|A Portuguese seller and a German buyer concluded a contract for the sale of fabric. The contract contained a choice of law clause in favor of German law. After several deliveries, the buyer refused to pay the full purchase price, arguing that it was entitled to set-off the price against the damages it had suffered by reason of the seller's breach of contract. The seller commenced legal action to obtain payment of the price. It objected to the application of CISG alleging that Portugal was not a Contracting State.
The Court of first instance rejected the seller's claim stating that the buyer had declared a valid set-off with the claims deriving from the seller's breach of contract.
The Court of Appeal confirmed the decision, but for the amount of damages awarded to the buyer.
The Court of Appeal held that the contract was governed by CISG. The Court pointed out that when the parties choose the law a Contracting State (in the case at hand: Germany) as the law governing the contract, CISG is applicable pursuant to Art. 1(1)(b) CISG, even if no express reference is made by the parties to the application of CISG. The Court further noted that the choice of the law of a Contracting State does not in itself amount to an implied exclusion of CISG, which is part of the domestic law of that State (Art. 6 CISG).
With respect to the buyer's claim for damages deriving from a substitute transaction after a delay of the first delivery, the Court held that the buyer was not entitled to the difference between the contract price and the substitute transaction price, because it had not avoided (terminated) the contract before concluding the substitute transaction (Art. 75 CISG). The Court stated that even if a party has committed a breach of contract, the other party is not entitled to conclude a substitute transaction before declaring the contract avoided (terminated) by notice to the other party (Art. 26 CISG), because CISG does not provide an avoidance (termination) of the contract ex lege.
Concerning the substitute transaction for the second delivery, the Court found that the buyer was entitled to the difference between the contract price and the lower price of the substitute transaction (Art. 75 CISG). The Court held that the contract had been avoided (terminated), even without an express notice by the buyer, because the seller's refusal to deliver was express and definite.
The Court rejected the buyer's claim for damages arising out of the fact that the fabrics of a third delivery had to be processed in Germany instead of Turkey due to the delay in delivery. The Court held that the buyer had not proved that the seller foresaw or ought to have foreseen these damages as a possible consequence of the breach of contract at the time of the conclusion of the contract (Art. 74 CISG).
The Court left the question of lack of conformity of the forth delivery unsettled as the buyer had in any case lost its right to rely on the lack of conformity, since it had failed to prove that it had given notice thereof to the seller within a reasonable period of time (Art. 39(1) CISG).
The Court awarded damages pursuant to Art. 74 CISG for the fifth delivery deriving from lost profits of the resale of the fabrics. It stated that the buyer had proved the non-conformity and that it had given timely notice thereof within a reasonable time (Art. 39(1) CISG).