January 1995. The purchase price was DM 780,000.
In paragraph 4 of the sales contract, the parties agreed upon the method of paying the purchase price. An instalment of DM 300,000 was to be paid no later than 10 days after signing the contract, by 31 October 1994. The payment of the remaining DM 480,000 was exactly detailed thereafter. The machines and accessories were to remain Seller's property until full payment of the purchase price and the interest, as stated in the agreement.
Seller declared that, if necessary, it shall be entitled to refer to retention of title against other creditors.
Relating to shipping, the parties agreed that shipping costs shall be borne by buyer. [Seller] agreed to conclude the consignment insurance.
In paragraph 6.2 of the sales contract, Buyer agreed to pay customs duties.
In paragraph 7, Defendant no. 2 [Buyer] agreed that it shall sell technical wooden goods solely thorough [Seller] in the years 1995, 1996 and 1997, that is, [Seller] shall receive exclusive right to sell technical wooden goods in Germany. Relating to that, a separate agreement was to be concluded by the parties.
The parties also agreed that if any provision of the agreement were to be invalid, other provision of the agreement would survive.
The contract conclusion took place in a way that the owner of the company being Defendant no. 2 [Buyer] went to Germany and conducted preliminary inspection of the machines with a witness.
In its claim, [Seller] stated that after several modifications of the contract they finally agreed to open a letter of credit for the instalment of DM 300,000. The remaining DM 480,000 was to be paid in instalments. However, the letter of credit concerning the instalment of DM 300,000 was opened not by Defendant no. 2 [Buyer] but, under an agreement concluded on 24 January 1995, by Defendant no. 1, as so-called consignment export effect advance credit, under different repayment conditions.
[Seller] also stated in its claim that the machines were dispatched between 30 March 1995 and 14 April 1995. The letter of credit was opened by Union Bank Switzerland on 27 January 195, with the modified expiration date of 6 May 1995 and with a delivery deadline of 15 April 1995.
[Seller] emphasized in its claim that a significant condition of the letter of credit was the following: "conveyance report issued in seller's facilities and signed by [Seller], Defendant no. 2 [Buyer] and Defendant no. 1".
[Seller] stated in its claim that the Swiss bank notified Seller on 3 May 1995 that the original 'conveyance report' was not signed and sealed by Defendant no. 1, therefore, the documents cannot be accepted and requested performance of the latter in order to be able to pay.
This happened because the representative of Defendant no. 1 was not present at the time of signing the conveyance protocol, the document was submitted to Defendant no. 1 by fax and it was signed and returned to [Seller] by Defendant no. 1. Yet, the bank did not receive the faxed copy as an original document, as stated in the claim.
[Seller] also stated in its claim that subsequently, upon request of the bank, the original protocol signed by all three parties was submitted, but the bank did not pay after expiration of the latter of credit, with reference to late submission.
"With reference to the relating letter of credit, we state that we acknowledge our debt of DM 300,000 as consideration for the wood processing machines and accessories thereof.
Payment shall take place in a way other than through the letter of credit opened by us and expired on 1 May 1995, date and form of which shall be agreed upon mutually at the time of the visit to Budapest. Today we negotiated with Germany and they agree with the above method of settlement.
We informed the bank as well about this agreement,"
Thereafter, [Seller]'s claim stated that Defendant no. 1 had different suggestions relating to payment of a sum less than DM 300,000, under the condition that [Seller] would undertake an advance repayment bank guarantee for the same amount. [Seller] found this nonsense because it did not address Defendant no. 1 with a credit request but its request was made under a sales contract. [Seller] did perform, therefore Buyer, or the person assuming its obligations, should pay unconditionally.
[Seller] stated that Defendant no. 1 acknowledged its debt without any doubt several times, on the one hand, by opening the letter of credit and by placing its signature "by fax and in original' several times, as requested by the bank, then, finally in the fax dated 15 May 1995 and referred to above.
In such situation, [Seller], in its claim, considered the failure to perform by Defendant no. 1, as lacking any reason, which, at the same time, is perfectly suitable for shaking international business trust.
"The mere fact that the bank refuses to pay with reference to strict technical provisions, by a just procedure from banking aspects, does by no means exempt Defendant no. 1 from payment since the service was performed by [Seller]."
[...] [Seller] extended its claim to Defendant no. 3 and requested a joint and severable court order to pay DM 300,000 and interest and legal costs as of 1 May 1995.
It requested rejection of the claim for lack of legal basis. It stated that on 24 January 1995, it provided a credit to Defendant no. 2 [Buyer] for purchasing equipment and machinery facilitating its production, in the amount of DM 300,000. Defendant no. 1 opened a letter of credit, and stated that the contract does not include that creditor wishes to establish a legal relationship with [Seller] selling the machinery to the debtor. As the credit was a targeted credit for buying the respective machinery, according to Hungarian bank practices, Defendant no. 1 stated that the credit shall be disbursed only if full performance by the supplier is certified, and the credit should be received directly by the supplier, being in direct contact with the debtor, rather than the debtor itself. Defendant no. 1 stated that this practice is in accordance with Hungarian and international banking practices.
Defendant no. 1 stated that the letter of credit was duly opened, the debtor and [Seller] were notified and it also stated which documents must be submitted to the bank for payment. As the requested documents were not submitted by the deadline, Defendant no. 1 was willing to extend the validity period of the letter of credit.
Defendant no. 1 stated that the documents required for validation and drawing of the extended letter of credit were submitted by [Seller] defectively and late, therefore, the bank refused to pay. Then, negotiations began for settling the situation. As the debtor failed to comply with its contractual payment duty and incurred other debts as well towards Defendant no. 1, Defendant no. 1 considered that repayment is doubtful. It stated that this was also supported by the fact that only a part of the wood processing machines imported to Hungary by Defendant no. 2 [Buyer] were cleared at customs and most of them are in customs storage. Therefore, Defendant no. 1 concluded that the economic situation of Defendant no.2 has become considerably weaker compared to that at the time of contracting. [...] Defendant no. 2 [Buyer] got into a desperate situation where it had to look for further solutions, so it started negotiations with [Seller] and Defendant no. 1, because performance of the contract was possible only if the economic situation of Defendant no. 2 [Buyer] was normalized. Yet, provision of the DM 300,000 credit was conditioned upon further collateral, in particular, on whether the supplier, i.e., [Seller], provides a bank guarantee. [...] In spite of all efforts, however, no agreement could be concluded which resulted or would have resulted in normalization of the economic situation of Defendant no. 1.
Defendant no. 1 believes that it is not in any legal relationship with [Seller] as [Seller]'s bank account is mentioned in the contract concluded with Defendant no. 2 [Buyer] only in a few places. [...] As [Seller]'s bank guarantee for repaying the DM 300,000 credit never came into existence, Defendant no. 1 did not disburse the credit with reference to the principle of clausula rebus sic stantibus because it saw no chance of repayment thereof.
[...] [Seller] and the Swiss bank assigned by it, submitted defective documents to the bank of Defendant no. 1. [Seller] sent only copies of the documents specified and only one copy of the sender's copies of the signed and sealed CMR document was sent to the bank, which could have meant for the bank that only one truckload of goods was dispatched. This was considered by Defendant no. 1 as partial performance, therefore payment of the bank was not possible. Defendant no. 1 stated that [Seller] considerably contributed to the damages by having submitted defective documents. Defendant no. 1 also stated that it was not invited to be present at receipt of the goods.
Defendant no. 2 [Buyer] requested rejection of the [Seller]'s claim.
- Defendant no. 2 [Buyer] complained with respect to the sales contract it had concluded with [Seller]. It stated that [Seller] had deceived it because it was made to believe that it can pay for most of the price of the machinery in dispute with the goods it produces. Defendant no. 2 [Buyer] also argued that the contract is defective for lack of equality of consideration, and also alleged defective performance.
- Defendant no. 2 [Buyer] also states that the [Seller] had told it that the machines were almost new, only a few years old, however, they could be used only after total repair and full refurbishment. Certificates of origin of the machines were sent by [Seller] well after delivery, which documents then proved that the machines are 15-20 years old. Therefore, real value of the machines delivered did not exceed DM 200,000, and the value of those adapted to operation in Hungary by Defendant no. 2 [Buyer] do not exceed DM 50,000.
The legal relationship between [Seller] and Defendant no. 2 [Buyer] is based an agreement called a sales contract and, in the court's opinion, it is governed by the CISG. The CISG has been part of Hungarian law since 1 January 1988 and in Germany the CISG has been part of the law since 1 January 1991. As Defendant no. 2 [Buyer] states that its legal relationship with [Seller] is based on a written contract, the court did not have to deal with the Hungarian reservation.
"This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State."
Therefore, the CISG is applicable to the facts included in the claim concerning the legal relationship between Defendant no. 2 [Buyer] and [Seller]. However, the court should examine whether the three defenses of Defendant no. 2 [Buyer] are covered by the CISG (mistake, equality of considerations, defective performance).
The first two defenses would render the contract invalid, and as Art. 4 CISG provides that the CISG is not concerned with validity of the contract or any contractual provision, mistake and lack of equality of considerations shall be adjudicated subject to the Civil Code of Hungary.
The third defense, i.e., defective performance, is covered by the CISG, namely Art. 36 CISG.
The court will discuss later whether the argument of Defendant no. 2 [Buyer] that the CISG is inapplicable has any merit.
Defendant no. 2 [Buyer], objected to the applicability of the CISG on the ground that the purchase price of DM 780,000 was to be paid by money only in part. Indeed, the contract had a provision allowing Defendant no. 2 [Buyer] to pay in kind, with the goods produced. This, however, does not mean that application of the CISG would be excluded with reference to Art. 3 CISG (because that is about furnishing the goods, not about consideration), because the modification of contract does not change the nature of the original sales contract. The entire transaction was concluded for the sale of machinery, which is a dominant element in the transaction, rather than a way of consideration, partly covered by the modification referred to.
III. [...] The court rejected the claim concerning defective performance for the following reasons.
As the court stated above, defective performance is covered by the CISG.
"(1) The seller is liable in accordance with the contract and this Convention for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time.
(2) The seller is also liable for any lack of conformity which occurs after the time indicated in the preceding paragraph and which is due to a breach of any of his obligations, including a breach of any guarantee that for a period of time the goods will remain fit for their ordinary purpose or for some particular purpose or will retain specified qualities or characteristics."
- Other parts of the goods were sold by the Customs Authority which is considered as loss of the goods under the CISG. Therefore, damages occurred concerning the goods and consequences thereof should have been borne by Defendant no. 2 [Buyer]. This is because Art. 36 was applicable, thus the burden of proof on Defendant no. 2 [Buyer] concerning defect of the goods was frustrated.
- As a considerable part of the goods was damaged or lost as a result of the conduct of Defendant no. 2 [Buyer] (it failed to pay the customs duty), also failed to perform its duty to inspect the goods as set out in Art. 38, and pursuant to Art. 39(1), lost the right to refer to quality defects. Therefore, Defendant no. 2 [Buyer] shall be liable.
The court found that Art. 40 CISG was not applicable because Defendant no. 2 [Buyer] could not prove that the damages were imputable to [Seller], because operable machines were purchased.
Adaptation of the machines was evaluated as follows. A witness stated that the machine with the highest value had to be refurbished. In the contract, [Seller]'s warranty was excluded. Therefore, adaptation and repair of the respective machine could not be adjudicated for Defendant no. 2 [Buyer], as the court examined all machines uniformly, with regard to the fact that Defendant no. 2 [Buyer] had to bear the consequences of frustration of proof concerning most of the machines.
The defective performance defense by Defendant no. 2 [Buyer] is covered by Art. 51(2) CISG. Art. 49 could not be applied because Defendant could not avoid the contract because of the fact that no fundamental breach under Art. 25 took place due to frustration of proof. This is governed by Art. 82(1), according to which the buyer loses the right to declare the contract avoided or to require the seller to deliver substitute goods if it is impossible for him to make restitution of the goods substantially in the condition in which he received them. Provisions of Art. 82(2) were not present.
* All translations should be verified by cross-checking against the original text. In this presentation, Plaintiff of Germany is referred to as [Seller]. The former currency of Germany (Deutsche Mark) is indicated as [DM]; the currency of Hungary (forints) is indicated as [HUF].

References: Art. 4
 Art. 36
 Art. 3
 Art. 36
 Art. 38
 Art. 39
 Art. 40
 Art. 51
 Art. 49
 Art. 25
 Art. 82
 Art. 82