C.A. 815/80 Harlow v. Adres P.D. 37(4)225

The German seller (the appellant) contracted to deliver iron to a company based in Israel (the respondent) but as a result of the Yom Kippur War the delivery was delayed. Despite the fact that after negotiations the buyer agreed to pay for the inconvenience, the seller failed to deliver the entire merchandise but instead sold part of the iron to a third party. Through this action the seller took advantage of the rising market price. The buyer demanded performance of the contract but the seller failed to respond. Over a year later the buyer sued for the financial damage caused by the failure to deliver the remaining iron.

In the buyer’s statement of claim there was no argument made as to when, if at all, the contract was avoided. The buyer claimed that the seller’s failure to supply the remaining iron was a breach of contract. The seller sold, or was able to sell, the remaining iron at a higher market price, and on this basis the buyer claimed to be entitled to damages which equaled the difference between the market price and the price agreed. Alternatively, the buyer argued that it was entitled to damages equal to the difference between the contractual price and the price it was forced to pay for similar goods.

The court’s discussion was based on the interpretation of those provisions of the Sale Act (International Sale of Goods), 1971 (which implements in Israel the Hague Convention Relating to a Uniform Law on the International Sale of Goods, 1964), that relate to avoidance and breach of contract. One of the main points of debate raised, centered upon the type of acts that may constitute a declaration of avoidance.

The Supreme Court ruled:

1. Under Article 84 of the Uniform Law of International Sales (ULIS), the buyer is not entitled to compensation for the difference in price. Article 84 states, “damages shall be equal to the difference between the price fixed by the contract and the current price on the date on which the contract is avoided”. The condition for entitlement under this provision is the avoidance of the sales contract. There is no evidence to prove that on the day the merchandise was sold to the third party, the contract was avoided. On the contrary, in response to this move, the buyer demanded performance of the contract. The failure to deliver the remaining iron resulted only in a breach of contract.

2. Article 85 of ULIS states, “if the buyer has bought goods in replacement or the seller has resold goods in a reasonable manner, he may recover the difference between the contract price and the price paid for the goods bought in replacement or that obtained by the resale”. Like Article 84, a prerequisite for eligibility under this provision is the avoidance of the contract. The joint heading of both articles which is ”Damages where the contract is avoided” , points clearly to the implicit intention of Article 85 to award damages only in the case of avoidance.

The buyer cannot rely on both alternatives detailed in Article 85. The buyer may rely only on the first alternative, which provides damages in the case of replacement, and not the second, which relates to resale. The buyer mistakenly concluded that according to Article 85 it is entitled to recover the difference between the contractual price and the higher resale price that the seller received. In actuality, this alternative is intended only for the seller to enable him to sue for damages in cases where it is the buyer who has breached the contract.

3. Neither Articles 84 or 85 require proof of damage. Expense incurred or benefit lost owing to the failure to deliver is irrelevant. If on the day avoidance took place the market price was higher than that agreed or the price of the goods bought in replacement was higher; then the buyer is automatically entitled to damages equal to the difference in price.

4. The right to declare avoidance in cases where there has been a fundamental breach is dealt with under Article 43 of ULIS. By reading this provision in conjunction with Article 42(2) it is clear that the buyer loses the right to declare the contract avoided if the right is not realised within a reasonable time after the breach. A wide interpretation must not be given to the phrase “ reasonable time” since Article 43 does not require proof of damage and insincere parties must not be permitted to fix the date of avoidance according to market trends. In the present case the lawsuit was not implemented within a reasonable time after the breach since it was submitted more than one year after failure to deliver. A reasonable time period would have been one or two months.

In certain instances the submission of a lawsuit may cause the contract to be avoided if action is taken in reasonable time. In such a situation the buyer is not bound to Articles 84 and 85 but may choose to sue under Article 86. Under Article 86 damages may be awarded not only to compensate for the difference in price but also to cover the entire loss suffered as a result of breach. However, if the plaintiff chooses to sue under this article, damage incurred must be proven.

5. A letter of credit contract is entirely independent of the sales contract, unless it contains an express instruction to the otherwise. In the present case, the buyer did not specify that the delivery of the remaining goods was a condition for renewal of the letter of credit - consequently the non-renewal of the letter of credit did not implicitly avoid the contract. Furthermore, according to Article 14 of ULIS: “Communications provided for by the present law shall be made by the means usual in the circumstances”. The non-renewal of the letter of credit is not an accepted form of notification.

6. Articles 25-28 of ULIS relate to the ipso facto avoidance of sales contracts. According to Article 25 if the purchase of replacement goods is “in conformity with usage and reasonably possible”, then the contract shall be ipso facto avoided from the time of the purchase. The buyer did not produce any evidence to support the claim that that the replacement of the goods was in conformity with usage and therefore there was no ipso facto avoidance of the contract.

According to Article 26(1) when failure to deliver amounts to a fundamental breach, the contract shall be ipso facto avoided unless the buyer informs the seller of his decision within a reasonable time. The appellant chose performance of the contract within a reasonable time after the breach and therefore the contract was not ipso facto avoided.

7. Article 82 of ULIS awards damages in cases where the contract has not been avoided. Article 82 provides, “When the contract is not avoided, damages for a breach of contract by one party shall consist of a sum equal to the loss, including loss of profit suffered by the other party “. The buyer must prove not only the breach, but also the “loss” suffered as a result of the breach. A consecutive rise in the market price is not sufficient evidence for the buyer’s loss - other factors may have counteracted the effect of a rise in market price - such as a low demand for the specific type of iron purchased or the placement of the goods in storage rendering the purchase unnecessary and without benefit. The fact that the seller resold the merchandise in Germany for a higher price cannot be considered evidence; firstly, the price in Germany does not indicate the level of demand in Israel, and secondly, the profit of the seller is not automatically the loss of the buyer.

8. Article 91 applies when breach of contract was caused by the buyer’s delay in taking delivery of the goods. According to Article 91, the seller must take reasonable steps to preserve the goods and it provides that the seller “shall have the right to retain them until he has been reimbursed”. It is written that the seller “shall have the right” and not that he is “obliged”. The reason for this is that if the buyer breached the contract, the seller is entitled to all the remedies available under the law and will not be bound by Article 91.