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3 November 1999 [VIII ZR 287/98]

Bundesgerichtshof 3 November 1999 [VIII ZR 287/98], Der Betrieb 2000, 569, 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.

and Schönherr Rechtsanwälte OEG, Vienna, Austria
Editor: Dr. Peter Konwitschka, Esq.

Key CISG provisions at issue

Articles 38(1), 39(1)

Facts

Plaintiff [buyer’s assignee] is a paper converting company and produces, inter alia, H.-moist tissues. It purchases the required semi-finished moist tissue-crepe from T. paper factory in B./Switzerland [buyer] in an ongoing business relationship; for the manufacture of the semi-finished product, the [buyer] uses cellulose material that is refined in a PM 3 paper machine in several production stages. This machine contains three grinding gears which are connected in series, so-called double-disk refiners, which are equipped either with model EWR 5/76/60 grinding devices of the manufacturer E. or with model E 6533 R/L grinding devices of the defendants [sellers].

On March 31, 1993, the [buyer] ordered one E 6533 R/L grinding device set from the [sellers] at the price of DM [Deutsche Mark] 3,065; at the time, the [sellers] did not know that this grinding device was intended for the production of moist tissues. The grinding device, which was delivered on April 7, 1993, was assembled on April 13, 1993 into the PM 3 paper machine as double disk refiner No. 1, which is connected in series prior to double disk refiners Nos. 2 and 3, and was put into operation on April 17, 1993. On April 25, 1993, the [buyer] first discovered a total loss of double disk refiner No. 2, which had been equipped with a grinding device supplied by company E.; as a result, the defective grinding device was replaced on April 26, 1993. On April 26, 1993, the grinding device which had been delivered by the [sellers] suffered a total loss; as a result, it was replaced by a grinding device supplied by company E.

From April 19 until April 22, 1993, the [buyer] produced with the aforementioned PM 3 paper machine a total of 243.51 tons of semi-finished moist tissues, of which the [buyer] delivered 120.953 tons in April and May 1993 to the [buyer’s assignee]. On May 17, 1993, the [buyer’s assignee] gave notice by telephone to the [buyer] that the already processed H. semi-finished moist tissues showed patches of rust and that the not yet processed semi-finished moist tissue-crepe also showed a tendency to brownish specking. On May 27, 1993, the [buyer] commissioned company P. in M. to identify the patches of rust and, for this purpose, had the grinding device inspected together with other things that had been delivered by the [sellers]. After receipt of the test report prepared by company P. dated June 9, 1993, which the [buyer] received on June 11, 1993, the [buyer] contacted the [sellers] by letter dated June 14, 1993 and, as a precaution, stated that it held them liable for the damages incurred because the [buyer] suspected that the grinding device delivered by the [sellers] on April 7, 1993 was defective. After the [buyer] assigned to the [buyer’s assignee] all of its claims arising from the purchase agreement concluded with the [sellers] on March 31, 1993, the [buyer’s assignee] claims a partial amount of DM 100,000 as damages arising from the lack of conformity of the grinding device with the contract. The [sellers] opposed this claim on the grounds that, inter alia, neither the [buyer] nor the [buyer’s assignee] had met their obligations to examine and to give timely notice; the [buyer’s] notice to the [sellers] of the defect was untimely. Further, the [sellers argued,] no particular specification of the grinding device delivered on April 7, 1993 had been agreed upon; in addition, the [buyer] had overloaded the delivered grinding device during its use.

The Regional Court dismissed the complaint, and the [buyer’s assignee’s] appeal against that decision was unsuccessful. On appeal, the [buyer’s assignee] pursues its claims further.

Grounds for the decision

[Translator’s note: In part I, the Supreme Court recites the holding of the Court of Appeals, and in part II, it analyzes the applicable law.]

I. The Court of Appeals explained: It can remain undecided whether the [buyer] has met its obligation to examine pursuant to Art. 38(1) CISG. Even on the assumption that the defect in quality alleged by the [buyer’s assignee] was a latent defect, the period for making a claim pursuant to Art. 38(1) CISG began on April 26, 1993 upon the total loss of the grinding device delivered by the [sellers] on April 7, 1993. The [buyer’s assignee] (correctly: the [buyer]) should not have simply accepted the total loss of the grinding device in question on April 26, 1993 and should not have blamed itself or an operating error of its employees, which it apparently did. According to the [buyer’s assignee’s] own argument, either an operating error or a lack of conformity with the contract was a possible reason for the total loss. A possible operating error by its own employees could have been clarified without difficulty and did not occur according to the [buyer’s assignee’s] own assertions. All the more, the defectiveness of the delivered grinding device must have been apparent. If the grinding device delivered by the [sellers] was destroyed after only a few days of use, then there was cause for the examination which the [buyer’s assignee] (correctly: the [buyer]) omitted at first. Notice of latent defects must be given not only after actual discovery in each specific case but within a reasonable time after the buyer ought to have discovered them.[**] Upon review of the possible causes of the loss, a clue as to the defectiveness of the delivered grinding device suggested itself upon the total loss on April 26, 1993, so that, at that time, the examination and notice period under Article 39(1) CISG commenced. Assuming that the [buyer], as it did later, ordered an expert opinion immediately after the total loss on April 26,1993, the communication of the result thereof had to be expected within no more than two weeks. If one added on a period of one month for the notice of the defect, then the notice letter dated June 14, 1993 was untimely – if only by a few days.

As the [buyer] therefore lost its right to rely on the alleged lack of conformity, the [buyer’s assignee] cannot proceed upon the assigned right. It can therefore remain undecided whether the letter dated June 14, 1993 met the substantive requirements of Art. 39(1) CISG, which quality of the grinding device had been agreed upon and whether there was a deviation relevant to the damages incurred.

II. These elaborations do not withstand scrutiny.

1. The Court of Appeals correctly and undisputedly applies the United Nations Convention on Contracts for the International Sale of Goods of April 11, 1980 (CISG), which became effective for the Federal Republic of Germany on January 1, 1991 and for Switzerland on March 1, 1993, to the purchase agreement entered into by the [buyer] and the [sellers] dated March 31, 1993.

2. In the absence of a contrary ascertainment of facts by the court of appeals, it must be assumed, for purposes of the proceedings on appeal, that the grinding device’s defect claimed by the [buyer’s assignee] is a latent defect that could not have been discovered by an appropriate examination (Art. 38(1) CISG) either upon delivery on April 7, 1993 or upon the installation on April 13, 1993 or during its use. If, thereafter, the lack of conformity with the contract of the delivered grinding device showed up for the first time at the time of the total loss on April 26, 1993, the beginning of the examination and notice period under Arts. 38(1), 39(1) CISG cannot yet be assumed at April 26, 1993.

a) In this context, it can be left undecided whether, under UN Sales Law, latent defects must, as the appeal argues, be brought to the [sellers’] attention only after actual discovery in each specific case, so that the reasonable period of time referred to in Art. 39(1) CISG only begins at the time of the (later) actual discovery of the defect, or whether, as the court of appeals assumes, the time at which the latent defect could be discovered is relevant to the beginning of the reasonable period of time (compare Schwenzer in von Caemmerer/Schlechtriem, CISG, 2d ed., Art. 39 20 for “defects occurring later catching one’s eye”; Koller in Staub, Großkommentar HGB [Comprehensive Commentary to the German Commercial Code], 4th ed., before § 373 Art. 39 WKR [CISG] 674; Honsell/Magnus, Kommentar zum UN-Kaufrecht [Commentary to the UN Sales Law], 1997, Art. 39 17; Piltz, Internationales Kaufrecht [International Sales Law], 1993, § 5 64; Heilmann, Mängelgewährleistung im UN-Kaufrecht [Warranties under the UN Sales Law], 1994, p. 324 et seq; see also Staudinger/Magnus, CISG, 1994, Art. 39 32, who derive such an obligation of the buyer from the principle of good faith).

b) Even if the [buyer] were not allowed to let the total loss of April 26, 1993 rest, but rather had to take measures to detect the cause of the damage, the court of appeals should not have assumed, as the appeal correctly argues, on the basis of the facts ascertained so far, that a possible operating error of the [buyer’s] own employees “could have been clarified without difficulty,” so that the defectiveness of the delivered grinding device must have suggested itself to the [buyer] already on the day of the loss.

aa) A possible reason for the total loss on April 26, 1993 was, as the [buyer’s assignee] submitted uncontestedly, and as the court of appeals also discussed, either an operating error or a lack of conformity with the contract of the delivered grinding device. The independent evidentiary process later initiated by the [buyer’s assignee] was supposed to clarify which of the two reasons for the loss was the case; even in the instant lawsuit, the [sellers] still claimed improper handling because the grinding discs moved at a very short distance (quasi-zero-zero-distance) in opposite direction. If hence an operating error could also have occurred unnoticed, it is not evident how such an error could have been excluded immediately after the damage occurred, without special effort, by merely questioning the [buyer’s] employees.

bb) Even if the [buyer] could have excluded a possible operating error quickly by internal investigation and without commissioning an expert opinion, it had to be allotted, in any case, a certain period of approximately one week for the decision as to what to do next and for the initiation of necessary measures – e.g., the selection and commissioning of an expert – followed by the two weeks assumed by the Court of Appeals for the expert’s investigation, followed by the – regular – one-month notice period pursuant to Art. 39(1) CISG (compare BGHZ [***] 129, 75, 85 et seq.). But in that case, the [buyer’s] notice letter to the [sellers] dated June 14, 1993 – seven weeks after the total loss – was not untimely.

3. The notice letter dated June 14, 1993 also met the substantive requirements of Art. 39(1) CISG, an issue the Court of Appeals was able to leave open based on its legal view point. By means of this provision, pursuant to which the buyer must specify “the nature of the lack of conformity,” the seller shall be enabled to get an idea of the lack of conformity in order to take the necessary steps. In that context, the buyer, in any case, must specify the complained-of deviation of quality; concerning machinery and technical equipment, only an explanation of the symptoms can be demanded, not an explanation of the underlying causes (Schwenzer, id., Art. 39 6 et seq.; Staudinger/Magnus, Art. 39 21). Here, the [buyer] gave notice to the [sellers] by letter dated June 14, 1993 that a customer had found steel splinters in the semi-finished goods that had been produced using the grinding device in dispute and that, as a result, when processing the semi-finished goods into moist tissues, patches of rust occurred thereon. At the same time, the [buyer] expressed the suspicion that the grinding device delivered on April 7, 1993 was defective, so that the [buyer], as a precaution, stated that it held the [sellers] liable for all damages incurred and to be incurred in the future. Thus, the complained-of lack of conformity of the shipment was sufficiently specified in accordance with the [buyer’s] state of knowledge at that time, so that the [sellers] were able to learn from the letter dated June 14, 1993 the delivery item as well as the complained-of lack of conformity with the contract.

4. Because the Court of Appeals – consistent with its legal view point – did not make any findings on the existence of the complained-of lack of conformity with the contract, on a possible limitation of liability of the [sellers] or on the extent of the alleged damages, the matter had to be remanded to the court of appeals for further clarification. Prior decisions: OLG [***] Bamberg, LG [***] Bayreuth.


Footnotes

* For purposes of this translation, the assignor of the Plaintiff of Switzerland is referred to as [buyer]; the Defendants of Germany are referred to as [sellers]. Amounts in German currency (Deutsche Mark) are indicated as [DM].

** Translator’s note: The German original uses the term “objektive Erkennbarkeit“, which means “objective discoverability.”

*** Translator’s notes:
BGHZ = Die amtliche Sammlung der Entscheidungen des Bundesgerichtshofes in Zivilsachen [Official Reporter of Decisions of the German Federal Court of Justice in Civil Matters];
LG = Landesgericht [District (trial) Court];
OLG = Oberlandesgericht [Higher Regional Court, a Court of Appeals].


Case commentary

Comments on Bundesgerichtshof VIII ZR 287/98, 3 November 1999

Peter Schlechtriem
Albert-Ludwigs-Universität Freiburg
January 2000

Translation by William M. Barron, Esq., Birgit Kirtz, Esq., Alston & Bird LL.P.
and
Dr. Peter Konwitschka, Schönherr Rechtsanwälte OEG, Vienna

Headnote

Articles 38(1), 39(1) CISG; cross-border sale; examination and notice period

The notice period pursuant to Art. 39 CISG does not always commence upon the occurrence of destruction of property that was possibly caused by a lack of conformity of the purchased good.

Comments

1. On April 7, 1993, defendant delivered a so-called grinding device to a Swiss paper factory (buyer) for its paper machine for the production of moist tissues. The semi-finished moist tissues that were produced on this machine were delivered to the plaintiff, who objected to rust-spots. As early as April 25, 1993, the grinding device caused a total loss of certain parts of the paper machine that were connected in series; the device itself was destroyed and replaced by a different product on April 26, 1993. On June 14, 1993, the paper factory gave notice of the defect to the defendant and claimed damages; it assigned its claims to the plaintiff, who sued for a partial amount of DM 100,000.

Because of the plaintiff’s notice, the buyer initially commissioned an expert company to investigate the symptoms of the defect and the grinding device; its test report was received on June 11, 1993. Defendant opposed this claim on the grounds of, inter alia, a failure to examine and to give notice in a timely fashion. The appellate court dismissed the complaint, reasoning that the period to give notice pursuant to Art. 39(1) CISG had begun upon the total loss on April 26, 1993. The Federal Supreme Court, however, held that notice given seven weeks after the occurrence of the total loss was timely, reversed the appellate court’s decision and remanded the matter for an analysis of the lack of conformity and other questions that had to be clarified.

2. According to the Federal Supreme Court’s opinion, “a commencement of the examination and notice period under Art. 38(1), 39(1) CISG cannot yet be assumed at the time of the total loss.” The Federal Supreme Court left undecided whether defects that could not have been discovered upon delivery in spite of an examination had to be brought to the seller’s attention as soon as they ought to have been discovered later, or whether notice was not required until the time of actual discovery; the Court did so because the notice was not untimely even if the notice period had begun at the time at which the defect ought to have been discovered. In this context, the Federal Supreme Court stated that the buyer had to be allotted a period of approximately one week on discovery of symptoms of defects for the decision on what to do next, followed by a period of two weeks for the expert’s investigation. A “regular” one-month notice period followed, so that the notice given seven weeks after the loss was not untimely.

3. In regard to the periods to which a buyer must adhere in order to preserve his rights arising from a lack of conformity, the examination period and the notice period must be strictly distinguished and must not be added up to one lump sum period. A period “as short . . . as is practicable under the circumstances” is available to the buyer for the examination, Art. 38(1) CISG. Among these “circumstances,” there is doubtless the time needed by an expert for the examination as to whether and, if applicable, which lack of conformity is present and can be specified in the notice; in the case at issue here, this period was therefore two weeks. In addition, the Federal Supreme Court, rather generously, granted the buyer one week to consider and to decide if the commissioning of an expert was necessary and to clarify possible operating errors; this is understandable, especially in cases of complex machines, where the causes of malfunction can be difficult to ascertain and perhaps only through specific experts, although this should not become a rule for all cases. Contrary to a misleading statement of the Federal Supreme Court’s decision (see II.2.a.e.) that seems to stand for the adding-up of both periods into one single period, the examination period began in any case upon the total loss, i.e., upon the occurrence of the symptoms of the defects; under the circumstances, the period was set at three weeks. Although not stated explicitly in Art. 38(1) CISG, it is true that the examination period generally begins upon the arrival of the goods at the buyer’s establishment (compare Art. 38(2) and (3) CISG). But this does not mean that the examination obligation and the examination period are irrelevant in cases of latent defects; rather, the period and the obligation begin when causes for suspicion later suggest a — possibly renewed — examination.

Only at the end of the short examination period, which has to take account of the circumstances, does the reasonable notice period pursuant to Art. 39(1) CISG begin, which the Federal Supreme Court set as a “regular” four-week period.

4. Chiefly, it is a welcome development that, contrary to some German decisions which, regarding the specification requirement of notices of lack of conformity, had set extremely rigorous demands, at least in the case of complex and complicated goods, notice of the defect symptoms shall be sufficient (but compare BGH 25 November 1998, NJW-RR 97, 680 = EWiR 97, 653 (Schlechtriem/Schmidt-Kessel with further references)). A general adding-up of the examination period and the notice period resulting in the buyer’s option to remedy his default during one period by his accelerated action during the other period will, however, probably not comply with the statutory provisions. The statement that the notice period is “regularly” one month must also give rise to concern. The reasonableness of the period depends mainly on the goods, but also on the type of the business and other circumstances. For certain goods, significantly shorter notice periods are advocated and applied by the courts; of course, these shorter periods must also not be misunderstood as standard periods. In the case of easily perishable goods or goods whose price fluctuates greatly, the buyer’s right to give notice within four weeks would put the seller at an unreasonable disadvantage (compare OLG Saarbrücken 3 June 1998, NJW 1999, 780 (flower business): “on the same day”; OLG Düsseldorf 8 January 1993, IPrax 1993, 413 (cucumbers): “seven days was already untimely”). Also in the case of an unambiguous identification of the defect, for example by experts, a faster reaction by the buyer could be “reasonable” (in the case at issue, he gave notice three days after receipt of the expert’s opinion!). But above all, when applying international uniform law, the Federal Supreme Court cannot, as it can for German law, claim the last word and suggest with the term “regular” a ruling with precedential effect; instead, it must — Art. 7(1) CISG — in the interest of keeping legal uniformity, consider how foreign case law and legal scholars interpret the reasonable period.