Analyse Under the CISG the Following Cases

FH Joanneum International BusinessLaw CASES Satu Pitkänen CISG/Trade

Analyse under the CISG the following cases:

1. An Italian manufacturer sold leather shoes to a Danish company. After receiving the delivery the buyer learned that instead of being full leather shoes, the soles of the shoes were of artificial material. Also some of the shoes had scratches on them.

The buyer gave notice claiming that the goods were defective. The seller contends that it is the general way shoes are made nowadays and these shoes were in perfect condition when they were loaded into the truck. Now the buyer is wondering what to do, can you help?

2. Oups Co. based in New Mexico agreed to purchase 750 mobile phones from Swedish Crazy Phone Ab. The terms of the contract were embodied in a one-page invoice prepared by Crazy Phone. A notation printed at the bottom of the invoice read:” Please send the merchandise in cardboard boxes duly strapped with metal bands via air parcel post to Albuquerque, New Mexico. Documents to Banco de Commercio De Quintano Albuquerque.

There were no provisions in the contract that specifically allocated risk of loss on the goods while in the possession of the carrier. Further, no standard trade terms were mentioned in the agreement. After Crazy Phone arranged to transport the phones from Stockholm to Albuquerque, NM, Oups Co. paid the full purchase price. When the cartons arrived in Albuquerque without any phones in them, Crazy Phone refused to refund Oups Co.’s money or to supply new phones at no charge. Who bears the risk of the lost phones?

3. Dealer in The United States owned a cargo of 10,000 barrels of oil that had been shipped from Mexico on January 1 for arrival in the United States on February 1. On January 15, Dealer informed Buyer that the oil was en route and they concluded a contract. On arrival, inspection showed that the oil had been contaminated by seawater at some indeterminate time during the voyage. Assuming CISG applies, who bears the risk?

4. Shoe Seller’s Case (Germany, Court of Appeals, Frankfurt am Main, 1994, Case 5 U 15/93)

The plaintiff, an Italian business, contracted in January 1991 to sell women's shoes to the defendant, a German businesswoman. The plaintiff-seller was late in making its delivery and the shoes did not completely conform to the original sample that had been shown to the defendant-buyer. Although the defendant accepted delivery, she refused to pay on two of the plaintiff's invoices. The plaintiff then brought suit in a German court to recover the amounts it had billed the defendant on its invoices. In the defendant's answer to the plaintiff's complaint, the defendant relied on the remedy of avoidance, maintaining that she was entitled to avoid the contract and be excused from any liability on the unpaid invoices because of (a) the plaintiff's late delivery and (b) the nonconformity of the goods. The court found in favour of the plaintiff and the defendant appealed. What should the Court of Appeals rule as regards the case, and why? (Source: Ray August. International Business Law)

5. Tai Wahl, a Hong Kong manufacturer of ladies’ wear, ordered fabric From Naomi Ltd. for the production of its fall season models. The time of delivery was agreed to be March 15. However, by the due date there was no delivery.

When enquired, Naomi Ltd. informed that they had received another, much better order from France and they would give priority to that. Tai Wahl replied that March 30 would be their absolute deadline and after FH Joanneum International BusinessLaw CASES Satu Pitkänen CISG/Trade that they would order the fabric from another supplier since their manufacturing process would otherwise be interrupted. Naomi did not reply to Tai Wahl but delivered the fabrics on April 15. By then Tai Wahl had ordered the fabrics from another manufacturer, and refused to receive Naomi’s delivery. Your comments?

6. Oups Co. agreed to deliver three software programs to Hulabaloo Ab that are specially designed for Hulabaloo's business. The first was to be delivered in January, the second in February, the third in March. The program delivered in January worked fine, but the one delivered in February was defective. It not only failed to function properly, it also made the other two programs effectively worthless. Oups Co. was unable to correct the defect, and no suitable replacement could be found from another supplier. What CISG remedies are available to Hulabaloo Ab?

7. A Canadian company received a big order from Austria. The time of delivery was very short and the seller had to use subcontractors. To make sure the delivery would be in time the Austrian company demanded an unusually hard contractual penalty clause be included in the contract. The seller used a smaller local company as a subcontractor. Soon the subcontractor encountered problems in its manufacturing process and it became obvious that the delivery would be late for 3 weeks. The seller informed the Austrian buyer about this. The buyer immediately announced that it will avoid the contract and claim for damages. Your opinion? FH Joanneum International BusinessLaw CASES Satu Pitkänen CISG/Trade

Solutions

1. Buyer must 1. examine the goods as soon as is practicable, Art 38(1) 2. give notice to the seller specifying the nature of the lack of conformity within a reasonable time after having discovered it, Art 39(1), within 2 years from receiving the goods at the latest, Art 39(2) 3. give notice of his claims

Artificial material - defective goods?

Seller must deliver goods which

1. are of the quantity, quality and description required by the contract and which are contained and packaged in the manner required by the contract, Art 35(1) or 2. are fit for the purposes for which goods of the same description would ordinarily be used, Art 35(2b) or 3. possess the qualities of goods which the seller has held out to the buyer as a sample or model, Art 35(2c)

=> Artificial material – defect or not? Is the quality in accordance with the contract, general expectations, the sample, trade usage (Art 35) If not => breach of the seller => buyer can claim for remedies

Scratches – seller’s fault?

Are the goods (with scratches) conforming to the contract? Crucial moment to determine: the time risk passes to the buyer (Art 36) Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller (art 66).

Risk passing

If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes when the goods are handed over to the first carrier for transmission to the buyer (Art 67) => Not breach of the seller

Only if the buyer can prove that

1. the scratches were caused by inadequate packaging (".. in the manner usual for such goods", Art 35.d). or 2. the packages were visibly damaged already at the moment the risk passed (proof: the carrier’s clause in the B/L)

the products are considered defective and the buyer can claim for remedies

Buyer’s remedies in case of the seller’s breach of contract

1. 1 ) repair 2) substitute goods 3) reduce the price or 4) avoid the contract as remedies and 2. damages (Art 45, 46, 48 - 50)

2. Issues: Defect? – Risk passing? FH Joanneum International BusinessLaw CASES Satu Pitkänen CISG/Trade

Defect Are the goods conforming to the contract? Crucial moment to determine: the time risk passes to the buyer (Art 36)

Risk passing > who has the risk of loss of the merchandise If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes - when the goods are handed over to the first carrier for transmission to the buyer (Art 67)

=> the risk of loss was with the buyer => if he can’t prove the goods were defective (lost) before handed over to the first carrier, he can't avoid the contract or demand for other remedies (Art 66).

3. Issue: Risk passing

The merchandise was sold in transit => the risk passes to the buyer from the time of the conclusion of the contract (Art 68).

The oil was contaminated during the voyage but was it contaminated already before the contract was concluded, remains unknown. If buyer claims it was contaminated he must prove it.

Only if at the time of the conclusion of the contract of sale the seller knew or ought to have known about the contamination, the loss or damage is at his risk ( Art 68). If buyer claims this he must prove it.

4. Buyer must examine the goods as soon as is practicable (Art 38) and give notice to the seller specifying the nature of the lack of conformity within a reasonable time after having discovered it, (Art 39.1), within 2 years from receiving the goods at the latest, (Art 39.2)

A buyer is excused from paying the purchase price for goods if the buyer can avoid the contract and, except for the obligation to pay any damages that may be due, the avoidance of a contract releases both parties from their contractual obligations.

Avoidance The buyer may declare the contract avoided if the failure by the seller to perform any of his obligations under the contract … amounts to a fundamental breach of contract (Art. 49.1a) … However, the buyer loses the right to declare the contract avoided unless he does so  in respect of late delivery, within a reasonable time after he has become aware that delivery has been made  in respect of any other breach, within a reasonable time after he knew or ought to have known of the breach (Art 49.2)

Fundamental breach: The CISG expects a buyer to accept deliveries of nonconforming goods [unless they are fundamentally nonconforming] and to invoke remedies other than avoidance (such as reduction of the price and damages) as compensation for the defects (Art. 46).

A breach of contract is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result (Art. 25).

=> The buyer must introduce evidence that (a) describes the exact nature of the defects and (b) shows that the goods cannot be used in any way. If a buyer does not do this, the court will be unable to determine if there was a fundamental breach.

Nachfrist notice: The buyer may declare the contract avoided … in case of non-delivery, if the seller does not deliver the goods within the additional period of time of reasonable length fixed by the buyer … or declares that he will not deliver within the period so fixed (Art. 49.b., Art. 47.1.).

=> no such period was defined by the defendant => she may not avoid the contract on this basis.

In the Shoe Seller’s case The Court of Appeals affirmed the decision in favour of the plaintiff. (Source: Ray August. International Business Law.) FH Joanneum International BusinessLaw CASES Satu Pitkänen CISG/Trade

5. Issue: Delay of delivery

1. Seller’s duty: Seller must deliver the goods on the date fixed by the contract (Art 33.a) > the delivery was late.

2. Buyer’s rights: - require performance, (Art 46.1) - fix an additional period of time of reasonable length for performance. He must wait for that period until he can order the goods from another manufacturer, unless the seller informs that he will not deliver during the additional period. (Art 47.1) - avoid the contract, if the delay was a fundamental breach of the contract or if the seller has not delivered within the additional period of time, (Art 49.a,b), - claim damages (Art 47.2)

6. Issue: Fundamental breach, delivery by instalments If the breach was fundamental, (Art 49.1a), buyer can avoid the contract

Breach of contract in respect of one instalment confers rights with respect to that instalment, (Art 73.1) “A buyer who declares the contract avoided in respect of any delivery may, at the same time declare it avoided in respect of deliveries already made or of future deliveries if, by reason of their interdependence, those deliveries could not be used for the purpose…", (Art 73.3)

7. Issue: Seller’s subcontractor’s delay, anticipatory avoidance

Force majeure Is subcontractor's delay a force majeure? No, unless it occurs because of a force majeure, or unless agreed as such. (79.2)

Anticipatory avoidance Art 72: If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract , the other party may declare the contract avoided

Fundamental breach or a contract => is a delay of 3 weeks a fundamental breach? - The contract terms emphasized the importance of the schedule

1) If yes => buyer may declare the contract avoided and demand for payment of the penalty (Art 72) 2) If not => buyer may demand for payment of the penalty (and claim compensation for exceeding damages) and demand for performance or give an additional period of time for the seller to deliver (Art 46)