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Date:   12 April 2002
Court:   Turku Court of Appeal
Local case reference:   n/a
CISG Nordic ID:   020412FI
Country of decision:   Finland
Buyer's country:   Germany
Seller's country:   Finland
Goods involved:   Forestry Equipment
Case history:   1st instance, District Court of Turku (not available)
Original language:   Finnish
Provisions cited:   CISG articles 35, 45, 78, 92
Original court document:   n/a
Rapporteur:   Thomas Neumann
Case citations:   n/a

 

Commentary

DiMatteo, Larry A, et al.: The Interpretive Turn in International Sales Law: An Analysis of Fifteen Years of CISG Jurisprudence Northwestern Journal of International Law & Business (Winter 2004) 299-440 at 316-317 and 326

Mazzotta, Francesco G: CISG Art. 78: Endless disagreement among commentators, much less among courts (2004)

Schlechtriem & Schwenzer ed., Commentary on UN Convention on International Sale of Goods, 2d (English) ed., Oxford University Press, Art. 49 para. 29 Art. 78 paras. 17, 27.

 

Abstract

An abstract is also available at Unilex.

 

Translated text

by Vanto, Jarno, with permission from Pace Law School

 

Court of Appeal (Hovioikeus) of Turku

12 April 2002

A. Case history 
B. Statements of claim and reply 
1. [Buyer]'s claim 
2. Grounds of [buyer]'s claim 
3. [Seller]'s reply 
4. Grounds of [seller]'s reply 
5. [Buyer]'s request for sequestration order 
C. Decision of the Court of First Instance 
1. Bias of witnesses 
2. Ruling on the main issue

a) Applicable law
b) Contractual relationship
c) Binding effect of warranty
d) Delivery non-conformities
e) Conclusions about the deliveries
f) Lost profits
g) Unreasonableness of the contracts and conciliation
h) Conclusions on damages
i) Avoidance
j) Outstanding invoices
k) Legal expenses 
D. Judgment of the Court of Appeal 
1. Damages and avoidance 
2. Return of unfounded benefit derived 
3. Legal expenses 
4. Witness expenses

 

A. Case history

UTC GmbH [buyer] is a German company specializing in selling, designing and manufacturing of forestry equipment. S P Ky [seller] is a Finnish company specializing in manufacturing forestry equipment.

[Buyer] and [seller] had a business relationship since 1994. [Seller] has sold various components to [buyer] to be attached to [buyer's] forestry vehicles. Such components include, but are not limited to, harvesting components, such as harvesting heads, computerized control units, hydraulic control valves and lifts. Additionally, spare parts have been sold for such components.

Previously, [seller] has delivered entire forestry machines to I GmbH, an affiliate of [buyer].

The price and delivery terms of [seller] have been provided to [buyer] in connection with each delivery, of which the first took place in 1994. Also the guarantee terms of [seller] have been provided to [buyer] at the same time.

The business relationship between [buyer] and [seller] came to an end after the year 1996.

B. Statements of claim and reply

1. [Buyer]'s claim

[Buyer] has demanded that:

  1. [Seller] and [seller]'s owner be ordered jointly and severally to pay to [buyer] damages in the sum of DM [Deutsche Mark] 314,995.45 with interest on sums in arrears from 17 February 1997.
  2. The sale by [seller] to [buyer] of a Pika 600 harvester head, delivered on 17 October 1994, be declared avoided and [seller] be ordered to refund to [buyer] the sale price of FM [Finnish Mark] 189,382.50 with interest on sums in arrears.
  3. [Seller] and [seller]'s owner be ordered jointly and severally to pay to [buyer] an outstanding invoice of DM 10,118.42 with interest on sums in arrears in the following manner:

    - to principal amount of DM 1,500.00 from 9 July 1995; 
    - to principal amount of DM 3,000.00 from 2 September 1995; 
    - to principal amount of DM 1,394.67 from 30 September 1995; 
    - to principal amount of DM 4,223.75 from 30 September 1995.

  4. [Seller] and its owner be ordered to pay damages for losses caused to [buyer] in the amount of DM 1,000,000.00 with interest on arrears from 13 February 1998.
  5. [Seller] and its owner be ordered jointly and severally to pay to [buyer] a sum of FM 3,200.00, resulting from a measure taken by [buyer] to secure payment from the [seller].
  6. [Seller] and its owner be ordered jointly and separately to pay the legal fees of [buyer] in the amount of FM 562,202.71 plus expenses resulting from producing evidence and the expenses of witness VS, in the amount of FM 157,490.97 with interest accruing one month after the delivery of judgment.

2. Grounds of [buyer]'s claim

[Buyer] has bought from [seller] forestry equipment, which was subsequently attached to [buyer]'s forestry vehicles with simple assembly mechanisms. Such assembled entities were further sold to [buyer]'s own clients.

The forestry equipment sold by [seller] to [buyer] has been continuously defective. [Buyer] consistently gave notice to [seller] of the defects when they appeared and [buyer] made efforts to cooperate with [seller] for the purpose of fixing the said defects. [Seller] was unwilling to cooperate and finally the defects just kept increasing, leading to an unbearable situation on [buyer]'s side.

[Seller] has consistently denied its responsibility for the defects. According to [seller], the defects have resulted from the assembly work carried out by [buyer] or faulty use or care of the forestry equipment. In cases where [seller] has taken upon itself to act on the notice, it has asserted willingness to apply its warranty terms according to which [seller] would give a new piece of equipment to replace the defective one. The said spare parts have been as defective as the already faulty ones.

Due to several defects in the forestry equipment delivered by [seller], [buyer] has lost seventeen of its clients. In addition to losing its clients, [buyer] has lost significant sums of money due to servicing the machines and providing spare parts. Likewise, [buyer] has lost the opportunity to sell more forestry equipment to those regions where the lost clients operate.

3. [Seller]'s reply

[Seller] and [seller]'s owner have responded to [buyer]'s claims and have demanded that:

  1. The claims of [buyer] be dismissed in their entirety; and
  2. [Buyer] be ordered to pay the legal fees of [seller] in the amount of FM 385,250.59; the legal fees of the [seller]'s owner in the amount ofFM 47,200.00; and expenses resulting from providing evidence in the amount of FM 52,016.40 with interest.

4. Grounds of [seller]'s reply

[Seller] denies the [buyer]'s allegation that [seller] had delivered defective forestry equipment to [buyer]. [Seller] alleges that the possible defects in the equipment have resulted from design or installation mistakes on [buyer]'s side, the use and adjustment of the equipment against the guidelines of the manual, and neglect of service.

[Seller] denies liability based on its warranty and the limitations of liability contained in the said warranty. An additional reason for non-liability is that [buyer] has not specifically given notice to [seller], as defined in [seller]'s warranty terms, in writing and within six months after having detected the defect.

Additionally, [seller] denies the outstanding invoice claims defined in section 3 of [buyer]'s statement of claim on the basis of the fact that the said invoices have been set-off; consequently there are no more outstanding invoices between the parties.

5. [Buyer]'s request for sequestration order

In addition to the [buyer]'s above-mentioned claims, [buyer] has demanded that the Court of First Instance place property of [seller] under sequestration in the value of DM 450,000.00 to secure the above-mentioned claims.

[Seller] demanded that such claim be denied.

The Court of First Instance issued a decision on 23 December 1997 stating that [seller]'s property shall be placed under sequestration in order to secure [buyer]'s claim of DM 450,000.00.

The said sequestration order was never executed because [buyer] did not place a security required by the decision or commanded by the executive authority.

C. Decision of the Court of First Instance

1. Bias of witnesses

After hearing witnesses GA and IK, called by [buyer], [seller] and the [seller]'s owner stated that GA and IK should not have been admitted as witnesses because they own some shares in the [buyer]. Because of the fact that [buyer] is a German GmbH - i.e., limited liability company - and comparable to a Finnish Ky, also a limited liability company - it seems that GA and IK are biased and as such they could not act in the capacity of witness. However, [seller] and [seller]'s owner have not produced any evidence as to the content of German law onGmbH companies.

According to the Finnish law of Civil Procedure - Section 17, para. 18 - everyone except the parties to the case can be heard as witnesses. A conventional way of interpreting this statute has been that what constitutes a "party" includes those who, according to law or their status, have the right to represent the party at the time of the hearing. Consequently, membership on the board of a Finnish company constitutes bias, but mere ownership of shares does not.

 

Due to the fact that no evidence has been presented to the Court of First Instance as to the content of the German law on GmbHcompanies, the Court of First Instance has referred to the work produced and the conclusions drawn by the Preparatory Committee on the Finnish law of Corporations. Considering the nature of the statement of [seller] and its owner, the said conclusion can be regarded as current and sufficient clarification of the law of a foreign State, as required by the Finnish Law of Procedure.

According to the said conclusion, a GmbH (Gesellschaft mit bescränkter Haftung) is a limited liability company which is regulated under the law of limited liability companies (GmbH Gesetz 1892). GmbH as a form of incorporation is intended for such companies that have a relatively small number of shareholders, provided that they do not intend to trade with the shares of the company. Such a corporation is represented by one or more executive officers. Such a corporation has no Board, but corporations with more than 500 employees must have a Board of Trustees. The Board of Trustees has no right to participate in the daily operations of the company. The shareholders use their decision-making powers at the company meetings. After the registration, the liability of the shareholders is basically limited to their capital input.

According to the conclusion, a GmbH is represented by one or more executives, but not by the shareholders. Therefore, a shareholder cannot assume the meaning of a "party"; consequently, a shareholder can be heard as a witness in a case dealing with a company.

The statement of [seller] and [seller]'s owner is dismissed as groundless.

2. Ruling on the main issue

a) Applicable law

In this contractual dispute based on a sale of goods and concerning damages, avoidance and demand of payment, the seller has its place of business in Finland and the buyer in Germany.

Finland and Germany have ratified the Vienna Convention of 11 April 1980, namely the Convention for the International Sale of Goods (CISG).

Because Finland and Germany are Contracting States as defined in the Convention, this contractual relationship currently in dispute falls within the scope of application of the Convention, with the exception of Part II of the Convention dealing with formation of the contract to which Finland has submitted a reservation (Art. 92 CISG).

Additionally, CISG is not applicable in terms of evaluating the reasonableness of the contract or the interest rate, because it has no article dealing with enhancing the reasonableness of the contract as does Finnish law, or articles to evaluate the interest rate except article 78.

According to the section 4 of the Finnish law defining the applicable law in international sale of goods, the law of the seller's place of business applies, unless the parties to the contract have agreed on the applicable law. According to section 6, a foreign law that contravenes the principles of Finnish law is not to be applied by the Finnish Courts.

As a consequence of the fact that the parties have not agreed on the applicable law, it is decided that, according to the above mentioned principles, when evaluating the conclusion of the contract, its fairness, possible mediation and the interest rate, Finnish law is applicable.

b) Contractual relationship

From 1994 until fall of 1996, [seller] delivered harvester heads, control computers, electronic systems, hydraulic control valves and lifts to be attached to forestry vehicles. Additionally, spare parts have been delivered. Already before this - since the end of the 1980's - [seller] had delivered assembled forestry equipment to I GmbH, an associate of [buyer]. Both I F GmbH and [buyer] are owned and operated by Mr. P van S.

The deliveries were based on an order concerning a single delivery and a confirmation of that order. The basis for these orders was the price list presented to [buyer] annually and the terms of warranty attached to the list. The warranty terms were also often attached to the user manuals sent with the deliveries.

Witness TS, who had acted as [seller]'s chief of marketing from the year 1988 until 1998, had negotiated all of the contracts relating to international sales, also the contracts now in dispute. The warranty terms had continuously been of the same content and they had been the same even before TS's arrival at [seller], during the sales to I.

P. van S., who had negotiated the contracts, had been well aware of the warranty terms. The change in their content, such as extending the warranty period and the compensation of work done within the context of repair under warranty, had been negotiated many times over. Also, the [buyer] has admitted that the warranty terms have been negotiated many times. For example, in connection with the sale of equipment to Mr. S.M. there had been negotiations over the extension of the hours of usage under the warranty.

According to the Finnish law on contracts, the parties to a sale of goods have an extensive freedom of contract. The Finnish law on sales concerning the liability for non-conformity of goods renders it subject to contractual freedom. Between businesses, such as [buyer] and [seller], this contractual freedom has been emphasized. Consequently, standard terms become part of the contract if they are contained in an accepted offer. The same rule applies also in Germany.

It is undeniable that [seller] has specifically demanded in the negotiations that the warranty terms become part of the contract. [Buyer] has not shown that it had not accepted the warranty terms becoming a part of the contract. In connection with breakage of the equipment, [buyer] has made several warranty claims to [seller] and has not, in that context or another, given notice about the warranty clause or its content. Therefore, the terms of the warranty have become part of the delivery contracts between [buyer] and [seller]. This also causes the binding effect on the buyer in relation to the warranty.

c) Binding effect of the warranty

In its warranty clause, [seller] has given a guarantee of operational quality with the maximum extent of six months from the delivery or 1,000 hours of operation. Based on the warranty, [seller] has committed to replace the spare parts it has manufactured and the subcontractor manufactured parts, the latter being subject to limitations in the subcontractor's warranty. The warranty has never applied to normal wear-and-tear parts and faults caused by wear and tear.

In the warranty, [seller] has limited its liability in a manner that work, travel, freight, lay day or other indirect expenses are not to be compensated under the warranty. The prerequisites for obtaining the warranty compensation are that the damage has resulted from operating the machinery in normal use environment, obeying the use and care instructions, and using the original spare parts in service and repair.

Furthermore, it has been required that the warranty repair be made by the manufacturer or a repairer approved by the manufacturer. If the seller fails to perform, the buyer has, according to Article 45 of the CISG, the right to demand performance, price reduction, avoidance or damages. The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies.

In its warranty, [seller] has limited its liability to the limited damages. On the other hand, the warranty does not exclude other forms of judicial protection, such as avoidance of the contract.

According to the Finnish contract law and the CISG, the parties are free to agree also on the content of the warranty and its effect on the liability for non-conformity. The content of the warranty clause and its binding effect on the buyer result in circumstances that where [seller] repairs the defect correctly, [buyer] has no claim for damages unless the damage resulted from or where the defect resulted from willful or harshly negligent action on [seller]'s side. However, other forms of judicial protection have not been limited.

The relationship between the right to repair and the right to declare the contract avoided is problematic. The goods under this contract are sizable machines intended for heavy use and they wear out faster than usual. Therefore the warranty terms are to be applied in a manner that places the primary emphasis on the seller's right to repair. If the seller does not employ that right or it causes the buyer unreasonable nuisance or expenses, the buyer alternatively has the right to avoid the contract based on fundamental breach.

[Buyer] has alleged that the warranty clause has to be interpreted in a way that the terms relating to limitation of liability would assume a limited interpretation of only being applied to manufacture defects; thus, they would not concern design or structural defects.

The warranty terms of [seller] state:

"The seller will commit, in a manner stated in these terms, to repair defects either resulting from raw materials or manufacturing in the equipment delivered by the seller which have been acknowledged and accepted by the seller."

[Seller] has stated that it has always interpreted the warranty terms in such a way that manufacturing consists both the machine-tooling and the design. Witness S has confirmed this in his statement.

[Buyer] has demanded and received a significant amount of compensation under the warranty from [seller]. In connection with these claims, [buyer] has not specified the defects that it is now calling design and construction defects. However, for example, the Pika 33 valves and crane poles which have been subject to many warranty compensation decisions, the sums have included compensation for the alleged design and construction defect. Consequently, in its compensation claims, [buyer] has interpreted the contractual terms in a manner similar to that of the [seller].

The words used in the warranty terms, namely "spare parts produced by the manufacturer" and "factory defects" support the interpretation brought forward by [seller].

Based on what has been mentioned above, the Court of First Instance is of the opinion that the [seller]'s interpretation, the previous practice of [buyer], and word-for-word interpretation of the warranty terms support the interpretation that factory defects comprise both defects caused by machine tooling and design and, in connection with these, structural defects.

[Buyer] has also alleged that the warranty terms have been severe and surprising.

Witness MK, who has worked for the Finnish Steel Producers Union and the Finnish Foreign Trade Association, has been dealing a long time with issues such as drafting contracts for international sales of goods. According to his opinion, the terms used by [seller] are conventional when compared to Finnish and German established practices. Only the warranty period is a little short, since the general trend has been towards longer warranty periods.

[Buyer]'s own warranty terms, which have been applicable also in relation to the equipment delivered by [seller], are similar in content to those of the [seller] in terms of their prerequisites and limitation of liability. The warranty period in [buyer]'s own terms has been either 1,000 hours of operation or one year.

When considering the severity of the warranty terms, it has to be considered that when [seller] delivers equipment to [buyer], [seller] cannot be in possession of detailed knowledge of structure or adjustment solutions employed by [buyer] or the fields of operation or the circumstances in those operations that would possibly fall under the warranty.

Not even when [seller] has knowledge of [buyer]'s client, is the [seller] able to estimate the limits of its liability in a reliable manner. Additionally, the equipment and machines in question are fairly complex, which is a further indication for a need to limit the liability.

The warranty period has been fairly short, as stated by the witness. When evaluating the significance of this, one has to take into consideration the typical use of forestry equipment. According to witness LR, when calculating the operating time of forestry equipment, the assumption is that the use will consist of 16 hours/day in two shifts.

Witness IS has stated that he has bought a Pika forestry machine with his partner from [seller] in 1993. They had used the machine in two shifts for 24h/day. It is typical in the forestry equipment industry, due to many different reasons such as financing of the equipment and felling contracts, that forestry equipment contractors aim at using the equipment up to their maximum capacity as long as this is economically viable.

In the light of the examples mentioned above, it is already apparent, that the 1,000 operating hours will be used up before the six month period has ended. As such, extensions of that period would not bear any significance.

Taking into consideration what has been said above about the content of both [seller]'s and [buyer]'s own contractual practices and the content of their warranty terms, the general international contractual jurisprudence, warranty terms and the negotiation between [buyer] and [seller], it has to be stated that [seller]'s warranty terms and the limitation of liability contained therein cannot be regarded either harsh or surprising from the point of view of the contracting parties.

The warranty terms of [seller] also contain a limitation period for warranty claims. According to it, a warranty claim will be processed only if notification is made in writing and delivered to [seller] in case of an occurrence. A warranty claim that has not reached the seller within one-month after the date of the occurrence is outdated. Furthermore, it is required that the damaged parts must be delivered to the manufacturer or his representative together with the claim.

It has been clarified during the evidentiary hearings that [buyer] has not conformed to these requirements when presenting claims, despite many requests by [seller]. [Buyer] had not delivered the broken parts in connection with the warranty claims to [seller] before May 1995, when fifteen valve blocks had been delivered. Although [buyer]'s actions were inconsistent with the requirements, [buyer] has been compensated in the amount of FM 425,575.00 for broken parts.

Consequently, because [seller] has to a large extent accepted [buyer]'s dealing with the matter, it has to be considered that [seller] cannot draw on the limitation period in its warranty terms for its defense. Therefore, [buyer] is not bound by the limitation period but instead [buyer] has the duty laid down in the CISG, to notify the other party about the non-conformity as soon as possible. Additionally, [buyer] has the right to submit the warranty claim within a reasonable period of time.

d) Delivery non-conformities

Witnesses VS, DE, GS, GA and IK have stated that forestry machines in which [buyer] had installed equipment provided by [seller], such as control ventilation, crane and harvester head, had had a lot of breakdowns. In particular, the equipment provided by [seller] had been subject to breakdowns.

According to Article 35 of the CISG, the seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract (Art. 35(1) CISG). The goods should be fit for the purposes for which goods of the same description would ordinarily be used and they also should be fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, unless the parties have agreed otherwise (Art. 35(2) CISG).

When estimating whether the damage claims based on the breakdowns fall within the scheme of liability of [seller], either based on the warranty or otherwise, one has to consider the nature of the deliveries. [Buyer] has emphasized that it has bought forestry machine parts from [seller] entirely assembled. The parts have then been attached to the forestry vehicle manufactured by [buyer]. [Seller], in turn, has emphasized that it has delivered machine parts that have passed the initial testing and the compatibility of the parts with [buyer]'s vehicles has to be taken into consideration when designing, manufacturing and adjusting the parts.

Based on the statements made by [seller]'s owner of, witnesses PK and L, it is apparent that constructing forestry machines in a way done by [buyer] is a demanding task. Witness L has stated that, in the 1980's, even Finnish forestry machine manufacturers built forestry machines in the way that [buyer] has done but they switched over to building complete harvesters in the 1990's. This is one of the reasons that the utilization rate of forestry machines was 60-70% in the 1980's and increased to 80-85% in the 1990's. Witness K has also emphasized that specific installation and the first service are very significant in terms of avoiding hydraulic breakdowns. Such breakdowns comprise about 70% of all breakdowns. Dirt damages the hydraulic system. Witness K states that all of the filters, pumps and hoses of the filter system were manufactured by [buyer] in its machines. Additionally, the witness statements provide that the functionality of the parts bought from [seller] has also been affected by the design and manufacturing solutions implemented by [buyer].

Witness L also stated that the Institute for Efficient Forestry (Metsateholaitos), owned and operated by forestry companies and wood refineries, has done research at length on the features of forestry equipment, such as their endurance and reliability. In those studies, it has been detected that the effect of the driver on the profitability amounts to circa 30%. Also the service and the use environment play a significant role in both endurance and profitability. An average time of operation for a harvester head in cost analysis calculations has been 1.5-2 years without fundamental repair, when the harvester head is used in double shifts. Witness L also estimates that spare part and repair expenses for a forestry machine amount annually to tens of thousands of Finnish Marks. Witness K has stated that an economically efficient time of operation for a harvester head is approximately four years, but that some have been known to use them even for seven years.

As to the harvester heads delivered to France, the Court has not been presented with any clarification as to service or use circumstances. None of the operators of the machines have been heard by the Court. Witness E, who had sold the said machines, had not, due to ill health or other reasons, been able to provide to the Court any detailed information as to service or use circumstances.

When considering the deliveries now in dispute, the starting point is the decision made by the Court of First Instance as to the significance of the warranty in relation to the liability for non-conformity. The most essential thing is whether [seller] has fulfilled its duties under the warranty and whether [seller] may have additional duties or liabilities on other grounds.

e) Conclusions about the deliveries

The most significant damage, both in terms of occurrence and financially, has been the damage caused to Pika 33 control valves. As to the breakage of valves caused to [buyer]'s client M, the Court of First Instance held that the evidence presented did not satisfy the Court in terms of [seller]'s production fault having been the cause of the breakage of the valves. It is apparent that the extensive damage caused to the valves has resulted not from the production fault but the structural solution chosen by [buyer], a solution that was not in conformity with the specific instructions provided by [seller]. Additionally, no specific, detailed clarification has been presented as to the reasons for other types of damage or need for repairs. The need for repairs may have resulted from both the quality of the [seller]'s products and the [buyer]'s design and structure solutions. Additionally, the testing system of [buyer] has been flawed in the sense that not until the end of March 1995 had the forestry equipment been actually tested in their actual use environment, i.e., a forest. The need for repairs has also resulted from the development needs of [buyer] and its clients, also in relation to the parts supplied by [seller]. Furthermore, the need for repairs may have been affected by the expertise of the user of the forestry equipment and the use environment as well as the quality of the service given to the machinery.

[Seller] has accepted such claims under the warranty which, based on the warranty clause, would not otherwise have fallen under it. Insofar as repairs or alterations have been caused by a reason that [seller] had not accepted as falling under the warranty, [buyer] has been unable to prove during the trial that [seller] would have been grossly negligent or had acted in willful misconduct. Therefore, [seller] cannot be held liable for the repair expenses claimed by the buyer more extensively than those falling under the warranty.

f) Lost profits

The limitation of liability clause contained in [seller]'s warranty clause is also applicable to damages claims resulting from lost profits. [Buyer] is bound by the warranty clause also in this instance and [buyer] has not proved that [seller] had acted in willful misconduct or had been grossly negligent. The warranty clause cannot be regarded as unreasonable or as justifying conciliation between conflicting interests.

[Buyer] has failed to establish that it has the right to claim damages from [seller] based on lost profit.

g) The unreasonableness of the contracts and conciliation [1]

In a case where a contractual term is unreasonable, conciliatory measures aim at rectifying the imbalance of the duties of the contractual parties.

The dispute at hand does not amount to a situation where after the conclusion of the contract the change in the circumstances would have caused an unreasonable state of affairs in the contractual relationship. When considering the unreasonableness at the time of the conclusion of the contract, one has to pay attention to the economic status of the parties, their actual and factual contractual freedom and their level of expertise.

Both [buyer] and [seller] are companies manufacturing forestry equipment and they in part also compete with one another in the area of export trade. Their cooperation had factually begun already in the 1980's, when [seller] was involved in projects with I GmbH, a party of the same business interests as [buyer]. At that time, [seller] delivered entire forestry machines instead of just parts. The warranty clause had the same content in relation to both [buyer] and I GmbH. Therefore, [buyer] must be in possession of reasonable expertise to evaluate the significance of the contractual terms. Even though business transactions between [buyer] and [seller] have risen to a significant level, it has not been established that [buyer] would not have been able to change the contractual terms, had it so wanted.

Based on what has been said above and also considering what the Court of First Instance has stated about the severity of the contractual terms, the warranty terms have not been unreasonable, even though they have strongly limited [seller]'s liability for non-conformities.

Therefore, [buyer] has not established a need for conciliating the contractual terms.

h) Conclusions on damages

As mentioned above, the Court of First Instance has held that the limitation of liability clause contained in the warranty clause of [seller] has also been binding on [buyer]. The delivery contracts between [buyer] and [seller] with their warranty clauses cannot be regarded as unreasonable or as necessitating conciliatory measures. Additionally, [buyer] has not established that [seller] had not fulfilled its duties under the warranty or that it would be liable for the damages claimed by [buyer] on other grounds.

i) Avoidance

The avoidance applies to a harvester package that [seller] delivered to [buyer] on 17 October 1994 and which was consequently installed to a vehicle and then delivered to LR in France. The harvester head was of type Pika 600. After the breakdown of the harvester head, the employees of [buyer] detached the head for repair and delivered it to [buyer]'s factory for fixing. For the duration of repair, a Pika 550-harvester head was installed to LR's forestry machine. After the Pika 600 had been repaired, LR refused to receive it and rather wanted to keep the Pika 550, to which [buyer] agreed. LR had based his refusal on his view that Pika 600 as a type of harvester head would never function properly.

According to Art. 49(2)(b)(i), in cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so within a reasonable time after he knew or ought to have known of the breach.

The harvester head of LR had been repaired and was ready for re-delivery to [buyer] on 25 January 1996. The request for avoidance has been presented in a written statement of the claimant-[buyer] on 31 May 1999, meaning more than three years after [buyer] received the information that LR refuses to accept the repaired Pika 600 harvester head. In this kind of commercial transaction, a reasonable time for notice is most often very short, at most a few months. To extend this period would require pressing circumstances indeed.

Based on the contract between [buyer] and [seller], witness TS had gone to the factory of [buyer] to repair, among other things, LR's harvester head. According to TS's statement, the damage in the equipment had resulted from either faulty handling or wrong adjustments and installation.

Witness S, together with his partner, had bought a forestry machine from [seller] in April 1995, which had a Pika 600 harvester head. The machine had first been used for a period of 2.5 years to harvest wood exported to Japan. S has stated that he is still satisfied with the quality of the machine and has no complaints about it. The harvester head has had some defects, but, according to S, they have been caused by demanding use of the machine and had been repaired in connection with the customary service procedures.

Also, witness SO has stated that harvester heads of the type Pika 600 have had no exceptional repair or service needs.

No clarification has been presented to the Court as to the use environment or the expertise of the operators of the harvester head delivered to LR. The harvester head had been in use for about a year before it was delivered back to [buyer]'s factory.

The period of use has consequently been about half of what witness L has stated as being an economical operating time of a harvester head.

[Buyer] has not established that LR would have had an acceptable reason not to accept the repaired harvester head. Furthermore, [buyer] has not brought forward any detailed clarification as to what financial harm it may have suffered as a result of replacing the harvester head for LR. Thus, [buyer] has not been able to present grounds for avoidance in the harvester head sale and or any pressing reasons for justifying the extension of the time for notification.

Because [buyer] has not notified [seller] within a reasonable time, it has lost its alleged right to avoid the contract.

j) The outstanding invoices

[Buyer] has demanded that [seller] and [seller's] owner be ordered to pay [buyer] the amount of DM 10,118.42 with legal interest on sums in arrears.

The claim is based on four different [buyer] invoices that [seller] has not paid.

[Seller] and its owner have admitted that the sums in the invoices are correct but have denied that they would owe such sums to [buyer] anymore because they had set-off their claims against those of the [buyer].

Witnesses SI and K have told the Court that they have made an agreement on setting off [buyer]'s invoices against [seller]'s invoices #225 and #248 in September 1995.

Regardless, [buyer] had, in connection with another larger payment procedure, also paid [seller]'s invoices #225 and #248 in October 1995. Witness K has stated that the payment took place because SI had sent a fax message confirming the set-off agreement so late that the payment had already taken place. SI has submitted that [seller] had noticed the payments taking place even though a set-off agreement had been concluded. Regardless, [seller] did not get in touch with [buyer], but instead had unilaterally decided to set-off the payments against other spare part invoicing. According to SI, this had actually taken place even though he was unable to specify the invoices against which the set-off might have taken place. Moreover, witness K has stated that [buyer] has not received a notification about the new set-off and that [buyer]'s bookkeeping does not contain any mention of such transaction having taken place.

A clarification signed by witness SI and a payment request were sent from [buyer] to [seller] on 26 September 1995. On the same day SI had agreed with K on the set-off. K also received a fax message stating that the set-off has taken place. According to payment order of 11 October 1995 signed by K, Bank S has paid invoices #225 and #248 on the same day. Therefore, the payment had taken place two weeks after the sending of the confirmation fax.

A set-off can be carried out either by means of parties' mutual agreement or through a principally unilateral demand placed by the other party based on law that in jurisprudence has been called an obligatory set-off. An obligatory set-off is carried out by means off a set-off notification.

The effects of a set-off commence when the other party is notified of the notification.

The parties to the dispute have unanimously stated that the set-off of invoices #225 and #248 had been agreed between [buyer] and [seller]. Moreover, the parties have not alleged that the contract was void or otherwise without legal effect. The fact that [buyer] has erroneously paid the invoices anew, has not rendered the already performed set-off ineffective. Therefore, [seller] has derived an unfounded benefit from the payment.

The procedure, as described by witness SI, where the payment was set-off against other unspecified invoices would have been acceptable if the claims to be set-off would have been ripe for that purpose. A unilateral set-off requires a notification in which the invoices to be set-off are specified. Such a notification has not been received by [buyer]. [Seller], when denying the existence of a lawful claim on [buyer]'s part, has not been able to specify invoices, against which the set-off would have taken place - even though such information should be easily obtainable from the book-keeping records. Additionally, [seller] has stated during the course of this trial that the set-off had taken place specifically against invoices #225 and #248, which additionally weakens the credibility of witness SI's statement.

Because [seller] has not presented [buyer] with a specified set-off notification or has not submitted to the Court any clarification about the invoices against which the set-off might have taken place, no set-off binding [buyer] has taken place. Therefore, [seller] and its owner will have to return the unfounded benefit derived from the repeated payment.

[Buyer] has demanded interest for the return payment. Because of the fact that the claim is based on a mistaken payment and the benefit derived from such a payment, according to the Finnish law on interest, interest accrues only after one month from the presentation of the claim onwards. Therefore, [buyer] is entitled to legal interest from 17 March 1997 onwards - one month after [seller] was served with summons.

k) Legal expenses

By and far, [buyer] has lost this case. The part concerning the invoices that [buyer] won comprises only a small part of the entire trial and claims presented, especially when considering the grounds for the claims and the claims in their entirety and therefore is inconsequential in relation to the division of the parties' legal expenses. Therefore, [buyer] has to compensate [seller] and its owner for their legal expenses in their entirety. [Buyer] has admitted the amount to be correct.

D. Judgment of the Court of Appeal

1. On damages and avoidance

The [buyer's] damages claim based on non-conforming goods and indirectly suffered loss of profit and the demand for declaring the contract avoided are denied as unsubstantiated.

2. On returning the unfounded benefit derived

[Seller] and its owner share a joint and several responsibility for the sum of DM 10,118.42, consisting of an unfounded benefit derived from a mistaken payment to [seller] by [buyer], with interest from 17 March 1997.

3. Legal expenses

[Buyer] has to pay to [seller] and [seller's] owner the amount of FM 437,266.99 with legal interest on sums in arrears. Additionally, [buyer] has to pay the owner of [seller] the amount of FM 47,200 with legal interest on sums in arrears, as compensation for work and lost time caused by the trial.

4. Witness expenses

Each of the parties will pay the witnesses they have invited, the fees and expenses they have accrued.

 

 

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