## Facts

- A German seller and a Swiss buyer concluded two international sales contracts for used industrial machines.
- In December 1994, the parties agreed on a first contract for two used grinding machines (CHF 250,000), sold “as is”; the buyer later alleged defects and damages.
- In May 1995, the parties agreed on a second contract for five additional machines and equipment (CHF 1,100,000): CHF 200,000 was paid at signing, the balance was due upon delivery, and delivery was to occur by September 1995.
- By the end of May 1995, part of the goods were delivered and the buyer paid an additional CHF 400,000.
- When the buyer requested delivery of an additional machine, the seller demanded substantial prepayment as a condition of delivery; the buyer obtained provisional relief compelling delivery of that machine.
- On October 4, 1995, the seller demanded that the buyer take delivery of the remaining goods under the second contract and pay an asserted outstanding balance of CHF 500,000.
- On October 13, 1995, the buyer declared set-off against the price based on its alleged damages claim from the first contract, set off CHF 131,730.30, and offered to release/pay amounts that would leave a lower net balance.
- The seller rejected set-off and insisted on full payment of CHF 500,000 as a condition to proceed.
- On October 30, 1995, the buyer declared the second contract avoided as to the undelivered goods.
- The seller sued for payment; lower courts rejected the claim, upholding the buyer’s avoidance.

## Issues

1. Whether the CISG governs the requirements and effects of set-off, or whether set-off is determined by applicable domestic law.
2. Whether a buyer may avoid under CISG art. 49(1)(b) when the seller conditions delivery on payment of an amount allegedly not owed because the buyer set off a counterclaim.
3. Whether a seller’s refusal to deliver absent such payment is equivalent to non-delivery for purposes of CISG art. 49(1)(b).

## Decision

- The Swiss Federal Supreme Court dismissed the seller’s appeal and affirmed the denial of the seller’s payment claim.
- The court held that set-off is not governed by the CISG and must be assessed under the applicable domestic law as identified by the forum’s conflict rules.
- If set-off was valid under that domestic law, the seller’s price claim was extinguished to the set-off extent, leaving only a reduced net amount due.
- The seller’s insistence on payment of the unreduced amount, and its conditioning of delivery on that demand, constituted a refusal to perform sufficient to support the buyer’s avoidance under CISG art. 49(1)(b) as to the undelivered goods.

## Legal Principles

- The CISG does not regulate set-off; under CISG arts. 4 and 7(2), set-off is addressed by the applicable domestic law determined through private international law.
- A valid set-off extinguishes the seller’s claim for the price to the extent of the set-off; the seller may demand only the remaining net balance.
- A seller’s refusal to deliver unless the buyer pays an amount to which the seller is not entitled (after valid set-off) can be treated as non-performance comparable to non-delivery for purposes of CISG art. 49(1)(b).
- Domestic law may determine whether and to what extent the price obligation is reduced by set-off, while the CISG governs the buyer’s remedies (including avoidance) based on the resulting performance posture.

## Conclusion

The court confirmed that set-off falls outside the CISG and is governed by applicable domestic law; when valid set-off reduced the amount owed, the seller’s demand for the unreduced price and refusal to deliver supported the buyer’s avoidance of the contract for the undelivered goods under CISG art. 49(1)(b).


X AG v. Y Sàrl, 4C.314/2006 (Switz. Dec. 20, 2006)