Source: http://cisgw3.law.pace.edu/cases/890705g1.html
Timestamp: 2019-04-18 10:41:24+00:00

Document:
Plaintiff, seated in Italy [seller], produced woodworking machines. Defendant [buyer] ordered circular saws and electric accessory tools, which [buyer] planned to distribute in Europe and the US. The machines intended for the European market were to be adapted to an A.C. frequency of 50 Hz and a voltage of 380 V; those intended for the US were to be adapted to 60 Hz and 110/220/440 V. Between 31 July 1985 and 30 September 1985, [seller] delivered those machines meant for the US. During a meeting with [seller] at the end of March 1986, [buyer], through its manager, reported complaints of its US customers about defective engines. In a telex dated 16 April 1986, [buyer] complained about a defective machine which had to be taken back from a US customer. [Buyer]'s telexes dated 29 April 1986 and 27 May 1986 also concerned complaints about deficient deliveries in the US. [Seller] claims payment of a remainder of 82,215,848 Italian lire [It�] for the woodworking machines it delivered plus interest and plus expenses of reminding. Two further deliveries to the US have been excluded from the claim. [Buyer] argues that all machines intended for distribution within the US had been wrongly adapted to European current voltage and frequency. Thus, all delivered machines were unfit for ordinary usage. This mistake remained unnoticed, because the delivered machines had been falsely tagged as the US version. According to [buyer], an inspection of the machines was possible just after they had already been delivered and [seller] was notified immediately after the defect was detected.
Due to the lack of conformity, [buyer] alleges that a reduction of the purchase price as regards US deliveries is justified. As far as it is entitled to reimbursement of effected payments for past deliveries (bill no. 686/85 dated 31 July 1985 and bill no. 66/86 dated 29 January 1986), [buyer] declares a set-off. [Buyer] further declares a set off with respect to damages suffered and lost profits: Due to the deficient machines, [buyer]'s contractor refused acceptance of more than half of the number of machines the contractor had ordered from [buyer], thus far cancelling a US $930,000 contract with [buyer]. Accordingly, [buyer] claims profit losses up to an amount of US $70,000. Including transport costs and other expenses, [buyer]'s damages would amount to 250,000 Deutsche Mark [DM] in total.
The District Court (Landgericht; LG) held [seller]'s claim to be justified. [Buyer]'s appeal remained unsuccessful. In its second appeal, [buyer] aims for full dismissal of [seller]'s claim.
1. The Appellate Court held the ULIS applicable to the case. The Court concluded that [buyer] was not entitled to damages for lack of conformity of [seller]'s deliveries. Art. 39(1) ULIS required [buyer] to notify [seller] of the lack of conformity of the goods promptly after it had been discovered. This had to apply irrespective of whether inspection of the goods before their delivery had been impossible and irrespective of whether the defect had remained unnoticed due to tags falsely indicating the machines' adaptation to US frequency. Art 39(2) ULIS further required [buyer] to specify the lack of conformity and to ask [seller] for inspection of the goods itself or through a commissioner. [Buyer] failed to comply with these provisions. [Buyer] had neither given notification within a reasonable time nor had it specified the alleged lack of conformity nor had it asked [seller] for inspection of the deficient goods. As [buyer] itself had reported that many machines blow immediately after first usage, it had no reason to assume ill-treatment on the part of its customers to be the cause of the defect. Moreover, the Court held that [buyer] could not rely on Art. 40 ULIS to grant suspension of the requirements of Art 39 ULIS in cases of fraudulent misrepresentation and gross negligence. [Buyer]'s submission that [seller] fraudulently placed the wrong tags on the machines [seller] delivered could not be sustained. On the other hand, even if a duty of final inspection of the goods it sold had to be imposed on [seller], as being also the producer of the goods, [seller]'s breach of this duty, according to the Court, had not been due to gross negligence as required by Art. 40 ULIS.
2. The Appellate Court's judgment has to be revised.
(a) The Appellate Court is correct in holding the ULIS applicable to the case: Italy resigned as a member of the Convention on 31 December 1987 (see Note of the German Secretary of Foreign Affairs, 25 March 1987 (BGBl. II page 231)). Yet, according to a generally accepted principle of intertemporal contract law, which also applies to the ULIS (see Dölle/Herber Kommentar zum Einheitlichen Kaufrecht, 1976, Art. 102 - Art. 104, No. 8), contracts are governed by the law valid at the time of conclusion of the contract (Official Compilation of Civil Judgements of the Federal Civil Court (BGHZ), vol. 10, page 394; vol. 44, page 194; Münchener Kommentar - Heinrichs, 1983, Art. 170 EGBGB No. 3 with further references). As [buyer] and [seller] entered into their contract before 31 December 1987, when Italy still was a member state under Art 1(1) ULIS, the contract is governed by the ULIS.
(b) [Buyer] objects to payment claiming a reduction based on Art. 41(1)(c), Art. 46 ULIS as concerns those deficient machines that were intended to be sold in the USA (bills K2 to K4). As regards payment of the machines meant for the European Market (K1, K5 to K7), [buyer] declares a set-off with its claims for reimbursement. These claims concern restitution for [buyer]'s effected payments for the delivered US machines (bill No.686/85 and bill No. 66/86) due to the claimed reduction. [Buyer]'s claims are grounded on an analogy to Art. 78(2) and Art. 81(1) ULIS (see Mertens/Rehbinder, Internationales Kaufrecht, 1975, Art. 46 No. 4; Staub/Koller, GK-HGB, 4th ed., 1985, No. 429 Vor � 373 HGB). [Buyer] further declares a set-off with its claim for damages based on Art. 41(2) and Art. 82 ULIS.
(c) [Buyer]'s claim reduction of the purchase price as well as its claim for damages requires lack of conformity of the goods with the contract. The Appellate Court held [buyer]'s submission to be correct, that [seller] delivered machines which had been wrongly adapted to European currency standards and, thus, were unfit for distribution within the US. The Court is bound to this evaluation of evidence and has to decide the appeal based upon the facts, as they are stated in the Appellate Court's judgment. So it has to be assumed the delivered goods were lacking conformity with the contractual agreement (Art. 33(1)(e) and (1)(f) ULIS).
(d) The Appellate Court's statement that [buyer] lost its contractual rights due to its delayed and insufficient notification (Art. 39(1) ULIS) does not need to be discussed. In any event, the Court's interpretation of Art. 40 ULIS does not stand judicial review. According to Art. 40 ULIS, a seller cannot rely on the provisions of Art. 38 and Art. 39 ULIS, if the breach of contract relates to facts of which it knew or could not have been unaware and which it did not disclose to the buyer. The phrase "could not have been unaware" means that seller's unawareness of the breach of contract must be due to gross negligence on its side (see Dölle/Stumpf, Art. 40 EKG No. 2; Appellate Court München (Oberlandesgericht; OLG) NJW 1978, pages 499, 500; Appellate Court Köln (Oberlandesgericht; OLG) MDR 1980 page 1023). However, gross negligence must relate to those facts which actually constitute the breach of contract, i.e., which cause a lack of conformity of the delivered goods. This has not been recognized in the Appellate Court's judgment. The Appellate Court was concerned with the question of whether the false tagging of the woodworking machines had been due to gross negligence. This misses the decisive point of the case. The fact that the tags did not correctly indicate the machines' required currency standard does not constitute a breach of contract itself. It only disguised the actual breach of contract; namely that the machines, being adapted to European currency standard, were unfit for [buyer]'s declared purpose, the distribution within the US market. Hence, it must be determined, whether [seller]'s unawareness of this very fact resulted from gross negligence. Here it is to be taken into account that [seller] is also the producer of the woodworking machines. If it turns out to be the truth, that in five major deliveries over several months [seller] incorrectly adapted its machines to the European currency standards so that they were unfit for [buyer]'s intended distribution within the US, then there is a strong indication for gross negligence on the part of the [seller]. In this case, it is for [buyer] to explain how such a grievous mistake within its sphere of responsibility could have remained unnoticed over several months. In this respect, it may also become relevant whether [seller]'s products had to pass a final quality inspection before being delivered and how strict such an inspection was conducted. However, this question requires further consideration of the facts of the case. Therefore, the Appellate Court's judgment must be revoked and the case is redirected to the Appellate Court which has to retry the case on grounds of new evidence. The question of whether [buyer]'s notification was delayed or unspecified (Art. 38 and Art. 39 ULIS) can be postponed until the Appellate Court decides the case. If still relevant, the Appellate Court may deal with this question taking into account the parties' additional submissions within the later proceedings. The decision on the costs depends on the final decision on the merits and so is also to be referred to the Appellate Court.
* All translations should be verified by cross-checking against the original text. For purposes of this presentation, the Plaintiff is referred to as [seller]; Defendant's British subsidiary, Firm J., is referred to as [buyer].

References: V. 
 Art. 39
 Art 39
 Art. 40
 Art 39
 Art. 40
 Art. 102
 Art. 104
 Art. 170
 Art 1
 Art. 41
 Art. 46
 Art. 78
 Art. 81
 Art. 46
 Art. 41
 Art. 82
 Art. 40
 Art. 40
 Art. 38
 Art. 39
 Art. 40
 Art. 39