Definition and Legal Classification of Substitute Sale
Der Substitute Sale is a term from the law of obligations and commercial law, particularly in the context of contracts for the sale of goods and securities. Legally, a substitute sale describes the approach taken by a creditor (usually the seller) who, after the contract partner fails to provide the promised performance, sells the agreed goods or contractual object elsewhere to minimize or limit their loss. The substitute sale often serves to mitigate damages and is a central tool in the handling of damages compensation in cases of performance disruptions.
Legal Basis
Regulations in the German Civil Code (BGB)
Under German law, the substitute sale is implied in Sections 280 et seq., Section 281, and Section 346 BGB. For mutual commercial transactions, provisions of the German Commercial Code (HGB), especially Section 373 HGB, supplement the regulation.
Section 281 BGB – Damages Instead of Performance
If the debtor fails to fulfill their contractual obligation, for example, due to non-delivery or delayed delivery despite a deadline, the creditor may claim damages instead of performance. Within the calculation of damages, the substitute sale is a permissible means to determine the actual loss incurred.
Section 373 HGB – Self-Help Sale
For merchants, Section 373 HGB grants the right to self-help within the framework of so-called self-help sales. If the buyer defaults on acceptance or refuses to accept the goods, the seller may, after giving notice and setting a deadline, sell the goods in a public sale at the buyer’s expense (substitute sale). The aim is to protect the creditor from further disadvantages and to clearly quantify the loss.
International Sales Law – UN Sales Law (CISG)
In international sales contracts governed by the UN Sales Law (CISG), substitute sale is addressed in Art. 75 CISG. The authorized seller or buyer may, after cancellation of the contract, purchase substitute goods or sell the goods elsewhere and then claim damages equal to the difference from the originally agreed price.
Requirements for Substitute Sale
General Requirements
- Performance Disruption: The debtor does not fulfill their obligations, especially by non-performance or delay.
- Notification and Setting a Deadline: For commercial transactions (§ 373 HGB), a reasonable deadline for performance or acceptance must be set, and the substitute sale must be threatened.
- Execution of the Substitute Sale: The sale usually takes place publicly or in the best possible manner and must be properly documented.
- Notification to the Contractual Partner: The debtor must be informed about the execution of the substitute sale.
Special Requirements for Securities and Financial Instruments
Substitute sale is of particular importance in financial transactions, for example in contracts for the delivery of securities, where the calculation of damages due to price differences on the stock markets is the main focus.
Legal Consequences of Substitute Sale
Calculation of Damages
The substitute sale forms the basis for calculating damages. The defaulting buyer is liable for the difference between the originally agreed purchase price and the amount achieved through the substitute sale. Any costs incurred in carrying out the substitute transaction may be added to the loss. At the same time, the injured party must take into account any expenses saved and other benefits received (duty to mitigate damages).
Transfer of Risk and Ownership
With the substitute sale, the risk and ownership are transferred to the new acquirer in accordance with legal provisions. Any proceeds exceeding the original price generally accrue to the original debtor, as they do not constitute a loss for the creditor.
Special Features in Commercial Law
In commercial law, substitute sale is of particular significance. The right of self-help sale is intended to enable quick loss limitation in commercial transactions. Furthermore, the public sale of easily perishable goods under Section 373 (2) HGB is permitted even without express notice or setting of a deadline.
Seller’s Duties in Substitute Sale
The seller is obliged to protect the interests of the defaulting contractual partner. This includes in particular:
- Reasonable efforts to achieve the best possible sale proceeds
- Immediate notification regarding impending and completed sale
- Proper accounting and, where applicable, payment of any excess proceeds
Distinction from Related Legal Institutions
Substitute sale must be distinguished from the substitute purchase (the buyer procuring the item elsewhere as a replacement) and from the self-help sale by the seller through withdrawal or damages without a substitute transaction.
substitute purchase
The substitute purchase is the counterpart to the substitute sale on the buyer’s side. Here, the buyer, after the seller’s non-performance, procures the goods elsewhere and can claim the additional costs as damages (Sections 280, 281 BGB).
Importance in Case Law
Case law specifies the requirements for notification, setting of deadlines, as well as the manner and method of conducting a legally valid substitute sale. In particular, it is emphasized that abuse of law and unjust enrichment must be excluded through handling that takes into account the interests of the contractual partner.
Substitute Sale in an International Context
For cross-border contracts of sale and securities transactions, international regulations (e.g., CISG) apply in addition to national law, whereby the principles of substitute sale are generally recognized as an expression of the duty to mitigate damages.
Literature and Further Information
- German Civil Code (BGB)
- German Commercial Code (HGB)
- United Nations Convention on Contracts for the International Sale of Goods (CISG)
- Commentary literature on HGB and BGB
The substitute sale is a key legal instrument for limiting damages in the event of performance disruptions in sales contracts and is of high practical relevance, particularly in commercial and securities transactions. Its legal requirements, execution, and consequences are regulated in detail and serve to protect both parties to a contract.
Frequently Asked Questions
What legal requirements must be met to carry out a substitute sale?
According to German law, a substitute sale may generally only take place if the buyer has failed to meet their acceptance or payment obligation within the prescribed period and thus is in default of acceptance or payment. This requirement arises particularly from Section 373 HGB for commercial sales between merchants, but may be similarly applied to other legal relationships. Before carrying out the substitute sale, the seller is required to again request the defaulting buyer to fulfill the contract and to set a reasonable deadline. Only after this grace period has expired fruitlessly is the seller entitled to sell the goods to a third party on the best possible terms. The substitute sale must be carried out in a manner that is understandable for the buyer (usually by public auction or private sale), and the buyer must be promptly informed of the date and location of the sale, so that they have the opportunity to protect their own interests or participate in the sale. If these formal obligations are not observed, the claim for damages arising from the substitute sale may be lost.
How are damages calculated legally and mathematically in a substitute sale?
The calculation of damages generally results from the difference between the purchase price originally agreed with the defaulting buyer and the purchase price actually achieved in the course of the substitute sale. If the resale results in lower proceeds for the seller, they may demand the difference as damages from the buyer; see Section 373 (2) HGB. Additionally, extra costs incurred through the sale (e.g., storage costs, transport, insurance or auction fees) are also refundable as so-called default damages, provided they are incurred in the normal course of business and are demonstrable. The duty to mitigate damages applies: the seller must demonstrate that, in selecting the method and conditions of the substitute sale, they have attempted to keep the loss as small as possible. Any other advantages or savings resulting from the substitute sale for the seller must be offset against the claim for damages.
Does the buyer have to be informed before a substitute sale is carried out?
From a legal perspective, the seller is fundamentally obliged to inform the buyer in good time before carrying out the substitute sale. Pursuant to Section 373 (2) sentence 2 HGB, the defaulting buyer must be notified of the time and place of the intended sale. This notification obligation serves the purpose of transparency and enables the buyer to safeguard their own rights and interests, for example by attending the sale, naming purchasers, or even accepting the goods themselves. Failure to notify may cause the seller to lose their right to claim damages in whole or in part. However, notification may be dispensable if the goods are perishable or if there are other reasons that require the immediate realization of the goods.
What legal risks does the seller face in a substitute sale?
Carrying out a substitute sale entails several legal risks for the seller. A central risk is that failure to provide correct information or to set a proper deadline may result in loss of the right to claim damages. Furthermore, the seller must be able to prove that the price achieved and the sales conditions conformed to the market value and usual business practices; otherwise, the buyer may challenge the process for breach of the duty to mitigate damages. Another risk lies in faulty execution of the sale, for example, if the sale is at an unreasonably low price or if proceeds from realization are overlooked; in such cases, the claimed loss may not be restituted, or only partially. In individual cases, liability for breaches of duty in connection with dispatch or storage of the goods may also become relevant.
Is it possible to assert claims against the buyer after a substitute sale?
After a substitute sale has been completed, the buyer is generally no longer entitled to claim delivery or transfer of the goods originally agreed upon, since the sale to a third party terminates the original obligation concerning these particular goods. However, if the sale was carried out in an impermissible or unlawful manner (e.g., without setting a deadline or proper notification), the buyer may claim damages from the seller. The buyer may also raise objections regarding the amount of damages, particularly if the sale price achieved was unreasonably low, or if the seller has breached their obligations regarding mitigation of loss. In individual cases, this may result in a reduction or complete exclusion of the damages claim.
Is a substitute sale also possible outside of commercial sales?
Although Section 373 HGB explicitly provides for the substitute sale in mutual commercial transactions between merchants, the principle can also be applied to other types of sales contracts, provided the debtor is in default of acceptance or payment and a grace period has expired without success. In general contract law (Sections 280 et seq., 323, 346 BGB), the substitute sale is an expression of the principle of the duty to mitigate damages: if a buyer refuses acceptance, the seller is generally permitted to sell the goods elsewhere to minimize damages. In these cases, however, the specific formalities of the HGB do not apply, rather the general rules of the BGB, which means the burden of proof regarding the loss and mitigation is even more prominent. For specific goods, especially perishable goods, special rules exist (e.g., analogies to the law on pledge sales under Section 383 BGB).
What special rules apply to international substitute sale cases?
For international sales contracts, particularly where the UN Sales Law (CISG) applies, there are sometimes different rules. According to Art. 75 CISG, in the event of a breach of contract by the buyer, the seller may make a substitute purchase (substitute sale) and claim the difference between the agreed price and the price achieved in the corresponding substitute transaction as damages. Here too, it is required that the substitute sale is carried out in a reasonable manner and within a reasonable time frame. The obligations to inform the buyer are similar to the national provisions, but are less formalized than under German law. The applicable law should always be carefully checked, since notarial or state requirements may apply in individual cases.
