Source: http://cisgw3.law.pace.edu/cases/991126g1.html
Timestamp: 2019-04-22 18:10:09+00:00

Document:
A Brazilian seller, the plaintiff, delivered jeans to a German buyer, the defendant. When inspecting the delivered jeans the buyer found the quantity to be incorrect. The jeans were also incorrectly labelled and the sizes were wrong. Some pairs had also become mouldy. The buyer declared the contract avoided and placed the jeans at the seller's disposal. When the seller refused to take the jeans back, the buyer sold them. The seller sued the buyer for the original purchase price and the buyer offset the claims with its own claim for damages. The lower court granted the seller the resale price reduced by the buyer's loss of profit and dismissed the counterclaim.
On appeal, the court dismissed the claim entirely.
The court held that the buyer was entitled to declare the contract avoided pursuant to Art. 49(1) CISG and that it was therefore released from the obligation to pay the purchase price under Art. 81(1) CISG. By delivering the defective jeans, the seller committed a fundamental breach of contract. The buyer gave notice about the lack of conformity specifying the nature of the lack within a reasonable time and declared the contract avoided (Art. 49(1) CISG in time (Art. 49(2) CISG).
The court stated that the buyer was discharged from its obligation to pay the resale price to the seller (Art. 88(3) CISG) due to set-off. The buyer was entitled to claim damages under Art. 45 and 74 CISG despite the avoidance of the contract (Art. 81(1) CISG). The court found, unlike the lower court, that damages under Art. 74 CISG were not limited to the loss of profit. As damages cover the whole loss resulting from non-performance, the buyer was entitled to claim the difference between its interest in the performance of the contract and its saved costs. The interest in the performance of the contract was calculated on the basis of the total profit reduced by the original purchase price. The difference had to be established in a concrete calculation, differing from Art. 76 CISG, where the current price was decisive. The court held that the fixed costs (so-called general expenses) could not be considered as being part of the saved costs. The seller had to prove that the fixed costs in case of performance exceeded the fixed costs in case of non-performance. The interest in the performance had to be reduced by saved value-added tax and costs for taking delivery and resale of the goods (so-called special expenses). The buyer's interest in the performance reduced by the value-added tax and the special expenses exceeded by far the benefit from the resale of the jeans.
The court stated that the CISG governed the issue of set-off (Art. 7(2) CISG) as long as the set-off was to concern claims arising under the CISG. Therefore the buyer was entitled to set-off. The court left however open the question of whether the buyer's right to keep the benefit of the resale could be directly inferred from the CISG or whether this issue was governed by the applicable German law, according to which set-off was also admissible.
- The action is denied.
- [Seller] is ordered to pay the costs of the proceedings.
if [buyer] does not provide security itself in same amount before execution.
- The judgment charges [seller] with DM 70,002.80.
The Brazilian plaintiff [seller] claims payment from defendant [buyer], a textile trader in Hamburg, for two deliveries of jeans trousers, alternatively payment of the surplus gained by [buyer] from the sale of the goods, by which sale [buyer] took justice into its own hands. [Buyer], on the other hand, claims avoidance of the contract on the ground of breach of contract by [seller] and sets off [seller]'s claim for payment against a claim for damages for defective delivery, i.e., delivery of poor quality.
[Seller]'s legal predecessor, company X S.A., produced textiles by order of its customers under customer�s brand and label. [Buyer] especially sells jeans under its own label "Shamo". These jeans are mostly produced in countries with low wages, according to its own specifications.
After several deliveries, defendant/buyer ordered approximately 17,000 ladies and mens jeans on 11 and 14 January 1993, enclosing extensive production specifications (compare Exhibit B.1). Delivery was supposed to take place between the end of February and the end of March 1993. [Buyer] received both deliveries, which are the subject matter of this dispute, in May 1993 by air carriage. [Buyer], who had cancelled the first order after unsuccessfully setting time limits because of delays in delivery (compare Exhibit B.3), accepted the goods at seller's request. [Seller]'s legal predecessor billed [buyer] for the first delivery of supposedly 8,900 jeans by invoice of 19 April 1993, amounting to US $75,183.00 (Exhibit K 1 A) and for the second delivery of supposedly 8,160 jeans by invoice of 5 June 1993 amounting to US $69,664.00 (Exhibit K 1 B).
By fax of 17 May 1993 (Exhibit B 4) [buyer] confirmed to have received two deliveries of 890 + 816 cartons of jeans during the previous weeks. In the case of the second delivery however, six cartons were missing; this was also the case with the packing list which was not enclosed with the second delivery. Moreover, [buyer] found upon opening of the cartons that a lot of jeans were labelled with the wrong size tag so that [buyer] had to re-measure the size, which caused much extra work. Because [buyer] was allegedly still occupied with controlling the goods, it could not sell the jeans and thus the invoice cannot be paid until it has determined which costs are incurred as a result of this.
By fax of 19 May 1993 (Exhibit B 5) [buyer] reclaimed again and proposed to [seller]'s sales manager to come to Hamburg and check the deliveries himself. This proposal was not followed.
By fax of 1 September 1993 (Exhibit B6) [buyer] completed the list, which indicates all defects [and problems relating to the deliveries].
By fax of 10 September 1993 (Exhibit K 3) [buyer] offered to pay US $71,534.63 if [seller]'s legal predecessor would acknowledge the counterclaim for defaults in delivery mentioned in the debit notes (Exhibit K 4). The parties did not reach an agreement. By fax of 22 September 1993 (Exhibit B 9) [buyer] informed [seller], inter alia, that it could collect the goods at any time, that [buyer], did not have sufficient storage room and could not store the goods any longer. Since the goods were not collected, [buyer] sold the major part of the goods between April 1995 and November 1996.
In connection with [buyer]'s claim for damages in set-off against [seller]'s claim, the parties have stated undisputedly that the average sale price per pair of jeans would have amounted to DM [Deutsche Mark] 24.95 and [buyer]'s lost profit would have amounted to 5% of the net sale price.
[Seller] pleaded: Contrary to [buyer]'s argument, the jeans were delivered according to contract. The price was US $8.75 per pair of jeans, excluding the 1,460 men's jeans stated on the invoice of 19 April 1993 for which a price of US $7.35 was agreed. The goods did not show signs of damage, the jeans were not cut or damaged in any other way. Moreover, [buyer] did not claim damages immediately or within a reasonable period. It would also be wrong to say that [buyer] only accepted the goods under explicit reservation of all of its rights. [Buyer] did not file counterclaims until three to four months later, namely by fax of 10 September 1993 (Exhibit K 3).
[Seller] requests: That [buyer] be ordered to pay [seller] US $145,495.00 plus 4% interest since the date of filing of the claim.
[Buyer] requests: That the claim be denied.
[Buyer] pleaded: On the one hand, [seller] has charged it too high a price, as it follows from the listing submitted in the proceedings as Exhibit B 21; the agreed price amounted to only US $7.90 respectively, $6.50. On the other hand, the amount of jeans delivered was less than the amount of jeans billed.
More specifically, [buyer] is not obliged to pay the purchase price since the jeans showed defects. On the contrary, it is for this reason entitled to claim compensation for damages, which supersede the claim for the purchase price and which can be set-off against that claim. [Buyer] inspected the goods at random after delivery on 10 and 13 May 1993. The part examined turned out to be defective. These complaints were communicated by fax of 17 May 1993 (Exhibit B 3). The examination of the complete delivery of jeans took some time because every pair of jeans had to be re-measured. During this examination, it became clear that every single pair of jeans from both deliveries was defective. The paper labels with respect to size attached to each pair of jeans did not correspond with the textile size labels stitched into the jeans. All jeans were one size or two sizes too big or too small; 80 to 90% of the cartons were labelled in such a way that the size could not be determined, neither from the paper labels nor from the textile labels nor from the actual size; all legs were one or two sizes too long; and the other sizes, such as waist, turned out to be not in accordance with the contract specifications, so that the jeans could in total be classified as wrongfully cut. Moreover, some parts were affected by fungus/mould or were stained with bleach, so that these jeans would have to be disposed of anyway.
The offer to pay a remaining amount of US $71,534.63 upon acknowledgement of the debit note, was made before [buyer] had an opportunity to gain clear knowledge of the extent of the defaults. When the legal predecessor of [seller] did not respond to the settlement offer, [buyer] informed [seller] by fax of 22 September 1993 that the goods could be collected at any time. [seller]'s legal predecessor responded by saying that it was willing to solve the problems in a commercial manner, but only after settlement of both disputed invoices in full.
Because of increasing storage problems, [buyer] announced that it would initiate a special sale of jeans of all second class quality, in order to cover its costs, if [seller]'s legal predecessor did not suggest another solution. In the end, [buyer] disposed of 1,582 jeans infected with fungus and sold the remaining 15,419 jeans as special items of second class quality to mainly the Czech Republic with a total loss of DM 91,225.35.
By regular sale it would have gained DM 24.95, which is uncontested, for 17,001 jeans delivered in conformity with the contract, in total DM 424,174.95. The pure profit would have amounted to 5%, which is also uncontested, therefore in total DM 21,251.55. The loss was increased by the fact that the exchange rate of the dollar since its rate of DM 1.50 increased in the meantime.
Moreover, the claim for the purchase price has become time-barred.
In its judgment of 23 December 1998, the District Court upheld the claim for DM 70,002.80 plus 4% interest since the day of starting proceedings, after proof was submitted by hearing witness X. The reason behind this was that the claim for the purchase price under the provisions of the applicable United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980 (hereinafter referred to as CISG) had lapsed. The evidence showed that the [seller] committed a fundamental breach of contract because the goods did not meet the contractually agreed quality requirements. The [buyer] timely notified the breach of contract pursuant to article 39 CISG and timely issued a statement of avoidance pursuant to article 49(2)(a) CISG. As a consequence of the valid avoidance of the contract under article 49(1)(a) CISG, the [seller] lost its right to payment of the purchase price under article 81(1) CISG. The [seller] does, however, have a claim for payment of the profits which were generated out of the sale by way of taking justice into its own hands, under article 88(3), second sentence, CISG in the amount of DM 70,002.80. The obtained surplus amounted to DM 91,255.35, but the claim for payment of the surplus is balanced with [buyer]'s lawful claim for damages under articles 45, 74 CISG to the amount of DM 21,151.55. [Buyer] would undisputedly have gained a profit of 5% of the sales price, which would have led to an amount of DM 21,251.55 at the total sales price of DM 424,174.95. [Buyer] does not have any further claim for compensation for damages. The interest claim is justified under article 74 CISG in connection with � 288 BGB (German Civil Code).
[Buyer] appealed the above judgment of the District Court which was served upon it on 4 January 1999, with a writ which was delivered on 4 February 1999 and which was substantiated with a statement of 2 March 1999.
The [buyer] pleads: The appealed judgment is incorrect because the amount of damages awarded to [buyer] under article 74 first sentence CISG is set too low. The claim for damages is not in any way consumed with [seller]'s counterclaim for payment of the sale surplus by way of taking justice into its own hands, as the District Court calculated lost profit by taking 5% of the gained profits of the proceeds of sale. On the contrary, [buyer] could claim damages for breach of contract on the grounds of the delivery of defective goods by [seller]. In calculating the damages for non-performance [breach] of contract, it is assumed that [buyer] could have gained profits in the amount of DM 424,174.95 by selling the goods that were not in default, from which amount the price should be deducted, which price [buyer] should have paid to the [seller] had the contract been fulfilled ordinarily; this leads to a difference of DM 221,152.40 at a dollar exchange rate of DM 1.52, which would lead to damages for [buyer] in the amount of DM 203,022.55 caused by not fulfilling the resale. If one would assume that approx. DM 21,000.- of this amount would be pure profit, then the remaining amount of approx. DM 183,000.- accrues to [buyer] as general expenses of [buyer]. The damages, lost profits included, amount to approx. DM 203,000.-, which amount exceeds [seller]'s claim by DM 91,255.35 and thus [seller]'s claim has expired by way of the explained set-off. Even if the uncontested price and profit data only concern average figures and therefore only approximate amounts, it has been sufficiently proven that [buyer] has suffered damage by the imperfect delivery, which damage supersedes in any case [seller]'s claim for payment. In this respect there is no need for a penny-precise calculation of the damage. As a consequence, the appealed judgment should be amended and the claim denied.
[Buyer] claims: To amend the judgment of the District Court [Landesgericht] Hamburg dated 23 December 1998 and to fully dismiss the claim.
[Seller] claims: To dismiss [buyer]'s appeal.
[Seller] pleads: The Hamburg District Court has, in as far as it allowed the claim, ruled correctly. The District Court has clearly explained that [buyer] did not prove to have more damage than the net profit, increased with some increased employment costs for extensive inspection of the goods or extra storage costs. It remains undisputed that [buyer] would have earned only DM 21,000.- with the entire deal anyway. It is to be disputed that [buyer] actually incurred general costs in the amount of DM 183,000.- and could not cover these costs with the claimed loss of income.
Moreover, it is pointed out as a precaution that, contrary to the argumentation, in the judgment of the Hamburg District Court the claim for the purchase price has not lapsed and is justified in the amount of, as ordered by the District Court, DM 70,002.80. The District Court has leaned too heavily on the statement of witness [X], who worked for a long time for [buyer], to establish a fundamental breach of contract. It is not correct that the goods were by-and-large not in conformity with the agreed quality. In any case, [buyer] has lost by way of lapse of time the right to claim breach of contract for non-conformity of the goods. A period of two or three weeks would anyhow have been appropriate; the examination of the goods should not have taken months. In this respect, the declaration of avoidance of the contract was not submitted within the proper time limit.
Furthermore, [seller] disputes the argument of period of limitation for legal remedies and claims for damages. Pursuant to article 3 of the Approval Act of 5 July 1989 to CISG, claims of the seller for breach of contract become time barred within six months after the delivery of the goods under �� 477, 478 German Civil Code. The Approval Act does not mention � 479 German Civil Code thus [buyer] is not allowed to set-off a possible claim for damages in spite of � 478 German Civil Code.
Taking the above into consideration, [buyer]'s appeal must remain unsuccessful.
Due to further details with respect to the facts and the dispute, reference is further made to the explained content of the reciprocal submitted pleadings of both parties and Exhibits thereto.
I. The appeal filed by [buyer] is admissible, is filed in accordance with formal requirements, is sufficiently accounted for and filed within the time limit, and is successful. The [seller] is not entitled to the payment as claimed from [buyer]. The [seller] wrongfully disputes in appeal the fact that the Hamburg District Court did not allow its claim for the purchase price (see 1.). [Seller] is furthermore not entitled to the awarded claim for the profit gained by [buyer] by reselling the defective goods in the amount of DM 70,002.80 exclusive legal interest of 4% which was awarded to it by the District Court. This claim is fully set-off against [buyer]'s claim for damages on the ground of non-performance ex articles 45, 74 CISG (see 2.).
1. The District Court correctly denied [seller] in first instance its primarily stated claim for payment of the purchase price of the jeans ordered by [buyer]. [Seller]'s objections in appeal are dismissed. [Seller]'s claim for the purchase price has lapsed in accordance with article 81(1) CISG on the ground that [buyer] pursuant to article 49(1) CISG rightfully avoided the contract.
[Seller] has committed a fundamental breach of contract under articles 25, 35(1) CISG. The breach results from the fact that the goods delivered by [seller] did not comply with the contractually agreed quality. In so far as [seller] argues that the District Court has come to the wrong conclusion because of procedural mistakes in that the Court followed without question the testimony of witness X, who was employed with [buyer] for a long time, this objection is denied. The circumstance that the witness was an employee of the [buyer] does not justify attaching no probative value whatsoever to his testimony. This is especially the case against the background that his testimony is consistent with undisputed elements of the course of events and that [seller] has not brought forward concrete facts that the explanation of the witness, which is trustworthy according to the appraisal of the District Court, should not be followed.
Also [seller]'s objection that the [buyer] did not sufficiently specify the defect and provide notice of it within the time limit, is unjustified. The District Court thoroughly dealt with this objection of [seller] in its judgment. The Court of Appeal [Oberlandesgericht] concurs. With respect to the motivation, reference is made to the relevant arguments in the appealed judgment (compare page 8 et seq. of the judgment). More specifically, there are no grounds to allow [seller] to have the period for functional inspection of the goods as argued by [buyer] verified by a surveyor for appropriateness.
When one assumes that [buyer] was entitled to wait until the beginning of September 1993 with the checking of the goods, then the notification of avoidance as required by article 49(1) CISG dated 22 September 1993 (compare Exhibit B 9) was also in time in the sense of article 49(2) CISG. As a consequence of the timely declared avoidance of the contract, [seller] has lost its claim for the purchase price, article 81(1) first sentence CISG.
2. [Seller] is also denied its claim for payment of the proceeds of the resale of the goods which [seller] did not take back as allowed by the District Court. Although [buyer] is obliged under article 88(3). second sentence, CISG to pay [seller] the balance which it achieved by the sale in the amount of DM 91,255.35, this claim for payment has lapsed by the set-off declared by [buyer] against the claim for damages for breach of contract under articles 45, 74 CISG (see also b).
a) Pursuant to article 88(3) 2nd sentence CISG, the [buyer] is obliged to pay [seller] the proceeds it gained out of the resale of the goods which are the subject of dispute. [Buyer] has submitted Exhibits B 10 - B 18 as evidence of the proceeds gained from the sale and has summarized the calculation methods in the specifications pursuant to Exhibits B 19 and B 20. From these documents a total profit of DM 91,255.35 (compare Exhibit B 20) gained by [buyer] can be deduced. [Seller] has not submitted specified objections against this statement. On the other hand, [buyer] has not demonstrated that it was entitled to deduct further costs such as agent costs or carriage costs as meant in article 88(3), first sentence, CISG from this amount. [Seller] had in this respect a claim for payment of DM 91,255.35 under article 88(3), second sentence, CISG.
b) [Seller]'s claim under article 88(3), second sentence, CISG has lapsed by way of the declared set-off of [buyer] against a claim for damages for breach of contract under articles 45, 74 CISG which claim [buyer] retained notwithstanding the avoidance of the contract (compare article 81(1), first sentence, CISG).
[Buyer]'s claim for damages on the ground of breach of contract by [seller] under article 74, first sentence, CISG exceeds the claim for payment of the excess profits in the amount of DM 91,255.35. As a consequence, [seller]'s claim for payment has lapsed completely by set-off.
The damages which [seller] must pay on the grounds of breach of contract are not limited to the lost profit under article 74 CISG, but fundamentally comprises the total damages caused by non-performance (compare Staudinger/Magnus, 13th edition 1994, article 74 CISG, paras. 20 et seq.).
Contrary to the view of the District Court, the claim for damages is not limited to 5% of the net profits gained by the resale as is undisputed between the parties. It is not correct that the costs which [buyer] saved by the non-performance of [seller] also comprise the so-called basic salary [N.B. this comes from the Latin fixum: basic salary] costs (general expenses), i.e., those expenditures which are connected with maintaining a company ready for operation, maintaining/preserving the installation and distribution complex and the operational management. The Federal Supreme Court of Germany explained in the above mentioned judgment of 22 February 1989 (BGHZ 107,67,69) that for calculation of the damages suffered by the seller caused by non-purchase of the buyer, it is correct that also basic costs form part of seller's price calculation; however, it should not be overlooked that we should put the seller by way of payment of damages for breach of contract in such a position which it would have had if the buyer would have fulfilled its obligations correctly; in this respect the party who is obliged to pay damages must explain and if necessary give evidence that if the contract would have been fulfilled correctly, the basic costs would have been higher than the costs for actual not taking over of the goods.
This argument is valid because it is assumed that general company expenditures generally arise. This Court sees therefore no reason not to apply the reasons expressed by the Federal Supreme Court of Germany for calculation of damages for breach of contract by the seller in case of non-acceptance of the goods by the buyer to the case in which the buyer can claim damages for imperfect delivery. This Court finds itself to be in line with the judgments of the Court of Appeal [Oberlandesgericht] Stuttgart of 13 December 1956 (JR 1957, 343, 344) and of the Court of Appeal [Oberlandesgericht] München of 28 August 1958 (MDR 1959, page 300), which judgments already applied these principles for calculation of damages claimed by the buyer for breach of contract by the seller, before the above mentioned judgment of the Federal Supreme Court [Bundesgerichtshof] of Germany.
Consequently, the basic costs (general expenses) may not be deducted from the price difference between sale and purchase price in the amount of DM 203,022.55, and thus in any case there remains an amount which exceeds [seller]'s claim with DM 91,255.35 and this amount is susceptible for compensation of the damages. To be deducted from the amount of DM 203,022.50 are VAT [Value Added Tax], which leads to a deduction of approx. DM 176,500.-, and further only the special expenses which arose for [buyer], i.e., such costs which are involved with accepting and reselling the goods bought from [seller]. Irrespective of the fact that [buyer] in the present case would have to bear part of these special expenses anyway, it does not show nor it is proven by [seller] that the costs which [buyer] saved by not fulfilling this deal, exceed the amount of DM 80,000.-.
Even if one would deduct the present special expenses by net 40% of the purchase price or 20% of the sale price, which would be very generous indeed (compare Court of Appeal [Oberlandesgericht] Stuttgart JR 1957, 343, 344 where the special expenses were estimated at 20% of the purchase price) this would lead with approx. DM 77,000.-, or just DM 74,000.- -- to an amount which, if saved would not lead to such a reduction in the amount of damages which can be awarded to [buyer], that it would not lead to the amount as claimed by [seller] against which claim [buyer] has set-off its own claim.
If one would deduct from the remaining difference between the purchase and sale price in the amount of approx. DM 176,500.- (after deducting VAT) the estimated special expenses in the amount of DM 80,000.-, then there would still remain a claim for damages in the amount of more than DM 95,000.-, thus exceeding [seller]'s claim amounting to DM 91,255.35, as a consequence of which the set-off as declared by [buyer] causes [seller]'s claim to lapse completely.
[Seller] argues in response without success that [buyer]'s claim has become time-barred.
[Buyer] is not only entitled to set-off the claim for damages for breach of contract against the purchase price, but also against the claim for payment of the profits from the sale (by taking the law in its own hands) under article 88(3), second sentence, CISG. The set-off is considered a general principle in the meaning of article 7(2) CISG in any case in so far as two reciprocal claims arising from the Convention are facing each other (compare Staudinger/Magnus, op. cit., article 81 CISG, para.15 and article 4, para. 46 with further references). It remains to be seen whether [buyer]'s right to retain the profits of the sale for reasons of having a claim for damages against [seller] can be derived directly from the Convention (in this way Staudinger/Magnus, op. cit. article 88 CISG, para. 25, similar Herber/Czerwenka, UN-Kaufrecht 1991, article 88, para. 8) or whether the set-off is dealt with by the applicable national law (compare v. Caemmerer/Schlechtriem/Eberstein, UN-Kaufrecht, 2nd ed. 1995, article 88, para. 32). Also on the grounds of the applicable national law, [buyer] has maintained its right by way of timely notification of defect under � 479 German Civil Code to set-off its claim for damages for breach of contract against the claim for payment of the exceeding profits from the sale. Contrary to [seller]'s view, it remains irrelevant that article 3 of the Convention Act of 5 July 1989 on the CISG with respect to the question of the period of limitation only refers to �� 477, 478 German Civil Code and not to � 479 German Civil Code; then these paragraphs only determine the period of limitation for claims arising out of non-conformity of the goods, and not for claims to set-off.
II. [Seller] as the party against whom the Court ruled is ordered to pay all costs of the proceedings.
Other (additional) judgments follow from �� 708 no.10, 711 Civil Procedural Code. � 546 Civil Procedural Code demands the fixture of the efforts.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, the Plaintiff-Appellee of Brazil is referred to as [seller]; the Defendant-Appellant of Germany is referred to as [buyer]. Amounts in German currency (Deutsche Mark) are indicated as [DM].
** Annemieke Romein studied law at the University of Utrecht from 1993 to 1998 and at University College, London, during 1998. She earned her LL.M. (Magisterstudiengang) at the University of Heidelberg, graduated in 1999. Ms. Romein practices law at NautaDutilh, attorneys, civil law notaries and tax advisers in Rotterdam, at first Maritime Law, presently Corporate Law.
*** Loukas Mistelis is Clive M Schmithoff Senior Lecturer in International Commercial Law at the School of International Arbitration and the Chair, Graduate Studies Committee, School of Law, Queen Mary, University of London.

References: Art. 49
 Art. 81
 Art. 45
 Art. 74
 Art. 76
 v.