Source: http://cisgw3.law.pace.edu/cases/071127g1.html
Timestamp: 2019-04-25 07:55:24+00:00

Document:
The decision by the Federal Court of Justice clarifies that a mistake in a calculation, which is part of the contract, is governed by article 8 CISG and that a disturbance of sales does not allow the reseller to terminate the agreement relying on article 79 CISG.
The seller, a German producer of glass bottles, entered into a contract for the manufacture and delivery of 50-ml and 100-ml glass bottles with a Greek corporation, which intended to export these goods to Russia. After concluding the contract, the buyer asked for an amendment, according to which it would pay a higher price, but the seller would pay in return a certain amount as “consulting and marketing fees” to a third company. The seller agreed. In addition, the parties agreed on the Greek corporation’s granting an interest-free loan to the seller for manufacturing the press moulds required to produce the bottles.
After the delivery of the first batch of bottles, the buyer requested the seller to forward a higher amount of money to the third company, due to a mistake in the calculation of the “consulting fees”. The buyer also informed the seller about its difficulty in the Russian market due to the decline of the currency rate and announced that it would take over only the bottles already produced. Finally, the buyer requested that the moulds be packed for transport to Russia, where it wanted to sell them. The seller refused and the buyer demanded it to pay back the loan, which the seller also refused.
Eventually, the buyer sued the seller for the payment of the outstanding amount of the “consulting fees” and for repayment of the loan. The seller challenged the plaintiff’s claims and demanded compensation for loss of profits. Contrary to the lower courts, the Federal Court of Justice sustained the plaintiff’s claims.
The court held that pursuant to article 8(1) CISG the real intent of the contract’s amendment proposed by the buyer was known to the seller, or, in any case, this latter could not have been unaware of it. As a matter of fact, the buyer had explained to one of the seller’s employees, before sending the proposal to amend the contract, that the modifications were done in order to avoid that the buyer’s Russian customers could find out the actual purchase price of the bottles. Furthermore, other circumstances, including the wording of the proposed amendment, easily revealed the true intentions of the buyer. The seller, thus, was in a position to understand that the buyer had committed a mistake in calculating the amount of the “consulting fees” in the amendment. With this regard, the court noted that the same conclusion would have been reached applying German law provisions on the so called “open error” (outside the scope of the CISG, see art. 4 of the Convention).
The court also supported the buyer’s claim for loan repayment, due to the cessation of the bottles production, which the loan was supposed to cover. The Federal Court of Justice inferred the termination of production from the seller’s claims for damages due to the buyer’s failure to perform its outstanding obligations.
The buyer, however, was not entitled to declare the contract avoided (article 49(1)(a) CISG) since the seller’s refusal to pay the remaining “consulting and marketing fees” did not amount to a fundamental breach of contract(article 71(1)(b) CISG). The buyer in fact had already announced it would not perform its duty to take further deliveries. The buyer was also not entitled to terminate the contract under article 79 CISG, since this is not the scope of the article. Furthermore, it still remained to be seen whether the ruble’s fluctuations could amount to an impediment beyond the party’s control.
The court upheld the seller’s set-off claim, since the buyer had not fulfilled its contractual obligations, with the exception of the first delivery. However, it could not reach a decision on the set-off, since the Court of Appeal had not quantified the damages.
The Federal Court thus remanded the matter to the Court of Appeals for a new decision that would consider the issues outlined by the court.
"2. A disturbance of sale (i.e. currency fluctuations) does not allow the on-seller to cancel the agreement according to Article 79 paragraph 1 CISG. This is due to the fact that this rule only frees the debtor from creditor's claim for damages."
Translation [*] by Birgit Kurtz, Esq.
Upon the appeal by Plaintiff [Buyer's assignee], the decision of the 31st Civil Panel of the Munich Court of Appeals dated 19 April 2004 is reversed.
The case is remanded to the Court of Appeals for a new hearing and decision, including regarding the costs of the appeal to this Court.
	[Buyer's assignee] sues based on rights that have been assigned several times regarding payment of overdue amounts declared as "consulting and marketing fees" and also for repayment of a loan.
	Defendant [Seller], which operates a glass factory, entered into a contract on 29 December 1997 with the Greek branch of S. Ltd. (hereinafter, Assignor [Buyer]) regarding the manufacture and delivery of 10 million 50-ml glass bottles for Deutsche Mark [DM] 80.00 per 1,000 pieces and 6 million 100-ml glass bottles for DM 100.00 per 1,000 pieces. By telefax dated 27 May 1998, the Managing Director of [Buyer] requested an amendment to the contract. According to the proposed amendment, on the one hand, [Buyer] should pay a higher price, increased by DM 20 or DM 22 (to DM 100.00 per 1,000 pieces for 50-ml bottles, and to DM 122.00 per 1,000 pieces for 100-ml bottles), and on the other hand, [Seller] should pay within seven days after receipt of each payment DM 2.00 per 1,000 50-ml bottles and DM 2.20 per 1,000 100-ml bottles as "consulting and marketing fees" to a third company, S. Marketing Ltd., to which [Seller] in fact did not owe anything. [Seller] agreed to the contract amendment. After a first batch of bottles had been produced, accepted and paid for, the [Seller] transferred DM 9,256.00 to S. Marketing Ltd. This sum was derived from the number of bottles delivered multiplied by DM 2.00 or DM 2.20 per 1,000 pieces. [Buyer] wrote on 10 February 1999 to [Seller] with reference to a telephone conversation of the same day and with reference to the amended contract that its bookkeeping department had confused the order with the order to Company O., a company affiliated with [Seller], in which the prices had been quoted per 100 bottles; [Buyer] thus wrote that a consulting fee of DM 20.00 instead of DM 2.00 or DM 22.00 instead of DM 2.20 was correct. [Buyer] therefore demands the payment of an additional DM 83,304.00 as a consulting fee to S. Marketing Ltd. [Seller] refused this, referring to the clear text of the contract amendment.
	In addition, [Buyer's assignee] demands the repayment of a loan of DM 112,000.00 (€ 57,264.69). According to the original contract, [Buyer] was supposed to buy the moulds necessary for the production of the bottles from [Seller] for the price of DM 112,000.00 and provide them to [Seller]; in order to avoid sales tax, the contract parties, by way of an addendum, agreed, on 25 February 1998, that the moulds remain the property of [Seller] but that [Buyer] give [Seller] an interest-free loan in the amount of the former purchase price for the term of the contract and that [Buyer] receive a purchase option after the completion of the production. After the delivery of the first batch of bottles, [Buyer] pointed out to [Seller] its difficulties in selling the bottles in Russia as it had planned, and announced that, at first, it only wanted to accept the bottles already produced. By letter dated 15 June 1999, [Buyer] requested that the production moulds be packed for transport to Russia, where it wanted to sell the moulds. [Seller] refused this as long as its claims arising out of previous production break-downs remained open. Thereupon, by letter dated 25 October 1999, [Buyer] demanded that [Seller] pay back the loan. [Seller] refused this as well.
	In the alternative, [Seller] disclosed the set-off of the claims made in the Complaint for the payment of additional consulting fees and repayment of the loan, against a claim for compensation for lost profit in the amount of DM 410,999.94 (€ 210,140.93), which, according to [Seller], [Buyer] had suffered due to the premature termination of the contract of 15 June 1999.
	The District Court dismissed the Complaint. [Buyer's assignee]'s appeal was unsuccessful. With its appeal to this Court, permitted by this Panel, [Buyer's assignee] continues to pursue its claims set forth in the Complaint to the fullest extent.
	The appeal is successful. It leads to the reversal of the disputed decision and remand of the case to the Court of Appeals.
	The Court of Appeals held that [Buyer's assignee] has no claim for an additional payment of higher "fees" because it did not prove that [Seller] knew or could have known that the fee amounts set forth in the demand to revise were due to a typographical error. The Court of Appeals stated that it is true that it may be unusual for the Buyer to agree voluntarily after the fact to a higher price, but here it is not a question of a price mistakenly set too high, but of fees to be paid to a third party unknown to [Seller], mistakenly set too low. The Court of Appeals stated that a connection between the higher purchase price and the "fees" that [Seller] was supposed to pay to the third party for unknown purposes, cannot be ascertained. The Court of Appeals stated that the content of the letter of witness C., dated 13 January 2004, proffered by [Buyer's assignee], can be presumed to be true because it set forth only that [Buyer] explained to [Seller]'s employee H. that the reason for the higher prices in official invoices was that it, the [Buyer], did not want to reveal its actual lower purchase prices to its customers; in this letter, the fact of necessary commission payments and their coverage by means of higher prices is mentioned, but it was not set forth that this was explained to the witness or other employees of [Seller].
	The Court of Appeals stated that [Buyer's assignee]'s claim for repayment of the loan is also not well-founded. The loan was only due for repayment when the main contract was over. But it has not come to that. The Court of Appeals stated that it was neither a question of a contract regarding target amounts, which would be finished with the first delivery, nor did [Buyer's assignee] declare an appropriate termination, nor did [Seller] terminate the main contract by only naming an alternative demand for damages because of failure to perform, nor did a frustration of contract occur. The fall in value of the ruble was solely the risk of [Buyer's assignee] and/or [Buyer]. The Court of Appeals stated that, similarly, there was no important reason for the extraordinary termination of the main contract declared by [Buyer's assignee]. [Seller]'s refusal to pay the "fees" is not an important reason because the payments made by [Seller] were proper under the contractual agreements.
 II. These explanations do not withstand scrutiny by this Court. Based on the facts assumed at this time by the Court of Appeals, both causes of action are well-founded, to the extent that they have not been cancelled by [Seller]'s set-off against its claim for damages due to failure to perform the contract.
 1. [Buyer's assignee]'s claim for payment of the DM 83,304.00 difference between the increased purchase prices paid by it and the consulting fees paid by [Seller] is, according to the facts assumed by the Court of Appeals, well-founded because of the contract amendment.
 a) The interpretation of the contract amendment by the Court of Appeals does not bind this Panel, because the Court of Appeals violated the principle that interpretation be fair to the interests of both sides and violated the requirement that the trial judge must exhaust the evidence in the lawsuit available to him, thus a court may not disregard essential circumstances. Since no further determinations of fact essential to the interpretation are expected, this Panel may itself interpret the contract amendment (continuous holding of the Supreme Court; see only Decision dated 24 January 2002 - IX ZR 228/00, NJW 2002, 1421). This is done, however, with the proviso that the interpretation is not based on firm determinations, but solely on the facts assumed by the Court of Appeals, and, thus, inevitably is only of a preliminary nature.
 b) The Court of Appeals incorrectly held [Buyer's assignee] to the exact wording of the contract amendment, according to which [Buyer's assignee] was supposed to pay purchase prices increased by DM 20.00 or DM 22.00, but [Seller] was supposed to pay only one tenth of these amounts as consulting fees. Assuming, as the Court of Appeals did, that the content of the letter of [Buyer]'s Managing Director C. of 13 January 2004 was correct, then the contract amendment must rather, regardless of its wording, be interpreted to mean that [Seller] should pay to S. Marketing Ltd. exactly as much as it received from [Buyer] through the purchase price increase.
 aa) According to Article 8(1) CISG, which must be applied to the mixed manufacture/sales contract [Werklieferungsvertrag], declarations of a party must be interpreted according to its intent if the other party knew or could not have been unaware of that intent. This was the situation here, if one assumes, as the Court of Appeals did, that the testimony of Managing Director C. was correct. According to C., before sending his proposal to amend the contract (which was transmitted in writing), he clearly explained to [Seller]'s employee witness H. in a telephone call that it was a matter of avoiding that [Buyer]'s Russian customers find out the purchase prices actually paid to [Seller]; in the past, the Russian customers had occasionally inadvertently received [Seller]'s invoices to [Buyer]. Already because of this explanation, according to which the contract amendment was supposed to conceal the true purchase price, [Seller] could not erroneously believe that [Buyer] wanted to give the increase of its, [Buyer]'s, property to [Seller] to increase [Seller]'s property, and conversely, could not help but be aware that [Buyer] was paying it on the one hand higher prices, but on the other hand wanted to skim off the price difference again immediately and transfer it to its affiliate S. Marketing Ltd. From this, [Seller] had to assume that the stated size of the consulting fees in the proposal to amend the contract was based on a mistake and that [Buyer]'s intention was actually for ten times the amount.
	[Seller] also could not be unclear about [Buyer]'s true intention because, independently of the assumed testimony by Managing Director C., there were other factors indicating it. Among these is the wording of [Buyer]'s proposal for amendment, where, in a casual tone, a simple mention of "rewriting" of the original contract and "modification" is made, which was not consistent with an actual increase of the purchase price by 25 or 22%. It also contradicts life experience that a buyer, of his own free will and, in addition, without reference to the gratuitousness of his accommodation, offers the seller a price that is 25 or 22% higher than originally agreed upon. Furthermore, the instructions to [Seller] to pay un-owed consulting fees to a company affiliated with [Buyer] spoke against a gift to [Seller] and in favor of a concealment maneuver for the benefit of [Buyer]. Finally, the conspicuous circumstance that, according to the wording of [Buyer]'s proposal for amendment, of all things a tenth of the price increase should be transferred to S. Marketing Ltd., which, in the face of circumstances speaking against a genuine price increase, constitutes a further strong indication for an erroneous move of the decimal point.
	The above-mentioned indicia are also not weakened by the statement of witness H. that she knew from [Seller]'s Managing Director He. that the price increase also took place because of the increase in production costs. In contrast to the District Court, the Court of the Appeals correctly did not base its analysis on this statement. On the one hand, this was no longer logically possible, after the Court of Appeals assumed the correctness of the testimony of Managing Director C., because there is an unsolvable contradiction between the statement of witness H., who claimed to never have spoken about a price increase, and his letter. On the other hand, this testimony of witness H., which is also only based on hearsay, is not consistent with the fact that, while [Seller], in a letter dated 4 March 1998, had pointed to increased prices because of subsequent changes to the design of the bottles, but that it also, in reference to [Buyer]'s answer dated 9 March 1998, in which it had rejected this request of the price increase, for its part in [the letter] dated 10 March 1998, clarified that, in its fax dated 4 March 1998, it did not intend to announce a price increase, but only intended to inform regarding the additional costs. Furthermore, as [Buyer's assignee] had calculated (without object by [Seller]), these additional costs had constituted only a small fraction of the price increase set forth by [Buyer].
	Under these circumstances, the analysis of the Court of Appeals, that in connection with the price change, it had remained totally unclear that a connection existed between the "fees" and the higher purchase price, and that it remains incomprehensible how [Seller] could have recognized that these "fees" were to be identical with the amount of the increase of the purchase price, cannot be understood. Rather, assuming the facts as presented by Managing Director C., one must assume that [Seller] was obligated to reimburse in full to [Buyer] via S. Marketing Ltd. the purchase price increase it received. Since [Buyer] transferred all its claims against [Seller] to S. Marketing Ltd., and the latter transferred its claims against [Seller] to [Buyer's assignee], the Court of Appeals would have had to grant the Complaint's demand for payment of DM 83,304.00.
 bb) The application of German general civil law produces no different result. The CISG permits this application in the case of questions that can also arise from other contractual relationships (MünchKomm./Peter Huber, German Civil Code, 4th ed., Art. 4 CISG � 16). According to German law, [Buyer]'s mistake must be classified as a so-called open mistake in calculation. The recipient of the declaration is not permitted to hold the declarant to an open mistake in calculation. In the case of positive knowledge or bad faith frustration of positive knowledge, an impermissible use of a right is given if the recipient of the declaration accepts the offer to a contract and insists on the performance of the contract. According to this, [Seller] must let itself be treated as if the contract amendment had not occurred, and it must reimburse to [Buyer's assignee] the price increase minus the one-tenth transferred to S. Marketing Ltd. Furthermore, due to culpable actions during the contract negotiations (now � 311(2) (No. 1) BGB [*]), the recipient of the declaration is obligated to clarify [the situation] as soon as a mistake in calculation with unacceptable consequences becomes obvious. (German Supreme Court for Civil and Criminal Matters, Decision of 7 July 1998 - X ZR 17/97, BGHZ 139, 177, 184, 188). According to this, [Seller] here should have made [Buyer] aware of its mistake and must, by way of damages, put it in the position in which it would be if it had made the clarification it neglected to make. Then [Buyer] would have corrected its request to amend the contract accordingly and [Seller] would have agreed to the corrected contract amendment. Consequently, [Seller] must pay as damages ten times the consulting fees, and thus make a supplemental payment in the amount of the still outstanding nine tenths. In any case, it must pay the amount demanded in Count 1 of the Complaint.
 2. The Court of Appeals should have also granted [Buyer's assignee]'s claim for repayment of the loan on the basis of the facts assumed so far.
	There are no legal objections to the Court of Appeals' approach that [Buyer's assignee]'s claim for repayment of the loan requires the termination of the main contract. In the end, however, the Court of Appeals incorrectly denied that assumption.
	The termination of the main contract within the meaning of the contractual provision regarding the repayment of the loan means that [Seller] will not produce any more bottles. That is so because the loan was supposed to cover the production costs of the moulds and, thus, served the production of the bottles; therefore, upon the final termination of the production, it has fulfilled its purpose and must be wound up, together with the remainder of the contract. A final cessation of production must, however, be assumed because [Seller] has raised claims for damages regarding [Buyer]'s failure to perform all still outstanding contractually agreed duties, and thus has dropped its claim for acceptance of subsequent deliveries (Art. 53 CISG), and therefore will also not manufacture any more bottles for [Seller].
	The District Court and the Court of Appeals found that this was not the case here because [Seller] demanded damages only in the alternative, in the event that the claim for repayment of the loan was already due. But the limitation to the claim for repayment of the loan is not correct here. In its brief dated 2 February 2002, [Seller] declared the set-off generally in the alternative, i.e., not only vis-à-vis the claim for repayment of the loan, but also vis-à-vis [Buyer's assignee]'s claim for supplemental payment. Because, as explained above, the claim for supplemental payment would have to be granted on the basis of the current facts as assumed by the Court of Appeals, the condition precedent, contained in the alternative set-off and required for raising the claim for damages for failure to perform, has thus occurred. (Palandt/Heinrichs, German Civil Code, 66th ed., � 281 � 50). For this reason, the claim for repayment of the loan is due. The fact that the loan has not amortized for [Seller] because of the premature termination of production is irrelevant, but rather must be considered in the calculation of [Seller]'s damages for failure to perform.
 3. Because, based on the factual assumptions of the Court of Appeals, both claims are, therefore, well-founded, the crucial issue then becomes [Seller]'s alternative set-off declaration. Its damages claim for failure to perform (which it used for its set-off declaration) is generally well-founded; that is so because [Buyer] did not fulfill its contractual obligations to take delivery and to pay the purchase price, with the exception of the first batch (Art. 53, 61(1)(b), 74 CISG). But, because the Court of Appeals - consistently, from its standpoint - has not yet made any determinations regarding the amount of this damages claim, this Panel cannot itself issue a decision regarding the set-off.
 III. The matter must be remanded to the Court of Appeals because the Court of Appeals issued a decision regarding the damages claims on the basis of assumed facts that are not consistent with the decision.
 1. Because the Court of Appeals incorrectly denied the claims in the Complaint based on the hypothetical assumption that [Buyer]'s Managing Director C. had explained to witness H. the purpose of the contract amendment, it will first have to examine anew the merits of the claims in the Complaint.
 2. If the claims prove to be justified, the Court of Appeals will further have to examine whether they were extinguished by the set-off. For this task, it will have to determine the amount of [Seller]'s damages due to failure to perform.
 3. If, however, the Court of Appeals should again reach the result that [Buyer's assignee]'s claim for supplemental payment is not justified, then this also leads to the non-existence of the claim for repayment of the loan.
 a) That is so because then, the condition precedent for [Seller]'s alternative set-off against a claim for damages for failure to perform has not occurred, and because of the set-off, no termination of the main contract has occurred and, thus, [Buyer's assignee]'s claim for repayment of the loan is for this reason not due.
 b) Its maturity can also not be derived from a frustration of the contract. It is not relevant whether the CISG, which itself does not establish any substantive limitation of the claim for fulfillment because of frustration of contract, thus permits recourse to national law. That is so because, as the Court of Appeals accurately recognized, according to German law, this legal doctrine would not apply. In this case, contrary to the view of the appeal, there has not been a disruption of the equivalence mandate [violation of rule that value of duties on both sides must remain roughly the same, "Äquivalenzstörung"]. Rather, if [Buyer's assignee]'s submissions regarding the fall of the ruble are correct, there is a disruption of sales on the part of the buyer. According to the jurisprudence of the German Supreme Court, however, the buyer bears the risk whether the purchased object can be resold for a profit. (Decision dated 8 February 1984 - VIII ZR 254/82, NJW 1984, 1746; MünchKomm./Roth, German Civil Code, 4th ed., � 313 � 203).
 c) The disruption of sales also did not allow [Buyer] and/or [Buyer's assignee] to put an end to the main contract by termination. Art. 79(1) CISG does not entitle a party to terminate a contract. According to this provision, a party is not liable for a failure to perform any of its obligations if it proves that the failure was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. It can remain undecided, whether this applies to the constellation alleged by [Buyer's assignee], that [Buyer] was not able to sell the ordered bottles as planned to Russian customers because of the decline of the ruble exchange rate (disapproved by Staudinger/Magnus, CISG, 2005, Art. 79 � 7). That is so because Article 79 CISG releases the debtor only from damages claims by the creditor. The creditor's obligations to perform remain unaffected (MünchKomm./Peter Huber, CISG Art. 79 �� 10, 58).
 d) Finally, [Buyer's assignee] also cannot base a claim on Art. 49(1)(a) CISG, according to which the buyer can declare the contract avoided if the failure by the seller to perform any of his obligations amounts to a fundamental breach of contract. It is true that [Seller] has not fulfilled its obligation to reimburse the higher purchase price received or to pay supplemental consulting fees. This does not, however, constitute a fundamental breach of contract because, until it declared the set-off, it had the right to suspend performance. According to Art. 71(1)(b) CISG, a party may suspend the performance of its obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of its obligations, as a result of its conduct in preparing to perform or in performing the contract. [Buyer] had, when it demanded the supplemental payment of the consulting fees, already declared that it would not perform its duty to take delivery (Art. 53 CISG).
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Plaintiff-Appellant is referred to as [Buyer's assignee] and Defendant-Appellee is referred to as [Seller]. Amounts in the former currency of Germany (Deutsch Mark) are indicated as [DM].
Translator's note on other abbreviations: BGB = Bürgerliches Gesetzbuch [German Civil Code].

References: art. 4
 Art. 4
 Art. 79
 Art. 79
 Art. 79
 Art. 49
 Art. 71