CISGinternational salesItalian case-lawnon-conforming goods

Almost in Order – The Sandretto Case

By 14 January 2022 February 24th, 2022 No Comments

May a working industrial equipment, though not-fully-in-order, be considered as non-conforming under the law?

A preliminary annotation. We are talking about international supplies, governed by the CISG – the uniform law set out in the Vienna Convention of 11/04/1980 that governs (unless excluded by the parties concerned) international contracts for sale. ‘Non-conformity’ under the CISG is mainly addressed in art. 35, which provides a series of criteria for assessing whether or not the goods sold can be considered “conforming” to what was agreed in the contract. The passage is important because a lack of conformity allows the buyer to make recourse to a series of remedies, ranging from price self-reduction, to contract termination. CISG applies automatically in case the parties to the transaction are established in two contracting States. In addition, CISG applies where the sale turns out to be governed by the law of a contracting State. Therefore, taking into account the fact that there are nowadays 94 contracting States, a large part of the international transactions qualifying as sale and purchase (transfer of goods against money) may fall within the CISG domain.

The question above –  May a working industrial equipment, though not-fully-in-order, be considered as non-conforming under the law? – has recently been dealt with by the Italian Courts (namely the First Instance Court and Court of Appeal in Turin, and also by the Court of Cassation). The case was concerning a large industrial press (not the one in the picture, of course…), manufactured and sold by the now discontinued Turin-based company Sandretto Industrie Ltd., to Tiberias Plast Ltd., an Israeli company. The sale was governed by CISG, failing any indication to the contrary in the contract, and being both Italy and Israel CISG contracting States

As it often happens, technical problems surface with machinery of a certain complexity, even after successful testing. Although this may not preclude the equipment to get into operation, fine-tuning is required, and one may experience a slowdown in production, or blocking of certain functions. This was exactly what happened to the Sandretto press. In fact, the buyers were claiming that the equipment, although working, would not meet the agreed standards, both in terms of quality and output timing. Since the Israelis refused, for this reason, to settle the entire price, the issue ended up in court, with the buyer demanding a reduction of price on account of serious defects, and lack of promised qualities. The First Instance Court found a ‘substantial capacity’ of the equipment to carry out its function (indeed, “it appeared to have been working for many years in an intensive manner“), even though some components were undeniably defective/ missing. Consequently, the claim was rejected, and the Israelis were condemned to pay the balance of the supply (with just a slight discount – i.e. €16,000 of the €236,000 still due. Art. 50 CISG in fact provides that “If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price“. The rule indeed empowers the buyer himself to a (self-)reduction, but here it was the court that provided it.

The decision was appealed, and confirmed in May 2016, and finally submitted for review to the Supreme Court of Cassation.  The Cassation Court final decision (judgment no. 26687, filed on Nov. 24, 2020), upheld the reasoning of the Court of Appeal according to which “since the machinery has been working for a long time, the presence of some operating problems cannot be ascribed with certainty to the  seller’s responsibility, since it remains unclear whether those defects were original or could be attributable to subsequent causes (e.g. defective maintenance)“. Most notably, it provides useful elements to answer the initial question. In particular, it states that –

(1) “the presence of some defects does not necessarily imply the non-conformity of the thing sold“.

(2) “the burden of proof for conformity of goods lays upon the buyer

As for (1),  the Cassation’s statement appears a bit daring, indeed. In fact, it seems that the Sandretto press was undoubtedly lacking conformity, although not to an ‘essential’ degree. Now, CISG (art. 36 and 45) does not set any threshold in respect of major, or minor non-conformity; in case the goods are found as non-conforming, seller is always liable. It is the system of relevant remedies, that provides for an articulated series of consequences in accordance with the seriousness of the non-conformity. The Cassation court, instead, seems to follow a different line of reasoning. Maybe, this is due to the legacy of the traditional categorization of seller’s non-compliance in terms of (i) defects, (ii) lack of promised qualities, (iii) malfunctioning, and (iv) aliud pro alio (supply of a goods totally different in genus)  – with the relative, diversified remedies.

It must be said that this is not a uniquely Italian problem. The CISG regulations have inevitably given the courts of the various countries the opportunity to give different interpretations. This happens in relation to the very concept of non-conformity (for example, a Swiss court (HG Zürich 30/11/1998), fortunately isolated, has affirmed that there is no non-conformity if the goods supplied, although different from those agreed upon, are equivalent in value and usefulness).

As for (2), the Cassation decision at hands seems to ignore the debate arisen on the topic, and the need to assure uniformity in applying CISG. In fact, although CISG does not address the issue explicitly, it is quite accepted that burden of proof is kind of complex issue that deserve an articulated approach. Firstly, it appears that it is seller who has to give prima facie evidence of having supplied conforming goods (art. 35); then, if step one is satisfied, burden of proof shifts to buyer; finally, if buyer satisfactorily gives evidence of non-conformity as per step two, burden of proof comes back upon seller to possibly explain why it should not be liable. On the contrary, the Cassation based the Sandretto decision on the principle established by same Cassation at ‘sessioni unite’ (joint sitting of all divisions) in case no. 11748/19: “With regard to the warranty for defects of the goods sold pursuant to art. 1490 of the Civil Code, the buyer who exercises the actions of contract termination or price reduction pursuant to art. 1492 of the Civil Code is burdened with the burden of offering proof of the existence of defects”.

 

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<img src="" class="rounded-circle shadow border border-white border-width-4 mr-3" width="60" height="60" alt="Carlo Mosca">
Author: Carlo Mosca

A lawyer specializing in international commercial transactions. Lexmill's owner.

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