Introduction
Facts
Decision
Comment
A recent case regarding a production line that was unsuitable for industrial production sheds some light on whether a failed service should be regarded as a breach of contract. The case confirms the need for the buyer to specify clearly the object of the agreement.
When Sweden codified some of its general commercial principles at the beginning of the 20th century, two different acts were issued. The first concerned the sale and purchase of goods, which at the time was the most common type of commercial agreement. The second concerned the formation, authority and validity of agreements in general. After Sweden ratified the UN Convention on Contracts for the International Sale of Goods (CISG) in the 1980s, the old Sale of Goods Act was restructured – for nearly all intents and purposes – to mirror the CISG. At the same time, a consumer protection act on service was issued. However, the commercial terms and provisions for the services between non-consumers were left uncodified – and remain so today, even though the sector is growing.
As a result, the Swedish provisions regarding service agreements can be said to be a mishmash of general commercial principles, which mainly derive from the Sale of Goods Act, the Consumer Service Act and the Agreements Act. Thus, when it comes to service agreements, a fundamental question is: what kind of obligation must the service provider fulfil? In other words, what is the object of the agreement? A recent Western Sweden Court of Appeal case(1) regarding a production line that was unsuitable for industrial production sheds some light on this difficult subject.
A medical technology company needed a new production line for the manufacture of parts for a blood glucose meter and commissioned the work to a mechanical engineering company. When the production line was eventually ready for use, major components were found to be either non-functioning or unsuitable for industrial production. The buyer naturally demanded that the engineering company remedy this. The engineering company, however, stated that it would do no additional work until it received payment for all outstanding invoices. The parties were unable to reach an understanding and the case was taken to court.
Both the district court and the appeal court ruled in favour of the engineering company.
The buyer argued that the purchase of the production line should fall under the Sale of Goods Act – that is, that the engineering company's main obligation was to supply a material production line, rather than labour or other services.(2) This would mean that the engineering company was obliged to remedy the non-conformance. The engineering company, on the other hand, argued the opposite.
The appeal court acknowledged the fact that the agreement in dispute was a mixed agreement, containing elements of both the sale of goods and services. However, it concluded – with reference to the agreement's heading and terms, as well as the qualified engineering skills needed for the work – that the agreement mainly related to product development and the sale of technical labour hours (ie, services). Thus, the Sale of Goods Act was held not to be directly applicable.
Due to the above, the court also held that the obligation of the engineering company did not involve a duty to achieve a specific result. Accordingly, since the object of the agreement was not a strict duty of result, but rather a duty of best efforts, the court held that the only thing that the buyer had reason to expect was that service would be performed in a professional manner by a professional. Although the production line was definitely inoperative and unsuitable for industrial production, this was not in itself a breach of contract. Since the buyer had been unable to prove that the engineering company had performed in a less than professional manner, the ruling went in favour of the engineering company.
This is one of the few cases where the courts tried the question of non-conformity in a commercial service agreement. It also appears to be the first time that the courts have clearly identified the two major objects of an agreement: the duty to achieve a specific result and the duty of best efforts.
Although it may seem intuitive that the seller's obligation under an agreement regarding goods should be considered to involve a duty to achieve a specific result (ie, to hand over the agreed goods), the opposite cannot be held to be true regarding a rendered service. Of course, most services can be said to involve a duty of best efforts (eg, employment or legal services), but they may just as well involve a duty to achieve a specific result (eg, to carry goods to a specific destination). As a consequence – and since everything in the appeal court's reasoning suggests that the provisions in the Sale of Goods Act would have been applicable had the object of the agreement been found to be a duty of result (although this was not explicitly stated) – it would have been clearer if the courts had asked not whether a dominant part of the agreement was the sale of a product line or the sale of services, but rather whether the object of the agreement was a duty to achieve a specific result or a duty of best efforts.
Based on the above, one cannot help but wonder whether the outcome would have been different had the buyer emphasised that the agreement obliged the engineering company to achieve the specific result of a fully functioning product line, rather than that the agreement was dominated by the sale of the production line. This was what the buyer expected when the agreement was concluded. It might seem a case of semantics, but it would at least have forced the courts to further elaborate why a failed service was still not considered a breach of contract. Nevertheless, the case clearly confirms the need for the buyer to specify the object of the agreement – that is, to identify both what must be done and how that should be achieved.
At the time of writing, there was still time to appeal this decision.
For further information on this topic please contact Bo Thomaeus at Gärde Wesslau Advokatbyrå by telephone (+46 8 587 240 00), fax (+46 8 587 240 01) or email ([email protected]).
Endnotes
(1) T 1115-11; December 30 2011.
(2) See Paragraph 2 of the Sale of Goods Act and Article 3.2 of the CISG.