The defendant in West Berlin, who had been doing business with the plaintiff for some time, ordered from the latter 600 drill hammers by a letter dated 31 May 1948. In it the defendant stated "delivery as quickly as possible" "we will fetch it ourselves by long distance lorry" and "payment through our office in West Germany". As the plaintiff knew, the drill hammers had been ordered from the defendant by the office for Foreign Trade of the Eastern Zone of Germany and were intended for the mines in that zone. The order reached the plaintiff only on 18 April 1948, since it had first to be passed by the authorities in the Eastern Zone.

In the meantime the so-called "Berlin Blockade" had begun, which lasted from 24 June 1948 until 21 May 1949. The plaintiff, replying on the order, manufactured first 200 hammers and, by an invoice dated 30 November 1948, invited the defendant to take delivery. Subsequently he produced 74 more hammers and prepared the remaining 326 hammers up to a semi-finished state. The defendant did not fetch the hammers and did not pay for them either.

The plaintiff sued for payment of the order. The Court of Appeal gave judgment for the plaintiff against delivery of the hammers. The defendant's second appeal was rejected for the following

Reasons

The Court of Appeal was correct in holding that the purpose of the contract for the production and sale in dispute, namely to forward the drill hammers to the Eastern Zone, never became part of the contract as a real condition in the meaning of para. 158 BGB. Neither the wording of the defendant's written order nor the plaintiff's letter of acceptance disclose that the validity of the contract was to "depend upon the possibility of delivery to the Eastern Zone". As the defendant himself states, the drill hammers which have been ordered represented a type which was no longer sufficiently modern for the advanced mining technology in the Western Zone. When the plaintiff received the written order, the Berlin Blockade was already in force and it was completely uncertain whether and when it would be lifted. It would have been of extreme consequence for the plaintiff, who had to incur considerable costs for the manufacture of the hammers, the object of the order, if the validity of the contract had been made to depend upon the condition, completely outside his control, that the delivery of the hammers to the Eastern Zone could be carried out ... the plaintiff had no personal interest as to the manner in which the defendant intended to deal with the drill hammers. The plaintiff's own interest was only that the defendant should take delivery and make payment in accordance with the contract. With these interests in mind, it would only have been justified to regard the intended use of the hammers as a genuine condition of the contract, if an intention to this effect by the parties had been clearly expressed in the terms of the contract. This was not done.

The performance of the contractual obligations is also not contrary to the legal provisions which forbid exports into the Eastern Zone or require a permit. Since there is no doubt that the parties did not intend to evade the prohibitions of export when they concluded the contract and would not have achieved it by a delivery of the hammers to the defendant at the contractual place of delivery ... the appeal fails in so far as it alleges that the contract is contrary to para. 134 BGB.

At the same time the performance by the defendant has not become impossible in law. It is true that the payment of the contract price would mean a financial sacrifice for the defendant, resulting from the supervening difficulties of disposing of the goods, which the defendant has not foreseen at the time when the contract was concluded. It need not be decided here whether to this extent an economic impossibility exists in the meaning of the previous practice of the Reichsgericht [references]. At a time when the doctrine of the fundamental basis of transactions (Geschaftsgrundlage) had not yet been developed, the Reichsgericht formulated the concept of economic impossibility and equated it to true impossibility in the meaning of para. 275 ff, 323 ff, BGB. The purpose was to facilitate a release from contractual obligations in case of an increase in the burden of the performance appearing after the conclusion of the contract which exceeds the limit of financial loss which the debtor can be expected to bear. In its later decisions the problem of the economic impossibility of contractual performance was treated by the Reichsgericht, not on the basis of an analogous application of the rigid legal consequences of true impossibility but of a concept of a fundamental basis of transactions viewed within the wide and loose framework of para. 242 BGB [references]. The questions which are raised by the concept of economic impossibility also concern in reality the problem as to whether the performance of a contract can be expected of the debtor. This is a problem which, having regard to the usually opposing interests of the parties, can only be solved in reliance on para. 242 BGB which makes it possible to adopt the substance of the contract to present circumstances by balancing the opposing interests of the parties from the point of view of what can be expected from them [references]. The Court of Appeal has correctly examined the question as to the extent of the performance of the contract which can be expected of the defendant by relying on para. 242 BGB, though it did so from the legal aspect of the failure of the fundamental basis of the transaction and not of economic impossibility.

The Court of Appeal agrees with the District Court that the delivery of the drill hammers into the Eastern Zone and its sale to the users had become a basis of the transaction. This cannot be challenged on legal grounds. It is true that as far as a rule in a contract for the production and sale of gods the intention of the person placing the order to forward the semi-finished or finished products to a particular client does not render this purpose of concluding the contract a basis of the transaction which affects both parties. Reasons of contractual certainty require that in principle each party must bear the risk that the purposes intended by him in concluding the contract cannot be achieved. However, both parties proceeded from the assumption that the delivery of the drill hammers into the Eastern Zone would become possible within the foreseeable future, despite the blockade existing at the time of the conclusion of the contract. This hope of the parties did not materialise, however ... It need not be determined ... whether the basis of the transaction has disappeared after the conclusion of the contract or ... whether it did not exist at the time when the contract was concluded, because it is undisputed that even at that time the hammers could not be sent to the Eastern Zone. For even if the basis of the transaction was absent from the beginning, though its absence was only realised afterwards, the legal consequence is not that the transaction is invalid, but that it must be adapted to the actual situation, having regard to para. 242 BGB; it is true that good faith may also require a total release from the contractual liabilities [references]. Thus, also from the point of view of an initial failure of the basis of the transaction, it is correct in law when the Court of Appeal held that the impossibility of disposing of the drill hammers in the Eastern Zone did not result in a complete release of the defendant from his contractual duties, but - in so far as the entire contract is in issue - proceeded from the need to adopt the contractual duties to the real situation, having regard to the circumstances in the light of good faith.

If the basis of the transaction has failed and if having regard to the purpose of the transaction a party cannot be expected to remain bound by the contract, it must be examined first whether it is possible to adapt the contract to the real situation [references]. This examination must cover in each case the individual content of the particular contractual relationship, including all accompanying circumstances; the interference with the contractual relationship must be limited to such modifications as are necessary to avert unbearable consequences according to the demand of justice [references].

If in a contract for the delivery and payment of a series of objects, all the individual claims arising out of the contractual relationship are in issue, the court must adapt the entire contractual relationship as a unit to the factual situation, unless a complete release from all obligations is indicated. This adaptation may lead to a modification, especially a reduction, of the individual claims, or to a partial maintenance of the contract in accordance with the existing terms of the contract coupled with the elimination of far-reaching obligations. The decision of the Court of Appeal is not open to legal challenge when in the present case, having balanced the interests and the risks involved of both parties, it held in the exercise of its judicial powers of adjustment flowing from para. 242 BGB that the defendant could be expected to be bound by the contract in issue at least up to the amount of the payment for work done, equal approximately to one quarter of the total sum due under the contract. It cannot be overlooked that this decision leaves the fate of all other contractual duties of the defendant completely open. Since, however, the Court of Appeal ... believes that it is in accordance with good faith to hold the defendant to a part of the contract and since this part of the contract exceeds what is demanded in the claim and the counterclaim - it is only the consequence of the fact that in their statements of claim they have merely submitted a segment of the entire legal relationship to the contract of the courts.

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