By defendant's letter of 23 November and plaintiff's letter of 29 November 1928, the parties concluded a contract according to which the plaintiff was to deliver an automatic press for concrete slabs. Payment totalling DM 24,000 was to be made in 5 instalments (details on dates). The plaintiff guaranteed certain parts of the contractual performance. Separate agreements were reached in this respect and on any necessary removal of defects.
Between 8 October and 2 November, the press was installed by the plaintiff's mechanic, but subsequently it did not operate properly. After the pressing table broke on 20 January 1930, the press stood idle until a new table was delivered at the beginning of May. Work was resumed on 14 May. There is dispute as to whether or not the press was "accepted" at that date. The defendant had paid the first two instalments of DM 4,8000 each and the plaintiff then demanded payment of the three outstanding instalments before 10 June 1930. The defendant refused to pay, since the press still showed several faults which the plaintiff needed to repair. After the press had been in use since May 1930, the table broke once again on 3 September 1930. In their subsequent correspondence, the parties disagreed on the exact nature of the plaintiff's duty to repair the faults, in particular whether or not an automatic safety device needed to be installed and whether the plaintiff had to carry out the repairs before the remaining payments became due. Finally, by letter of 13 November 1930, the defendant requested that the press be taken back and payments made be returned.
By this action, the plaintiff demands payment of the outstanding instalments; the defendant raises a counter-claim for repayment of DM 9,800. The Landgericht (High Court) decided in favour of the plaintiff and dismissed the counter-claim. The Oberlandesgericht (Court of Appeal) dismissed the action and ordered the plaintiff to pay the defendant DM 9,800. The plaintiff's further appeal is unsuccessful.
In his further appeal, the plaintiff submits that by using the machine the defendant had in fact accepted it despite the lack of an automatic safety device and had not reserved any rights under para. 640 II BGB for lack of that device. He cannot later on claim work to be done in addition to the work already performed. This submission is unfounded. The appeal court implies that the defendant accepted the press in May 1930 but holds that the defendant was unaware of its faults since he neither knew that the press could break a second time nor could ascertain whether or not production of 500 slabs per hour could in fact continuously be achieved. The court's findings are legally correct. A work is defective in the sense of para. 640 BGB, where it falls short of the expectations under para. 633 I BGB, for instance where it fails to have a promised property or has defects which remove or reduce its value or suitability for normal or contractually agreed purposes. As long as the principal can only detect surface defects, he is still unaware of any hidden defects, especially as here, the lack of an automatic safety device. The hidden defect is only perceived once he knows that this defect removes or reduces the value or contractually-agreed use of the work. Only then will he know of the legal significance of the defect in respect of para. 633 BGB (see RG decision of 11 June 1905 - II 643/04, in Gruchot, vol. 50, 368). The appeal court ascertained that in May 1930 the defendant had no such knowledge.
The further appeal also submits that discussions in respect of the fixing of an automatic safety device were only introduced at a later stage of the proceedings when an expert's report was produced. From their correspondence the plaintiff was unable to deduce exactly what changes or additions to his work the defendant requested. The expert's report, which was only produced in the course of the proceedings, could not have been used as reason to rescind the contract. The plaintiff's letters contained no refusal to make the necessary repairs, since he declared his readiness, as part of his guarantee, to do whatever was necessary to produce a workable machine.
The question whether or not the plaintiff finally refused to make repairs involves considering and establishing the facts. The appeal court judge did not overstep the legal rules on interpretation or the need to take good faith in commercial dealings into account when he interpreted 1) the defendant's letter of 10 October 1930 as a request to fix an automatic safety device and 2) the plaintiff's letters of 20 and 30 October as final refusal of this request, irrespective of any default in respect of payments. The court of appeal does not cite any legal provisions for its opinion that the defendant is entitled to rescind the contract. But the court obviously considered the legal principles of positive breach of contract. The court was legally correct in establishing such breach of contract in the plaintiff's firm and final refusal to carry out the necessary repairs, i.e. to fix an automatic safety device. The court did not expressly state that the plaintiff is liable for the consequences of his refusal to perform the contract, i.e. that he is at fault. But where, as ascertained, it was absolutely necessary to fix an automatic safety device, the plaintiff, as manufacturer of the machine, acted negligently when he failed to detect the defect even after the table had broken as a result of this defect. In any case, it would have been his responsibility to substantiate why, in this case, he had not acted negligently. He failed to do so. The fact that the plaintiff did not know the expert report produced later on is insufficient rebuttal of fault. Under para. 325 BGB, a positive breach of contract provides the defendant with the right to rescind the contract. However, even before the plaintiff's positive breach of contract, the defendant had been in default, since he had not paid the remaining due instalments. In principle, this deprived him of the possibility to rescind the contract for positive breach of an obligation since, according to established case law of the Reichsgericht, such right of rescission only exists for a contractual partner who himself has fully performed his contractual obligations (RGZ 120, 193, at 196; 109, 54; 67, 313, at 319). In its decision of 6 December 1935 - VII 104/35 this Division recently reiterated this legal principle. Before effectively rescinding the contract, the defendant should first have remedied his own breach of contract, i.e. paid the outstanding instalments. Nonetheless, under the given circumstances, the defendant was relieved of this duty. As stated in RGZ 67, 313, at 319, even without first removing his own breach of contract, a contractual partner can claim for himself the effects of his partner's determined refusal to perform the contract, where that partner has stated that he intends to refuse performance even after, as is still possible, the other partner has remedied his own breach of contract.
It serves no purpose to demand performance from one partner when it is already clear that the other partner, after such performance, will unjustly continue to refuse performance of his own obligations with the result that the first partner could immediately demand that his performance, i.e. payment, be returned. The appeal court held that such a final refusal to perform the contract is present here when it stated in its decision that the plaintiff refused to fix the safety device not only until the outstanding payments were made but irrespective thereof and for good.
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