Cancellation of international contracts of sale due to shortages

BGH, verdict from 24 October 2014 – VIII ZR 394/12 

Along with the following case:
The defendant, located in Germany, mass produced plastic automotive parts. They required purpose-built tools which they had made by a manufacturer in Hungary. Although the tools were flawed and the defendant gave notice of the defects, they nevertheless accepted the tools, corrected the defects themselves and implemented the tools in their production processes. The claimant requested payment of the purchase price from numerous outstanding supply contracts. The defendant, on the other hand, was of the opinion that the claims for remuneration were no longer applicable, as the defects among other things had declared the "withdrawal" from the contract. 

In this case, the contractual parties had branches in different states, both of which subject to the UN CISG. The UN CISG not only applies to contracts of sale, but also to contracts pertaining to the supply of goods to be manufactured. Therefore, supply contracts are to be treated in the same way as contracts of sale, if the supplier manufactures and delivers the goods in accordance with the customer's specifications.

In accordance with the UN CISG – unlike solely national German law – the purchaser is only entitled to cancel the contract in the case of a fundamental breach of contract (Article 25 I CISG).

A breach of contract committed by one of the parties is fundamental is it results in such detriment to the other party as substantially to deprive them of what they were entitled to expect under the contract. 

The defective goods must be largely of no use to the purchaser; if they are able use them, albeit to a limited extent, there is no fundamental breach of contract according to the UN CISG.

If the purchaser is able to otherwise process the goods without excessive effort, such a defect does not strictly constitute a fundamental breach of contract. It is therefore likewise not deemed a fundamental breach of contract when selling the goods through regular business transactions, where applicable at a reduced price. 

If the purchaser uses the defective goods – which are not intended for resale – for the intended purpose for a prolonged period, there is no fundamental breach of contract according to the UN CISG. According to the BGH, such behaviour on the part of the purchaser demonstrates that the goods are indeed of interest to him.

In its verdict, the BGH demonstrates that rescission of the contract is only available to the purchaser as a last resort. 

Agreements made between the parties are thereby to be given priority. If the contractual parties have not made any agreements, it must be observed that cancellation of the contract is the last resort, and other legal remedies such as mitigation or compensation are preferred. 

This also applies for significant defects, unsuccessful repair attempts, time pressure or if the purchaser is convinced that the defaulting contractor will be unable to correct the defects in time.

Verdict printed in NJW [Legal Weekly Magazine] 12/2015, page 867 ff.