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24 March 1999 [VIII ZR 121/98], BGHZ 141, 129

Bundesgerichtshof 24 March 1999 [VIII ZR 121/98], BGHZ 141, 129, with case note

This case is published in the German Law Archive courtesy of Pace Law School Institute of International Commercial Law.

Translation [*] by Alston & Bird LL.P.
Editors: William M. Barron, Esq.; Birgit Kurtz, Esq.

1. CISG Art. 79 On the question of the exemption of the seller under CISG Art. 79 when, in the case of a delivery not conforming with the contract, he was only acting as an intermediary, and the reason for the goods’ non-conformity is in the control of his supplier or his supplier’s supplier.

2. CISG Art. 77; ZPO § 304 (1) On the admissibility of a judgment as to the existence of a damage claim without considering mitigation of damages pursuant to CISG Art. 77.

BGH,[*] decision dated March 24, 1999 – Index No. VIII ZR 121/98 (Pfälzisches OLG Zweibrücken, LG Frankenthal [**]).

The Eighth Civil Panel of the Federal Court of Justice has decided, after the hearing of March 24, 1999 (judges Dr. Zülch, Dr. Beyer, Dr. Leimert, Wiechers and Dr. Wolst):

Upon the appeal of the defendant, the judgment dated March 31, 1998 of the Eighth Civil Division of the Pfälzisches Oberlandesgericht Zweibrücken is reversed.

The case is remanded to the Court of Appeals for another hearing and decision, also regarding the costs of the appeal.

[…]

Facts

Plaintiff runs a vine nursery in Austria dealing, inter alia, with the breeding and refinement of vines as well as the sale of these vines. In the grafting process, the [plaintiff] uses a special wax in order to protect the vines from drying out and in order to reduce the risk of infection. The wax, which plaintiff also in part resold, was purchased by [plaintiff] for many years from the defendant, whose owner also runs a vine nursery. The defendant in turn obtained the wax from the F.W. company. The manufacturer of the wax was the company S. Werke GmbH.

In a letter dated January 18, 1994, plaintiff asked defendant, as in previous years, to submit an offer for “about 5,000 kg black vine wax.” With reference to this letter, the defendant offered to plaintiff, in a letter dated January 21, 1994, 5,000 kg of “black vine wax” at the price of DM [Deutsche Mark] 5.43 per kilogram. On January 31, 1994, plaintiff placed such an order.

The wax which was thereupon delivered to plaintiff was a type of wax newly developed by S. Werke, as requested by defendant. Defendant had neither actually received accepted nor inspected the goods prior to delivery to plaintiff. The delivery took place in the original packaging directly from the manufacturer, S. Werke, as requested by defendant via the F.W. Company.

Plaintiff partially used the wax for the treatment of its own vines. In addition, plaintiff also sold the wax and vines which had been treated in its nursery with the wax to other nurseries which, in turn, treated their vines with the wax and also delivered vines that had been treated with the help of the wax to other customers.

In a letter dated June 16, 1994, plaintiff gave notice of the defective wax to defendant and complained of major damage to vines treated with the wax. In the lawsuit at issue, plaintiff demands the value of sA [Austrian Schillings] 14,146,348.40 in damages from the defendant. Defendant refuses to compensate [the buyer]. [The defendant] attributes the alleged damages to frost and argues that it is exempt from any liability as an intermediary pursuant to Art. 79 CISG because the reasons for the damages are out of its control. In addition, [defendant argues that] the asserted damages are excluded by its general terms and conditions of sale.

The Landgericht [Court of First Instance] dismissed the complaint. Upon the appeal of the plaintiff, the Oberlandesgericht [Regional Appellate Court] held that the complaint presented a valid cause of action and remanded the case to the Landgericht for further hearings on the amount of damages. The appeal of defendant argues against this and requests the reinstatement of the Landgericht judgment.

The Reasons for the Decision

I. The [Regional] Court of Appeals held:

[The Court held that] plaintiff had a claim for damages against defendant pursuant to CISG Art. 45(1)(b) in connection with Art. 74 – 77, from which defendant could not be exempted by CISG Art. 79.

[The Court found that] the black vine wax delivered by defendant did not meet industry standards and was therefore not in conformity with the contract pursuant to CISG Art. 35(1). [The Court stated that] on the basis of the expert’s opinion, the defectiveness of the wax was proven without a doubt. [The Court pointed out that] insofar as defendant denied that the delivered vine wax was the cause of the damage, this was unsubstantiated.

[The Court held that] defendant’s liability was not excluded by defendant’s terms and conditions of sale. They did not become part of the contract. Moreover, they were invalid because they violated AGBG [*] § 9 by excluding damage claims completely.

[The Court held that] defendant’s liability was also not exempted by CISG Art. 79. Because defendant itself herself had commissioned the development of the new type of wax that was delivered to plaintiff, an exemption was only possible if defendant could rely on the newly developed wax having been exhaustively tested. This was not, however, the case. [The Court stated that] as a result, the impediment pursuant to CISG Art. 79(1) was not beyond defendant’s control. Defendant could have avoided the defect. It [defendant] should have had the new product tested for plant compatibility.

[The Court held that,] therefore, plaintiff has a cause of action for compensation of its actual financial damages because of the delivery of the defective wax in 1994.

[The Court held that,] with respect to the extent of the damages caused by the defect, the matter was not yet ripe for decision. For this purpose, further determinations, especially an evidentiary hearing, are necessary to determine the extent of the damages suffered by plaintiff in its own vine nursery with respect to the vines intended for sale as well as the extent of its losses as a result of having to reimburse its customers for damages suffered due to the defective vines and its customers’ property loss caused by the use of the defective wax.

II. These views do not withstand legal scrutiny on appeal in all points.

1. The appeal tries unsuccessfully to overturn the decision of the Lower Court with respect to the defectiveness of the black vine wax delivered to plaintiff by defendant in 1994.

The Court of Appeals correctly justifies its decision by the fact that the expert determined, without any reservations, that pursuant to his experiments and analyses there is no doubt that a causal connection existed between the vine wax used and the damages to the vine nursery’s field.

The appeal unsuccessfully attacks the expert’s knowledge with the reproach that, while he was only an expert in biology, he still conducted chemical and physical experiments and analyzed the results himself. The deciding determination that the use of the sold wax caused the damage to plaintiff’s plants, was found by the expert in a field test whereby 500 vines were paraffined with the result that the plants that were treated with the wax in dispute were heavily damaged. Contrary to the argument of the appeal, there is no need for an additional expert’s opinion based on chemistry and physics to determine which specific harmful substance in the wax was responsible for the damages. The Court of Appeals correctly relies on the fact that defendant was obligated, pursuant to CISG Art. 35(2)(a), to deliver wax that is suitable for the treatment of vines, but that the black vine wax delivered by defendant in 1994 did not meet the industry standards – of which both parties were aware and which both parties applied – and that therefore the wax was not in conformity with the contract within the meaning of CISG Art. 35.

2. The appeal further asserts that defendant is, in any event, not liable for the damages caused by the use of the vine wax because it was only the intermediary and, therefore, the vine wax’s non-conformity with the contract was beyond its control (CISG Art. 79). This attack is also unsuccessful.

a) It may remain undecided whether CISG Art. 79 encompasses all conceivable cases and forms of non-performance of contractual obligations creating a liability and is not limited to certain types of contractual violations and, therefore, includes the delivery of goods not in conformity with the contract because of their defectiveness (compare Schlechtriem/Stoll, Kommentar zum einheitlichen UN-Kaufrecht, 2d ed. 1995, Art. 79 ¶¶ 45-47; Staudinger/Magnus, Wiener UN-Kaufrecht, 1994, Art. 79 ¶¶ 25-26; Piltz, Internationales Kaufrecht, Munich 1993, § 4 ¶ 217 et seq.; Herber/Czerwenka, Internationales Kaufrecht, Munich 1991, Art. 79 ¶ 8; Schlechtriem, Internationales UN-Kaufrecht, Tübingen 1996, p. 164 et seq.), or whether a seller who has delivered defective goods cannot rely on Art. 79 CISG at all (compare Nicholas, Impracticability and Impossibility in the UN Convention on Contracts for the International Sale of Goods, in: Galston N.M./Smit H., International Sales, New York, Mathew Bender, 1984, Chapter 5 § 5.10 to 5.14; Tallon, in Bianca/Bonell, Commentary on the International Sales Law, Milan 1987 Art. 79 cmt. 2.6.2.; Honnold, J.O., Uniform Law for International Sales under the United Nations Convention, December 1982, Art. 79 N. 427; compare also Lautenbach, Die Haftungsbefreiung im internationalen Warenkauf nach dem UN-Kaufrecht und dem schweizerischen Kaufrecht, Doctor’s Thesis of the University of Zurich, 1990 p. 33 et seq.; Keil, Die Haftungsbefreiung des Schuldners im UN-Kaufrecht, Doctor’s Thesis of the law faculty of the Ruhr-University Bochum, Frankfurt am Main 1993, p. 18 et seq.). An exemption pursuant to Art. 79 CISG, upon which the Court of Appeals correctly based its decision, is not applicable because, in any case, the defectiveness of the vine wax was not outside defendant’s control. It is, therefore, responsible for the consequences of a delivery of goods not in conformity with the contract.

The possibility of exemption under CISG Art. 79 does not change the allocation of the contractual risk. According to the [CISG], the reason for the seller’s liability is that he has agreed to provide the purchaser with goods that are in conformity with the contract. If the supplier’s (or suppliers’) breach of the contract is a general impediment within the meaning of CISG Art. 79 at all, it is generally an impediment that the seller must avoid or overcome according to the content of the contract of sale. This follows the typical meaning of such a contract (Magnus in: Honsell [publisher], Kommentar zum UN-Kaufrecht, 1997, Art. 79 ¶ 10; but see Schlechtriem/Stoll, supra, Art.79 ¶ 47 et seq. with further citations). From the buyer’s point of view, it makes no difference whether the seller produces the goods himself – with the consequence that the non-performance is generally in his actual control so that, as a rule, a dispensation pursuant to CISG Art. 79(1) is generally excluded – or whether the seller obtains the goods from suppliers. Just as in the case of unspecified obligations, where the seller is liable for the timely delivery by his supplier (compare, e.g., Staudinger/Magnus, supra, Art. 79 ¶ 22; Schlechtriem/Stoll, supra, Art.79 ¶ 30 et seq.), he is also responsible to see that his supplier delivers defect-free goods. In this respect, the [CISG] does not distinguish between an untimely delivery and a delivery of goods not in conformity with the contract. For both breaches of contract the same standard of liability applies. The appeal does not indicate that the parties agreed to a different allocation of risk at the formation of the contract, nor is this otherwise apparent.

Pursuant to CISG Art. 79, the seller’s exemption from consequences of goods not in conformity with the contract can only be considered – if at all (see above) – when the non-conformity cannot be deemed to be within the seller’s control. Because the seller has the risk of acquisition (as shown), he can only be exempted under CISG Art. 79 (1) or (2) (even when the reasons for the defectiveness of the goods are – as here – within the control of his supplier or his sub-supplier) if the defectiveness is due to circumstances out of his own control or out of each of his suppliers’ control. The appeal cannot show this. Insofar as the appeal points out that the manufacturer, in 1994, used an inappropriate raw material possibly imported from Hungary during the production of the delivered vine wax, this is not relevant with respect to CISG Art. 79 because the manufacturer would be liable – and thus also plaintiff vis-à-vis defendant – for those product defects within its control.

b) For this reason, the basic responsibility of defendant for plaintiff’s damages is not questioned by the appeal’s argument that the damage would have occurred in the same way if defendant in 1994 had delivered the same vine wax to plaintiff as it had delivered in prior years and that was used by plaintiff without any damages instead of the newly developed vine wax, because all brands of vine wax produced by the manufacturer in that year had the same defect due to the defective raw materials used only in this year. That is so because defendant would also have been liable for plaintiff’s damages in this hypothetical case. The liability under the [CISG] is, contrary to the Lower Court ‘s opinion, not based on the supplier’s obligation to inspect the goods before delivery to its purchaser, which – according to the appeal – was not necessary in this case because the vine wax previously purchased had always been free of defects. That is so because the seller’s culpability is not important due to the statutory allocation of risk and the lack of a different agreement between the parties concerning the allocation of risk, resulting in a guarantee [warranty] liability of the seller.

3. We do not disagree with the Appeals Court ‘s view (not questioned on this appeal) that defendant’s liability was not excluded under its terms and conditions because they did not become part of the contract and, moreover, violated AGBG § 9 by completely excluding damage claims.

4. The appeal, however, correctly argues that the Court of Appeals did not review the question whether and to what extent plaintiff carries a joint responsibility for the damages pursuant to CISG Art. 77.

a) The question whether, during the litigation with respect to the legal basis of the claim, a decision must be made concerning the violation of an obligation to mitigate the damages pursuant to CISG Art. 77 or whether it is reserved for separate proceedings concerning the amount of the claim, must be decided according to the principles developed with respect to BGB [*] § 254; the principle of autonomous interpretation of the [CISG] (CISG Art. 7) is not contradictory because this is a question of procedural law.

CISG Art. 77 establishes a defense that may exclude a claim and must be considered sua sponte (Schlechtriem/Stoll, supra, Art. 77 CISG ¶ 12 with further citations). The failure to meet the duty to mitigate damages can result in the complete exclusion of compensation insofar as damages could have been avoided altogether (compare Schlechtriem/Stoll, supra). As a rule, the review of the failure to observe the duty to mitigate damages pursuant to CISG Art. 77 must take place as part of the decision as to the existence of a cause of action. Only when it is certain that the failure to meet the duty to mitigate damages does not lead to the exclusion of liability and, thus, a claim of the injured party remains, the decision about [the failure to mitigate damages] can be reserved for separate proceedings concerning the amount of the claim. If, in the decision with respect to the existence of a claim, some individual questions regarding the existence of a claim are ignored and their clarification is left to a separate proceeding concerning the amount of the claim, the main holding, or at least the grounds of the decision, must show which points concerning the existence of the liability have not been decided in the decision on the existence of a claim. This has long been accepted by the Court s in the review of contributory negligence pursuant to BGB § 254 (compare BGH, judgment dated July 11, 1974, II ZR 31/73 = VersR [*] 1974, 1172 at 6; Civil Panel, judgment dated January 31, 1990, VIII ZR 314/88 = NJW [*]1990, 1106 at II 2 b aa; Civil Panel, judgment dated January 31, 1996, VIII ZR 243/94 = NJW-RR [*] 1996, 700 at II 1 d aa), and the same applies to CISG Art. 77.

b) The Court of Appeals did not, as the appeal correctly argues, deal with the question of plaintiff’s joint responsibility for the damage, neither in the main holding nor in the grounds for the decision. It thus passed over defendant’s argument that plaintiff continued to use the vine wax in dispute after it – when only a little more than half of the vines in the vine nursery had been treated – had learned about its defectiveness. Because the Court of Appeals did not make an appropriate reservation, it would be prevented by ZPO [*] § 318 from considering plaintiff’s alleged joint responsibility for the damages in the further course of the lawsuit (compare Civil Panel, decision dated January 31, 1990, supra).

5. Finally, the appeal correctly argues that the Court of Appeals did not address defendant’s argument that plaintiff had also applied the wax for a purpose not intended, namely the treatment of young vines supposed to be planted into so-called “young fields,” even though it was only offered by defendant and ordered by plaintiff for the purpose of vine grafting.

If plaintiff used the delivered vine wax for a purpose for which it was not meant to be used under the contractual agreement, defendant is not liable for resulting damages. There would be no causal connection between the violation of the statutory obligations set forth in CISG Art. 35 and the damages appearing in the young fields.

According to the reasons under Point 4, the [Court of Appeals] should have either made an explicit decision about defendant’s liability for the damages caused by the use of the delivered wax on “young fields,” or – if not – the Court at least should have made an appropriate reservation in the decision. Both are missing.

III. Because further determinations by the trial judge are necessary, the Appeal Court ‘s decision must be reversed and remanded to the Court of Appeals for further trial and decision.


Footnotes

* Translator’s notes: AGBG = Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen [Act Regarding the Regulation of the Law of General Contractual Terms and Conditions]; BGB = Bürgerliches Gesetzbuch [German Civil Code]; BGH = Bundesgerichtshof [German Federal Supreme Court]; Landgericht = Regional District Court, here the Trial Court; NJW = Neue Juristische Wochenschrift [pre-eminent German weekly law journal]; NJW-RR = Neue Juristische Wochenschrift – Rechtsprechungsreport [weekly law journal reporting on civil and criminal judgments]; sA = Austrian shillings; VersR = Versicherungsrecht [monthly law journal specializing in insurance law]; ZPO = Zivilprozeßordnung [German Code of Civil Procedure].

** Translator’s note: LG Frankenthal, the Regional Court of Frankenthal, was the Trial Court in this matter, and Pfälzisches OLG Zweibrücken, the Higher Regional Court decided the appeal from the Trial Court.


Case Commentary

Also available at Pace Review of the Convention on Contracts for the International Sale of Goods (CISG), Kluwer Law International (2000-2001) 383-407

Federal Supreme Court (Bundesgerichtshof), Civil Panel VII March 24, 1999, Index No. VIII ZR 121/98

Commentary by Peter Schlechtriem [1]

Translation by Todd Fox & Sonja Corterier

This decision is significant because it clarifies important and internationally disputed questions concerning a seller’s liability for delivery of non-conforming goods under the United Nations Convention on the International Sale of Goods (CISG). To understand the scope of the decision it is necessary to recall the entire context of seller’s liability for non-conformity. The possibility of exemption for an obligor for a breach of duty due to an impediment beyond his control and which was neither foreseeable nor avoidable for him is limited to the obligee’s claims for damages. According to Art. 79(5) CISG other remedies still remain viable when an obligor qualifies for an exemption. For the seller’s liability due to non-conforming goods that means that the buyer still has the right to a price reduction under Art. 50 CISG, to demand cure so long as the necessary prerequisites for cure or delivery of substitute goods are met, and in certain exceptional cases to declare the contract avoided.[2] As under §§ 459, 480 (1) BGB [German Civil Code] the seller is in this respect still liable for defects, i.e., for the non-conformity of the goods.

1. According to the CISG a party is not liable for damages due to “failure to perform any of [a party’s] obligations” if the prerequisites for an exemption stated in Art. 79(1) CISG are met. In simple terms this would include impediments that were unforeseeable and beyond the control of the party in breach and therefore unavoidable. The terminology of the Norwegian text is especially appropriate in using the term “sphere of control” to circumscribe the responsibility of the obligor and his risk of liability if damages arise. The prevailing view, not only in Germany, is that “a failure to perform any obligation” within the meaning of Art. 79(1) CISG includes the delivery of non-conforming goods. This means, at least theoretically, that a seller can escape his liability for damages by an excuse under Art. 79 CISG. The Bundesgerichtshof [German Federal Supreme Court, BGH] left open the question “whether Art. 79 CISG includes every possible case and form of failure to comply with obligations under the contract” as well as the question “whether the exemption applies to delivery of non-conforming goods.” However, the court’s holding that a seller is liable for defects attributable to his suppliers, and its reasoning why indicate that the court deemed Art. 79 CISG applicable for damages liability due to non-conformity; otherwise the court’s reasoning in denying an exemption for the seller would be superfluous.

To evaluate the question of whether the seller’s duty to deliver conforming goods under Art. 35 CISG is included under the obligations covered in Art. 79, and therefore whether an exemption for the seller is possible, and to give the appropriate weight to scholarly comments on this question, it is necessary to distinguish two lines of argument. Firstly, whether non-conformity is actually failure to perform an obligation within the meaning of Art. 79(1) or 79(2) CISG and whether it should be according to the intention of the drafters of the Convention. Secondly, if the answer to the first question is yes, whether non-conformity can depend on circumstances beyond the seller’s control that he cannot reasonably be expected to have taken into account at the time of the conclusion of the contract or to have avoided or overcome their consequences. Thus, whether and when an exemption for the seller from liability due to defective goods can be considered.[3]

a) The wording “any of his obligations,” which would include those of the seller under Art. 35 CISG, and the placement of this exemption provision in the CISG (Chapter V “Provisions Common to the Obligations of the Seller and of the Buyer”) clearly imply its applicability in cases where damages are claimed against the seller due to non-conformity of the goods. An interpretation leading to different results would go against the text of the Convention.

b) The legislative history of the CISG also supports this position. The question was already disputed during the preparations for the Hague Convention (ULIS) and seemingly decided that the exemption provision of Art. 74 ULIS in principle should also apply to non-conformity cases.[4] In the Secretariat Commentary [5] on the 1978 New York Draft,[6] which served as the basis for the Vienna Conference, the example chosen to illustrate 1978 Draft Art. 65(1) (=Art 79(1) CISG) was the liability and possible exemption of a seller who failed to package the goods in accordance with the contract. However, adequate packaging was already in Art. 33 of this Draft, as well as presently in Art. 35 CISG, classified as necessary for the goods to conform to the contract.[7] Anglo-American literature refers to the first sentence of Art. 79(4) CISG and argues on the basis of the wording of the text that this sentence clearly would not fit the case of delivery of non-conforming goods.[8] However, this sentence only makes clear that, in applying Art. 79 CISG, one has to differentiate between the modalities of the breach of contract. There is also, of course, the possibility that the party who cannot deliver conforming goods is able to communicate the reason for this hindrance prior to the delivery. The reference to damages in the second sentence of Art. 79(4) CISG makes sense for the buyer if exemption in cases of non-conformity to the contract is principally deemed possible in such a situation.

c) Especially practical considerations speak for qualifying delivery of non-conforming goods as “failure to perform an obligation” within the meaning of Art. 79 CISG. If the delivery of non-conforming goods were to be excepted from the possibility of exemption under Art. 79 CISG then the seller would, at least in borderline cases which would qualify for remedies under both liability for non-conformity and failure to comply with a collateral duty under German (national) sales law, be able to qualify for an exemption for breach of a collateral duty but not for breach due to non-conformity of the goods. Packaging that does not conform with the contract (Art. 35(1), (2)(d) CISG) could also be construed as a breach of a collateral duty to adequately pack the goods. The seizure of instruments which do not comply with certain security standards could be construed to be the result of delay in producing the required test-certificates and therefore as a breach of a collateral duty for which an exemption would be conceivable (e.g., if the administrative agencies worked slowly).[9] This would be a further case of an unsure, and therefore, unwanted borderline between liability for non-conformity and liability for breach of a collateral duty.

d) The differing opinions cited by the German Federal Supreme Court (BGH) have the following background. In the course of the preparations for ULIS Art. 74 (and later during the deliberations on the UNCITRAL Draft of the CISG) and in the discussions concerning the possibility of including an exemption for the seller in non-conformity cases, there was concern that, at least for courts whose system of contractual liability is based on fault, Art. 79 CISG could be misunderstood as a kind of weakened fault-liability principle.[10] An exemption for the seller due to lack of fault would however be so contrary to the Anglo-American legal tradition of seller’s liability based upon warranties,” that the CISG would therefore have been unacceptable to certain common law countries.

The cited contrary views are from authors who represented their countries during the 1964 Hague Conference and fought there, with a provision to exculpate a seller from liability for defects he could not detect by exercising due care, against the attempts of the German delegates to introduce fault-based liability.[11] The assertion that (at least) for non-conformity of goods there is no exemption for the seller is, therefore, to be understood as an attempt to restrict the exemption provision of Art. 79(1) CISG and prevent its misconstruction. Additionally the influence of the respective national law in construing the CISG is never entirely suppressible. This is especially true for French opinions since, according to French law, the commercial seller is presumed to be acting in bad faith and therefore is liable for damages — without the possibility of exemption — according to French Civil Code Art. 1645. Art. 79 CISG is construed in France accordingly. Here, “nationally developed legal principles [work] as background information.”[12]

In most cases in which the seller produced the goods himself an exemption for non-conformity to the contract would be out of the question. Even in cases in which impediments beyond one’s control occur during the production process (e.g., due to power fluctuations), the consequences are avoidable through appropriate quality controls before the goods leave the production site. Thus, the failure to comply with the contract occurs within the seller’s “sphere of control.” The same must be true for cases where the non-conformity of the goods under Art. 35(2)(b) CISG is due to influences in the buyer’s land such as climate, public law standards, cultural convictions, etc. which affect the suitability of the goods. If the fitness of the goods for a particular purpose was part of the determination of conformity to the contract because the seller knew of this particular purpose, then the cause of the damage and its consequences in the meaning of Art. 79(1) CISG could have been avoided by the seller through observation of these specific contractual obligations. This is, of course, a question of normative allocation of risk. The seller cannot always control the physical nature of the goods, but he can control the risk of damage liability. If he cannot bear that risk, or does not want to, he must contractually limit it or exclude it, thereby bearing the risk of losing customers or finding his exculpatory clause held invalid.

2. Another issue is whether and to what extent activities of suppliers and their suppliers are within the seller’s sphere of control, i.e., within his sphere of risk. Here one must first ask whether Art. 79(1) or 79(2) CISG is applicable. This issue was much debated at the Vienna Conference. The dispute was influenced by insecurity over the preliminary question of whether Art. 79(2) CISG was meant to facilitate the possibility of exemption for a seller or make it more difficult. This led to motions to explicitly adopt liability for “suppliers” in Art. 79(2) CISG and opposing motions not to mention suppliers and suppliers’ suppliers at all and thereby practically limit “third persons” in this provision to subcontractors. These questions were essentially whether in cases of “failure by a third person” the prerequisites for exemption should be required to be met cumulatively by both the seller and the third person (thereby restricting exemption) or whether the word “and” in Art. 79(2)(a) CISG should be read as “or.” Many motions and comments at the Vienna Conference clearly indicate that Art. 79(2) CISG (= Draft Art. 65(2)) was perceived by some delegates as a dangerous facilitation of a seller’s exemption for his supplier.[13] Other delegates, however, correctly recognizing subparagraph (2) as a means of restricting exemption, wanted to expressly include suppliers in the provision in order to secure equal treatment of subcontractors and suppliers and to avoid “that a party should be exempted from liability because he had chosen an unreliable supplier.”[14]

The final rejection of the motions to expressly include suppliers in Art. 79(2) was mainly due to the confusion and misunderstandings over whether subparagraph (2) meant to tighten or loosen liability.[15] The rejection of the propositions to view all independent subcontractors as included under subparagraph (2) can therefore hardly be seen as a clear vote for treating suppliers and their suppliers as part of the seller’s sphere of control pursuant to Art. 79(1). The majority opinion, which wanted (or considered as self-evident) a limitation on the possibility of exemption for suppliers and their suppliers in the case of non-conformity of the goods would have naturally been better served with an explicit classification of these “third persons” in subparagraph (2). This construction is, however, not necessarily excluded by the vote in Vienna.

There is much to be said in favor of considering suppliers and their suppliers as third parties under Art. 79(2) CISG. This would practically eliminate an exemption for the seller in cases of non-conformity to the contract since the suppliers and their suppliers would not qualify for exemption as far as they produced the goods themselves.[16] The result of the decision of the German Federal Supreme Court (BGH) that the seller is liable for suppliers and (all of) their suppliers as though the seller had himself produced the goods (the defect thus comes from within his “sphere of control”) could thus easily be arrived at. Particularly, an exemption for undiscoverable defects, despite the exercise of appropriate due care, would be ruled out.[17]

Nevertheless, it should be understandable that the BGH did not take this easy path to the desired policy goal of imposing liability on the seller for defects occurring within the sphere of influence of his suppliers, since that would practically cut off the exemption for the seller in cases of delayed performance or complete non-performance. Delay in performance or non-performance could certainly not be attributed to the seller if he had no influence on the choice of supplier. In that case his suppliers are fully outside of his sphere of influence (e.g., when the seller must rely on a government monopoly for certain materials or energy supply). It was cases such as these which caused the German delegation in Vienna to vote against an express inclusion of suppliers and their suppliers in Art. 79(2) CISG.[18] In addition, the buyer may have insisted upon the use of certain suppliers, which likewise upon their failure must lead to an exemption for the seller under Art. 79(1) CISG without having to resort to the, in this instance, overly broad Art. 80 CISG.[19] Here one can see that a unitary rule of exemption, the highly acclaimed “unitary, contractual approach”[20] can especially cause problems in dealing with the responsibility of suppliers and their suppliers. It seems therefore correct to have attributed responsibility for these third persons to the seller pursuant to Art. 79(1) CISG and to assign the procurement of non-conforming goods or their components to the seller’s sphere of risk. In the exact regulation and assignment of this risk the contract provisions and the construction of the contract are important.[21]

Here, however, as in the case of sales of self-produced goods, it is especially a question of normative assignment of risk of damages. The seller is perceived as the best suited to avoid, and therefore bear, this risk. Therefore, the BGH was correct to use the term “Garantiehaftung” [liability due to an implied warranty rather than fault] with regard to the seller.[22] The standard of liability thereby established will also satisfy those lawyers whose national laws operate on a system of implied warranty or presume the commercial seller to always act in bad faith: systems based on liability without fault where, theoretically at least, an exemption would never be allowed.

An exemption for the seller in cases of non-conforming goods is, however, not necessarily precluded. It would, however, go too far, corresponding to the German case law concerning the seller’s duty to inspect the goods as prerequisite to liability under the national legal doctrine of “pVV” [positive Vertragsverletzung, fault-based liability], to grant an exemption in cases of hidden defects which could not have been discovered by a reasonable person in the seller’s situation.[23] This concretization and limitation of the seller’s responsibility, traced to the prerequisites of § 276 BGB [German Civil Code], would, as mentioned above, confirm the concerns of the Anglo-American lawyers that the possibility of exemption in Art. 79(1) CISG could be (mis)understood by German courts as an expression of a fault-based liability principle. Limitations on liability for damages should only be considered to the extent provided in the second sentence of Art. 74 CISG (foreseeability), especially in dealing with consequential damages.

Thus, cases in which a seller can qualify for exemption for delivering non-conforming goods under the contract are hardly conceivable.[24] However, that does not mean that the possibility of such cases is excluded. If, for example, foodstuffs are suspected of being poisoned or contaminated due to their origin in such a way that the buyer (foodstuff dealer) effectively cannot resell them, the seller might qualify for an exemption, provided he can prove that the goods sold by him were indeed not affected by this suspected contamination. No seller can be held liable for a general suspicion on specific goods which as a consequence renders the goods unusable and thereby non-conforming to the contract under Art. 35(2)(a) and Art. 35(2)(b) CISG. The buyer still has the remedies of price reduction and avoidance [25] or a claim for cure by the seller. The fact that the buyer cannot recover further damages, such as lost profits on resale and perhaps damage to good will, is a consequence of the risk connected to the goods in which he deals. The risk exists for both the buyer and the seller that such goods might become useless due to a general suspicion over which the parties and their suppliers have no influence. It is therefore appropriate that the German Federal Supreme Court left open the possibility of an exemption in cases of non-conformity of goods when the non-conformity is a consequence of a risk that can neither be attributed to the sphere of influence of the seller nor that of his suppliers.

3. The case also holds that a violation of the obligation to mitigate damages must be considered ex officio and could result in the loss of all rights to damages if compliance would have prevented the damages as a whole.[26]

This decision of the German Federal Supreme Court can therefore rightly be viewed as a “landmark decision.” This Anglo-American term seems to be especially appropriate for a decision of such international importance and it is quite certain that it will also garner the appropriate attention of courts and lawyers outside of Germany.


Footnotes

1. This is an English adaptation of a commentary by Prof. Peter Schlechtriem, published in Germany in 15/16 Juristenzeitung [JZ] 794-797 (13 August 1999).

2. See Medico Marketing Int’l, Inc., v. Internationale Medico Scientifica, S.r.l., 1999 WL 311945 (E.D. La. 1999) available in (last visited Mar. 21, 2000) http://cisgw3.law.pace.edu/cases/990517ul. An American buyer avoided a contract due to non-conformity of medical equipment that did not meet administrative security standards. The failure to deliver conforming goods was regarded as a fundamental breach of contract that enabled the buyer to declare avoidance.

3. Precise in distinguishing these two questions, Bernard Audit, La Vente Internationale de Marchandises, Convention des Nations-Unies 1980 No. 181 (Paris 1990) [hereinafter Audit].

4. Otto Riese, Die Haager Konferenz über die Internationale Vereinheitlichung des Kaufrechts, Rabels Zeitschrift für Ausländisches und Internationales Privatrecht [RabelsZ] at 53-55, 79-81 (1965); Hans Dölle & Hans Stoll, Kommentar zum Einheitlichen Kaufrecht Art. 74 § 9, 101 (indicating other sources) (Peter Schlechtriem ed., 1976); regarding the choice of words in this context, see also John Honnold, Uniform Law for International Sales under the 1980 United Nations Convention Art. 79, § 427 (3d ed. 1999); on the preparations including Rabel’s first drafts, see Ulrich Krüger, Modifizierte Erfolgshaftung im UN-Kaufrecht, Die Haftungsbefreiung bei Lieferung vertragswiedriger Ware gemäß Art. 79 CISG 84-98 (1999). Tracing the legislative history of CISG Art. 79 from ULIS to the CISG, Krüger reports in detail that already in 1935 an exemption for the seller of non-conforming goods was contemplated if the failure to comply with the contract was due to an impediment beyond his control. Later the different provisions for possible sellers’ exemptions were incorporated into one general provision. At the Hague Conference in 1964 on Uniform International Sales Law (ULIS), an effort by the German delegation to clarify the wording on the issue of exemption in cases of non-conformity led to discussions on this very issue. The American representative Honnold proposed wording, which facilitated the possibility of a construction allowing exemption in cases of non-conforming goods (which he later fought against for the CISG). The German delegation’s insistence on the principle of fault based liability, which was not adopted, made the Anglo-American delegates especially concerned that the exemption provision Draft Art. 65 (= Art. 79 CISG) could be used as a “back-door” to introduce the German principle of fault based liability. Especially an exemption for damages for hidden defects should remain precluded. See id. at 92, 93. With the choice of the word “impediment” in the drafts of the CISG, Honnold meant to exclude an exemption for damages due to non-conformity of the goods. See id. at 95, 96. Krüger’s detailed analysis, however, leads him to conclude, “in the entire legislative history of the UN Convention an exemption for damages due to non-conformity of the goods was never unanimously and explicitly excluded.” Id. at 97.

5. Commentary on the Draft Convention on Contracts for the International Sale of Goods, prepared by the UNCITRAL-Secretariat, Document A/CONF/97/5, Art. 29, No. 5, United Nations Conference on Contracts for the International Sale of Goods, Official Records, New York 1981 (A/CONF.97/19, 53 [hereinafter Official Records]).

6. Regarding the preparatory work of the 1978 Draft, See Ernst Von Caemmerer & Peter Schlechtriem, Kommentar zum Einheitlichen UN-Kaufrecht Einleitung Sub I. (2d ed. 1999).

7. See Official Records, supra note 4, at 56. However, Honnold, who (as this author) was a delegate for his country to the Vienna Conference, disagrees with this construction of the language and legislative history, pointing out that CISG Art. 79(4) would not fit cases of non-conformity. Honnold supra note 4, Art. 79 at 427.

8. See id.

9. See Medico, supra note 2, where the seizure was indeed the consequence of failing inspection procedures which were required as proof of conformity to safety standards; See also BGHZ 90, 198, 202 = JZ 1984, 842 (lack of a type of inspection required under regulations for the prevention of accidents for the operation of a delivered crane).

10. See Barry Nicholas, Impracticability and Impossibility in the U.N. Convention on Contracts for the International Sale of Goods, in Nina M. Galston & Hans Smit, International Sales 5-14 § 5.02 (1984). For the reasons for this anxiety See supra note 4.

11. See id.

12. Helga Rudolph, Kaufrecht des Export- und Importvertrags Art. 79 Rn. 12 (1996). This should especially apply to the opinion of Denis Tallon in C. Massimo Bianca & Michael Bonell, Commentary on the International Sales Law, The 1980 Vienna Sales Convention Art. 79 Anm. 2.6.2 (1987), since he particularly points to French national sales law. See also Karl H. Neumayer & Catherine Ming, Convention de Vienne sur les contrats de vente internationale de marchandises, CEDIDAC, Art. 79 Anm. 10, 529 (1993). Here the same influence of national solutions as background information. This applies as well to the German authors who still advocate the possibility of exemption from liability if the seller examined the goods with due care.

13. See Official Records, supra note 5, at 378, para. 21, a motion from Turkey. See also the comment from Michida (Japan) in subparagraph 2 in which he pointed to the decision of the working group in January/February 1974 to strike the words “by his supplier or” “because they would thus tend to exempt the seller from liability…” and the comment from the Chairman of the First Committee. Id. at 380, para. 36. The working group, which was to resolve the dispute over the appropriate construction of the provisions. proposed two possible wordings. However, the different interpretations continued in the debate over these formulations. See id. at 410 paras. 3 et seq. This caused renewed uncertainty over the meaning of the word “impediment” for cases in which a third person was the cause for the failure to perform a duty under the contract. Regarding the consequences of this uncertainty in cases of delivery of non-conforming goods obtained from a supplier’s supplier, see Nicholas, supra note 10, at 5-10, § 5.02, who states that the choice of the term “impediment” was the result of the common wish to assure that the seller could not qualify for exemption in the case of non-conformity of the goods.

14. See Official Record, supra note 5 at 379 para. 23 for the reasons concerning the Danish motion; see also Kruse (Denmark), id. at 380 para. 55 (the provision was meant to be an exception to subparagraph (1) “… but … in fact constituted a broadening of the party’s liability.”); Rognlien (Norway), id. at 380 para. 44 (“… wide differences of interpretations …”). The result of subparagraph (2) is in fact stricter liability.

15. See Andreas Keil, Die Haftungsbefreiung des Schuldners im UN-Kaufrecht 143, 144 (clearly indicating that the insertion of “supplier” in Art. 79(2) CISG was misunderstood by some delegates as liability exemption and was for that reason rejected.); Albert Kritzer, International Contract Manual Art 79, 626 (1994); Frank Vischer, Gemeinsame Bestimmungen über Verpflichtungen des Verkäufers und des Käufers, in Schweizerisches Institut für Rechtsvergleichung 179 (Lausanner Kolloquium ed., 1985). Vischer reports “chaotic discussions.” The private notes of this author, written in the evening of each day of the session, show more clearly than the official protocol (which was edited by the delegates afterwards) that many misunderstandings over the meaning of subparagraph (2) prevailed which led to statements and motions to take suppliers out of the — supposed facilitated — possibility of exemption under Art. 79(2).

16. See supra concerning the seller in this respect. The decisions of arbitral tribunals and state courts vary in subsuming suppliers and their suppliers under Art. 79(1) or 79(2) CISG, even though their arguments are almost interchangeable. See OLG Hamburg [Regional Court of Appeals Hamburg] Entscheidungen zum Wirtschaftsrecht [EwiR] 791 (1997), available in (last visited Mar. 20, 2000) http://cisgw3.law.pace.edu/cases/970228g1.html, which considers the reliability of the supplier to be part of the “general risk of procurement” (an exemption under Art. 79(1) CISG was considered and denied); Arbitral Tribunal of the Hamburg Chamber of Commerce (partial award of March 21, 1996, RIW 1996, 766-771, available in (last visited Mar. 20, 2000) http://cisgw3.law.pace.edu/cases/960321g1.html also considered the responsibility for suppliers under Art. 79(1) CISG. The seller was considered to be not as responsible for the producer or suppliers’ suppliers as he is for subcontractors and his own personnel under Art. 79(2) CISG. However, the seller was considered to bear the risk of procurement, even under adverse conditions, and therefore is held liable for its supplier. But see Arbitral Tribunal of the International Chamber of Commerce (ICC International Court of Arbitration) 8128/1995, UNILEX J.D.I. 1996, 1024-1028, 1026, available in (last visited Mar. 20, 2000) http://cisgw3.law.pace.edu/cases/958128i1.html, which based the seller’s liability for his “fournisseur” on Art. 79(2) CISG. The seller’s responsibility for his supplier is considered an integral part of his general risk of procurement. Some decisions simply leave undecided whether the responsibility for the supplier is based upon Art. 79(1) or 79(2) CISG. See Arbitral Tribunal of the Chamber of Commerce of the Russian Federation of March 16, 1995, 155/1994 — abstract in CLOUT 140 — available in (last visited Mar. 20, 2000) http://cisgw3.law.pace.edu/cases/950316r1.html (the complete reasoning is not available, therefore the general basis on Art. 79 CISG in the abstract may be misleading). The question, however, in all these cases was not one of non-conforming goods but rather of non-delivery.

17. For a convincing argument against the possibility of exemption due to undiscoverability, see Honnold, supra note 4, Art. 79, para. 427 at 482. (If the seller buys and resells complex machinery in sealed containers examination is practically impossible; yet this (alone) should not exempt the seller from liability).

18. See Official Records, supra note 5 at 379, para. 29; Peter Schlechtriem, Einheitliches UN-Kaufrecht 97, 98 (1981).

19. See Audit, supra note 3 (defects resulting from the relevant instructions by the buyer concerning the material to be used).

20. Honnold, supra note 4, Art. 79 para. 427.

21. On the question of seller’s liability as an allocation of the risk imminent to the contract see Krüger, supra note 4, at 152 et seq., who, in cases of non-conformity, correctly interprets liability for “impediments to be considered at the conclusion of the contract” as a reasonably undertaken guarantee against damages, which must be covered in the price through a risk related price calculation.

22. See BGH, Decision from March 24, 1999, VIII ZR 121/98 at sec. II.2.b.

23. See LG Köln [Regional Court of Cologne] (Nov. 16, 1995) available in (last visited 20 Mar. 2000). http://cisgw3.law.pace.edu/cases/951116g1.html, aff’d OLG Köln, May 21, 1996.

24. Regarding cases of delivery of non-conforming goods where an exemption from liability might be possible, See Krüger, supra note 4, at 166 et seq. and especially at 185 et seq. (non-conformity due to force majeure).

25. It would have to be considered a fundamental breach of contract if the goods could only be disposed of as hazardous waste.

26. See BGH, supra note 22 at sec. II.4.a. See also OLG Köln, Aug. 21, 1997, OLG Rspr. Köln 1998, 2-4, JMB1 NW 1998, 76-78, available at (last visited Mar. 20 2000) http://cisgw3.law.pace.edu/cases/970821g1.html. The Regional Appellate Court of Cologne held that where the buyer stored aluminum hydroxide in a silo with defective aluminum hydroxide and the use of the aluminum hydroxide would have caused damages in the buyer’s glass production, the buyer’s damages came to nothing.