By contract notes dated 16 February 1900 the defendant purchased petrol from the plaintiff at a price of DM 6.5O per 5O kilos, 1,20O cwts to be delivered in August 190O and a like quantity in September. Delivery was to be made at the Oil Terminal in Hamburg into tankers supplied by the purchaser; payment was to be against delivery. In July l9OO the defendant received a circular dated 4 July wherein the plaintiff stated that it was forced to suspend payment, and expressed the desire that its creditors might agree to an extra-judicial composition. The defendant thereupon wrote on 7 July that ‘in these circumstances’ it was withdrawing from the February agreement. On 1O July the plaintiff replied contesting the defendant’s right to withdraw and maintaining its offer to deliver. On 21 September the plaintiff wrote to the defendant, giving him three days within which to supply the tankers required for the August and September deliveries, failing which it would refuse to accept any tanker proffered for the August delivery and would claim damages for non- performance under para. 326 BOB. The defendant replied on 25 September that it regarded the contract as over. On 29 September the plaintiff made a like written demand regarding the September delivery and gave the defendant until 3 October to provide the tankers, failing which it would claim damages for non-performance. The defendant maintained its position that it was no longer bound to perform the contract.
The plaintiff claimed damages in the amount of DM 3,22O.15 on the basis of expert opinions as to the price at which petrol on the same conditions as in the contract notes was being sold in Hamburg on 26 September and 4 October, and a letter from the plaintiff to the defendant dated 9 October 1900, demanding payment of the difference, DM 1,491.lO on the August delivery, and DM 1,729.05 on the September delivery.
The defendant asked for a non-suit, but the Landgericht allowed the claim and the Oberlandesgericht dismissed the defendant’s appeal. The defendant’s further appeal is now dismissed for the following
The Court of Appeal found that the plaintiff’s bad financial plight and inability to continue making payments did not of itself give the defendant, who learnt of it from the circular, the right to withdraw from the contract. This adequately reasoned conclusion is correct in law. Since the Court of Appeal correctly found that the change in the plaintiff’s financial circumstances took place after the conclusion of the contract in February 190O, it did not need to ask whether at the time of the contract the defendant was under any error regarding the plaintiff’s finances such as might fall to be considered in the light of para. 119 par. 1 and 2 BGB, the declaration of withdrawal perhaps counting as a rescission of the contract on the ground of such error.
The court went on to say that under the BGB a change for the worse in a contractor’s financial situation has in itself no effect on the other party’s obligation except in the specific cases under paras 321, 610 BGB. This is quite correct. The BGB has not adopted the doctrine that a clausula rebus sic stantibus is to be implied in every contract or in every executory contract. As we read in the Annotations to the First Draft of the Code (vol. 2 p. 199, with respect to para. 458 of that Draft, which is essentially the same as para. 610 BGB): the Draft admits the clausula rebus sic stantibus, whereby one may withdraw from a contract because circumstances have changed, in one case only, viz. in the case of a contract to make a loan. The Second Commission extended the doctrine of the clausula rebus sic stantibus to the case where one party to a bilateral contract has to perform before the other, but only to the extent and with the effect indicated in para. 321 BGB (Protocols vol 1 p. 61 ). The attendant observations and the remarks of the Second Commission regarding para. 485 of the First Draft (Protocosl vol. 2 p. 47) make it quite clear that this is a special rule applying by way of exception to these special relationships alone, rather than the application to two particular situations of a general principle of law. Of course it is still true, as we see from the Motives to the First Draft (vol. 2 p. 199), that in every case that arises one must go on to ask whether the parties may not actually have intended that one or other of them should have the right to withdraw from the contract if circumstances altered, and in making this inquiry one must, if applying para. 346 HGB, consider mercantile custom and usage, or, if applying para. 157 BGB, the demands of good faith in relation to normal practice. The Court of Appeal did look at the facts in this light, and though it did not expressly invoke para. 346 HGB and para. 157 BGB, it is nevertheless clear from what it said that in coming to the conclusion that no such clause was included, it was applying the tests indicated by those paragraphs. Accordingly the judgment under attack was not wrong in law in rejecting the defence that a right to withdraw had arisen from the change in the plaintiff’s circumstances.
The appellant next complains that the court of appeal should have applied para. 321 BGB, because this was a bilateral contract in which the defendant was required to perform first, in that it had to provide the tankers for the reception of the petrol. In fact there was no occasion for the Court of Appeal to go into any possible defence under para. 321 BGB since the defendant never raised it, having rested its defence solely on the change in the plaintiff’s finances. In any case, in the exchange of letters after 7 July, the plaintiff’s assertion of its readiness and ability to perform was such as to amount to the declaration of readiness to give security, here trivial, referred to in para. 321 BGB. The defendant’s point is therefore without substance, both in this connection and with regard to the question whether the defendant was in delay in payment 2. Having decided that the defendant was in default in payment with regard to the August and September deliveries, the Court of Appeal applied para. 326 par. 1 BGB, the debtor’s default being a precondition of that paragraph. Since para. 284 provides that such default can only arise when a debt has fallen due, the first question must be when and whether on the facts payment of the price fell due. Here one must note that as against the demand of 21 and 29 September, the defendant never raised the defence of non adimpleti contractus; its only purpose in contending below that the plaintiff had to prove that it was ready to perform at the time of the putting in default and demand under para. 326 par. 1 BGB was to show that payment of the purchase price had not fallen due by reason of the plaintiff’s unreadiness to perform, and that consequently the defendant was not in default regarding payment. The view that the plaintiff could not rely on para. 326 par. 1 BGB unless it was ready to perform was accepted by the Court of Appeal, though without really explaining why.
There is a difference of opinion among the commentators on the BGB regarding the question when, in a contract where the parties are to perform simultaneously, performance of an obligation falls due if the other obligation has not been performed. Some say that it invariably falls due at the time its performance is required by the contract, others that it is prevented from falling due, and default thus rendered impossible (para. 285 BGB), by the availability, not by the actual assertion of the defence non adimpleti contractus. Some of the commentators infer from para. 320 BGB that the purchase price always falls due at the time when performance is called for by the contract, even if the counter performance has not been rendered, and that therefore there is no need for a demand for performance Zug-um-Zug. The other view is that it is a necessary condition of the purchase price falling due that the purchaser be in default in accepting the goods, but it is also a sufficient condition, and in such a case they do not require that the seller’s notice of default contain a declaration that he himself is ready to perform. On the facts of our case we do not need to take a position on this disputed matter, nor on the further connected question whether the seller must remain ready to perform during the whole of the period he has set under para. 326 par. 1 BGB. Even on the latter, stricter view, no more is required to establish readiness to perform than is needed to establish default in accepting performance, and the only extra precondition is a notice of default under para. 284 BGB. But given that it was for the defendant under the contract to provide tankers for the reception of the petrol and that after its letter of 7 July 1900 it had repeatedly refused to take delivery on the ground that the contract no longer existed, a simple verbal offer of performance under para. 295 BGB was sufficient, and it is not open to the appellant to attack the finding of the court of appeal that this occurred when the plaintiff required the defendant to supply the tankers for delivery of the petrol. It is true that the Court of Appeal did not accept the plaintiff’s evidence that it had the appropriate quantity of petrol at its disposal, and it must therefore have proceeded on the basis that at the time the plaintiff made these offers it neither had the petrol in stock nor had a contract right to obtain it from a third party. On the other hand, the court of appeal found, as facts not susceptible of present review, that the quantity of petrol in question was at all times available on the market, and that the plaintiff could have procured it in good time for delivery if the defendant had unexpectedly changed its mind and provided the requisite tankers. There was therefore no breach of para. 297 BGB or any other text in the Court of Appeal’s finding that the plaintiff was ready to perform in the sense of that paragraph, that the plaintiff was at all times able to procure the goods in the way indicated, and that it was not necessary for him to have the goods in stock or to have a contract to obtain them from a third party. This disposes of the defence that the plaintiff was not ready to perform; we can ignore the fact that the defendant offered no proof, as para. 297 BGB requires of him, that the plaintiff was in no position to effect performance when he offered to.
Notice of default (Mahnung) is required after the obligation has fallen due. This is what para. 284 BGB says, but it is not to be taken as meaning that the legal act which gives notice of default need be distinguishable in point of time from the legal act which renders the performance due; the notice of default may perfectly well be combined with the acts which render the performance due. Thus, supposing that the plaintiff must be in delay in accepting the goods before the purchase price can fall due, notice of default in the payment of the price may well accompany the seller’s offer of the goods. Nor need the notice of default be express: it can inhere in the acts which render the performance due. The Court of Appeal felt able to construe the written demand for the provision of the tankers on 21 and 29 September as not just an offer of the goods but also a demand for payment of the purchase price against delivery of the goods. As to the August delivery, the court, on the basis of what we have stated, was quite entitled to hold that the letter of 21 September duly put the defendant in default of payment. As to the September delivery, to which the letter of 29 September referred, we can uphold the conclusion of the court of appeal that that letter did indeed put the defendant in default without endorsing all the court’s reasoning, for a factor to which it did not refer justifies the conclusion. 29 September l9OO, the earliest date on which that letter could have been posted in Hamburg, fell on a Saturday. Now it takes time for a letter to get from Hamburg to Mannheim, and on Sundays there are delays both in the Postal service and in a mercantile business as large as the defendant’s. So the plaintiff’s intention in sending the letter, as the defendant must have known, was that it should reach the defendant with the first post on Monday 1 October. But if on the first post on 1 October the plaintiff offered the goods to the defendant and demanded payment of the price Zug-um-Zug with their delivery, which was how the court of appeal construed the letter, then the attendant notice of default was timely and not premature, given the construction that is appropriated to transactions of this kind and excludes the application of para. 193 BGB. Thus all the requirements of default in payment would be met as to the September delivery as well.
para. 326 par. 1 BGB also requires the setting of a period of time for performance, and a declaration that at the end of that period performance will not longer be accepted; there is no reason why these acts cannot be combined with the notice of default. The Court of Appeal held that the period of time set by the plaintiff was a fair one, and they were not wrong to do so. 3. After giving notice of its intention and waiting in vain for the expiry of the period fixed for performance, the plaintiff had a choice of action under para. 326 par. 1 sent. 2 BGB and elected to claim damages for non-performance, the damages being based on the difference between the contract price and the market price on the day when the period set for performance expired. As the Court of Appeal observed, one cannot decide whether or not this method of computing the damages is justifiable without taking a position in the much-ventilated dispute among commentators on the BGB and the HGB concerning the legal scope of the choice of damages for non-performance under para. 326 par. 1 BGB.
One view is as follows. If one party to a bilateral contract is in default regarding his performance, the other party’s claim for damages for non-performance on the basis of debtor’s default, if he elects to pursue it, covers only the particular obligation regarding which the debtor is in default, and not the entire bilateral contract: only in place of this obligation does the guilty party owe a duty to make compensation; the obligation of the innocent party subsists, unaffected by the defence of non adimpleti contractus and remains in the same synallagmatic relationship to the other party’s duty of compensation as it did to that party’s original obligation which it replaces. Thus when the seller claims damages for non-performance based on the duty of compensation which has taken the place of the buyer’s original obligation, he is claiming performance of the bilateral contract and must, accordingly, on his part deliver the goods in return for the damages. Of course, the buyer who is in default with regard to payment will usually be in default with regard to acceptance of the goods as well, so that although the seller’s duty to perform continues, he will normally have the self-help remedy of resale under para. 372 par. 2 HGB if the parties are merchants, or else a right of resale under paras 383 ff. BGB.
The other view is as follows. The claim for damages for non-performance is not a claim for performance at all: the claim for performance is excluded as soon as the seller elects to claim damages for non-performance, as the Code expressly provides in para. 326 par. 1 BGB. It follows by legal logic that the buyer’s claim for performance is excluded as well, since it is only if the buyer performs that the seller need perform. Now if the buyer who has been put in default does not perform within the allotted time, and if the seller claims damages for non-performance, the result of the buyer’s fault is that the sale contract remains unperformed, and the seller can therefore claim compensation for the loss he suffers as a result of the buyer’s non-fulfilment of the contract. Thus a claim for damages for non-performance is not a claim for damages for non-performance of the unfulfilled obligation alone, but a claim for damages for non-performance of the whole contract, performance of which as agreed has been rendered impossible by the buyer’s default.
It is this second view which we adopt. We believe that when the buyer is in default in payment by failing to perform during the period allotted under para. 326 par. 1 BGB, and the seller elects to claim damages for non-performance, the effect of para. 326 par. 1 sent. 2 BGB is that the original contractual duties of both parties are replaced by the seller’s claim against the buyer for compensation for the harm suffered by reason of the contract’s not being performed as agreed owing to the buyer’s default.
The very words of para. 326 par. 1 BGB make it difficult to accept the contrary view that when the seller elects to claim damages for non-performance he remains bound to perform vis-à-vis the buyer, i.e. bound to deliver the goods. The word ‘non-performance’ and the ensuing ‘claim for compensation for harm’ unambiguously indicate that the Code assumes that neither side of the bilateral contract is now to be fulfilled. It is true, as is evident from the Protocols of the Second Commission (vol. 2 p. 644), that para. 326 par. 1 BGB was modelled on art. 354 of the old HGB, to the extent that when the buyer is in delay in payment the seller is offered a choice of three remedies, including the right ‘to claim damages for non-performance’ on the expiry of the period set by him pursuant to the first paragraph of that provision. It is also true that the claim which art. 354 of the old HGB designated as a claim for damages for non-performance was widely treated as a claim for performance, but this was only because the seller was obliged by that very article to resell the goods, as a form of self-help, for the account of the buyer, and this obligatory act was treated as against the buyer as being a performance of the contract. It is generally admitted that it was quite wrong to call this a ‘claim for damages for non-performance’. Now under the new Civil Code, the claim for damages for non-performance is no longer conditioned on resale as a form of self-help, and there is now no basis for treating the claim for damages as being in effect as claim for performance, as was done under art. 354. The claim for damages for non-performance under para. 326 BGB should now be seen to be what it evidently is.
Indirect support for our view can be found elsewhere in the Protocols of the Second Commission (vol. 1 p. 642 ff.), and neither in the wording nor in the legislative history of para. 325 par. 1 sent. 1 BGB is there any cogent counterevidence. Most importantly, there are statements in the Denkschrift to the Draft Commercial Code (p. 219) which support our view. It is true that those observations are concerned with the meaning and scope of para. 326 par. 1 BGB, but the very fact that such observations on a matter of especial importance to commercial practice were criticised neither in Committee nor in the Reichstag itself when the Commercial Code was being discussed entitles us to assume that the legislators, who had very recently adopted the final formulation of para. 326 BGB, accepted the view stated in the Denkschrift as being correct.
But internal reasons also speak powerfully in favour of our view. Consider the legal confusion which would result from the opposite view that the rights and duties of buyer and seller remain unchanged when the latter elects to claim damages for non-performance, save that his claim for the price is converted into a claim for damages. The result would be the very opposite of what was envisaged. The intention was indubitably to extend to private law the simple and clear regulation of these disputes laid down for commercial law by art. 354 old HGB, but what would actually happen would be that the uncertainty and confusion hitherto existing in private law would be continued and even extended into commercial law.
Critics of our view say that it depends on an interdependence of performance and counter performance in bilateral contracts which is alien to the BGB. It may be granted that the BGB is less emphatic about the interdependence of performance and counter performance in bilateral contracts than some other legal systems (see, for example, Code civil art. 1184), but, limited though the BGB’s recognition of such interdependence may be, it is certainly adequate to justify the view we take as to the legislator’s intention.
Another objection is that our view would permit a party to withdraw from the contract and claim damages for non-performance at the same time. This is quite unfounded and must be rejected with vigour. When a party withdraws from a contract as provided in para. 326 par. 1 and regulated in detail in paras 346-356 BGB, the obligational nexus resulting from the contract is rescinded ab initio, and the only claims that subsist are claims for the restoration of the situation which existed before the contract was formed, such as a condictio. Where damages for non-performance are claimed under para. 326 par.1 BGB, the situation is entirely different: as we said at the outset, the election of this remedy reduces the contractual relationship to the right to claim and the duty to provide compensation; thus damages for non-performance are claimed and owed on the basis of the contract, which continues to exist. It is true that the Comments to para. 369 of the Draft (vol. 2 p. 210) emphasise the impossibility of claiming damages if one is withdrawing from the contract, but this is no support for the view we reject. It is quite true that where neither party has performed, it might seem legally and economically superfluous to provide the option of withdrawal, since the person exercising that option gains nothing, unlike the person who, on exactly the same facts, claim damages, but this is not so where the seller has already performed in part: in such a case the seller has a justifiable interest in withdrawing from the contract and so securing, in the simplest possible manner, a claim for the return of his part performance. Furthermore, on the contrary view there is no real difference between the seller’s claim for damages for non-performance and his right to claim performance and sue for, damages for delay: in other words, the first and third choices offered to the seller would be identical.
According to another objection, the purpose of sale transactions, especially sale transactions between tradesmen is to effect an actual exchange of goods, and this function would be weakened by our view whereby an exchange of goods may be transformed into a claim for margin, where goods move neither out of nor into the market. But the instant case is not typical of the consequences of our view, for the fact that the plaintiff here is claiming damages for the price differential without ever having had the goods in his hands is attributable to the particular circumstance that the defendant first refused to accept performance months before the delivery date. Further- more, the objection would have force only if our view actually enabled commercial contracts of supply to be used for the evasion of existing legal prohibitions. But there is a whole series of provisions in the BGB designed to frustrate such attempts; accordingly the legislature had no need in this respect to adopt the view we here reject.
Finally, we can accord no weight to the argument that unfair harshness towards the buyer will result from the view we are adopting as to the consequences of default on the part of the buyer, or that it runs contrary to the express intention of the Second Commission in particular to strive to protect the economically weaker party. It is true that art. 354 of the old HGB, which obliged the seller to resell the goods as a form of self-help, as partly based on considerations of this nature (see the Protocols of the Commission for the Consideration of a General Commercial Code, p. 4598); But since the seller is no longer required to resell as a form of self-help, the view we are rejecting would expose the dilatory buyer much more to the danger that the seller might exploit market fluctuations, for it would then be up to the seller whether and when to exercise the power granted to him by para. 373 par. 2 KGB or paras 383 ff. BGB. As against this, our view that the seller can only claim damages for non-performance protects the debtor much better, especially as any resale for cover is at the seller’s risk, not just on his account, under paras 254 par. 1 and 2 BGB.
If, as we hold, para. 326 par. 1 BGB allows the seller who has elected to claim damages for non-performance to claim damages for the loss he suffers by reason of the non-performance of the contract, then on the facts of this case, where the seller did not necessarily have the goods in stock, there can be no objection to the way he has computed his loss, given that the component figures are undisputed, and it is therefore unnecessary to deal with the subsidiary arguments of the Court of Appeal.