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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

Commercial Court (Handelsgericht) Aargau

5 November 2002 [OR.2001.00029]

Translation [*] Martin F. Koehler [**]

[...]

A. [The background facts]

1. The Plaintiff [seller] is a limited liability cooperation based in the Canton of Aargau. The
object of its business operation is all types advertisement, especially during sports events by
using fixed balloons.

The Defendant [buyer] is an incorporated association based in Wiesbaden, Germany, and the
possessor of the right of commercialization of the German Touring Car Masters (DTM).

2. In June 1999, P. contacted the [seller] as the agent for the [buyer], asking if the [seller]
would be in the position to manufacture inflatable triumphal arches, to be used as advertising
media during car racing events. On 9 June 1999, the [seller] presented a cost estimate. He offered
the manufacturing and labeling of one triumphal arch, the appropriate supercharger as well as
the so-called "service expenditure" for the positioning, maintenance and taking down of one
triumphal arch.

On 6 April 2000, the [buyer] confirmed the order for the manufacturing of three triumphal arches
for the total price of Sf [Swiss francs] 127,157.50. This order confirmation included only the
manufacturing and the labeling of the three arches as well as the appropriate supercharger. In
addition, the [buyer] demanded that a test be carried out on the site of the Hockenheimring, at
which "inter alia, the best possible security of the advertising medium is developed and shown".
This test was realized on 2 May 2000. On Friday, 26 May 2000, the [seller] delivered the three
triumphal arches to the Hockenheimring site, where the [seller] set up the arches and briefed the
employees of one of the companies called in by the [buyer] to position the arches and handle the
supercharger. One triumphal arch was set up above the access road of the pit stop area; the other
arches were set up on the green space next to the racing circuit. On Saturday, 27 May 2000, one
of the arches next to the circuit collapsed. As a result, the race management center insisted that
all arches be removed. In a fax of that same day, the [buyer] complained of the defects that had
occurred. The [buyer] also responded by letter dated 29 May 2000, whereupon on 14 June 2000,
by authorized proxy, the [seller] declared the contract suspended.

B. [The legal proceedings]

1. In a complaint dated 3 May 2001 the [seller] claimed:

"1. The [buyer] should be obliged to pay to the [seller] the amount of Sf 127,157.50 with 5%
interest as of 20 June 2000.

2. The follow-up and compensation cost should be at expense of the [buyer]."

2. In his answer to the [seller] dated 19 December 2001, the [buyer] applied for dismissal of
the [seller]'s complaint.

[...]

CONSIDERATIONS

1. a) As the [buyer] is based in Wiesbaden, Germany, [and the seller in Switzerland] the facts
of the case are international. The competence of the court complies with the Lugano Convention
on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters of 16
September 1988, which was ratified by both Switzerland and Germany. The place of fulfillment
is to be determined depending on the substantive law that is applicable according to the rules of
conflict of law (EuGHE 1976, 1473 "Tessili" = NJW 1977, 491), even if the UN Sales Law (United
Nations Convention on Contracts for the International Sale of Goods; CISG) is applicable. This is
true in the present case, as set forth below. As the parties did not stipulate a place of delivery or
payment of the purchase price, according to Art. 57(1)(a) CISG the purchase price needs to be
paid at the place of the seller's establishment. The place of fulfillment in terms of Art. 5 No. 1 of
the Lugano Convention is the registered office of the [seller]. This means that the Commercial
Court of the Canton of Aargau has jurisdiction.

b) The competence of the court results from 404(1)(1) in conjunction with 405 ZPO [*].

2. Switzerland and Germany are both Contracting States of the United Nations
Convention on Contracts for the International Sale of Goods of 11 April 1980 (CISG). The
provisions of the CISG apply to contracts for the sale of goods between parties whose
places of business are in different Contracting States (Art. 1(1)(a) CISG). Contracts for the
supply of goods to be manufactured or produced are on a par with sales contracts. (Art.
3(1) CISG). Such a contract for the supply of goods has been concluded by the parties, as
the manufacture of three inflatable triumphal arches is the primary subject of the
contract. The contractual relationship is therefore subject to the CISG.

3. The [buyer] asserts the defectiveness of the work delivery. The [seller] denies this;
[seller] alleges perfect performance of the contract.

a) According to Art. 35(1) CISG, the seller must deliver goods of the quantity, quality and
description required by the contract. Unless the parties have agreed otherwise, the goods
provided for a certain purpose are only considered in conformity to the contract if they
are suitable for the certain purpose of which the seller has been made aware at the
conclusion of the contract explicitly or otherwise, except where the circumstances show
that the buyer did not rely, or that it was unreasonable for the buyer to rely, on the seller's
skill and judgment (Art. 35(2)(b) CISG).
b) In the case under consideration, it is clear that the purpose of the use of the goods to
be manufactured or produced was known to the [seller]; namely, use as advertising media
next to and across the racing track. As safety is of vital importance in this enterprise, a
test was carried out at the site of the Hockenheimring on 2 May 2002. As a result, it
became evident that that additional safety measures needed to be taken; it was generally
agreed to install a safety wire in order to avoid a breakdown of the arch that was to be
set up across the racing track in case of a failure of the supercharger, as well as to raise
the so-called site stamps in order to prevent sagging. The question of "statics",
respectively, "static calculation", remained open, in fact -- as far as the cost absorption as
well as the realization by a German specialist on-site or a Swiss specialist was concerned.
Moreover, it is not contested that the [seller] requested an offer for the optimal fixation
of the arches to the ground at the S. consortium in Herisau of 5 April 2000, which the
[seller] submitted to the [buyer] after the test of 2 May 2000. The additional costs
according to that offer totaled Sf 23,798.80 per arch. The [buyer] rejected this additional
charge of more than the half of what was agreed to as the price for a single arch.

Yet, all these circumstances do not have any impact on the purpose of use of the arches.
In spite of the question that remains open in connection with a static calculation, the
subject matter of the contract remains the supply of three triumph arches, which were
supposed to be used as advertising medium next to and across the racing track. The
rejection by the [buyer] of additional costs for an optimal fix does not entail either that
after the conclusion of the contract the [buyer] did not trust or must not have trusted the
[seller]'s experience as a specialist for such advertising media. In fact, the [buyer] might
still have acted on the assumption that the [seller] would carry the analytic expertise
necessary for the manufacturing and supply of arches suitable for the agreed purpose and
that the [seller] would deliver arches suitable for the target use. Otherwise, the [seller]
would have had to point out his missing expertise and to explicitly express his reservation
concerning the applicability of the arches for the agreed purpose. It is neither asserted
nor proved that the [seller] did so.

c) The D2-arch, delivered by the [seller] and set up on 26 May 2002 on a lawn next to the
Hockenheimring collapsed on the morning of 27 May 2002 at the connection of the
inflatable arch and the so-called "stamp". This occurred after the race (training and
preliminary heat) had started. The arch lost air and drifted with the wind towards the
racing track. The Arcor-arch, which was mounted above the access road of the pit started
to vibrate because of the racing cars going through with a reduced speed of 60 km/h. As
a result, the concrete elements used for the fixation of the Arcor-arch began to falter. For
this reason, the race organizers demanded that all three arches be removed. Thus both a
quality or manufacturing flaw as well as an insufficient stability of the arch set up above
the pit access occurred. The suitability of all three arches for the agreed target use - next
to and above the racing track - was not given at that point of time. Consequently, it was
a case of non-compliance with the contract (defects), for which the [seller] was liable
according to Art. 35(2)(b) in connection with Art. 36(1) CISG.

4. a) In case of a seller's non-compliance with a contract or CISG obligation, in principal

the following five legal remedies (defects rights) are at the buyer's disposal:

- Right to performance (Art. 46(1) CISG);

- Right to cure (Art. 48 CISG);
- Right to avoid the contract because of a fundamental breach of contract (Art.
49(1)(a) CISG);
- Right of price reduction (Art. 50 sentence 1 CISG);
- Right to damages (Art. 45(1)(b) in connection with Arts. 74-77 CISG).

In the present case, the [buyer] declared the contract's avoidance, due to the existence
of a fundamental breach of contract, analogously already in his notification of defects
dated 27 May 2000 and unmistakably, in the letter of his legal representative dated 14
June 2000. As, according to Art. 48(1) CISG, the seller "subject to Art. 49" may remedy any
failure even after the date for delivery, the question arises concerning the relationship
between the seller's right to cure (according to Art. 48(1) CISG) and the buyer's right to
avoid the contract (according to Art. 49(1)(a) CISG). About this the following may be
stated.
b) aa) The term fundamental breach of contract according to Art. 49(1)(a) CISG is defined
in Art. 25 CISG. According to this Article, the condition for a fundamental breach of
contract is an especially weighty impairment of the buyer's interest in the performance.
Yet, besides the objective weight or importance of a defect, it is decisive of the
substantiality of a breach of contract, whether the defect can be removed by subsequent
repair or substitute delivery. The UN Sales Law proceeds from the fundamental
precedence of preservation of the contract, even in case of an objective fundamental
defect. When in doubt, the contract is to be maintained even in case of fundamental
defects, and an immediate contract avoidance should stay exceptional. Because, as long
as and so far as (even) a fundamental defect can still be removed by remedy or
replacement, the fulfillment of the contract by the seller is still possible and the buyer's
essential interest in the performance is not yet definitively at risk. According to doctrine
as well as jurisdiction of the UN Sales Law, an objective fundamental defect does not
mean a fundamental breach of contract when the defect is removable and the seller
agrees to remedy this defect without creating unreasonable delay or burden on the
buyer. That the buyer is obliged to accept a remedy (subsequent cure of the defect)
offered by the seller results from Art. 48(2) CISG. According to this provision, when the
seller notifies the buyer of his readiness for performance, the buyer may not within a
reasonable period of time "resort to any remedy which is inconsistence with performance
by the seller". For this reason, the buyer does not have the right to avoid the contract
even in case of an objective fundamental defect as long as and as far as the seller comes
up with a remedy (subsequent cure of the defect) and such is still possible (see judgment
of the Bundesgericht [Swiss Supreme Court] of 28 October 1998, 4C.197/1998 Erw. 2b
[available at <http://cisgw3.law.pace.edu/cases/9810218s1.html>]; Oberlandesgericht
[Appellate Court] Koblenz [Germany], judgment of 31 January 1997, 2 U 31/96 = CISG
Online 256 [available at <http://cisgw3.law.pace.edu/cases/970131g1.html>];
Handelsgericht Zürich SZIER 1996, 51; Schlechtriem, Internationales UN-Kaufrecht,
Tübingen 1996, page 99/100 side no. 180; Schlechtriem/Huber, Kommentar zum
einheitlichen UN-Kaufrecht, 3.A., München 2000, note 12 to Art. 49, N 1, 20, 23 and 24 to
Art. 48; Honsell/Schnyder/Straub, Kommentar zum UN-Kaufrecht, Berlin 1997, note 35 to
Art. 48 and note 23 to Art. 49; Achilles, Kommentar zum UN-Kaufrechtsübereinkommen
(CISG), Neuwied 2000, note 4 et sqq. to Art. 48).
c) In the present case, both the quality problem or manufacturing defect (tearing out of
the connection of the D2-arch with the "stamp") which occurred on 27 May 2000, and the
lacking stability of the Arcor-Arch could have been remedied. And it is certain that the
[seller] reacted immediately to the notice of defects dated 27 May 2000 and made
different proposals ("as I see it") in his writing dated 29 May 2000, through which the
"goal jointly", i.e., the subsequent performance, could be reached. The [buyer] reacted to
the [seller]’s readiness to remedy on 14 June 2000 by declaring the contract avoided.
[Buyer] was not entitled to do so according to the explained priority of the entitlement to
subsequent cure or remedy over the entitlement of contract avoidance that forms the
basis of the UN Sales Law, even in the case of an objective fundamental defect.
d) aa) According to UN Sales Law doctrine, a buyer’s right of immediate contract
avoidance is conceded by way of exception, without having to wait for the seller’s
readiness to remedy or the remedy itself. Yet, these exceptional facts of the case require
that a remedy not be possible, is refused by the seller, or is not reasonable for the buyer.
An entitlement to immediate contract avoidance is conceded by Schlechtriem/Huber (op.
cit., note 12 to Art. 49) if:
- The date of delivery has a fundamental importance (usual practice in the trade
or similar cases);
- The remedy of the defect by the seller is not reasonable from an objective
point of view; for example because of the uncertainty about the refund of the
expenses in the sense of Art. 48(1) CISG;
- It is not reasonable for the buyer to agree with the remedy of the defect; for
example, because it is obvious that the seller is not capable of this;
- The seller refuses to remedy the defect seriously and finally.
bb) The parties did not agree upon a date of delivery in the sense of a fixed trade usage
that would exclude a subsequent performance. The arches were supposed to be used as
advertising media in several races during the entire season. If a remedy would have been
carried out after the first use on 27 May 2003 within a useful period of time, the arches
could have been used during further races. Therefore, the inadequate performance of the
agreed delivery of the arches for the car racing in Hockenheim on the 27/28 May 2000
did by no means exclude the subsequent performance during the following races during
the 2000 season. It was not a case of complete impossibility, but only a partial
impossibility. As far as the still possible part of the owed performance is concerned, the
[seller] can rely on his entitlement to remedy. As [seller] has – as stated (see 4c, supra) –
at least analogously declared his readiness to remedy, the [buyer] has to bear the onus of
assertion and proof concerning the existence of an exceptional fact of the case. But a
corresponding state of affairs, which in the case of a fixed usage could justify the priority
of [buyer]’s right to avoid the contract over [seller]’s entitlement to remedy the defect,
was not substantiated or proven in the proceedings.

5. a) For this reason, the [buyer] was not able to declare the contract avoided in a
legally binding way in his writing of 14 June 2000. In this case, the legal consequences
depend on the reaction of the seller. Only if the seller consents to the avoidance of the
contract will the contract get avoided. If, however, the seller disagrees with the avoidance
of the contract or does not declare the contract avoided himself, the contract
consequently will continue (Schlechtriem/Huber, op. cit., note 66 et seq. to Art. 49).

In this proceeding, the [seller] asks the [buyer] for performance: payment of the purchase
price. Thus, [seller] holds on to the continued existence of the contract, and consequently
the primary duty of the [buyer]: to pay the [seller] for the goods. Based on the contract
concluded by the parties and according to Art. 53 CISG, the [buyer] is bound to pay the
purchase price and to receive the goods. The fact, that – with the exception of the right
to avoid the contract – the [buyer] is entitled to certain rights in the event of defects, does
not alter the situation.

b) The [seller] submitted claims for damages, but he did not substantiate them nor did he
reserve the assertion of these claims "in further proceedings". Claims against the [buyer]
for damages, as defined by Art. 45(2)(b) in connection with Art. 74-77 CISG, consequently
are not to be judged in the present lawsuit.

6. a) The purchase price must be paid according to Art. 58(1) and (3) in connection with
Art. 59 CISG without specific summons or adherence to formalities, as soon as the seller
has made the goods available to the buyer and the buyer has had the opportunity to
examine the goods. In the present case, the maturity of the charge would have arisen on
26 May 2000, when the three arches were delivered and ready to be examined by the
[buyer]. However, the [seller] billed the purchase price of Sf 127,157.20 on 31 May 2000
on terms "20 days netto" (KB 10), which must be seen as a deferment of payment and
reprieve of the maturity. The payment claim therefore did not mature until 20 June 2000.

b) If the buyer fails to pay the purchase price when due, the seller is entitled to interest
on it "without prejudice to any claim for damages recoverable under Art. 74." (Art. 78
CISG). The amount of interest is not laid down in the UN Sales Law. It is controversial,
whether one must aim for automous contract gap-filling and a uniform solution or if
recourse must be made to national law. In regard to national law, the mainly
recommended recourse, it is again uncertain how the determination of that law within
the scope of the conflicts of law is supposed to take place (Schlechtriem/Bacher, op. cit.,
note 27 and 32 to art. 78 CISG). The doctrine convincingly postulates that to determine
the relevant national law, it is the connection to the currency that is decisive for the
primary claim. (Schlechtriem/Bacher, id., note 33 to Art. 78 CISG). Decisive in this
connection is the rule of the amount of the interest on arrears that is reached by the
concerned system of laws (Bacher, id., note 34 to Art. 78 CISG).
c) In the present case, the primary claim is owed in Swiss francs. Thus, Swiss law is the
applicable law for the determination of the amount of interest owed on arrears. Since the
[seller] did not prove or demand a discount rate that would exceed the usual 5% percent
(Art. 194 para. 3 OR [*]), the statutory interest on arrears of 5% is owed (Art. 104 para. 1
OR).
d) In the CISG’s sphere of application, even the default of payment on the date of maturity
creates a dereliction of duty, so that the need of payment of interest sets in immediately
with the maturity (Schlechtriem, op. cit., note 319). As the maturity started off on 20 June
2000 (see 6a, supra), the [seller] is entitled to interest to the amount of 5% from this date
on.

7. Proceeding on that assumption, the [buyer] is fully liable to pay the cost ( 112
para.1 ZPO [*]).

JUDGMENT

Accordingly:

1. Approving the statement of claim, the [buyer] is obliged to pay to the

[seller] Sf 127,157.50 including 5% interest since 20 June 2000.
2. The cost of the action, consisting of a court charge of Sf 7,600.-, office charge and
expenses of Sf 582.-, in total Sf 8,182.-, will be imposed on the [buyer].
3. The [buyer] is obliged to compensate to the [seller] the party’s costs in the
judicially laid down amount of Sf 20,695.- (including VAT).
4. Delivery service of this judgment to the [seller]’s legal representative (in duplicate;
with credit note) and to the [buyer]’s legal representative (in duplicate; with
account).

Aargau, 5 November 2002

Commercial Court of the Canton of Aargau

The President:
The Clerk of the Court: