Source: http://www.cisg.law.pace.edu/cisg/wais/db/cases2/981005g1.html
Timestamp: 2019-04-19 04:28:53+00:00

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A Chinese manufacturer of circuit boards, plaintiff, delivered an instalment of goods under an exclusive sales agreement to a German buyer, defendant. The buyer made a fraudulent statement to the manufacturer that the goods were essentially worthless and could not be sold. However, when the buyer did sell the goods for approximately three-fifths their stated price, the manufacturer sued for payment of the purchase price. The buyer argued that the claim was made outside of the limitation period and claimed set-off. The buyer also relied on a purported agreement between the parties to lower the price of these goods to zero.
The court found that as the parties had agreed "on the law as per European common market (EU)", this clearly excluded Chinese law. Since there is no uniform contract law within the European Union, the court held that what the parties had intended by this clause was that the law of the most closely related European State would govern the contract. As the parties therefore had made an implied choice of German law, the CISG was applicable (article 1(1)(b) CISG).
The court allowed the manufacturer's claim (article 53 CISG). With the exception of the time limit in article 39(2) CISG, which was not applicable, the CISG does not provide limitation periods (article 4 CISG). Therefore, the court applied German domestic law, pursuant to which limitation was not a ground for exclusion of the claim.
Furthermore, the court held that the set-off claim was not admissible since the parties had agreed upon a contractual payment clause "net 40 days". This clause had to be construed by primarily having regard to the intent of the parties (article 8(1) CISG). As their intent could not be determined, when taking into account objective and international standards of interpretation, such a clause had to be understood as a reference to a trade usage that excludes set-off (articles 8(2) and 9(2) CISG). As authority for determining the international standard of interpretation of this contractual clause, the court cited both German and English case law and authorities. The court rejected the buyer's view that such a contractual exclusion violated the principle of good faith. Although that principle is relevant in general in the application of the CISG, the circumstances of this case gave no reason to rely on this principle in favour of the defendant.
As to the purported agreement to lower the price to zero, the court held that, even if there had been such an agreement in the manner alleged by the buyer, it would have been annulled by the manufacturer. Since the CISG does not deal with the issue of annulment (article 4(a) CISG), the court applied German domestic law, pursuant to which the agreement would have been annulled by means of a declaration by the seller.
The agreement will enter into force on 1 January 1995 for an indefinite period.
The agreement can be terminated by either party with a 90 days notice in writing and at the end of a calendar year.
The agreement can furthermore be terminated without notice of particularly important reasons, such as bankruptcy or winding up of the business of either party. A majority participation of third parties to the agreement is no reason for the immediate termination of the agreement.
As stipulated by the contract, [seller] delivered a considerable amount of circuit boards to the [buyer], who then resold the goods to other companies. In its letter of 10 October 1996, [seller] cancelled the contract without advance notice, claiming that the [buyer] was in default of payment and had furthermore kept fraudulent accounts and misled [seller] about alleged defects of the goods.
[Seller] alleges that [buyer] has outstanding debts in the amount of DM [Deutsche Mark] 216,566.94, listing the deliveries concerned and taking into account the sums credited by [seller] to the [buyer].
The [buyer] submits several defenses. [Buyer] has objected to an amount of DM 42,859.46 with various reasons explained in detail. Furthermore, it puts forward that, with respect to deliveries made in the year of 1994 (an overall sum of DM 40,200.), the claim is made outside the limitation period. The claim for payment of DM 31,744.85 for the delivery of 7,000 circuit boards was non-existent, because the circuit boards had been unusable. [Buyer] and L., the [seller]'s manager, had subsequently agreed to reduce the purchase price to zero. This, however, put L.'s job at risk, therefore they had agreed to reduce the purchase price for these and all following deliveries by DM 1.39 per circuit board, until the overall amount for the 7,000 circuit boards was compensated. Finally, the [buyer] is declaring set-off with respect to the remaining claim of DM 101,762.63. [Buyer] submits that it was entitled to damages of DM 673,306.24 because the [seller] was not entitled to cancel the contract without advance notice and [buyer] had subsequently suffered loss of profit in the amount stated.
[Seller] submits that it had been entitled to cancel the contract without advance notice, as the [buyer] had misled [seller] about alleged defects in the circuit boards, fraudulently charged travel and other costs, and had been in default of payment.
The Court of First Instance in a partial judgment allowed the [seller]'s claim in the amount of DM 173,707.48 with interest of 5% from 6 March 1997. The Court held that with respect to the existence of the claim, the [buyer] had objected only with respect to DM 42,859.46 (of the overall amount of DM 216,566.94), and that [buyer]'s set-off claim was not admissible.
[Buyer] appeals this partial judgment of the Court of First Instance.
[Buyer] submits that the parties had formed an effective agreement to reduce the price by DM 31,744.85, because L., as the [seller]'s manager, had acted within his representative authority. [Buyer] furthermore claims a set-off with respect to the remaining purchase price. [Buyer] again submits that it is entitled to damages for [seller]'s allegedly inadmissible termination of the contract without advance notice. [Buyer] explains that it has suffered a loss of profit in the amount of DM 170,136.38 for the year 1996. Since a cancellation of the contract with proper notice would only have taken effect at the end of the year 1997, it further puts forward a loss of profit of DM 479,611.16 for the year 1997. [Buyer] claims further damages for higher customs duties (DM 5,065.32) because [seller] failed to provide it with certificates of origin for the goods already delivered once it had cancelled the contract. Moreover, the carrier had charged [buyer] FOB charges in Hong Kong in the amount of DM 929.56, even though it had been agreed that [seller] would bear the cost of transportation.
[Buyer] submits that its claim for set-off is admissible. Admittedly, the parties had agreed upon a contractual payment clause of "net 30 [respectively 40] days" for the individual delivery contracts. Contrary to the view of the Court of First Instance, this did not bar the [buyer] from declaring a set-off. According to relevant case law, a clause stipulating net-payment only prevents a party from claiming set-off in order to protect third parties. By claiming that the set-off was inadmissible, the [seller] was acting in bad faith because its own breach of contract (the cancellation of the contract without advance notice) had given rise to the [buyer]'s claim for damages. Finally, even if the contract clause had acted as an impediment to the set-off, the parties had agreed to modify this agreement, as shown by the fact that the [seller] had credited sums towards the [buyer]'s account.
[Seller] submits that the [buyer] is not entitled to damages that would enable it to declare a set-off. [Seller] had been entitled to terminate the exclusive sales agreement without advance notice for important reasons. With respect to some deliveries, the [buyer] had paid the purchase price fifteen months after the due date. [Buyer] had furthermore charged travel costs and carriage surcharges that had not been accrued. With respect to the delivery of the 7,000 circuit boards, [buyer] had reduced the purchase price to zero, even though it customer had taken delivery of those boards for a smaller reduction in the purchase price. The alleged agreement on the reduction of the price between the [buyer] and [seller]'s manager was invalid as it was unconscionable and unlawful. In any event, [seller] contests the agreement because of [buyer]'s misleading conduct, as the goods had in fact not been defective. Furthermore, [seller] submits that the [buyer] has not substantiated its alleged damages. Finally, [buyer]'s claim for set-off was inadmissible as the parties had agreed on a net-payment clause which effectively barred the [buyer] from declaring a set-off. The sums credited to [buyer]'s account could not be used to interpret a clause in the contract. [Seller] further submits that [buyer]'s other claims for damages are unfounded.
[Buyer]'s appeal is unfounded. The Court of First Instance was correct in ordering the [buyer] to pay the [seller] the remaining purchase price in the amount of DM 173,707.48.
1. The Convention on Contracts for the International Sale of Goods (CISG) is the law applicable to the contract, under an implied choice of law clause in the contract. Such an implied choice of law follows from clause 11 of the exclusive sales agreement between the parties. The choice of law in an exclusive sales agreement does not necessarily apply to all singular contracts formed within its framework. Rather, the question of the applicable law has to be determined for each individual contract (cf. BGHZ [*] 74,136 [with respect to ULIS [*]]). Nonetheless, in the absence of other means of interpretation, the choice of law in the exclusive sales agreement is a high indication that the law chosen was also to apply to the individual contracts. By including a choice of law clause in the framework agreement, the parties clearly expressed their intent that their business relation (of which the individual contracts are a part of) was principally to be governed by the law chosen.
The Court concurs with the Court of First Instance that the choice of law clause in the contract is to be interpreted in a way that the parties intended to choose German law. The clause "the law governing this agreement as per European common market (EU)" is unusual and its meaning is not obvious. However, it shows the parties' intent that the contract should not be governed by Chinese law, but by law in force in the European Union. It could be inferred that the parties intended to agree on application of unified law in the European Union or in the countries of the contractual sales area (Germany, Switzerland, Austria, the Netherlands). However, a unified contract law -- and for exclusive sales agreements in particular -- does not exist within the European Union. Even the CISG has not been ratified by all members of the European Union. The Convention is furthermore is not applicable to exclusive sales agreements (cf. v.Caemmerer/Schlechtriem-Schlechtriem, Kommentar zum einheitlichen UN-Kaufrecht, 2nd ed., ante Art. 14-24 n. 7; Staudingen/Magnus, Wiener UN-Kaufrecht, Art. 1 n. 37). The Court therefore holds the view that the choice of law clause included in the contract should be interpreted in a way that the law of the member state of the European Union that has the closest connection to the contract was to be chosen. This leads to the application of German law, because the [buyer]'s place of business is in Germany and Germany constitutes a large part of the sales area of the contract. During the proceedings, the [seller] also pleaded in favor of the application of German law; the [buyer] did not object.
Choice of German law included the CISG as part of the German legal order (see BGHZ [*] 96,313 [with respect to ULIS [*]], with respect to the CISG, see OLG [*] Düsseldorf [<http://cisgw3.law.pace.edu/cases/930108g1.html>]; Schlechtriem, Internationales UN-Kaufrecht, n. 15; Staudinger/Magnus, Art. 1 n. 104). The further requirements for the application of the Convention are met: The parties have their place of business in different Contracting States, China ratified the Convention on 1 August 1988, and the Federal Republic of Germany ratified it on 1 January 1991.
2. It is undisputed that the [seller] was originally entitled to payment of the purchase price in the amount of DM 173,707.48 under Art. 53(1) CISG and the individual delivery contracts.
3. [Buyer]'s defenses to [seller]'s claim for payment are unfounded.
(a) [Buyer] cannot invoke the expiry of the limitation period with respect to deliveries effected in the year 1994 (an overall amount of DM 40,200.-). As the CISG does not provide limitation periods, the matter has to be settled according to German domestic law (following the implied choice of law clause in the contract). The time limit provided in Art. 39(2) CISG only applies to claims resulting out of a non-conformity of the goods delivered, not to claims for payment of the purchase price. The limitation period lasts four years following � 196(2) BGB [*], because the delivery was effected in trade or commerce under � 196(1) no. 1 BGB. When [seller] brought the action in 1997, the limitation period of four years had therefore not expired.
(b) [Buyer]'s claim for set-off is also unfounded. Apart from the delivery of the 7,000 circuit boards, the parties had agreed to exclude the possibility of a set-off. It is undisputed that a claim for payment of DM 141,962.63 arose. It is further undisputed that, with respect to this claim, the parties had agreed on a payment clause "net 40 days". Following Art. 8(1) CISG, the payment clause has to be interpreted according to the parties' intent. In doing so, an objective standard is to be applied and regard is to be had to the international character of the transaction (Arts. 8(2) and Art. 9(2) CISG, Cf. Bianca/Bonell-Farnsworth, Commentary on the International Sales Law. The 1980 Vienna Sales Convention, Art. 8 n. 2.4; v.Caemmerer/Schlechtriem-Junge, Art. 8 n. 7 et seq.; Staudinger/Magnus, Art. 8 n. 17 et seq.). According to these criteria, the agreement on a net-payment clause means that the debtor is not entitled to make deductions. [Buyer] is supposed to pay for the delivery first and then put forward its counterclaims. According to German case law, a clause stipulating "net" or "net cash" payment therefore constitutes an exclusion of set-off by trade usage (BGHZ [*] 14,62; BGHZ 23, 131; BGH NJW [*]1985, 550; OLG [*] Düsseldorf, NJW-RR [*]1996, 115; Baumbach/Hopt, HGB, 29th ed., � 346; Palandt/Heinrichs, � 387 n. 14; Staudinger/Gursky n. 173; Liesecke, WM [*]1978, Beil. 3, p. 8 et seq.). British case law interprets the clause "net" or "net cash" accordingly (Biddel Brothers v. Clemens Horst Company  1 K.B. 934 [C.A.] 940; Benjamin on Sale [4th ed. 1992] n.9-060].
[Buyer] has submitted that a net-cash clause only constitutes an exclusion of set-off when the interests of third parties are concerned. Such an interpretation can neither be inferred from either the case law mentioned above, or from the general understanding of the clause. Rather, the clause intends to secure the interest of the creditor to be able to rely on the receipt of an initial payment.
Contrary to [buyer]'s contention, [seller] is not acting in bad faith by relying on the exclusion of the set-off. For matters covered by the CISG, the principle of good faith also applies to the relations between the parties (Bianca/Bonell-Bonell, Art. 7 n. 2.4.1; v.Caemmerer/Schlechtriem-Herber, Art. 7 n. 1; Staudinger/Magnus, Art. 7 n. 10). According to the principle of good faith, the [seller] could possibly be barred from relying on the exclusion of set-off if the [buyer] was entitled to claim damages for breach of contract. However, as will be explained below, the [buyer] is not entitled to any such damages.
The [buyer] further submitted that, in crediting sums towards the [buyer]'s account in several instances, the [seller] had agreed to derogate from the net-payment clause. However, an agreed exclusion of set-off does not keep the seller from accepting legitimate counterclaims by the debtor and thereby refrain from demanding full payment. Not even the [buyer] contends that the [seller] refrained from asking for the full price with respect to the counterclaims in dispute. Due to the agreed exclusion of set-off, [buyer]'s claim for set-off therefore fails with respect to the amount of DM 141,962.63.
(c) With respect to [seller]'s claim for payment of the delivery of 7,000 circuit boards [buyer]'s defenses also do not succeed.
aa) [Seller] has not agreed to a reduction of the purchase price with respect to the 7,000 circuit boards. In this context, it is irrelevant whether the parties had agreed on such a reduction of the price. Even if this were the case, the [seller] has effectively contested its consent to such an agreement (given by its manager L.) because of the [buyer]'s misleading conduct.
German domestic law is applicable to the contestation of [seller]'s agreement. The modification of a contract is settled in Art. 29(1) CISG. However, the validity of the contract and any modification thereof, and therefore also a contestation of one party's declaration, is not governed by the Convention (Art. 4(a) CISG). Such matters have to be settled according to the law applicable by virtue of the rules of private international law. According to Art. 33(1) EGBGB, [*] the contestation of a contractual agreement is governed by the law that governs the contested contract (Reithmann/Martiny/Martiny, Internationales Vertragsrecht, 5th ed., n. 226; Soergel/von Hoffmann, Art. 31 EGBGB n. 9; Staudinger/Hausmann, Art. 31 EGBGB n. 18). As the parties have implicitly chosen German law as the supplementary law of contract, the contestation has to be considered under � 123 BGB [*].
[Seller]'s contestation of its declaration of will is effective under � 123 BGB. It is undisputed between the parties that, on the one hand, the [buyer] informed the [seller] that the entire delivery of 7,000 circuit boards was essentially worthless. On the other hand, the parties agree that the [buyer]'s customer accepted delivery of the circuit boards for a reduction of price in the amount of DM 2.49 apiece. The overall amount of DM 53,850.- was reduced by DM 20,044.50. The Court therefore finds that the [buyer] deceived the [seller] about the non-conformity of the goods. The circuit boards were not completely worthless and were sold at a reduced price. The [buyer] must also have been aware of the fact that the [seller] would not have agreed to lower the price to zero had it known the true course of events. The [seller] declared its contestation of the agreement to reduce the price by fax on 5 October 1996. Since [seller] delivered the circuit boards on 21 and 28 August 1996 and therefore discovered [buyer]'s deceptive behavior after that point in time, the [seller] also declared the contestation within the one-year period after discovery provided by � 124(1) BGB.
bb) [Buyer]'s claim for set-off is also unsuccessful with respect to the delivery of the 7,000 circuit boards. It can be doubted whether the exclusion of set-off also applies to this delivery, as the [seller] had already credited the sum of DM 31,744.85 to [buyer]'s account, and [seller] is striving to reverse this credit. The purpose of the net-cash clause to initially secure full payment of the price for the [seller] can therefore not be achieved in the same way as with the remaining sums that are in dispute. It is, however, irrelevant whether the net-payment clause would also exclude a set-off with respect to this claim. The [seller] did not commit a breach of contract by terminating the exclusive sales agreement without prior notice that would entitle the [buyer] to seek damages. Rather, [seller] was entitled to cancel the contract in accordance with clause 8(3) of the exclusive sales agreement. Clause 8(3) allows a termination of contract without notice for "particularly important reasons, such as bankruptcy or winding up." Art. 32(1) n. 1 EGBGB [*] stipulates that the law according to which this clause is to be interpreted is the law governing the contract, in this case, German domestic law because the exclusive sales agreement itself is not governed by the CISG. The words "such as" used in clause 8(3) show that the enumeration of important reasons is not exclusive. "Bankruptcy" and "winding up" are simply examples of especially important reasons that would allow a termination of contract without notice. The Court is of the opinion that frequent and grave breaches of contract are also important reasons under clause 8(3), if they make it unacceptable for one party to hold on to the contract. If that is the case, they can be equated with the listed examples, which also gravely restrict or make it impossible to carry through with the contract.
Such an interpretation is not hindered by the fact that Art. 8(4) of the contract also stipulates an avoidance for fundamental breach in case the party in breach "fails substantially to fulfil contractual obligations and has not rectified matters within 90 days of receiving written notice." The clause provides for a fundamental breach of contract of a kind that can still be rectified. An example could be the default of payment. Such a rectification is not possible where the basis of trust between the parties has been destroyed and carrying through with the contract is unacceptable for one of the parties. A breach of contract of this kind is therefore governed by clause 8(3) of the exclusive sales agreement. In the case at hand, the [seller] with letter of 5 October 1996 relied on the [buyer]'s deceptive conduct, fraudulent assertions of travel, transport and other costs on the part of the [buyer] and finally, frequent and serious default of payment. Due to these circumstances, it is unacceptable for the [seller] to hold on to the contractual relations. The [buyer] has basically not objected to these accusations. [Seller] was therefore entitled to avoid the exclusive sales agreement without prior notice.
[Buyer]'s claim for damages fails moreover because it failed to substantiate its purported damages in detail (despite the remarks made in the Court's order of 11 May 1998 and in the hearing on 29 June 1998). [Buyer] only put forward its turnover and gross proceeds for the years 1995 and 1996 as well as estimates for the year 1997. [Buyer] then calculated overall damages of at least DM 655,742.32. However, that [buyer] actually suffered damages in this amount cannot be deduced from the figures presented. For 1996, [buyer] estimates a loss of revenue of DM 653,527.02, from which it derives a loss of profit of DM 170,136.48. Since the [seller] terminated the contract on 10 October 1996 and the [buyer] herself put forward a turnover of DM 1,171,730.34 for the year 1996, it could have lost a third of the annual turnover at the most (= DM 390,576.78). The loss of profit claimed for 1996 would then have amounted to almost 50% of the turnover that the [buyer] could have achieved in the last quarter of 1996. Enclosure B 15, however, which has been submitted by the [buyer] shows that the difference between wholesale and retail price was roughly one half of the final price. This is without making allowances for [buyer]'s overhead costs. The figures presented by the [buyer] do not enable the Court to estimate the purported damage, because they do not reveal what turnover it made before and after the termination of the exclusive sales agreement.
Also unfounded are [buyer]'s claims for damages with respect to higher customs duties in the amount of DM 5,065.32, and carriage costs in the amount of DM 929.46. With respect to the higher duties, [buyer] asserts that the [seller] no longer provided it with certificates of origin for goods already delivered, so that [buyer] had to pay duties of 5.2% instead of 3.8%. This submission is insufficient to form the basis of a claim for damages. [Buyer] neither submitted nor proved that it asked the [seller] to produce the certificates of origin. [Buyer] did not contradict [seller]'s submission that the [buyer] requested the production of documents for the first time during the legal proceedings -- that is, two years after the contract had been cancelled. [Buyer] also did not prove the carriage costs. [Buyer] did present five invoices over FOB charges issued by the company W. in Hong Kong. [Seller], however, disputes the legitimacy of the invoices, which are remarkable in that they do concern circuit boards of the [seller], but list the FOB charges as their sole item. The only complete cargo invoice (issued on 14 October 1996), in comparison, does not list FOB charges. Since the [buyer] has neither offered any further explanation to shed light on this matter, nor given any further proof, the amount cannot be accepted as claim for set-off.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, the Plaintiff-Appellee of China 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].
Translator's note on other abbreviations: BGB = Bürgerliches Gesetzbuch [German Civil Code]; BGHZ = Entscheidungen des Bundesgerichtshofs in Zivilsachen [Official case reporter of the Federal Court of Justice, the highest German Court in civil matters]; EGBGB = Einführungsgesetz zum Bürgerlichen Gesetzbuche [German Code on the Conflict of Laws]; IPRax = Praxis des Internationalen Privatrechts [German Law Journal]; NJW = Neue Juristische Wochenschrift [pre-eminent German law journal]; NJW-RR = Neue Juristische Wochenschrift Rechtsprechungs-Report [German case reporter]; OLG = Oberlandesgericht [German Court of Appeals]; ULIS = Uniform Law on the International Sale of Goods (1964 Hague Sales Convention); WM = Wertpapier-Mitteilungen [German law journal].

References: Art. 14
 Art. 1
 Art. 1
 Art. 53
 Art. 39
 Art. 8
 Art. 9
 Art. 8
 Art. 8
 Art. 8
 v. 
 Art. 7
 Art. 7
 Art. 7
 Art. 29
 Art. 33
 Art. 31
 Art. 31
 Art. 32
 Art. 8