In March 1920 the plaintiff sent the defendant a price-list of goods he had in stock. This was stated to involve no obligation (freibleibend). Crystallised tartaric acid, priced at 68.50 M, was included in the list. On 20 March the defendant sent the plaintiff a telegram: "Request best price for 100 kilos Gries lead-free tartaric acid." Two days later the plaintiff replied by telegram: "Lead-free taThe plaintiff used the defendant for transactions with end-of-month settlement. Arising from this business relationship, in February 1916 the plaintiff owed the defendant RM 134 111.50. By notarised certificate of indebtedness of 26 February 1916, he acknowledged this debt and undertook to repay it by an agreed schedule of instalments (details on dates of instalments due). As collateral security he pledged some securities, amongst them 25 shares of the Petersburg Internationale Handelsbank, abbreviated to Peter Inter. He agreed to an immediate execution of the title should this become necessary. On 12 December 1917, the plaintiff ordered the defendant to sell the Peter Inter in his possession since, as a result of the troubles which had started in Russia, a sharp slump in the share price was to be expected. He also ordered the purchase of shares in Phönix (RM 5,000) and Norddeutsche Lloyd (RM 5,000) as replacement, likewise to act as collateral security. The defendant refused to carry out the instruction. The plaintiff submits that the defendant's behaviour was in breach of good faith and led to considerable losses. The plaintiff was not able to redeem the Peter Inter shares before 12 August 1918, when he could sell them at a price of only RM 112, whereas on 12 December 1917 a price of RM 149 1/2 could have been obtained. Furthermore, if the Phönix shares had been bought on 12 December 1917 a 40% profit could have been made, since in May 1918 the plaintiff had sold other Phönix shares he held at a price which was 40% higher than the December 1917 price. After deduction of an undisputed claim which the defendant has against him, the plaintiff demands payment of RM 4581.50 plus interest. In addition, he requests a declaratory judgment to the effect that the defendant has no further claims from their business contacts and that he is therefore not entitled to execute the document of 26 February 1916.
Both lower courts have found according to the plaintiff's claim. The defendant's further appeal was rejected for the following
The legal findings of the Kammergericht are to be upheld which state that the defendant needed to comply with the plaintiff's request, i.e. to exchange 25 shares of Peter Inter, which the defendant held as security, for RM 5000 worth of shares in Phönix and Norddeutscher Lloyd., each worth RM 5,000.
It is an established fact that in December 1917, as a result of a price slump, a considerable reduction in the value of Peter Inter shares could have been expected. Based on para. 1218 BGB, the plaintiff as pledger of the share certificates could demand to have these shares returned in exchange for other securities. If at that time the plaintiff had offered the defendant RM 5,000 worth of Phönix shares and RM 5,000 of Norddeutsche Lloyd shares against the return of the Peter Inter, the defendant could not have refused the exchange since, as the court of appeal ascertained, these exchange documents represented at least the same amount of security as the Peter Inter. No slump in prices was to be expected in respect of the substitute shares. The defendant had no claim to greater security than the one represented by the Peter Inter shares in December 1917. In particular, he had no claim to have these exchanged for gilt-edged securities. In commercial terms the same result would have been achieved if the defendant had himself carried out the substitution which the plaintiff had requested, i.e. if he had sold the Peter Inter on the stock exchange and bought the replacement shares with the proceeds and then kept these as collateral security. The defendant alleges that he was under no obligation to accept the instruction since a banker is not committed to accept orders for share dealings. However, this is not the point here. Whether or not and to what degree, in view of commercial usage, a banker is permitted to refuse share dealing orders can be left unanswered. In this context the only question that needs to be answered is whether the holder of a collateral security, whether a banker or not, must co-operate when a risky security is to be exchanged for a safer one of equal value, and, as here, in the manner as instructed by the plaintiff. The plaintiff's order was addressed to the banker not only in his professional capacity but also in his capacity as contractual partner and plaintiff's pledgee. It was this contractual relationship with the plaintiff which gave rise to special obligations. By his unreasonable refusal to accept the plaintiff's commission, the defendant has culpably infringed his contractual obligations.
There is no need for further reasoning that a contract of pledge gives rise to obligations for the pledger as well as the pledgee. Similarly, the principle of good faith (para. 242 BGB) applies to the way in which the pledgee meets his contractual obligations. para. 1218 sets out the pledgee's obligation to return the pledged documents in return for other securities where a considerable reduction in the value of the pledged documents is to be expected. This provision is in itself a practical application of para. 242 (RGZ 74, 151). Although para. 1218 does not explicitly state that the pledgee needs to cooperate in the legal transactions required for a substitution of the pledged documents, in the light of the principle of good faith, circumstances such as these can demand a duty to cooperate.
The principle of good faith is mainly a question of weighing up both parties' interests. Where the defendant's cooperation in the exchange of the pledged documents was required because of the plaintiff's urgent needs and where this could be achieved without any risk to the pledgee, it was a breach of good faith for the defendant to refuse to cooperate. The plaintiff's urgent interest in the sale of the Peter Inter shares was evident as these were threatened by a further reduction in value as a result of the troubles in Russia. On the other hand, not only were the defendant's interests unaffected by the substitution of the Peter Inter by sound German securities of at least equal value, likewise held by him as pledge; but such an exchange also served his own interests. Moreover, compliance with the order did not encumber the pledgee with unreasonable effort. The sale and purchase of securities was part of his usual commercial activities. The banker could charge the usual fee for carrying out the instruction. It is true that the banker had a greater interest in merely selling the Peter Inter and to offset the proceeds against his claim for which the plaintiff had given the pledge. But no such right existed under the parties' contract and the defendant had no right to refuse the instruction in order to force the plaintiff to agree to the sale of the Peter Inter shares merely as a means of settling the debt from the proceeds. In breach of the contract, the defendant would thereby have obtained an unmerited advantage.
The further appeal submits that the defendant had not been under any obligation to assist in the plaintiff's speculative transactions in respect of the pledged securities and that the possibility could not have been ruled out that the share prices may have fluctuated in a different way. In theory, both points are valid. But what the plaintiff intended was not a speculative share dealing. He had no interest in making a profit from the exchange of the shares but rather intended to avert the threat of considerable losses. The defendant did not refuse to carry out the commission because the substitute shares were likely to fall in price or to become worthless. The appeal court rightly assumed that in view of the political and economic situation in Germany at that time as far as the substitute share were concerned, such a considerable drop in share prices as forecast in respect of Russian securities could not have been foreseen. In the proceedings before the lower court, the defendant submitted no facts to justify doubts he may have had at that time.
It can also be left undecided whether or not the defendant could have rejected the plaintiff's instruction if the latter had been able otherwise to obtain substitute securities, since the appeal court had in fact ascertained that the plaintiff had no ready cash with which to acquire substitute shares. The further appeal's submission must be rejected.
The defendant also cannot submit that he had been prohibited from accepting instructions other than for cash transactions. The case only concerns cash dealings. The Phönix shares and the NorddeutscherLloyd shares, each worth RM 5,000, were to be purchased with the cash proceeds from the sale of the Peter Inter shares. The plaintiff needed no credit. The defendant has not been able to show that the cash proceeds from the shares to be sold would not have been sufficient to meet the purchase price for the substitute shares.
Finally ,the further appeal alleges that even if the defendant needed to carry out the order to sell the Peter Inter shares, he would not have been under an obligation to acquire the substitute shares and that he was therefore not responsible for the loss which the plaintiff sustained from the missed increase in value of the Phönix shares. This submission is wrong. The plaintiff's instruction was made in respect of one single indivisible transaction intended, under para. 1218 BGB to substitute the threatened Peter Inter shares by other shares, equally given as pledge. The commission could only be carried out as intended, i.e. in its entirety. As a result, the defendant must compensate the plaintiff for the entire loss arising from the defendant's breach of contract through failure to carry out the instruction as a whole. The lost profit from the RM 5,000 worth of Phönix shares and the loss in price of the Peter Inter shares are adequately connected with the defendant's culpable breach of contract.
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