| Decisions of the Federal Court of Justice (Bundesgerichtshof) |
Translation [*] by Birgit Kurtz, Esq. of Alston & Bird LLP, New York
Plaintiff [seller], which trades in steel produced in South Korea, delivered to Defendant [buyer], whose place of business is in Switzerland, a total of 125.81 tons of stainless steel wire upon an order dated 7 February 1992, which was confirmed by the [seller] on 10 March 1992; it is in dispute between the parties whether the delivery took place in July or September 1992. Of the total purchase price, Deutsche Mark [DM] 366,174.51, the amount of DM 63,180 is still unpaid. The [buyer] notified the [seller] with "notices of substandard material", dated 5 November 1992, and 6 April 1993, that specific, individually indicated quantities of the raw material could not be processed, and that it placed the substandard material at the [seller]'s disposal. At the same time, the [buyer] inquired about what should be done with these materials and also with the "semi-processed materials" that was "possibly" still in storage. In letters dated 2 December 1992, and 27 January 1993, the [seller] notified the [buyer] that, if the complaints are justified, the value of the material would be credited, and if further substandard material was found in the [buyer]'s stock, responsibility would also be taken if the complaint is justified. Both parties have obtained expert opinions regarding the suitability of the raw material, which, however, reached conflicting conclusions.
With its complaint, the [seller] demands that the [buyer] pay the outstanding purchase price plus interest. After the [buyer] had processed the extant raw material during the course of the litigation before the Court of First Instance at the end of 1995, it continued to pursue the avoidance of the contract in its brief dated 6 November 1995 only with regard to the substandard quantities indicated there. Alternatively, it declared a set-off against the claims for damages of DM 4,800, Swiss francs [Sfr] 2,850.50 and DM 75,578.53.
The District Court [Landgericht], in dismissing the complaint, ordered the [buyer] to pay the remaining purchase price in the amount of DM 50,580 plus interest. The Court of Appeals [Oberlandesgericht] dismissed the [buyer]'s appeal. By appealing to the Supreme Court, the [buyer] continues to pursue its application for dismissal of the complaint.
I. The Court of Appeals explained that the [buyer] could rely neither on the avoidance of the contract nor on the defense based on the reduction of the purchase price when defending against a demand for the remaining purchase price. The Court of Appeals stated that, to the extent that the [buyer], in consideration of the District Court's decision - which was partially in its favor - continued to pursue the defense of avoidance of the contract regarding a partial amount of DM 22,611.76 (DM 35,211.76 minus DM 12,600 already awarded by the District Court), this explanation was irrelevant if it referred to the 12.478 tons of substandard goods that resulted during the processing of the extant raw materials of 38-39 tons in 1995. The Court stated that, to that extent, the [buyer] had to accept that it neither complied with the obligation imposed on it by CISG Arts. 38, 39 to investigate and notify of a defect, nor declared the contract avoided within an appropriate period of time within the meaning of CISG Art. 49(2)(b). To the extent that the [seller], in letters dated 2 December 1992, and 27 January 1993, stated in so many words that it would also take responsibility for any further justified complaints by the [buyer], these declarations of willingness were to be interpreted such that the [seller] would not be held liable for an indefinite period of time, but rather wanted to vouch for only those defects that would have been determined by the [buyer] in the course of the current production. The Court found that this condition was not, however, fulfilled with respect to the defects that appeared upon the processing at the end of 1995. It held that such warranty claims were time-barred according to BGB [**] § 477 anyway.
In addition, the District Court correctly assumed that the [buyer], in its letters of complaint dated 5 November 1992, and 6 April 1993, regarding the individually listed substandard goods, declared the contract avoided in a timely manner, which, on appeal, it only pursued as to a quantity of 7.978 tons. The Court held that it could remain undecided whether this quantity was substandard and whether the District Court correctly rejected a further evidentiary hearing. It was decisive that it could not be determined from the [buyer]'s submission whether the afore-mentioned substandard goods are identical to the ones referenced in the letters of complaint or whether they accrued exclusively during the processing at the end of 1995.
The claims for damages raised by the [buyer] in the alternative set-off did not exist. Regarding the amount of DM 4,800 - which was an alleged increase in value due to the processing of the material - it could not be assumed that the substandard goods of around 12 tons, which, in the opinion of the [buyer], should be taken back by the [seller], were in a better condition than before due to the [buyer]'s treatment. Moreover, the Court stated that the [buyer] had not submitted enough facts to support this claim for damages. Furthermore, in the Court's view, the [buyer] could not demand an amount of damages of DM 75,578.53 in lost profits for the double-sanding, because [buyer] violated its obligation to mitigate the loss (CISG Art. 77) in any event. The claim for the refund of costs incurred for converting the sanding machine in the amount of Sfr 2,850 was therefore also excluded.
II. These remarks cannot, in their entirety, withstand legal scrutiny.
1. The Court of Appeals incorrectly denied the [buyer]'s right, based on the CISG, which is applicable here, to declare the contract avoided against the demand for payment of the remaining purchase price in the amount of DM 50,580 still in dispute in the appellate proceeding because of a partial amount of now DM 22,611.76 (CISG Art. 81(1)(first sentence), Art. 49(1)(a) in connection with CISG Art. 51(1)).
a) The [buyer], with its notices of substandard goods dated 5 November 1992, and 6 April 1993, complained of the defects in the delivered material and, thus, with essentially the same wording, declared that it could not use said substandard goods and would place them at the [seller]'s disposal.
The Court of Appeals also apparently assumed that, with the references "the material has splinters", and "the material is split and has splinters," the defects were described in sufficient detail (Art. 39(1) CISG).
b) It can remain undecided whether, in doing so, the [buyer] complied with its duty to inspect the goods within the time limit of CISG Art. 38 and to give notice of the defects within a reasonable period of time after discovering the lack of conformity of the goods with the contract (CISG Art. 39(1)). That is so because the [seller] received from the [buyer], by letter dated 27 November 1992, the notice of defective material and its redirection to its factory in Korea, and by letters dated 2 December 1992, and 27 January 1993, [seller] declared that it would, in case there were more defects in the [buyer]'s stock and if the complaints were justified, "also take responsibility for it and handle it properly". In doing so, the [seller] not only acknowledged the timeliness of the notice of defects dated 5 November 1992, but also waived the defense of untimeliness for future complaints, as the District Court had already assumed. Such a waiver is generally possible under the CISG (Schwenzer in v. Caemmerer / Schlechtriem, CISG, 2d ed., Art. 39 ¶ 33; Staudinger / Magnus, Art. 39 CISG ¶ 18; re. § 377 HGB [**] compare BGH [**] decision of 19 June 1991 - VIII ZR 149/90 = WM 1991, 1636 under II 1 c aa = BGHR HGB § 377 defense of untimeliness 1).
To the extent that the Court of Appeals has interpreted the aforementioned letters from the [seller] such that it did not want to be liable without a time limitation, but only to take responsibility for such defects in the raw material that would have been noticed by the [buyer] during the course of the current production, this interpretation is not free of legal mistakes, as the appeal to this Court correctly argues in the end, so that it does not unfold a binding effect on this Court. Such a restriction is neither conveyed through the wording of the [seller]'s declarations nor does it find support in the parties' submissions. The connection of these declarations with the answer to the [buyer]'s question as to what should happen to the stock, even speaks against it. The content of the letters must, therefore, as this Court may determine on the basis of its own interpretation, be understood to mean that the [seller] wanted to take responsibility for identical defects in the delivered goods that will only be apparent during the processing of the material. The [seller] had to assume that the processing of all the steel wire would take place over a longer period of time in view of the size of the delivery. Besides, the occurrence of the substantial delay was based on the fact that the District Court had ordered that an expert opinion be obtained regarding the alleged defect in the steel wire; hence, any subsequent processing of the steel wire by the [buyer] was ruled out for the time being. When the [buyer] then, at the end of 1995, decided to process the delivered and not-yet-processed material, and later relied on the still remaining substandard stock, it thereby substantiated the extent of the originally complained of defects. Then, however, it did not lose its right to rely on the lack of conformity of the goods with the contract with respect to all of the defects of which it had complained.
c) Since the [buyer] stated in its notices of defects that it was unable to use the substandard material and therefore placed it at the [seller]'s disposal, whereby, at the same time and within the time limit, it declared the contract avoided, according to CISG Arts. 49(1)(a), 51(1), the question whether the avoidance of the contract was declared in a timely manner by the letter dated 6 November 1995 is irrelevant.
d) Thus, the Court of Appeals was not allowed to leave the question of the lack of conformity of the remaining 7.978 tons of raw material, as to which the [buyer] is continuing to demand the avoidance of the contract, unanswered by reasoning that it cannot be gleaned from the [buyer]'s submission whether the above-mentioned substandard material was partially identical with the material mentioned in the letters of complaint or whether it came about exclusively during the processing at the end of 1995.
To the extent that the explanations of the Court of Appeals are based on the consideration that the [buyer] is not entitled to the claims with respect to the processing of the substandard material at the end of 1995 because it did not comply with the requirements of CISG Arts. 38, 39 and 49(1)(a), this fact is irrelevant. As explained (see above II 1 b and c), the [buyer] can enforce its rights also with regard to those defects that only appeared during the processing at the end of 1995. As for the rest, much actually speaks for the fact that the quantities still complained of are identical with the quantities that were complained of before the litigation, as correctly argued in the appeal to this Court.
e) The avoidance of the contract is also not excluded according to CISG Art. 82(1) by the fact that the [buyer] cannot return the processed material in the same condition as it had received it. The [buyer] stated that, in order to determine which portion of the delivered raw material was still substandard, it had to process all of the raw material; the [seller] also stated that the defects claimed by the [buyer] were apparent in their entirety only in the course of the processing of the material. Thus, the material was altered under CISG Art. 38 due to the necessary processing for the investigation. But if the [buyer] keeps its right to declare the contract avoided even when the goods have perished or deteriorated by the investigation (CISG Art. 82(2)(b)), this rule must apply especially when - as the [buyer] claimed - the goods improved through the processing. The fact that the alteration of the goods took place only after the avoidance of the contract was declared, does not change anything with regard to the earlier avoidance of the contract (compare Staudinger / Magnus, Art. 82 ¶ 14).
f) Contrary to the opinion of the Court of Appeals, the [buyer]'s warranty claims are also not time-barred. Since the [buyer] already effectively declared the contract avoided with the notices of defects of 5 November 1992, and 6 April 1993, it is, according to CISG Art. 81(1) (sentence 1), freed, to that extent, from the obligation to pay (Leser in v. Caemmerer / Schlechtriem, Art. 81 ¶ 8; Staudinger / Magnus, Art. 81 ¶ 5), so that [buyer] can refuse payment of the purchase price.
2. The Court of Appeals was, therefore, not permitted to leave open the question whether the disputed substandard material, after repeated re-sanding, is not salable and constitutes unusable defective stock, but rather should have taken the testimony of fact and expert witnesses. The [buyer] did not lose this right by not making the advance payment of costs for the supplemental expert opinion, requested in the order of the Court of First Instance dated 9 December 1994, but rather processed the remaining raw material itself at the end of 1995. The non-payment of the requested advance payment of costs for the fact and expert witnesses' summons - subject to the non-admission of a prosecution or defense instrument under ZPO [**] § 528(2), which did not happen here - does not lead to the exclusion of the evidence (decision by the BGH [**] dated 5 May 1982 - VIII ZR 152/81 = NJW 1982, 2559 under 2(b); Baumbach / Lauterbach / Hartmann, ZPO, 55th ed., § 379 ¶ 7 et seq.; Zöller / Greger, 20th ed., § 379 ¶ 8). The processing of the delivered raw material by the [buyer] also does not constitute frustration of the evidence, as the [seller] argued in the second instance. This term refers to conduct by which one party is culpable of making it impossible or more difficult for the party with the burden of proof to meet this burden by destroying or withholding existing evidence or by making the use of the evidence more difficult or by refraining (at least negligently) from clearing up a loss that has already occurred, in order to prevent the development of evidence, although the subsequent necessity to proffer evidence had to already be recognizable by the party with the duty to clarify (BGH [**] decision dated 15 November 1984 - IX ZR 157/83 = NJW 1986, 59 under II 2 b; Thomas / Putzo, ZP0, 20th ed., § 286 ¶ 17; MünchKomm-ZPO / Prütting, § 286 ¶ 75 et seq.).
By processing the raw material, the [buyer] did not hamper the [seller]'s ability to proffer evidence but possibly its own; that is so because it has the burden of proof regarding the defectiveness of the delivered material. Because of the fact that obtaining an expert opinion regarding the unprocessed material is now impossible, and the [buyer] can rely on the examination of an employee of its operation with respect to the alleged defectiveness of the raw material, no procedural disadvantages must arise for the [seller]. A possible personal interest of the witness in a favorable outcome of the legal dispute for the [buyer] must be considered by the Court when assessing the evidence. Besides, the [buyer] offered expert evidence for the allegation that the disputed remaining raw material is unusable scrap, despite repeated re-sanding.
III. Because the decision of the Court of Appeals regarding the uniform claim for payment of the outstanding purchase price by the [seller] for the partial amount of DM 22,611.76 cannot be followed, this Court vacates the judgment of the Court of Appeals altogether (compare MünchKomm-ZPO / Walchshöfer, § 564 ¶ 3 et seq.). This matter has to be referred back to the Court of Appeals for further clarification and decision. To the extent that that Court will have to make a decision regarding the set-off declared by the [buyer], this Court notes that it shares the view of the Court of Appeals, according to which the set-off does not have any effect.
1. For one, the [buyer] set off a claim for damages in the amount of DM 4,800 against the amount claimed in the complaint, and it derives this claim from the fact that the material that must be taken back by the [seller] is, due to the processing, in a better condition than before. It can remain undecided if such a claim can generally be justified as a reimbursable expenditure of the establishment of the loss (Stoll in v. Caemmerer / Schlechtriem, Art. 74 ¶ 19). Since the [buyer], when calculating the demand for damages, alleges a value increase of DM 400 per ton without further explanation and has calculated from this an amount of DM 4,800, a substantiated factual presentation for such an increase in value is missing, as already noted by the [seller] in the first instance.
2. Free of legal mistakes are also the statements with which the Court of Appeals denied the [buyer] the claim for damages in the amount of DM 75,578.53 for the double re-sanding and of Sfr 2,850 for the re-calibration of the sanding machine. These costs to remedy the defects were no longer reasonable in view of their amount in relation to the purchase price claim still outstanding, so that the seller does not have to assume them according to CISG Art. 74; only adequate expenditures for the assessment of the damage, as well as for its prevention or reduction, are appropriate (Stoll in v. Caemmerer / Schlechtriem, id.; see also Staudinger / Magnus, Art. 77 ¶¶ 15, 20). In view of the costs to be expected from the beginning, it could, as the Court of Appeals correctly assumed, rather be expected from the [buyer] to return the goods after the contract avoidance and to raise a claim for damages on its part (CISG Arts. 45(1)(b), 74).
* For purposes of this translation, Plaintiff-Appellee of Germany is referred to as [seller]; Defendant-Appellant of Switzerland is referred to as [buyer]. Amounts in the currency of Germany (Deutsche Mark) are indicated as [DM]; amounts in the currency of Switzerland (Swiss francs) are indicated as [Sfr].
** Translator's note on other abbreviations: BGB = Bürgerliches Gesetzbuch [German Civil Code]; BGH = Bundesgerichtshof [Federal Supreme Court of Germany]; HGB = Handelgesetzbuch [German Commercial Code]; ZPO = Zivilprozessordnung [German Code of Civil Procedure].
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