Landmark decision of the Swiss Supreme Court on the CISG
In a recently published landmark decision dated 28 May 2019 (case no. 4A_543/2018), the Swiss Federal Supreme Court had the opportunity to tackle several questions concerning the United Nations Convention on Contracts for the International Sale of Goods (the Convention), in particular:
- The applicability of the Convention if only one of two selling parties is located in a different contracting state;
- The subsequent consensual non-application of the Convention; and
- The relationship between the Convention and Swiss rules on fundamental errors that relate to specific facts which the party acting in error considered in good faith to be a necessary basis for the contract (Grundlagenirrtum).
The Federal Supreme Court further confirmed the predominant view that a choice of Swiss law in principle also includes the Convention.
The decision was essentially based on the following facts:
A Swiss public law establishment was regularly buying electronic meters from two sellers which belonged to the same group. One of the sellers was located in Slovenia while the other one was a Swiss company. It was controversial whether the Swiss company was a party to the purchase agreement at the time the agreement was concluded or whether it joined only thereafter. In 2012, the sellers informed the purchaser about a defect of some of the electronic meters that resulted in measuring errors. As a consequence, the seller invoked a fundamental error according to art. 24(1)(4) of the Swiss Code of Obligations (Grundlagenirrtum) and took the position that the purchase agreements are void. Based on this, the purchaser requested the redemption of the purchase price in return for the defective electronic meters. The purchaser filed an action and succeeded in first instance but the verdict was overturned and the claim dismissed by the court of appeal. The Federal Supreme Court upheld the decision of the court of appeal.
Application of the Convention on “split” counterparties
After a call to mind that the Convention is to be interpreted uniformly and independent of national particularities, the Federal Supreme Court found that the entire purchase contract will be governed by the Convention even if only one of two selling parties is located in a different contracting state than the purchaser. No recourse can be made to Swiss private international law, which provides for a determination of the applicable law for claims against each selling party separately. In an obiter dictum, the Court held that the relevant point in time to determine the internationality of a contract is the conclusion of the contract. Any subsequent accession or exclusion of parties does not affect the internationality and hence the applicability of the Convention.
Choice of Swiss law is meant to include the Convention
The Federal Supreme Court further confirmed the opinion prevailing in legal doctrine and foreign case law that a choice of the law of a contracting state includes the Convention and does presumably not imply that the parties wanted to exclude the application of the Convention. Such an implied exclusion could only be found if other circumstances indicated the parties’ intent to deviate from the application of the Convention. In particular, the facts that the purchase agreement was concluded following a public procurement procedure and that the general purchase conditions used terminology that is also used by the Swiss Code of Obligations were held to be insufficient indications. With regard to the latter, the Federal Supreme Court stated that the application of the Convention may only be deemed excluded implicitly if a contractual provision was drafted in a way that it could only be applied under domestic law but not if the Convention governs the agreement.
Subsequent consensual non-application of the Convention
According to the further considerations of the Federal Supreme Court, a subsequent consensual non-application of the Convention is in principle possible. However, such consensual preclusion may not easily be assumed. The parties’ behavior in the proceedings may only be considered a subsequent consensual exclusion of the Convention if it is proven that all parties were aware of the applicability of the Convention and all parties nevertheless based their claims and defenses on domestic law.
Warranty claims under the Convention vs. Swiss rules on fundamental error (Grundlagenirrtum)
Under Swiss domestic law, the purchaser has in principle two options when the delivered goods are defective or do not meet the requirements which were specified in the agreement or which the purchaser could reasonably have expected the goods to meet: He may pursue the warranty claims provided in art. 197 et seq. of the Swiss Code of Obligations or, if the defects or shortcomings of the purchased items are subjectively and objectively significant for the purchaser and this significance was apparent to the seller, invoke a fundamental error according to art. 24(1)(4) of the Swiss Code of Obligations (Grundlagenirrtum) and request the redemption of the purchase price.
The purchaser decided to pursue the latter option and succeeded in the first instance proceedings. However, the court of appeal and the Federal Supreme Court disagreed and ruled that the purchaser may not invoke a fundamental error that relates to characteristics and qualities of the purchased goods if the Convention applies.
Article 4(a) of the Convention provides that the Convention does not deal with the validity of the contract or any contractual provision except as otherwise expressly provided in the Convention. Under Swiss domestic law, a fundamental error would result in the contract being challengeable and void, respectively.
The Federal Supreme Court clarified that the recourse to domestic law in relation to the validity of a contract is precluded if the Convention provides a conclusive set of rules for a specific problem. This is the case, if (i) the relevant question was recognized by the authors of the Convention, (ii) at least a “functionally equivalent” solution is provided for that question by the Convention, and (iii) this solution is supposed to be the only solution.
Against this background, the Federal Supreme Court held that the purchaser may not invoke a fundamental error that relates to characteristics and qualities of the purchased goods based on domestic law since the Convention contains provisions concerning breaches of contract and in particular defects of the purchased goods which also take the purchaser’s level of information into account. These rules are “functionally equivalent” to the provisions on fundamental errors in the Swiss Code of Obligations and are meant to be conclusive. In particular, the Convention only provides for the cancellation of an agreement as a last resort. That is because the consequences of a cancellation, in particular the triggered return shipment, is particularly harmful in international trade relationships that often include long-distance transports of goods. The balancing of interests underlying the specific rules in the Convention would be distorted if the purchaser was allowed to invoke a fundamental error based on domestic law in order to rescind an agreement.
As the purchaser had only based its claims on fundamental error and had not substantiated the facts necessary to establish a claim for breach of contract, its claims were dismissed in their entirety.
Should you have any questions to the above or need legal advice, please do not hesitate to contact our advisers.
RobinMoserLocal partner Attorney at law
Robin Moser, attorney at law, is a local partner in our Zurich office. He focuses on domestic and international dispute resolution and has broad experience in representing clients in court, before federal and cantonal authorities and arbitral tribunals.T: +41 43 434 67 42 M: +41 78 806 40 91 E: email@example.com