Bundesgerichtshof (8th Civil Panel) 25 June 1997 [VIII ZR 300/96], Neue Juristische Wochenschrift 1997, 3311

Translation [*] by Birgit Kurtz, Esq. of Alston & Bird LLP, New York

Facts

Plaintiff [seller], which trades in steel produced in South Korea, delivered to Defendant [buyer], whose place of business is in Switzerland, a total of 125.81 tons of stainless steel wire upon an order dated 7 February 1992, which was confirmed by the [seller] on 10 March 1992; it is in dispute between the parties whether the delivery took place in July or September 1992. Of the total purchase price, Deutsche Mark [DM] 366,174.51, the amount of DM 63,180 is still unpaid. The [buyer] notified the [seller] with “notices of substandard material”, dated 5 November 1992, and 6 April 1993, that specific, individually indicated quantities of the raw material could not be processed, and that it placed the substandard material at the [seller]’s disposal. At the same time, the [buyer] inquired about what should be done with these materials and also with the “semi-processed materials” that was “possibly” still in storage. In letters dated 2 December 1992, and 27 January 1993, the [seller] notified the [buyer] that, if the complaints are justified, the value of the material would be credited, and if further substandard material was found in the [buyer]’s stock, responsibility would also be taken if the complaint is justified. Both parties have obtained expert opinions regarding the suitability of the raw material, which, however, reached conflicting conclusions.

With its complaint, the [seller] demands that the [buyer] pay the outstanding purchase price plus interest. After the [buyer] had processed the extant raw material during the course of the litigation before the Court of First Instance at the end of 1995, it continued to pursue the avoidance of the contract in its brief dated 6 November 1995 only with regard to the substandard quantities indicated there. Alternatively, it declared a set-off against the claims for damages of DM 4,800, Swiss francs [Sfr] 2,850.50 and DM 75,578.53.

The District Court [Landgericht], in dismissing the complaint, ordered the [buyer] to pay the remaining purchase price in the amount of DM 50,580 plus interest. The Court of Appeals [Oberlandesgericht] dismissed the [buyer]’s appeal. By appealing to the Supreme Court, the [buyer] continues to pursue its application for dismissal of the complaint.

Reasoning

I. The Court of Appeals explained that the [buyer] could rely neither on the avoidance of the contract nor on the defense based on the reduction of the purchase price when defending against a demand for the remaining purchase price. The Court of Appeals stated that, to the extent that the [buyer], in consideration of the District Court’s decision – which was partially in its favor – continued to pursue the defense of avoidance of the contract regarding a partial amount of DM 22,611.76 (DM 35,211.76 minus DM 12,600 already awarded by the District Court), this explanation was irrelevant if it referred to the 12.478 tons of substandard goods that resulted during the processing of the extant raw materials of 38-39 tons in 1995. The Court stated that, to that extent, the [buyer] had to accept that it neither complied with the obligation imposed on it by CISG Arts. 38, 39 to investigate and notify of a defect, nor declared the contract avoided within an appropriate period of time within the meaning of CISG Art. 49(2)(b). To the extent that the [seller], in letters dated 2 December 1992, and 27 January 1993, stated in so many words that it would also take responsibility for any further justified complaints by the [buyer], these declarations of willingness were to be interpreted such that the [seller] would not be held liable for an indefinite period of time, but rather wanted to vouch for only those defects that would have been determined by the [buyer] in the course of the current production. The Court found that this condition was not, however, fulfilled with respect to the defects that appeared upon the processing at the end of 1995. It held that such warranty claims were time-barred according to BGB [**] § 477 anyway.

In addition, the District Court correctly assumed that the [buyer], in its letters of complaint dated 5 November 1992, and 6 April 1993, regarding the individually listed substandard goods, declared the contract avoided in a timely manner, which, on appeal, it only pursued as to a quantity of 7.978 tons. The Court held that it could remain undecided whether this quantity was substandard and whether the District Court correctly rejected a further evidentiary hearing. It was decisive that it could not be determined from the [buyer]’s submission whether the afore-mentioned substandard goods are identical to the ones referenced in the letters of complaint or whether they accrued exclusively during the processing at the end of 1995.

The claims for damages raised by the [buyer] in the alternative set-off did not exist. Regarding the amount of DM 4,800 – which was an alleged increase in value due to the processing of the material – it could not be assumed that the substandard goods of around 12 tons, which, in the opinion of the [buyer], should be taken back by the [seller], were in a better condition than before due to the [buyer]’s treatment. Moreover, the Court stated that the [buyer] had not submitted enough facts to support this claim for damages. Furthermore, in the Court’s view, the [buyer] could not demand an amount of damages of DM75,578.53 in lost profits for the double-sanding, because [buyer] violated its obligation to mitigate the loss (CISG Art. 77) in any event. The claim for the refund of costs incurred for converting the sanding machine in the amount of Sfr 2,850 was therefore also excluded.

II. These remarks cannot, in their entirety, withstand legal scrutiny.

1. The Court of Appeals incorrectly denied the [buyer]’s right, based on the CISG, which is applicable here, to declare the contract avoided against the demand for payment of the remaining purchase price in the amount of DM 50,580 still in dispute in the appellate proceeding because of a partial amount of now DM 22,611.76 (CISG Art. 81(1)(first sentence), Art. 49(1)(a) in connection with CISG Art. 51(1)).

a) The [buyer], with its notices of substandard goods dated 5 November 1992, and 6 April 1993, complained of the defects in the delivered material and, thus, with essentially the same wording, declared that it could not use said substandard goods and would place them at the [seller]’s disposal.

The Court of Appeals also apparently assumed that, with the references “the material has splinters”, and “the material is split and has splinters,” the defects were described in sufficient detail (Art. 39(1) CISG).

b) It can remain undecided whether, in doing so, the [buyer] complied with its duty to inspect the goods within the time limit of CISG Art. 38 and to give notice of the defects within a reasonable period of time after discovering the lack of conformity of the goods with the contract (CISG Art. 39(1)). That is so because the [seller] received from the [buyer], by letter dated 27 November 1992, the notice of defective material and its redirection to its factory in Korea, and by letters dated 2 December 1992, and 27 January 1993, [seller] declared that it would, in case there were more defects in the [buyer]’s stock and if the complaints were justified, “also take responsibility for it and handle it properly”. In doing so, the [seller] not only acknowledged the timeliness of the notice of defects dated 5 November 1992, but also waived the defense of untimeliness for future complaints, as the District Court had already assumed. Such a waiver is generally possible under the CISG (Schwenzer in v. Caemmerer / Schlechtriem, CISG, 2d ed., Art. 39 ¶ 33; Staudinger / Magnus, Art. 39 CISG ¶ 18; re. § 377 HGB [**] compare BGH [**] decision of 19 June 1991 – VIII ZR 149/90 = WM 1991, 1636 under II 1 c aa = BGHR HGB § 377 defense of untimeliness 1).

To the extent that the Court of Appeals has interpreted the aforementioned letters from the [seller] such that it did not want to be liable without a time limitation, but only to take responsibility for such defects in the raw material that would have been noticed by the [buyer] during the course of the current production, this interpretation is not free of legal mistakes, as the appeal to this Court correctly argues in the end, so that it does not unfold a binding effect on this Court. Such a restriction is neither conveyed through the wording of the [seller]’s declarations nor does it find support in the parties’ submissions. The connection of these declarations with the answer to the [buyer]’s question as to what should happen to the stock, even speaks against it. The content of the letters must, therefore, as this Court may determine on the basis of its own interpretation, be understood to mean that the [seller] wanted to take responsibility for identical defects in the delivered goods that will only be apparent during the processing of the material. The [seller] had to assume that the processing of all the steel wire would take place over a longer period of time in view of the size of the delivery. Besides, the occurrence of the substantial delay was based on the fact that the District Court had ordered that an expert opinion be obtained regarding the alleged defect in the steel wire; hence, any subsequent processing of the steel wire by the [buyer] was ruled out for the time being. When the [buyer] then, at the end of 1995, decided to process the delivered and not-yet-processed material, and later relied on the still remaining substandard stock, it thereby substantiated the extent of the originally complained of defects. Then, however, it did not lose its right to rely on the lack of conformity of the goods with the contract with respect to all of the defects of which it had complained.

c) Since the [buyer] stated in its notices of defects that it was unable to use the substandard material and therefore placed it at the [seller]’s disposal, whereby, at the same time and within the time limit, it declared the contract avoided, according to CISG Arts. 49(1)(a), 51(1), the question whether the avoidance of the contract was declared in a timely manner by the letter dated 6 November 1995 is irrelevant.

d) Thus, the Court of Appeals was not allowed to leave the question of the lack of conformity of the remaining 7.978 tons of raw material, as to which the [buyer] is continuing to demand the avoidance of the contract, unanswered by reasoning that it cannot be gleaned from the [buyer]’s submission whether the above-mentioned substandard material was partially identical with the material mentioned in the letters of complaint or whether it came about exclusively during the processing at the end of 1995.

To the extent that the explanations of the Court of Appeals are based on the consideration that the [buyer] is not entitled to the claims with respect to the processing of the substandard material at the end of 1995 because it did not comply with the requirements of CISG Arts. 38, 39 and 49(1)(a), this fact is irrelevant. As explained (see above II 1 b and c), the [buyer] can enforce its rights also with regard to those defects that only appeared during the processing at the end of 1995. As for the rest, much actually speaks for the fact that the quantities still complained of are identical with the quantities that were complained of before the litigation, as correctly argued in the appeal to this Court.

e) The avoidance of the contract is also not excluded according to CISG Art. 82(1) by the fact that the [buyer] cannot return the processed material in the same condition as it had received it. The [buyer] stated that, in order to determine which portion of the delivered raw material was still substandard, it had to process all of the raw material; the [seller] also stated that the defects claimed by the [buyer] were apparent in their entirety only in the course of the processing of the material. Thus, the material was altered under CISG Art. 38 due to the necessary processing for the investigation. But if the [buyer] keeps its right to declare the contract avoided even when the goods have perished or deteriorated by the investigation (CISG Art. 82(2)(b)), this rule must apply especially when – as the [buyer] claimed – the goods improved through the processing. The fact that the alteration of the goods took place only after the avoidance of the contract was declared, does not change anything with regard to the earlier avoidance of the contract (compare Staudinger / Magnus, Art. 82 ¶ 14).

f) Contrary to the opinion of the Court of Appeals, the [buyer]’s warranty claims are also not time-barred. Since the [buyer] already effectively declared the contract avoided with the notices of defects of 5 November 1992, and 6 April 1993, it is, according to CISG Art. 81(1) (sentence 1), freed, to that extent, from the obligation to pay (Leser in v. Caemmerer / Schlechtriem, Art. 81 ¶ 8; Staudinger / Magnus, Art. 81 ¶ 5), so that [buyer] can refuse payment of the purchase price.

2. The Court of Appeals was, therefore, not permitted to leave open the question whether the disputed substandard material, after repeated re-sanding, is not salable and constitutes unusable defective stock, but rather should have taken the testimony of fact and expert witnesses. The [buyer] did not lose this right by not making the advance payment of costs for the supplemental expert opinion, requested in the order of the Court of First Instance dated 9 December 1994, but rather processed the remaining raw material itself at the end of 1995. The non-payment of the requested advance payment of costs for the fact and expert witnesses’ summons – subject to the non-admission of a prosecution or defense instrument under ZPO [**] § 528(2), which did not happen here – does not lead to the exclusion of the evidence (decision by the BGH [**] dated 5 May 1982 – VIII ZR 152/81 = NJW 1982, 2559 under 2(b); Baumbach / Lauterbach / Hartmann, ZPO, 55th ed., § 379 ¶ 7 et seq.; Zöller / Greger, 20th ed., § 379 ¶ 8). The processing of the delivered raw material by the [buyer] also does not constitute frustration of the evidence, as the [seller] argued in the second instance. This term refers to conduct by which one party is culpable of making it impossible or more difficult for the party with the burden of proof to meet this burden by destroying or withholding existing evidence or by making the use of the evidence more difficult or by refraining (at least negligently) from clearing up a loss that has already occurred, in order to prevent the development of evidence, although the subsequent necessity to proffer evidence had to already be recognizable by the party with the duty to clarify (BGH [**] decision dated 15 November 1984 – IX ZR 157/83 = NJW 1986, 59 under II 2 b; Thomas / Putzo, ZP0, 20th ed., § 286 ¶ 17; MünchKomm-ZPO / Prütting, § 286 ¶ 75 et seq.).

By processing the raw material, the [buyer] did not hamper the [seller]’s ability to proffer evidence but possibly its own; that is so because it has the burden of proof regarding the defectiveness of the delivered material. Because of the fact that obtaining an expert opinion regarding the unprocessed material is now impossible, and the [buyer] can rely on the examination of an employee of its operation with respect to the alleged defectiveness of the raw material, no procedural disadvantages must arise for the [seller]. A possible personal interest of the witness in a favorable outcome of the legal dispute for the [buyer] must be considered by the Court when assessing the evidence. Besides, the [buyer] offered expert evidence for the allegation that the disputed remaining raw material is unusable scrap, despite repeated re-sanding.

III. Because the decision of the Court of Appeals regarding the uniform claim for payment of the outstanding purchase price by the [seller] for the partial amount of DM 22,611.76 cannot be followed, this Court vacates the judgment of the Court of Appeals altogether (compare MünchKomm-ZPO / Walchshöfer, § 564 ¶ 3 et seq.). This matter has to be referred back to the Court of Appeals for further clarification and decision. To the extent that that Court will have to make a decision regarding the set-off declared by the [buyer], this Court notes that it shares the view of the Court of Appeals, according to which the set-off does not have any effect.

1. For one, the [buyer] set off a claim for damages in the amount of DM 4,800 against the amount claimed in the complaint, and it derives this claim from the fact that the material that must be taken back by the [seller] is, due to the processing, in a better condition than before. It can remain undecided if such a claim can generally be justified as a reimbursable expenditure of the establishment of the loss (Stoll in v. Caemmerer / Schlechtriem, Art. 74 ¶ 19). Since the [buyer], when calculating the demand for damages, alleges a value increase of DM 400 per ton without further explanation and has calculated from this an amount of DM 4,800, a substantiated factual presentation for such an increase in value is missing, as already noted by the [seller] in the first instance.

2. Free of legal mistakes are also the statements with which the Court of Appeals denied the [buyer] the claim for damages in the amount of DM75,578.53 for the double re-sanding and of Sfr 2,850 for the re-calibration of the sanding machine. These costs to remedy the defects were no longer reasonable in view of their amount in relation to the purchase price claim still outstanding, so that the seller does not have to assume them according to CISG Art. 74; only adequate expenditures for the assessment of the damage, as well as for its prevention or reduction, are appropriate (Stoll in v. Caemmerer / Schlechtriem,id.; see also Staudinger / Magnus, Art. 77 ¶¶ 15, 20). In view of the costs to be expected from the beginning, it could, as the Court of Appeals correctly assumed, rather be expected from the [buyer] to return the goods after the contract avoidance and to raise a claim for damages on its part (CISG Arts. 45(1)(b), 74).

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Footnotes

* For purposes of this translation, Plaintiff-Appellee of Germany is referred to as [seller]; Defendant-Appellant of Switzerland is referred to as [buyer]. Amounts in the currency of Germany (Deutsche Mark) are indicated as [DM]; amounts in the currency of Switzerland (Swiss francs) are indicated as [Sfr].

** Translator’s note on other abbreviations: BGB = Bürgerliches Gesetzbuch[German Civil Code]; BGH = Bundesgerichtshof [Federal Supreme Court of Germany]; HGB = Handelgesetzbuch [German Commercial Code]; ZPO = Zivilprozessordnung [German Code of Civil Procedure].

© 2005 Pace Law School Institute of International Commercial Law. This HTML edition © 2006 Gerhard Dannemann.

Bundesgerichtshof 4 December 1996 [VIII ZR 306/95], NJW Rechtsprechungs-Report 1997, 690

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

Facts

Plaintiff [seller’s assignee] demands payment of the purchase price from defendant [buyer] for a computerized printing system including software arising out of an assigned right.

On November 11, 1992, the [buyer], located in Vienna, ordered a printing system called “dynamic page printer” from Company A [hereinafter seller], located in P. near N. for the total price of DM [Deutsche Mark] 65,100. The unit consisted of a thermal transfer printer, a color monitor, a computer and a software package. [Seller] confirmed the order by letter dated November 22, 1992. With respect to the warranty, the order confirmation contained the following arrangement, which indisputably became part of the contract:

“The warranty covers software and hardware as a unit. The warranty period is 6 months and starts with the non-defective functioning of the system. The start of the warranty period is calculated from the installation and operational handover.

In the event that a subsequent malfunction or a defect appears later, the buyer shall give prompt written notice of this fact to [seller]. . . . If cure of the defect fails twice, the buyer may then, according to his choice, reduce the purchase price or declare the contract avoided.”

On January 30, 1993, the printing system was installed at the [buyer’s] offices, and on February 8, 1993, it was handed over for the purpose of commencing operation. By letter dated February 9, 1993, the [buyer] already informed [seller] of eight – 4 “open points,” among others under Point 4 “Documentation of the Printer,” and requested resolution by February 25, 1993 at the latest. [Seller] commented on this by letter dated February 11, 1993; it announced that the delivery of the documentation would take place during the 7th calendar week 1993.

By further letter dated March 2, 1993, the [buyer] complained that despite the additional period of time set until February 25, 1993, [seller] had not remedied the defects listed under Points 1, 2, 3, 5 and 8 of the letter dated February 9, 1993; at the same time, [the buyer] declared the contract avoided “because of non-compliance with the additional time period granted.” [The buyer] did not mention the Documentation of the Printer any more.

Until now, the [buyer] has neither in total nor in part paid the purchase price, which was due in installments of 20% upon receipt of the confirmation of the order, of 60% upon announcement of delivery, and of 20% after the installation and operational handover. The Regional Court [Landgericht] granted the claim for payment of DM 65,100 in all respects. On appeal by the [buyer], the Higher Regional Court [Oberlandesgericht] revised the decision of the Regional Court and dismissed the complaint. On appeal, the [seller’s assignee] requests that the judgment of the Trial Court be reinstated.

Grounds for the decision

I. The Appeals Court stated: It was not necessary to decide whether the Regional Court had wrongfully assumed its local, and through that, its international jurisdiction, as the [buyer] argues. Pursuant to ZPO [*] § 512, the appeal cannot be based upon this anymore.

On the merits, however, [the Court held] the appeal of the [buyer] was successful. The [buyer] did not owe the purchase price because it was entitled to declare the contract avoided under Art. 49(1)(a) of the Uniform U.N. Sales Law (CISG), which is applicable here; the reason was that the delivered printing system did not meet the requirements of the contract within the meaning of CISG Art. 35 in any case because there was no delivery of a complete documentation. No handbook for the computer was delivered at all. The instructions to the user software given to the [buyer] met the requirements of complete documentation only to a small extent. According to the jurisprudence of the Federal Court of Justice, a complete user handbook was part of the supplier’s principal obligation to perform, and the (partial) failure to perform this principal obligation entitles the buyer generally to repudiate pursuant to BGB [*]§ 326.

[The Court stated that] the [buyer] had given timely notice of the defect of incomplete documentation. Under an objective and reasonable view, the chosen term “Documentation of the Printer” referred to the entire system, i.e., to the hardware as well as to the software; it was timely and sufficiently detailed. Since [seller] did not deliver complete documentation despite the [buyer’s] notice of the defect, the [buyer] repudiated the contract rightfully on account of a fundamental breach of contract.

[The Court held that,] besides — if it still mattered — the second attempt to cure the defect failed as well, since the [seller’s assignee] also remained inactive after the [buyer’s] second demand of August 24, 1994. This letter by the [buyer] was also still timely; specifically, the claim for delivery of complete documentation was not time-barred. Finally, the failure to mention the insufficient documentation in the [buyer’s] letter of repudiation dated March 2, 1993 did not constitute a waiver of the right to assert the defect. After all this, the [buyer] (once again) declared the contract avoided by letter dated October 12, 1994, which amounts to an avoidance under CISG Art. 64(1)(a). Therefore, pursuant to CISG Art. 81(1), it was freed from the obligation to pay the purchase price.

II. These statements do not withstand legal scrutiny.

1. The international jurisdiction, which must be analyzed sua sponte at every stage of the proceeding (BGH,[*] decision of February 3, 1993 – XII ZB 93/90 = BGHR [*] ZPO before § 1 / Competence, international, alimony 1), was wrongfully not considered by the court of appeals. The rule in ZPO § 512a cited by the court does not apply to the question of international jurisdiction (BGHZ [*]44, 46).

The international jurisdiction of German courts follows from the general rules of jurisdiction. Accordingly, the Regional Court of Nürnberg-Fürth, acting as the trial court and constituting the venue of the contractual place of performance, had local and international jurisdiction (ZPO § 29(1)). Pursuant to CISG Art. 57(1), which applies in this case, the disputed purchase price claim (obligation which must be fulfilled at the debtor’s address) had to be satisfied at the location of the seller’s seat — P. near N.; the regulation of CISG Art. 57(1)(b), according to which, under certain circumstances, the payment must take place at the location of the handover of the goods, does not apply because the conditions of payment agreed upon — also regarding the last installment payable after the installation and operational handover of the system — do not contain a reciprocal and simultaneous [performance] provision in the sense of the mentioned rule.

2. On the merits, the appeal is successful. The Court of Appeals based its opinion, that the [buyer] rightfully declared the contract avoided, only on the failure to deliver complete documentation of which the [buyer] gave notice. The appealed decision cannot be based upon this reasoning.

a). It can be left open, whether the contract concluded between [seller] and the [buyer] is a pure sales contract or a contract for the supply of goods to be manufactured or produced. Pursuant to CISG Art. 3(1), contracts for the supply of goods to be manufactured or produced generally are to be deemed sales contracts; therefore, the warranty provisions of the CISG apply without restriction (Schlechtriem/Herber, CISG, 2d ed., Art. 3 ¶ 3).

b). If the [buyer] has warranty claims against the seller — and of what kind — primarily depends upon the warranty terms and conditions of [seller], which became part of the contract. They have priority over the CISG provisions (CISG Art. 6).

The contractual provisions merely regulate the extent, the beginning and the duration of the warranty, the obligation of the buyer to give immediate notice of the defects occurring after the handover, as well as the buyer’s right to reduce the purchase price or to declare the contract avoided after attempts to cure failed twice. Apart from that, the warranty provisions of the CISG remain applicable.

aa). The latter initially apply to the timeliness of the notice of those defects that already exist at the goods’ handover. To that extent, CISG Art. 38(1) provides that the buyer must examine the goods within as short a period of time as the circumstances will allow. He must give notice to the seller of any defect within a reasonable period after this point in time (CISG Art. 39(1)).

The [buyer] already complained about the “Documentation of the Printer” as an “open point” by letter dated February 9, 1993, i.e., one day after the February 8, 1993 handover of the system and instructions by an employee of the seller. Therefore, the timeliness of the notice is beyond question.

bb). We cannot agree, however, with the court of appeals insofar as it deemed the [buyer’s] notice to be detailed enough with respect to the lack of complete documentation for the printer unit.

Pursuant to CISG Art. 39(1) (last clause), the buyer must, in his notice, describe with particularity the kind of lack of conformity with the contract. That way, the seller shall be enabled to get an idea of the kind of breach of contract and to take the necessary steps, e.g., to initiate a substitute or subsequent delivery. On the other hand, the demands of specificity must not be carried too far (Schlechtriem/Schwenzer, supra, Art. 39, ¶ 6). The determination as to whether a notice of defects complies with this standard is primarily made by the trial judge.

The Court of Appeals held that the term “Documentation of the Printer” under Point 4 of the [buyer’s] notice of defects dated February 9, 1993 referred to the whole unit including the software. This interpretation does not hold up against the arguments on appeal [here].

Since the printer unit delivered by the [seller] consisted of a thermal transfer printer, a color monitor, a computer and a software package, the term “printer” — as the court of appeals did not correctly see — was, without further specification, at least ambiguous because it could relate to the unit as well as to the individual element. Therefore, in order to meet the requirements of CISG Art. 39(1), the [buyer] would have been obligated to describe the defect in such a detailed manner that any misunderstandings were impossible and to enable the seller to determine unmistakably what was meant. Special knowledge on the part of the [buyer] was not necessary for this task because anyone who handles these kinds of systems is able to distinguish the printing system from the printer itself as an individual component. Therefore, the ambiguity of the term “printer” goes against the [buyer].

Up to now, the Court of Appeals has not reached any findings from which one could discern that the parties nevertheless understood the [buyer’s] notice of defects unambiguously in the sense of the missing documentation for the entire printer unit. The [seller’s assignee’s] submission in the lower courts indicates the opposite, i.e., that the notice of defect really only covered the documentation for the printer. The [seller’s assignee] already claimed at trial that [seller] had sent the demanded documentation for the printer by letter dated February 22, 1993 in order to settle the notice of defects concerning Point 4 of the letter dated February 9, 1993. It additionally referred to this allegation in its reply to the notice of appeal in an admissible manner (BGH, decision dated October 20, 1992 – VI ZR 361/91 = BGHR ZPO § 520(2)(1), reply to notice of appeal 1, with further citations). If the seller, in reaction to the [buyer’s] notice of defects, sent documentation for the “printer” as an individual component — which must be presumed for the appeal to this court — and if the [buyer] did not mention Point 4 anymore in its letter of rescission dated March 2, 1903 but objected to five of the formerly eight defects as “not cured,” one must infer that what the [buyer] received from [seller] corresponded to what it had asked for in its letter dated February 9, 1993.

In any event, we cannot assume, based on the facts known so far, that the notice of defects dated February 9, 1993 referred to the documentation for the entire printer system with the clarity CISG Art. 39(1) requires in the interests of the seller.

c).

aa). In the opinion of the Court of Appeals, however, the [buyer] had the right to revive the notice of defective documentation by letter dated August 24, 1994 — after the issuance of the first judgment dated July 26, 1994 — and to grant the [seller] another period for subsequent improvement.

In this respect, the legal starting point of the Court of Appeals is already incorrect: It assumes that the beginning of the time period is the time of the delivery of the complete documentation and relies on the decision of the Federal Court of Justice dated November 4, 1992 – VIII ZR 165/91 (NJW [*] 1993, 461, 462). In doing so, it overlooks that HGB [*] § 377, upon which the decision was based, refers to the time of “delivery,” which requires the complete delivery of the goods into the buyer’s sphere of influence (decision of the Federal Court of Justice, supra, at II.2.b). In contrast, CISG Art. 39(1) speaks of a “reasonable time after (the buyer) has discovered or ought to have discovered (the lack of conformity of the goods).” Recourse to the mentioned jurisprudence is, therefore, for this reason alone not possible.

It is obvious, that the limitations period of CISG Art. 39(1) had run by August 1994; upon a reasonable examination, the [buyer] could have, within a short period of time, recognized the complained-of alleged breach of contract regarding “the documentation, i.e., the operating or service instructions,” which was noticed in the letter dated August 24, 1994. The question whether this period of time had expired on the day of the [buyer’s] letter of repudiation dated March 2, 1993, can be left open (for the calculation of the time period during which to give notice, compare BGHZ 129, 75, 85 et seq.). It can further be left open whether the [buyer] has forfeited its right to give notice of defects by basing its repudiation exclusively on other defects, without reserving its right to raise warranty claims concerning any defects with respect to the documentation. The Court of Appeals’ assumption that the [buyer] validly declared the contract avoided in its letter dated October 12, 1994 after the notice of defects dated August 24, 1994 and the failure to cure, is therefore incorrect.

bb). Insofar as the Court of Appeals reasons that the [buyer’s] repudiation “amounts to an annulment within the meaning of CISG Art. 64(1)(a),” it must be noted for clarity purposes that this provision refers to the seller’s right to repudiate. Here, however, we are only looking at the question whether the [buyer] in his role as the buyer was able to declare the contract avoided. As long as we do not deal with contractual conditions that have precedence, this must be answered pursuant to CISG Art. 49.

Moreover, the Court of Appeals did not consider — as the appeal has rightly claimed — whether the [buyer’s] repudiation dated October 12, 1994, was already null and void simply because it was not declared vis-à-vis the seller but only vis-à-vis the [seller’s assignee]. The [seller’s assignee] only became the owner of the purchase price claim by assignment. A transfer of the contract did not take place.

3. The Court of Appeals judgment can therefore not be valid (ZPO § 564). This panel cannot finally decide the matter because the determination of further facts is necessary. In both lower courts, the [buyer] gave notice of further defects concerning the functioning of the system. On remand, the Court of Appeals will have to consider whether those defects of the system justify the repudiation of the contract because of a fundamental breach of contract pursuant to CISG Art. 49(1)(a) or a repudiation pursuant to the seller’s terms and conditions of warranty. Therefore, the matter must be remanded to the lower court (ZPO § 565(1)(1)).

---

Footnote

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

Translator’s note on other abbreviations: BGB = Bürgerliches Gesetzbuch[German Civil Code]; BGH = Bundesgerichtshof [Federal Court of Justice]; BGHR = Systematische Sammlung der Entscheidungen des Bundesgerichtshofs (LBl) [Systematic Collection of Decisions of the Federal Court of Justice (looseleaf)]; BGHZ = Entscheidungen des Bundesgerichtshofes in Zivilsachen (amtliche Sammlung) [Official Reporter for Decisions of the Federal Court of Justice in Civil Matters]; HGB = Handelsgesetzbuch [German Commercial Code]; NJW = Neue Juristische Wochenschrift [a weekly law journal]; ZPO = Zivilprozeßordnung [German Code of Civil Procedure].

© 2005 Pace Law School Institute of International Commercial Law. This HTML edition © 2006 Gerhard Dannemann.

BGH NJW 1996, 2373
Bundesgerichtshof judgment of 28th March 1996 – III ZR 141/95 (Düsseldorf).

This case is first published in the German Law Archive courtesy of:

Translated German Cases and Materials under the direction of Professors P. Schlechtriem, B. Markesinis and S. Lorenz

Translated by Mr Raymond Youngs, Southampton Institute

Facts:

The A Group offered facilities for investment of capital for small investors. In October 1987 because of a fall in share prices the group suffered heavy losses so that the whole capital investment was exhausted. This was concealed from the investors, and the group carried on advertising investment facilities. The state prosecutor took investigatory proceedings against those responsible. The group’s money deposited with a bank was first of all seized, but the Amtsgericht (district court) quashed the seizure and the state prosecutor discontinued the investigatory proceedings. Five months later, the plaintiff made a financial management contract with the A Group. Over a year later the A Group suffered further heavy losses and the investigatory proceedings were recommenced against those responsible which led to their conviction for deceit. The plaintiff who had lost about three quarters of his capital claimed compensation from the defendant state (Land).

Grounds:

The case is not of significance on an issue of principle; and the appeal in law has no prospect of success [reference omitted].

1. The appeal court denied that the official duty of the state prosecutor to pursue crimes, to carry out investigatory proceedings against the perpetrators and if necessary to start a public prosecution is owed to third parties. It stated that this duty was exclusively to serve public interests, namely the fulfilment of the criminal powers of the state. The arguments raised in the appeal in law against this are unsuccessful. The introduction of investigatory proceedings in criminal law, the initiation and execution of a search order, a decision about the starting of a public prosecution and measures in proceedings for fines can represent violations of the official duty owed to the suspect if they are undertaken without justification [references omitted]. But there is no official duty on the part of the state prosecutor to intervene in the interest of a person possibly affected by a crime – in contrast to the position in relation to the police (see Senate, LM § 839 [Fg] BGB no 5). The duty of the state prosecutor to pursue crimes, to arrest an accused etc exists only in the public interest. Failure to carry it out cannot therefore as a rule violate an official duty against the person harmed by the crime [references omitted]. It can be otherwise if concrete protective duties to the person harmed by a crime are acquired by the state prosecutor in current investigatory proceedings, perhaps to secure stolen property in the interests of the person from whom it has been stolen [references omitted]. The principles set out above also apply to the prevention of crimes which is the issue in the case of plaintiff.

2. As the appeal court further states, the plaintiff did not in May 1988 come within the category of those who had already paid their money to the A Group. They could not therefore have possibly been protected from harm by the seizure being kept in force and the proceedings against the suspects being pursued on the grounds that those steps would have deprived the suspects of access to further accounts. As the plaintiff first made his investment on the 18th June 1988, he was not directly affected by the decision of the state prosecutor to order the quashing of the seizure and to discontinue the proceedings on the 2nd May 1988 [reference omitted]. The harm he has suffered is based on the fact that the accused persons had not been forced to give up their activity. It can however be left undecided whether, if an official duty on the part of the state prosecutor owed to third parties suffering harm could be accepted, this would stand in the way of including the plaintiff within the circle of those protected (see Senate, LM § 839 [Fg] BGB no 5), as the duty is not owed to third parties.

3. The appeal court judgment does not reveal any other legal errors which are significant in the context of the decision and are to the disadvantage of the plaintiff.

©1999 University of Oxford. Since 2002: © Translation The University of Oxford and Professor Markesinis 1999. HTML edition by Lawrence Schäfer. © 1999 Gerhard Dannemann.

Bundesgerichtshof (Sixth Civil Senate) 9 May 1995, NJW 1995, 2162, with case note.

This case is first published in the German Law Archive courtesy of:

Translated German Cases and Materials under the direction of Professors P. Schlechtriem, B. Markesinis and S. Lorenz

Translated by Mr Raymond Youngs, Southampton Institute

Facts: The defendant bottled and distributed carbonated mineral water in returnable glass bottles, either “standard spring-water bottles” or bottles of thicker glass and different shape. On 27 June 1990 the plaintiff, then nine years old, was fetching two bottles of the latter type from the cellar of her parents’ house. She had placed them on the floor outside the cellar in order to close the door and was about to pick them up when one of the bottles exploded. Splinters of glass entered her left eye and caused serious injuries which despite an operation reduced her sight to 60% and left her with astigmatism.

When bottles were to be refilled in the defendant’s factory the following process took place. Cases of empties were put on rollers and carried to a conveyor belt, where the bottles, still in the cases, were visually inspected by two of the defendant’s operatives, whose job it was to discard any intrusive or damaged bottles. Then a grab armed with rubber bulbs picked up the bottles, three at a time, and transported them to the washing point, where they were repeatedly sprayed with water. On leaving the washing point, still on the conveyor belt, they were inspected again visually by another employee. They then passed through the bottle-inspection unit, an electronically-operated machine which passed a beam of light through the base and mouth of each bottle, and if this disclosed any damage in those parts, the bottle was discarded. There was then a further visual inspection before the conveyor belt carried the bottles to the filling station. Before entering the filling station they were subjected to yet another visual inspection, and then entered the pressure chamber, where they were subjected to a pressure of 5 bar, a pressure one-third greater than would be exerted by the contents of the bottle once filled. On leaving the pressure chamber the bottles were filled, visually checked once again, and then labelled. The conveyor belt then carried them to the packing station where rubber grips lifted them and placed them in cases for consignment. About 15,000 bottles per hour were processed in this manner.

The plaintiff, relying on the report of the national materials laboratory in D. which he put in evidence, maintained that there was a fault in the glass at the site of the fracture – a chip about 4 mm. broad, which may well have existed at the time the bottle was delivered.

For her pain and suffering the plaintiff claimed an appropriate capital sum plus monthly instalments of DM 500. She also claimed a declaration that the defendant was bound to make good to her any material loss she might suffer as a result of the accident on 27 May 1990, except in so far as her claims may have vested in third parties.

Both lower courts dismissed her claim. Her appeal was now allowed.Reasons: The court below, whose decision is published in VersR 1995, 103, accepted the evidence that explosions of glass bottles filled with carbonated water are always due to damage to the surface of the bottle, and that spontaneous explosions occur through the spread of a very fine hairline crack. The very slightest physical contact, even, under certain circumstances, that of a warm hand, may be enough to cause the bottle to break. The court below held that in this case the bottle had such a hairline crack in it and that the defendant should have withdrawn it during the production process, but that it was at fault in failing to do so and letting the bottle get into circulation. Accordingly the precondition of a claim for damages for pain and suffering, namely that the defendant have been culpably in breach of a duty of care towards the public, was not satisfied. The explosive bottle was one which unavoidably “got away” despite the exercise of all appropriate precautions. Certainly before a manufacturer puts into circulation a product which entails particular risks he must take every care to make sure that it has no defect. But the defendant’s techniques of quality control were, according to the experts, up to the state of the art, and no system of control could absolutely ensure that no bottle with a hairline crack left the factory. According to the experts there was an irreducible residual risk in refilling glass bottles, and this case was an instance of it.
The court below was also of the view that the defendant was not liable for the future material loss of the plaintiff under the Product Liability Law of 15 Dec. 1989 (BGBl. I, 2198), since it followed from the reasons given for dismissing the claim in tort that in the current state of scientific and technical knowledge the defect in the bottle could not have been detected (II no. 5). The appellant’s criticisms of the judgment below are justified.

1. The court below was wrong to dismiss the plaintiff’s claim for damages for her material harm under 1 of the Product Liability Law.

a) The plaintiff rightly objects on procedural grounds to the finding that there was a hairline crack in the bottle, which exploded in the plaintiffs’ hand. There was no basis for such a finding. The plaintiff’s case was that there was a 4 mm. chip off the surface of the bottle, and this was confirmed by the report from the national materials laboratory in D. which was put in evidence. The report was to the effect that this fault, which could have arisen shortly before the bottle broke, was the direct cause of the explosion. Furthermore V. stated in his expert testimony that the explosion could be assumed to have occurred at the place of the fault. If so, the bottle had at the time of the accident a defect, which caused the bottle to explode.

If it was by reason of the chipping that the bottle exploded, then the defendant is liable for the consequent material harm to the plaintiff under 1 I (1) of the Product Liability Law. Liability could only be avoided if the defendant could prove (1 IV (2)) that at the time the bottle was put into circulation it did not have the defect, which caused the damage (1 II (2)). No such proof was adduced by the defendant in this case. It asserted only, by reference to the expert opinion of C., its production manager, that if the bottle had been chipped when it was in the factory, it would have exploded in the pressure chamber, an assertion which does not exclude the possibility that the bottle was chipped after being filled but while it was still in the defendant’s sphere of influence and risk.

On such facts there would be no room for the defence under 1 II no. 5 of the Product Liability Law: there is no difficulty in detecting such a chip.

b) But even if, as the court below evidently supposed, the bottle broke not in the area of the chip but elsewhere, by reason of a hairline crack, it was still no defence to a claim under 1 I (1) of the Law that the current state of science and technology did not permit the defect to be detected.

aa) As the court below rightly held, a product is defective under 3 I of the Law if it does not afford the safety which in all the circumstances can justifiably be expected, and consumers expect soda water bottles to be free from faults such as hairline splits and microfissures which could make them explode. The consumer’s expectation that the bottle be free from faults would not be diminished even if it were technically impossible to identify and remove such faults. The presence of such a hairline crack constitutes, as the court below rightly held, a manufacturing fault, even if it is one which “got away”. (see BGHZ 51, 91 [105] = NJW 1969, 269 – the “chicken-pest” case).

bb) Manufacturing defects which “get away” do not, simply because they cannot be avoided by any proper precautions, constitute defects unascertainable in the current state of scientific or technical knowledge in the sense of art. 7(e) of the Directive or of 1 II no. 5 of the Law which transposes the Directive into German law.

The purpose of the rule in both instances is merely to exclude liability for what are termed development risks [references to literature]; the term covers only cases where at the time a product was put into circulation none of the means offered by the current state of science and technology rendered it possible to detect its dangerous quality. [More references]. The strict liability of the producer is to be limited by what is objectively possible in the light of the knowledge of risks available at the time the product is put into circulation. [Reference]. The only dangers to be treated as development risks are dangers inherent in the design and construction of the product, which in the current state of technology could not be avoided, not those that were inevitable at the stage of production. When the EC Directive on product liability was being fashioned it was agreed that the defence under art. 7 (e) should apply not to manufacturing defects, but only to defects of design and construction [references], and the only dangers emanating from a product which the German legislator wished to exempt from the scope of the Product Liability Law were dangers, undetectable even with the exercise of all possible care, arising at the stage of design and construction. Liability is to be excluded “only if the potential danger of the product was unrecognisable by reason of the fact that at the time of circulation it was not yet possible to recognise it” [official explanation (Gesetzeserluterung) of the draft Product Liability Law]. It is no longer a defence to this strict liability that the defective product “got away”.

The potential danger of returnable glass bottles filled with carbonated liquids has long been recognised and has indeed frequently engaged the courts [references]. As the lower court found, the danger of such glass bottles lies in the fact that even a tiny hairline crack which spreads can cause it to explode. Such a defect may arise at the stage of filling or pre-exist unnoticed, but in neither case is it a fault of design or construction, so liability in respect of it cannot be excluded under 1 II (5) of the Product Liability Law. In such a case the liability of the producer under 1 I (1) of the Law can only be avoided if it appears that the hairline crack was not in the bottle when it had been refilled and put into circulation. No such proof has been adduced by the defendant.

c) There is no need to refer the matter to the Court of Justice of the European Communities. It is true that the concept of “the state of science and technology” in 1 II no. 5 of the Product Liability Law comes from art. 7 (e) of the EC Directive and must be interpreted in a similar manner in all member states [reference]. It is also true that if the interpretation of a concept of community law is in issue the court of last resort in a member state must in principle refer the matter to the Court of Justice (art. 177 II EC). But in the present case there is no occasion to construe the concept of “the state of science”. The question is rather whether and how far the German legislator has utilised the freedom allowed by art. 15 I (b) of the Directive to deviate from art. 7(b) and make the producer liable, and this is a question for the national courts. Indeed, even where a concept in a Directive is in issue, a reference to the Court of Justice is required only if its interpretation is disputed in the literature or the case-law [reference] or if the court wishes on a point material to the case to deviate from the holding of the Court of Justice (see BVerfG NJW 1988, 2173). Neither of these is the case here.

2. The appellant is also right to criticise the court below for rejecting her claim in tort for damages for pain and suffering.

a) The court below correctly held that on the question whether a particular defect, such as the chip or hairline crack in this case, arose or even remained undiscovered while it was in the producer’s sphere of responsibility the burden of proof can be reversed if the producer was in breach of his Befundsicherungspflicht, his duty to ascertain the condition of his product and correct it if defective (BGHZ 104, 323 [330]; BGH NJW  1993,  528). [See note, below.] It also rightly held that users of returnable bottles are bound to have a control system which so far as is possible and reasonable in the light of the latest technology checks the condition of every bottle and takes out of circulation any bottles which might be dangerous.

b) The court below concluded that in this case the defendant had fulfilled its Befundsicherungspflicht, but there are procedural objections to the way in which it reached its conclusion.

aa) Despite the appellant’s complaint, there was no need for the court below to inquire whether the defendant excluded bottles which had been in prolonged use, since even if such a duty was broken, the breach was not causative of the harm in issue. The evidence of the national materials laboratory in D. was that the general condition of the bottle that exploded indicated that it had been used relatively infrequently. So the court below could properly suppose that the defendant was not in breach of its Befundsicherungspflicht for failing to remove from circulation, on the ground of its prior use, the bottle which injured the plaintiff.

bb) But the court below failed to obtain the further expert opinion demanded by the plaintiff on the question whether the pressure of only 5 bar in the chamber through which the bottles were passed prior to being refilled was adequate. This was a procedural lapse (references) which the plaintiff is right to criticise. The particular reason for obtaining such a report in this case is that standard spring-water bottles, which are made of thinner glass than the bottle which injured the plaintiff, are exposed to a pressure of 5.5 to 6 bar, and even this is inadequate to exclude all bottles which are apt to explode (reference). In principle the extra thickness of the bottle in question may have increased the resistance of the glass (reference), as is indeed indicated by the defendant’s assertion that 25 bar was needed to make their bottles explode. The court below should therefore have called for direct evidence on the question whether the pressure chosen by the defendant for its bottles of thicker glass was adequate to produce the desired effect of excluding damaged bottles. It was not bound to raise the pressure so high as to cause all bottles with hairline cracks to explode, for the precautions which a defendant must take in order to avoid a reversal of the burden of proof need not totally exclude the chance of explosion of bottles when handled by the consumer: it is enough if they would significantly reduce the risk of this happening (reference).

cc) The court below was also wrong to ignore the plaintiff’s evidence that the production methods used by the defendant and its system of control were inadequate to disclose existing defects such as the possible chipping of the bottle in question.

Having found that the defendant’s electronic bottle inspection unit could recognise a blemish only if it was apparent at the base or neck of the bottle, the court should not have been satisfied by the expert opinion of V. that it would be impossible to construct a machine which could detect other faults. As this court has already held (NJW 1993, 528) a mineral water company’s Befundsicherungspflicht requires it to provide a control system which reveals the condition of every single bottle and guarantees, within the limits of what is technically feasible, that dubious bottles are not reused. This does not mean that it is enough for the company to use the best possible machinery in its control procedures. If defects in bottles undetectable by machinery could be seen by human beings, the company is under a duty to arrange for a visual inspection of every single bottle. Here the defendant admittedly had the bottles inspected visually several times both before and after they were filled, but it is not clear that every bottle was so inspected, especially as during the first inspection the bottles were still in cases, and the two inspectors had to remove not only damaged bottles but also those of a different sort. Again, seeing that the throughput was 15,000 bottles per hour the subsequent inspectors had to check four bottles every second, and to check them not only for faults but also to see that they were clean, duly filled and properly labelled: it is highly unlikely that they could be expected to discover all possible faults, including a chip only a few millimetres in size. III. This being so, the decision below must be reversed. The plaintiff’s claim for material harm is ripe for final decision. The evidence shows that the explosion which damaged the plaintiff was due either to a chip or to a hairline crack, both of which are defects under 3 of the Product Liability Law so that the defendant is liable under 1 for all material harm and the declaration sought can be made. There is no case for restricting the quantum of damages since the harm suffered by the plaintiff falls below even the individual limit under 10 I of the Law.

The plaintiff’s claim for damages for pain and suffering must be reheard and decided afresh.
In the further proceedings the following must be noted. Should the court accept that the bottle was chipped, as the plaintiff claims, and the question is whether the chipping occurred during carriage or within the parents’ sphere of control and responsibility, this would be a matter for the defendant to prove if it emerged that it was in breach of its Befundsicherungspflicht. If the defendant cannot discharge that burden, it will be liable even if the explosion was not due to the chip but to a hairline crack elsewhere in the bottle: its failure to keep the bottle out of circulation would constitute a cause of the injury, and damage due to its exploding because of a hairline crack would fall within its area of responsibility since the exclusion of bottles with external damage helps protect consumers from injury through explosion. Should it transpire that the bottle was not chipped but that the explosion was due to a tiny hairline crack invisible to the human eye somewhere else on the bottle, then if the defendant has fulfilled its Befundsicherungspflicht by having adequate pressure in the pressure chamber and keeping the bottle exposed to it for long enough, it will not be liable for the plaintiff’s pain and suffering.

NOTE to BGH NJW 1995, 2162

In product liability cases the victim must prove that the defect in the product which was the cause of the injury arose in the producer’s organisational area, before the product left the defendant’s factory. In the instant case the Bundesgerichtshof alleviates this difficult burden of proof by imposing on the defendant a Befundsicherungspflicht and applying a presumption that the defect arose in the producer’s organisational area unless he can prove that he took all possible and requisite measures of quality control to ensure that the product was free from defects. The term Befundsicherungspflichthas perplexed some commentators. Literally it signifies a duty to keep a record of the results of an investigation, such as a doctor’s note of his diagnosis, a meaning quite appropriate to its function of reversing the burden of proof in cases where the defendant can adduce relevant evidence more easily than the claimant. But the term is here used to mean a duty not just to ascertain the condition of the product but also to correct it if faulty, i.e. effectively to operate an extremely good system of quality control. As the BGH said in another case: “The producer’s duty to ascertain and assure the result of the investigation is neither a duty to “keep a record of the evidence”, as Winkelmann puts it, nor a (non-existent) duty of documentation, as Fierste suggests. In this context Befundsicherungapplies to all bottles being reused, not in the sense of making a list of the results of checking each bottle, but rather in the sense of establishing and operating a control procedure which permits the ascertainment of the physical condition of each bottle and ensures that, so far as technically possible, all bottles which are in any way faulty are kept out of further use.” (BGH 8 Dec. 1992, NJW 1993, 529.)

Finally, one should note that the device is necessary only where a claim is brought for pain and suffering under the BGB. the Directive and the laws which implement it make it clear that it is for the defendant to prove that the established defect was not present in the product when it was put into circulation.

©1998 University of Oxford. Since 2002: © Translation The University of Oxford and Professor Markesinis 1998. HTML edition © 1998 Gerhard Dannemann.

Bundesgerichtshof 8 March 1995 [VIII ZR 159/94], BGHZ 129, 75

Translation [*] by Alston & Bird LL.P.
Editors: William M. Barron, Esq.; Birgit Kurtz, Esq. Coordinator: Thomas Carlé (Referendar); Translators (Referendars): Thomas Carlé; Nicola Heraeus; Carmela Schmelzer; Ulrich Springer

Facts

Defendant [buyer], who runs a fish import business in D., bought 1,750 kilograms (kg) New Zealand mussels for U.S. $3.70 per kg from Plaintiff [seller], who resides in Switzerland. [Seller] delivered the goods, as agreed, in January 1992 to a storage facility belonging to [buyer] and located at Company F. in G.G., and invoiced [buyer] on January 15, 1992 in the amount of U.S. $6,475 payable within 14 days.

At the end of January 1992, Company F. informed [buyer] that the federal veterinary agency of G.G. had taken samples of the goods for examination purposes. After the veterinary agency confirmed at the end of January/beginning of February 1992, upon [buyer’s] request, that an increased cadmium content was discovered in the mussels and that further examinations by the responsible veterinary examination agency of Southern Hesse were necessary, [buyer] informed [seller] of these facts by facsimile dated February 7, 1992. According to the report by the veterinary examination agency of Southern Hesse, which was received by [buyer] on February 26, 1992 and forwarded to [seller] by [buyer], cadmium contents of between 0.5 and 1.0 milligram per kg (mg/kg) were ascertained in four of the examined bags of mussels; these contents did not yet exceed twice the amount of the 1990 standard of the federal public health agency, but further examinations by the importer were found necessary. An examination commissioned by [seller] and conducted by the federal agency for veterinary matters in Liebefeld-Bern determined a cadmium content of 0.875 mg/kg.

By facsimile dated March 3, 1992, [buyer]) announced to [seller] that she was going to send the mussels back at [seller’s] expense since the veterinary agency had declared them “not harmless” due to their high cadmium content; simultaneously, she complained that the goods were “no longer in their original packaging as required” and that, furthermore, the packaging was unsuitable for frozen food. Thereafter, [seller] informed [buyer] by telephone that she would not accept the goods. Consequently, [buyer] did not return the goods. According to a report of the chemical examination laboratory of Dr. B. dated March 31, 1992, which had been commissioned by [buyer] for further examination, three samples revealed 1 mg of cadmium per kg; a doubling of the federal public health agency standards could not be “tolerated,” and at least 20 additional samples of the entire delivery had to be examined.

[Buyer] requested that [seller] cover, among other things, the future expenses of the examination; [seller] did not reply.

In the complaint, [seller] demands payment of the purchase price of U.S. $6,475 plus interest. She claimed that the mussels were suitable for consumption because their cadmium content did not exceed the permitted limit; furthermore, [buyer] had not given timely notice of the defects. [Buyer], on the other hand, declared the contract avoided due to a fundamental breach of contract because the mussels were defective and had been complained of by the responsible authorities. Thus, the mussels were not permitted to be delivered out of the storage facility. And by now, the “expiration date of 12/92,” affixed to the merchandise by [seller], had come and gone anyway.

The Trial Court (here the “Landgericht“) obtained an expert opinion from the federal public health agency. With respect to the question whether the mussels were suitable for consumption having the reported cadmium content, the federal public health agency elaborates that the ZEBS (central registration and evaluation office of the federal public health agency for environmental chemicals) standards are guidelines indicating an unwanted concentration of harmful substances in food for purposes of preventative consumer health protection. Occasionally exceeding the individual standard which are not toxicologically explainable, usually does not lead to harmful effects on one’s health, even if the measured concentration reaches twice the amount of the standard. If twice the amount of the standard is exceeded, the responsible state control authorities usually declare that, analogous to the procedure legally required for enforcement of the meat hygiene regulations (FleischhygieneVerordnung), the relevant food can no longer be considered suitable for consumption according to the foodstuffs and consumer goods law (“Lebensmittel- und Bedarfsgegenständegesetz” or “LMBG”) § 17(1)(Nr.1).

The Trial Court ruled against [buyer] in accordance with [seller’s] petition [seeLG Darmstadt 22 December 1992]. On appeal, buyer claimed, as a precaution and with offer of proof, that the cadmium content of the mussels was even higher than 1 mg/kg. The Court of Appeals (Oberlandesgericht) dismissed [buyer’s] appeal [see OLG Frankfurt 20 April 1994]. In the appeal to this Court, [buyer] continues to move for a dismissal, whereas [seller] pleads for a dismissal of the appeal.

Opinion

The appeal is unsuccessful.

I. The Court of Appeals has explained:

The U.N. Convention on Contracts for the International Sale of Goods dated April 11, 1980 (CISG) applies to the legal relationship between the parties. According to CISG Art. 53, [seller] is entitled to the purchase price. [Buyer] can only declare the contract avoided pursuant to CISG Art. 49(1)(a) in case of a fundamental breach of contract by seller. It is true that a delivery of goods that do not conform with the contract can be a fundamental breach of contract within the meaning of CISG Art. 25; in case of a lack of express agreement, CISG Art. 35(2) governs the question whether the goods conform with the contract. The question whether only goods of average quality are suitable for ordinary use (CISG Art. 35(2)(a)) or whether it is sufficient that the goods are “marketable” may be left open. The delivered mussels are not of inferior quality even if their cadmium content exceeds the examination results known so far. The reason for this is that the standard for cadmium content in fish, in contrast to the standard for meat, does not have a legally binding character but only an administratively guiding character. Even if the standard is exceeded by more than 100%, one cannot assume that the food is no longer suitable for consumption, because mussels, contrary to basic food, are usually not consumed in large quantities within a short period of time and, therefore, even “peaks of contamination” are not harmful to one’s health. That is why it is no longer relevant whether the public law provisions of those countries, to which an export was possible at the time of conclusion of the contract, have no influence on the conformity of the goods with the contract according to CISG Art. 35(2)(a).

The fact that the standard was exceeded is similarly not relevant to the elements of CISG Art. 35(2)(b) (fitness for a particular purpose). There is no evidence that the parties implicitly agreed to comply with the ZEBS-standards. Even if [seller] knew that [buyer] wanted to market the goods in Germany, one cannot make such an assumption, especially since the standards do not have legal character.

The demand to declare the contract avoided is also not legally founded based on [buyer’s] allegation that the goods were not packaged properly. [Buyer’s] pleadings in this respect are not substantiated and can, therefore, not be accepted. In any event, the statement to declare the contract avoided is statute-barred by CISG Art. 49(2). This is so because on March 3, 1992, Defendant (buyer) gave notice for the first time that the packaging of the goods delivered in the beginning of January did not conform with the contract; therefore, she did not give notice within a reasonably short time.

II. These elaborations hold up against a legal re-examination with respect to the result.

1. The application of the CISG provisions to the contract between the parties is expressly no longer questioned and is also correct (CISG Art. 1(1)(a)). The prerequisite to [buyer’s] right to declare the contract avoided pursuant to CISG Art. 49(1)(a) due to the cadmium contamination of the delivered mussels is, therefore, a fundamental breach of contract by [seller] within the meaning of CISG Art. 25. This is the case when the purchaser essentially does not receive what he could have expected under the contract, and can be caused by a delivery of goods that do not conform with the contract (see, e.g., Schlechtriem in von Caemmerer/Schlechtriem, Kommentar zum Einheitlichen UN-Kaufrecht(Commentary on the Uniform U.N. Law of Sales) Art. 25 6 20 (2d ed.) (with further citations)). Not even non-conformity with the contract within the meaning of CISG Art. 35 can, however, be determined.

a) In this respect, an agreement between the parties is primarily relevant (CISG Art. 35(1)). The Court of Appeals did not even find an implied agreement as to the consideration of the ZEBS-standards. [Buyer] did not argue against this finding, and it is not legally objectionable. The mere fact that the mussels should be delivered to the storage facility in G.G. does not necessarily constitute an agreement regarding the resalability of the goods, especially in Germany, and it definitely does not constitute an agreement regarding the compliance with certain public law provisions on which the resalability may depend.

b) Where the parties have not agreed on anything, the goods do not conform with the contract if they are unsuitable for the ordinary use or for a specific purpose expressly or impliedly made known to the seller (CISG Art. 35(2)(a) and (b)). The cadmium contamination of the mussels, that has been reported or, above that, alleged by [buyer], does not allow us to assume that the goods, under this rule, do not conform with the contract.

aa) In the examination of whether the goods were suitable for ordinary use, the Court of Appeals rightly left open the question — controversial in the legal literature — whether this requires generic goods of average quality or whether merely “marketable” goods are sufficient (see, e.g., Schwenzer in von Caemmerer/Schlechtriem, supra, Art. 35 6 15 (with further citations)). Even if on appeal, goods of average quality were found to be required, [buyer] has still not argued that the delivered mussels contain a higher cadmium contamination than New Zealand mussels of average quality. It is true that, according to the report from the examination laboratory of Dr. B., submitted by [buyer] to the trial court, and the contents of which is thereby alleged, “there are also other imported New Zealand mussels on the market … that do not show a comparable cadmium contamination.” It does not follow, however, that average New Zealand mussels on the market contain a smaller amount of cadmium than the mussels delivered to [buyer].

The appeal wrongly requests that [seller] submit a statement that New Zealand mussels usually have such a high cadmium contamination. After taking delivery without giving notice of the lack of conformity, the buyer must allege and prove that the goods do not conform with the contract and the seller does not have to allege and prove that they do conform with the contract (see, e.g., Herber/Czerwenka, Internationales Kaufrecht (International Law of Sales) Art. 35 6 9 (1991); Piltz, Internationales Kaufrecht (International Law of Sales) § 5 6 21 (1993); Schwenzer, supra, 6 49 (with further citations)). Contrary to [buyer’s] contention at trial, she accepted the mussels by physically taking delivery (CISG Art. 60(b)) at the place of destination in G.G., and she did not give notice of the lack of conformity of the goods at that time.

bb) Admittedly, from the point of view of salability and, therefore, resalability of the mussels and contrary to the Court of Appeals’ opinion, even if twice the amount of the ZEBS-standard is exceeded, as [buyer] alleged, this would not change anything regarding the suitability of the mussels for consumption pursuant to LMBG § 17(1)(1), and, considering the report from the federal public health agency and the documented administrative practice of the state health agencies, there would be reservations, if the public law provisions of the Federal Republic of Germany were relevant. This, however, is not the case. According to the absolutely prevailing opinion in the legal literature, which this Court follows, the compliance with specialized public law provisions of the buyer’s country or the country of use cannot be expected (Schwenzer, supra, Art. 35 6 16 et seq.; Stumpf in von Caemmerer/Schlechtriem, supra, Art. 35 6 26 et seq. (1st ed.); Staudinger/Magnus, BGB (German civil code), CISG Art. 35 6 22 (13th ed.); Herber/Czerwenka, supra, Art. 35 66 4, 5; Piltz, supra, § 5 66 35, 41; Enderlein in Enderlein/Maskow/Stargardt, Konvention der Vereinten Nationen über Verträge über den internationalen Warenkauf, Kommentar (The U.N. Convention on Contracts for the International Sale of Goods, Commentary) Art. 35 6 4 (1985); the same in Enderlein/Maskow/Strohbach, Internationales Kaufrecht(International Law of Sales) Art. 35 6 8 (1991); Bianca in Bianca/Bonell, Commentary on the international sales law Art. 35 6 2.5.1, p. 274 et seq., 6 3.2, p. 282 et seq. (1987); Audit, La vente internationale de marchandises (The International Sale of Goods) 6 98, p. 96 (1990); Heuzé, La vente internationale de marchandises (The International Sale of Goods) 6 290 (1993); Neumayer/Ming, Convention de Vienne sur les contrats de vente internationale de marchandises (The Vienna Convention on Contracts for the International Sale of Goods), Art. 35 6 7 (1993); probably also Hutter, Die Haftung des Verkäufers für Nichtlieferung bzw. Lieferung vertragswidriger Ware nach dem Wiener UNCITRAL-Übereinkommen über internationale Warenkaufverträge vom 11. April 1980 (The Liability of the Seller for Non-delivery or Delivery of Goods Not Conforming with the Contract pursuant to the Vienna UNCITRAL-Convention on the International Sale of Goods dated April 11, 1980) at 46 et seq. (doctoral thesis 1988); Otto, MDR [*] 1992, 533, 534; probably differentSchlechtriem in International Sales §§ 6.03, 6.21 (Galston/Smit 1984); not clearSoergel/Lüderitz, BGB (German civil code), CISG Art. 35 6 11 (12th ed.); inconsistent Heilmann, Mängelgewährleistung im UN-Kaufrecht (Guaranty with Respect to Non-Conformity with a Contract pursuant to the U.N. Law of Sales), compare p. 184 with p. 185 (1994); concerning the legal situation pursuant to the EKG,[*] compare, e.g., Dölle/Stumpf, Kommentar zum Einheitlichen Kaufrecht(Commentary on the Uniform Law of Sales) Art. 33 6 18 (1976) (with further citations) with Mertens/Rehbinder, Internationales Kaufrecht (International Law of Sales), Art. 33 6 16, 19).

Some uncertainties, noticeable in the discussions in the legal literature and probably partly caused by the not very precise distinction between subsections (a) and (b) of CISG Art. 35(2), do not require clarification in the evaluation of whether this question must be integrated into the examination of the ordinary use of the goods or the examination of the fitness for a particular purpose. There is, therefore, no need to finally decide whether, within the scope of CISG Art. 35(2)(a), as most argue, the standards of the seller’s country always have to be taken into account (see, e.g., Bianca, supra, 6 2.5.1; Piltz, supra, 6 41; Enderlein in Enderlein/Maskow/Strohbach, supra; Aue, Mängelgewährleistung im UN-Kaufrecht unter besonderer Berücksichtigung stillschweigender Zusicherungen(Guaranty with Respect to Non-conformity with a Contract pursuant to the U.N. Law of Sales under Special Consideration of Implied Promises), at 75 (doctoral thesis 1989); probably different Schlechtriem, supra; Hutter, supra, at 40), so that it is not important for the purposes of subsection (a) whether the use of the goods conflicts with public law provisions of the import country (see, e.g., Herber/Czerwenka, supra, 6 4). In any event, certain standards in the buyer’s country can only be taken into account if they exist in the seller’s country as well (see, e.g., Stumpf in von Caemmerer/Schlechtriem, supra, 6 26; Schwenzer, supra, 6 16; Bianca, supra, 6 3.2) or if, and this should possibly be examined within the scope of CISG Art. 35(2)(b), the buyer has pointed them out to the seller (see, e.g., Schwenzer, supra, 66 16, 17; Enderlein, supra) and, thereby, relied on and was allowed to rely on the seller’s expertise or, maybe, if the relevant provisions in the anticipated export country are known or should be known to the seller due to the particular circumstances of the case (see, e.g., Piltz, supra, 6 35; Bianca, supra). None of these possibilities can be assumed in this case:

aaa) [Buyer], who bears the burden of proof, did not allege that there are any Swiss public law provisions concerning the contamination of mussels with toxic metals. The appeal similarly does not mention anything in this respect.

bbb) The agreement regarding the place of delivery and place of destination is in itself, even if it could be viewed as an indication by [buyer] of the anticipated marketing in Germany, neither under subsection (a) nor under subsection (b) of CISG 35(2) sufficient to judge whether the mussels conform with the contract pursuant to certain cadmium standards used in Germany (compare, e.g., Stumpf, supra, 6 27; Schwenzer, supra, 6 17; Piltz, Enderlein and Bianca, each supra). Decisive is that a foreign seller can simply not be required to know the not easily determinable public law provisions and/or administrative practices of the country to which he exports, and that the purchaser, therefore, cannot rationally rely upon such knowledge of the seller, but rather, the buyer can be expected to have such expert knowledge of the conditions in his own country or in the place of destination, as determined by him, and, therefore, he can be expected to inform the seller accordingly. This applies even more in a case like this, where, as the reply to the appeal rightly points out, there are no statutes regulating the permissible cadmium contamination and where, instead, the public health agencies apply the provisions, that are only valid as to the meat trade (compare No. 3 of Exh. 6 to the regulation for meat hygiene dated Oct. 30, 1986, BGBl.[*] I 1678, as modified by the regulation dated Nov. 7, 1991, BGBl. I 2066)), “analogously” and, seemingly, not uniformly in all the German Länder(federal states) (compare the announcements of the federal public health agency in Bundesgesundhbl.[*] 1990, 224 et seq.; 1991, 226, 227; 1993, 210, 211) to the exceeding of standards in the fish and mussels trade and where the legal bases for measures of the administrative authorities do not seem completely certain (compare, in a different context, e.g., BVerwGE [*] 77, 102, specifically 122).

ccc) This Court need not decide whether the situation changes if the seller knows the public law provisions in the country of destination or if the purchaser can assume that the seller knows these provisions because, for instance, he has a branch in that country (see, e.g., Neumayer/Ming, supra), because he has already had a business connection with the buyer for some time (see, e.g., Schwenzer, supra, 6 17), because he often exports into the buyer’s country (see, e.g., Hutter, supra, at 47) or because he has promoted his products in that country (see, e.g., Otto MDR 1992, 533, 534). [Buyer] did not allege any such facts.

ddd) Finally, the appeal argues unsuccessfully that the mussels could not be sold due to the “official seizure” and were, therefore, not “tradable.” There is no need to go into great detail with respect to the question whether [buyer] has even alleged a seizure of the goods and whether she could have reasonably and with a chance of success attacked such a measure. In any event, a seizure would have been based on German public law provisions which, as set forth above, cannot be applied in order to determine whether the goods conformed with the contract (supra, specifically II(1)(b)(bb)(bbb)).

2. The Court of Appeals also correctly denied the [buyer’s] right to declare the contract avoided because of the improper packaging of the goods. The question whether [buyer’s] allegations were sufficient for a conclusive statement of a fundamental breach of contract (CISG Art. 25) or of any lack of conformity with the contract at all (CISG Art. 35(2)(e) [sic]) may remain unanswered. In any event, Defendant (buyer) lost her rights that might have resulted from these allegations due to untimeliness. This does not, however, result from the “untimeliness” of the declaration to avoid the contract pursuant to CISG Art. 49(2)(b)(i), but from the untimeliness of the notice of the lack of conformity required by CISG Art. 39(1), which must be considered first (compare Huber invon Caemmerer/Schlechtriem, supra, Art. 49 66 45 et seq. (2d ed.)).

In that respect, it does not make any difference whether the mussels were delivered “in the beginning” of January 1992, as the Court of Appeals assumed, or not until January 16, 1992, as the appeal alleges pointing to the “Betreff” (“Re.”) section of [buyer’s] facsimile dated February 7, 1992. The first notice of the lack of conformity of the packaging in the facsimile dated March 3, 1992 was untimely even if the latter date of delivery was decisive. [Buyer] had to examine the goods or had to have them examined within as short a period after they arrive at the place of destination as practicable under the circumstances (CISG Art. 38(2) in connection with subsection (1)). At least during the working week from January 20 to 24, 1992, [buyer] could have easily done this, whether by herself at the storage facility not far from her place of business or by a person employed by company F. and designated by [buyer]. The allegedly improper packaging could have easily been ascertained in an external examination. The time limit for the notice of the lack of conformity, which starts at that moment (CISG Art. 39(1)), as well as the time limit to declare the contract avoided pursuant to CISG Art. 49(2) (compare judgment by this Court dated Feb. 15, 1995, VIII ZR 18/94 at II(3)(b), intended for publication) should not be calculated too long in the interest of clarifying the legal relationship of the parties as quickly as possible. Even if this Court were to apply a very generous “rough average” of about one month, taking into account different national legal traditions (seeSchwenzer, supra, Art. 39 6 17 (with further citations); stricter, e.g., Herber/Czerwenka, supra, Art. 39 6 9; Piltz, supra, § 5 6 59; Reinhard, UN-Kaufrecht (U.N. law of sales) Art. 39 6 5 (1991)), the time limit for the notice of the lack of conformity with the contract had expired before March 3, 1992.

The appeal’s reference to an examination of the mussels already carried out by the public health agency as well as [buyer’s] earlier notice of the increased cadmium content do not affect the assumption that the notice of lack of conformity was untimely. If the goods do not conform with the contract in various aspects, it is necessary to state all defects individually and describe them (see, e.g., Schwenzer, supra, Art. 39 6 10; Herber/Czerwenka, supra, Art. 39 6 8). The buyer cannot claim those defects, of which he gave untimely notice.

Judgments of the Lower Courts: OLG [*] Frankfurt, April 20, 1994, Index No. 13 U 51/93; LG [*] Darmstadt, December 22, 1992, Index No. 14 O 165/92.

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Footnote

* For purposes of this translation, the Plaintiff of Switzerland is referred to as [seller]; the Defendant of Germany is referred to as [buyer].

Translator’s note on abbreviations: BGBl. = Bundesgesetzblatt [Federal Law Gazette]; Bundesgesundhbl. = Bundesgesundheitsblatt [Federal Health Gazette]; BVerwGE = Bundesverwaltungsgerichtsentscheidungen [Official Reporter of cases decided by Germany’s highest Federal Administrative Law Court]; EKG = Einheitliches Gesetz über den internationalen Kauf beweglicher Sachen [ULIS: 1964 Hague Convention, Uniform Law on the International Sale of Goods]; LG = Landgericht [District (trial) Court]; MDR = Monatsschrift für Deutsches Recht [monthly law journal]; OLG = Oberlandesgericht [Regional Court of Appeals].

© 2005 Pace Law School Institute of International Commercial Law. This HTML edition © 2006 Gerhard Dannemann.

Bundesgerichtshof 15 February 1995 [VIII ZR 18/94], Neue Juristische Wochenschrift 1995, 2101

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

Headnote

Regarding the time limitations of a right to declare a contract avoided due to anticipatory fundamental breach of contract.

Main Holding

Upon appeal by plaintiff [seller], the judgment of the Sixth Division for Civil Matters of the Higher Regional Court [Oberlandesgericht] of Düsseldorf dated November 18, 1993 is reversed with regard to costs and to the extent that the judgment found against the [seller]. The cross-appeal is dismissed.

To the extent that the judgment was reversed, the case is remanded to the Court of Appeals for another hearing and decision, also regarding the costs of the appeal.

Facts

On March 4, 1991, defendant [buyer] ordered a key-embossing machine with a round switch-table from the [seller] for a purchase price of DM [Deutsche Mark] 259,900. The [seller] accepted the order by confirmation dated March 22, 1991, and the purchase price was payable in three installments of 30% each upon confirmation of the order, at the time of notice of readiness for delivery, and at the time of invoicing, and the remaining 10% was payable after acceptance of the equipment; until the full purchase price was paid, the [seller] retained title to the machine, which was to be delivered in September 1991 “subject to the usual reservation.” The manufacturer of the machine, with whom the [seller] was connected through the distribution agreement dated February 21/23, 1979, was the intervenor [manufacturer]; the machine was supposed to be accepted in advance by the [buyer] at the manufacturer’s place of business. The [buyer] paid the [seller] the down payment in the amount of DM 77,970, which was due at the time of the confirmation of the order. After disputes arose between the manufacturer and the [seller] during the subsequent period of time, the manufacturer terminated the distribution agreement for cause without notice by letter dated July 18, 1991 and imposed, by letter dated August 14, 1991, a halt of delivery of goods against the [seller] until claims described in detail were satisfied. By letter dated August 26, 1991, the manufacturer notified the [buyer] that it was ready to make delivery to the [buyer] and attached its own invoice for the second installment in the amount of DM 77,970. Thereafter, the [buyer’s] employees performed the pre-acceptance of the machine in the absence of the [seller] at the manufacturer’s factory on September 11, 1991; following that, the [buyer] paid the requested second installment to the manufacturer. The latter delivered the machine including accessories in the beginning of October 1991 to the [buyer’s] business, who accepted the machine on October 18, 1991 after installation and training.

By facsimile dated November 4, 1991, the [seller] requested from the [buyer] payment of the remaining purchase price in the amount of DM 181,930 setting a deadline for payment. After the manufacturer had argued that it had “stepped into” the existing orders after the termination of the distribution agreement and after it required payment to itself, the [buyer] made no further payments to either the [manufacturer] or the [seller]. In its complaint, the [seller] demands that the [buyer] pay to the [seller] the remaining purchase price in the amount of DM 181,930 plus interest. The [buyer], supported by the manufacturer as the intervenor, claimed that the machine had been delivered to it by the [manufacturer] under retention of title in the [manufacturer’s] own name and on the [manufacturer’s] account. Arguing that the [seller] had not performed its fundamental obligation to deliver the purchased item and to transfer ownership, the [buyer] further declared the contract avoided pursuant to Art. 49(1)(a) of the U.N. Sales Convention. Alternatively, it set off the [seller’s] claim against the claim that arose under the agreement for services, in favor of the key-embossing machine in the amount of DM 102,240.35, which had been assigned to it by the [manufacturer] on April 2, 1992.

The Trial Court [Landgericht] granted the complaint except for part of the interest. After filing the appeal, the [buyer] declared a set-off against all of the payment claims of the [manufacturer] arising from the manufacture of the key-embossing machine and amounting to DM 186,333, based on the additional contract of assignment dated July 29, 1993 which was submitted by the [manufacturer’s] brief dated September 7, 1993. Furthermore, the [buyer], by facsimile of its attorney dated October 16, 1992, set a deadline of November 16, 1992 for the [seller] to prove that the [seller] was entitled to transfer ownership of the already delivered key-embossing machine in order to remove the existing defect of title, and after the time limit had expired without result, the [buyer] again, in the alternative, declared the contract avoided. With regard to the [buyer’s] alternative set-off, the [seller] asserted that the assignment of the [manufacturer’s] claim to the [buyer] had no effect because the [manufacturer] had already assigned this claim to someone else after the order was made, and, additionally, that it [the seller] had set off the [manufacturer’s] claim arising under the agreement for services against claims of higher amounts by a letter of its attorney dated November 22, 1991.

The Court of Appeals [Oberlandesgericht] amended the decision of the trial court and merely ordered the [buyer] to pay DM 3,577 plus interest and otherwise dismissed the claim. On appeal, the [seller] demands the reinstatement of the trial court’s decision. By brief dated November 22, 1991, the [manufacturer] filed a cross-appeal on behalf of the [buyer], requesting full dismissal of the claim irrespective of the alternative set-off.

Grounds

I. In the opinion of the Court of Appeals, which applies the United Nations Convention on Contracts for the International Sale of Goods of April 11, 1980 (CISG) to the legal relationship between the parties, the [seller] had a claim for the balance of the purchase price in the amount of DM 181,930 pursuant to CISG Art. 53 until the [buyer] declared the set-off. Because of the [seller’s] lack of cooperation and consent, [the court ruled that] the [buyer] and the [manufacturer] were unable to replace the contracting party in such a way that, from then on, the [manufacturer] had become the contracting partner of the [buyer] instead of the [seller]. [The Court found that] the [buyer] also did not effectively declare the contract avoided because the requirements of CISG Art. 49(1) were not met. The Court held that, as anticipated, the [buyer] first obtained possession of the machine and, taking into account the retention of title, a legal expectancy right of the machine ordered by it; in this respect, [the Court reasoned that] its legal position was no different than if the [buyer] had considered the [seller] its supplier. The [buyer] should have given the [seller] an additional delivery deadline according to CISG Art. 47(1) after the [manufacturer] had refused to deliver in the [seller’s] name; then, after expiration of the time-limit without result, it could have declared the contract avoided under CISG Art. 49(1)(b); but it failed to do this. [The Court stated that] after obtaining possession of the machine and using it, it was no longer possible to set an additional time-limit for the purpose of declaring the contract avoided.

[The Court ruled that] the [buyer] could not successfully rely on the facsimile dated October 16, 1992. [It held that] it does not constitute a fundamental breach of contract that the [seller] was not yet able to transfer full ownership of the machine to the [buyer]. [The Court stated that] the [buyer] itself did not comply with its contractual duties, because it refused to fulfil its obligation to pay the purchase price to the [seller]; furthermore, the [buyer] was supposed to perform in advance considering the retention of title to which the [seller] and the [buyer] had agreed. [The Court found that] in any case, according to CISG Art. 80, the [buyer] could not rely on the still outstanding transfer of ownership, because the transfer of ownership had failed, among other things, for the reason that the [buyer] had not given the [seller] the opportunity, by granting a certain time-limit according to CISG Art. 47(1), to meet the requirements for the transfer of ownership after complete payment of the purchase price.

[The Court held that] the [seller’s] claim for the balance of the purchase price in the amount of DM 181,930 had, however, become void by way of set-off against a claim arising out of a right assigned by the [manufacturer] in the amount of DM 178,353, so that the [buyer] only had to pay DM 3,577.

II. These elaborations do not withstand legal scrutiny in all points.

1. The Court of Appeals correctly assumes that, pursuant to CISG Art. 1(1)(a) in connection with CISG Art. 3(1), the United Nations Convention on Contracts for the International Sale of Goods of April 11, 1980 (BGBl. [*] 1989 II, 588) applies to the contract between the parties dated March 4/22, 1991 concerning the delivery of a key-embossing machine.

2. As the Court of Appeals further correctly states, the [seller’s] claim for the purchase price has not become void because of the alleged agreement between the [buyer] and the [manufacturer], since, due to the lack of the [seller’s] participation, the consent of all the parties (BGHZ [*] 96, 302, 308 with further citations) required for such an assignment of the contract is missing.

3. With respect to the result, there is no objection to the assumption of the court of appeals that the contract between the parties continues to exist, because the [buyer] has neither in its answer to the complaint nor in its appeals brief effectively declared the contract avoided.

a) It need not be decided whether the [buyer] was entitled to declare the contract avoided pursuant to CISG Art. 72 after it had obtained knowledge of the [manufacturer’s] imposing a halt on the delivery of goods and whether there was, therefore, a risk that the [seller] would possibly no longer be able to transfer ownership of the machine to the [buyer]. It is true that, according to CISG Art. 72, the other party may declare the contract avoided if, prior to the date of performance of the contract, it is apparent that one of the parties will commit a fundamental breach of contract. The purpose of this provision, however, is only to protect a party against a future breach of contract, and it therefore takes place before the delivery and its different forms of disruptions (see von Caemmerer/Schlechtiem, Kommentar zum Einheitlichen UN Kaufrecht, 1990, Art. 72 para. 4).

With respect to breaches of contract that occur only after the obligation has become due, the ordinary provisions applicable hereto remain in force, especially the right of the buyer to declare the contract avoided pursuant to CISG Art. 49.

After the [buyer] had accepted the machine on October 18, 1991 and valid delivery had thereby taken place, it was obligated to pay the balance of the purchase price after another six weeks, at the latest, pursuant to the contract entered into by the parties on March 4/22, 1991, i.e., it was obligated to pay by November 29, 1991, in order to cause the transfer of ownership of the machine. Therefore, performance of the contract was set by both parties for the end of November 1991, so that the [buyer] was able to exercise its right to declare the contract avoided pursuant to Art. 72 CISG only until that point. Although the [seller] had demanded, by facsimile dated November 11, 1991, that the [buyer] pay the balance of the purchase price in the amount of DM 181,930, so that the [buyer] had to assume that the [seller] insisted on the performance of the contract, the [buyer] exercised its right to declare the contract avoided for the first time in its answer to the complaint dated March 30, 1992.

b) The [buyer’s] claim to declare the contract avoided is also not justified under CISG Art. 49, as the court of appeals has correctly found in the outcome. In this respect, it can be left undecided here as well, whether the [seller] committed a fundamental breach of contract by failing to perform its obligations, which would have given the [buyer] the right to declare the contract avoided according to CISG Art. 49(1)(a). In any case, the [buyer] lost this right because it did not exercise it within a reasonable period of time (CISG Art. 49(2)(b)). At the latest, when the [buyer] received notification that the [manufacturer] had imposed a halt of delivery of the goods to the [seller] in November 1991, it was apparent to the [buyer] that the [seller] would not be able to perform its obligation of transferring ownership even after receiving payment of the purchase price. If, however, the [buyer] let approximately five months pass until it declared the contract avoided for the first time during the lawsuit commenced by the [seller], it lost its right to declare the contract avoided, the exercise of which should not be delayed unreasonably in the interest of quick clarification of the legal relationships between the parties. Therefore, the [buyer’s] cross-appeal properly was unsuccessful.

4. The Court of Appeals is, however, wrong in assuming that the [seller’s] claim for the balance of the purchase price in the amount of DM 181,930 is voided by the [buyer’s] set-off against a claim in the amount of DM 178,353 arising out of an assigned right.

a) Nevertheless, on appeal, the [seller] argues unsuccessfully that the set-off already does not hold up because the [buyer] has not submitted evidence showing that the claim for the balance due under the agreement for services was assigned effectively to the [buyer] by the [manufacturer]. The appeal thus refers to the [seller’s] allegation that the [manufacturer] had already assigned its claim against the [seller] arising under the order dated March 26, 1991 to the G.-Bank in B. after the order was placed; the Court of Appeals considered this statement irrelevant because an allegation of the point in time of the alleged other assignment was missing.

aa) It is true that the [seller’s] allegation may be interpreted as the defense of another prior assignment because a subsequent (further) assignment would not have affected the preceding assignment.

bb) Even if the [seller] had denied the validity of the assignment to the [buyer] by arguing that there was a prior assignment of the claim of the [manufacturer] to G.-Bank and that, consequently, the [buyer] had the burden of proof regarding the absence of the alleged assignment as a negative fact, the principles established by case law with respect to furnishing so-called negative evidence are of advantage to it. According to these principles, the [seller] first had to deny the validity of the assignment of the claim to the [buyer] by substantiated specification of the alleged prior assignment, while the [buyer] then had to prove the falsity of the other party’s argument (compare BGH,[*] decision dated February 5, 1987 IX ZR 65/86 = WM 1987, 590 at II 1 = BGHR [*] ZPO [*] § 286 Negativbeweis 1 with further citations; see also Zöller/Greger, ZPO, 19th ed., before § 284 para. 24). A substantiated specification of the alleged prior assignment to G.-Bank, which the [buyer] denied by pleading lack of knowledge and which the [manufacturer] denied as false, is, however, missing so that the court of appeals has rightly assumed, at least with respect to the result, that this argument was irrelevant.

b) The Court of Appeals has, however, as the appeal correctly argues, made a procedural error by rejecting the [seller’s] argument as untimely under ZPO §§ 527, 520(2), 296(1), that it [the seller] had set off the claim assigned to the [buyer] [**] against claims amounting to more than DM 218,000 by letter of its attorney dated November 22, 1991.

aa) Insofar as the [buyer] has, with reference to the [manufacturer’s] brief dated September 9, 1993, declared a set-off exceeding the assignment dated April 2, 1992, for the first time on appeal in accordance with the submitted assignment agreement dated July 29, 1993, a failure to observe the deadline to answer set for March 1, 1993 (ZPO § 520(2)) cannot be considered in any event, because, until this time, the set-off had not yet been declared in this respect. If the [seller], therefore, by brief dated September 22, 1993, substantiated, for the first time, its counter-claims, with which, according to its submissions, it declared a set-off against the [manufacturer’s] claim by letter from its lawyer dated November 22, 1991, this was not too late.

bb) The question, whether the [seller’s] argument was late with respect to the partial amount of DM 102,240.35, which was designated for set-off at trial because of the assignment dated April 2, 1992, does not have to be decided. Because the [seller’s] contention that the [manufacturer’s] claim arising under the agreement for services was void because of the counter-set-off pursuant to the letter dated November 22, 1991, must be investigated as explained above, a delay of the proceedings according to ZPO §§ 527, 520(2), 296(1) will equally not be considered insofar as the [seller’s] objection is aimed at the assignment of the claim to the partial amount of DM 102,240.35 according to the assignment declaration dated April 2, 1992.

5. The challenged decision therefore must be reversed upon the [seller’s] appeal insofar as it found against the [seller], and the matter must be remanded to the court of appeals to that extent for clarification of the question whether the alleged counter-set-off dated November 22, 1991 was valid.

Prior decisions: OLG [*] Düsseldorf November 18, 1993, 6 U 228/92; LG [*]Düsseldorf July 9, 1993, 31 O 223/91.

---

Footnotes

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

Translator’s note on other abbreviations: BGBl. = Bundesgesetzblatt [Federal Law Gazette]; BGH = Bundesgerichtshof [German Federal Supreme Court]; BGHR = Systematische Sammlung der Entscheidungen des Bundesgerichtshofs (LB1) [Systematic Collection of Decisions of the German Federal Court of Justice (looseleaf)]; BGHZ = Die amtliche Sammlung der Entscheidung des Bundesgerichtshofes in Zivilsachen [Official reporter of Decisions of the German Federal Court of Justice in Civil Matters]; LG = Landgericht [District (trial) Court]; OLG = Oberlandesgericht [Higher Regional Court, a Court of Appeals]; ZPO = Zivilprozeßordnung [German Code of Civil Procedure].

** Translator’s note: The original German text states “the claim assigned to plaintiff [seller],” which does not make sense in this context.]

© 2005 Pace Law School Institute of International Commercial Law. This HTML edition © 2006 Gerhard Dannemann.

Bundesgerichtshof (Sixth Civil Senate) 15 November 1994, BGHZ 128,1, with case note.

This case is first published in the German Law Archive courtesy of:

Translated German Cases and Materials under the direction of Professors P. Schlechtriem, B. Markesinis and S. Lorenz

Translated by Mrs Irene Snook

[The defendant publishes widely distributed illustrated magazines. On the front page and inside of two of these magazines appeared  a fictitious interview with the plaintiff, Princess Caroline of Monaco, along with an article containing false statements about her intentions to re-marry.  The plaintiff requested that the defendant publish a full retraction and two clarifications, giving these items the same prominence as the original statements and articles.  She also claimed monetary compensation for non-pecuniary damage to her right of personality.  Both lower courts found in favour of the plaintiff.  The defendant’s further appeal was unsuccessful in principle, but the Federal Supreme Court (Bundesgerichtshof) quashed the Appeal Court’s decision and referrred the case back for the following reasons]

II.  The further appeals of both parties are admissible.  The appeal court’s decision contains no addendum restricting the admissibility of the further appeal.  Nor do the reasons for the decision contain a restriction as to the further appeal’s admissibility.  In these reasons, the court states that the decision on the compensation for pain and suffering and the order to print certain matters on the front page of the magazine concern legal questions of fundamental importance.  But this reference is not to be understood as a restriction to but rather as a reason for declaring the further appeal to be admissible.  The appeal court did not pronounce as unequivocally as necessary that it intended to restrict the further appeal to the two legal questions referred to in its statement of reasons.

III. [Dealing with the defendant’s further appeal]

The defendant’s appeal is unsuccessful.

1.  The defendant’s arguments against the court order to print a retraction fail.  By analogy to § 1004 of the BGB, the courts grant the person of whom untrue factual statements have been made a claim for retraction against the tortfeasor, in order to curtail a continued damage to the injured person’s reputation and to end the unlawful intrusion (reference). The Court of Appeal correctly found that the plaintiff’s claim satisfied these pre-requisites.

The Court of Appeal correctly held that the publication complained of continues to injure the plaintiff’s person.  Her right to determine her own image is impaired by fictitious statements.  The untrue allegation, printed in the widely distributed magazine, according to which the plaintiff revealed to a reporter and intended for publication her reasons for refusing to give interviews, infringes her right to self-determination.  In order to eradicate the continued intrusion into her personality, a retraction of the untrue statements is necessary.  The defendant cannot rebut this demand with reference to the fact that more than two years have passed since publication.  This time-scale is insufficient to eradicate the harmful effects for the plaintiff resulting from the false statements made in a magazine with a large circulation.

Publication only of a counter-statement from the plaintiff was insufficient to remove the intrusion.  This follows from the limited protective function of such counter-statements, which aim to provide the injured party with a means of expressing her side of the story without anyone else checking the truth behind these statements.  It makes no difference that the defendant added an apology to his counter-statement saying that he had made a mistake, since the statement and apology were printed in an obscure place, and in small type.  The plaintiff can demand that the retraction be printed on the cover page and in the particular type size ordered by the Appeal Court.

The defendant’s further appeal submits that this decision contravenes the principle of proportionality since the statements objected to appeared on the inside of the magazine.  The decision also infringes the constitutionally guaranteed right to freedom of the press which allows the defendant, freely and uncensored by public authorities to decide on the make-up of cover-pages.  This argument fails.  The correction that the plaintiff had not, as printed, talked to the defendant’s reporter serves no other purpose than – in a few factual words – to abolish, as far as still possible, the impairment to the plaintiff’s personality originating in the false report.

Contrary to the arguments of the further appeal, the order to print the retraction on the front page, using a certain specified type size, is sound.  It is true that the principle of proportionality requires the defendant’s interests to be taken into account.  By this order, he is restricted in his decision as to the outer appearance and thus the marketing of his magazine.  The front page of a magazine fulfils a special function: it serves as the magazine’s billboard, attracts the readers’ interest, and highlights the main stories.  This function of a front page should not unduly be reduced by the need to publish a retraction on it.  There must be enough space left for notices on other editorial contents.

On the other hand, the publication of the retraction must be able, as far as possible, to remove the intrusion into the plaintiff’s rights.  Through its visual effect, the retraction must therefore be able to reach approximately the same readership as the initial statements.  These readers not only comprise the purchasers of the magazines but also the “news-stand readers”.  The order as to the size of print must express the importance of the retraction, which must be capable of creating in the reader the same amount of interest as the false information which it countermands.  This means that in all cases where an announcement illegally created a false impression on the front page, as a rule the retraction must also appear on the front page  (references).

The decision appealed against follows these principles.  The nucleus of the information injuring the plaintiff’s legal right … appeared on the front page so that the purpose of the retraction demands that it appear in that position, also.  The Appeal Court’s decision to reduce the required type size to be used for the text of the retraction, consisting only of three short sentences, leaves ample space for further headlines.

The defendant’s reference to the guaranteed freedom of the press (Art. 5 (1) (2) of the Constitution – GG) must fail.  The equally constitutionally guaranteed right of personality (Arts. 1 (1) and 2 (1) GG), to be safeguarded by the retraction, sets limits to the freedom of the press.  In cases of conflict, both legal positions must be weighed against each other.  Contrary to the opinion expressed in the defendant’s further appeal, the order that the defendant publish the retraction in the manner stated does not deprive the defendant of his freedom to decide on the make-up of the front page.  This freedom is only restricted in so far as this is necessary in order to protect the plaintiff’s right to her personality.

[2. and 3. contain similar rebuttals of further appeal arguments in respect of another article misquoting the plaintiff and/or creating a wrong impression as to her future intentions.]

4.  The further appeal also attacks the decision as to payment of compensation. This, too, must fail.  According to the established case law of this court, the victim of a breach of the general right to one’s personality is entitled to monetary compensation where the intrusion is grave and the impairment cannot otherwise adequately be compensated.  Whether there is a grave infringement of the right of personality requiring payment of monetary compensation, depends in particular on the severity and extent of the intrusion, the occasion giving rise to the article, the infringer’s motive and the degree of his culpability (references).

Infringements of the right of personality like the one before the court are grave intrusions of this kind.  In full knowledge of the fact that the plaintiff refused to be interviewed, the defendant created a fictitious interview on problems in the plaintiff’s private life and her psychological condition [further details].  In order to increase his circulation numbers and for commercial gain, the defendant exposed the plaintiff’s private life to the curiosity and sensationalism of hundreds of thousands of readers.  In respect of two of the publications in question this was done deliberately. In the case of the third publication there was at least negligence.

The claim for monetary compensation raised by the plaintiff is not barred by the fact that the defendant is also ordered to print the two corrections.  Some legal authors are of the opinion that such retraction usually suffices to remove the breach of the right of personality (references).  Others argue that a retraction does not in principle exclude monetary compensation, since it does not include an element of satisfaction, specially since it is the weakest means of protecting the general right of personality (references).

In the opinion of this Division, the facts of each case will determine the outcome.  The decisive factor is whether or not the retraction provides a sufficient compensation for the interference with the plaintiff’s rights.  This can be negated where the attack is aimed at the very essence of one’s personality (reference), or where the infringer refuses to print a requested retraction, so that the plaintiff can only obtain a corrective statement on the basis of a court order (reference).  Thus, a retraction and correction will not exclude the plaintiff’s right to monetary compensation.  We are dealing here with injuries to the right of personality of a particularly grave nature given the contents of the publications, their distribution numbers, and the defendant’s motives and degree of culpability.  Moreover, the plaintiff had to fight for a retraction and correction by taking the defendant to court, fighting the case through all three instances before finally, and after long delays, obtaining relief.

IV. [Dealing with the plaintiff’s further appeal]

The plaintiff’s further appeal is unsuccessful in so far as she demands that the retraction and correction are printed in the size and type of lettering corresponding to the initial statements made on and in the magazines.  But her claim for an improved monetary compensation is successful.

1.  The plaintiff’s further appeal alleges that the Court of Appeal, by ordering that the retraction and correction be printed in a somewhat smaller print than the initial publication, had violated the principle of “equal fighting chances”.  Based on her constitutionally guaranteed right of personality, the plaintiff could claim that the retraction and correction should be as noticeable to a cursory reader or passer-by as the initial article/headline.

The court cannot follow the argument that the type size must be equal to that of the original statements.  As pointed out above, the decision on the placing and the size of lettering for the retraction and correction is made in view of the conflict between the general right of personality and that of press freedom.  In her further appeal, the plaintiff fails to take into account the requirements of press freedom to which the defendant rightly refers.

These pre-requisites require that in order to design sales-promoting front and other pages on which he must include the retraction and correction, the defendant must still have sufficient room for other purposes.  A high circulation of the magazine containing a correction or retraction on the front page is also in the interest of the plaintiff.  Her interests in attracting the same degree of readers’ attention for the retraction or correction as for the original untrue statements fought against by her court action can be satisfied by an announcement on the front page even when a smaller typeface is used.

2.  But the plaintiff is entitled to more substantial monetary compensation than the one afforded by the Appeal Court.  The plaintiff correctly argues that the Appeal Court’s reasoning fails to do justice to the purpose of monetary compensation payable in the case of grave infringements of the general right to personality.  In such cases, compensation is not really compensation for pain and suffering (Schmerzensgeld) under § 847 BGB but rather a legal form of redress which is based on the protective mandate enshrined in Arts. 1 and 2 (1) GG (reference).

Granting monetary compensation has its roots in the consideration that, without such a claim, impairments of a person’s dignity and honour would often remain unpunished with the result that legal protection of one’s personality starts to wither and decay.  In contrast to compensation for pain and suffering, in cases of monetary compensation claimed for an infringement of the general right of personality, the aspect of the victim’s satisfaction comes to the fore (reference).  Despite doubts raised in legal literature (references), the court upholds this point of view.  Moreover, this form of redress is meant also to serve a preventive purpose (references).

The Appeal Court’s reasoning as to the amount of compensation due here fail to do justice to these specific purposes which relate to any claim for monetary compensation for infringment of the right of personality.  According to the Appeal Court, the fact that the defendant infringed the plaintiff’s right of personality for reasons of personal gain must, like the idea of prevention, be left out of consideration when the compensation due is calculated.  This court, however, is of the opinion that for cases like the one before it the Appeal Court’s view is too narrow.

The case is characterised by the fact that the defendant, by a deliberate tortious act, used the plaintiff’s personality as means of increasing the circulation of his publications and of pursuing his own commercial interests.  Without any monetary compensation that the defendant can actually feel [as unpleasant], the plaintiff would practicably be unprotected against such irresponsible compulsory commercialisation of her personality.  Court orders to retract or correct will only provide an insufficient protection for the plaintiff since, as shown, they may only be ordered by taking into account the defendant’s own rights arising from the guaranteed freedom of the press.  An order to pay monetary compensation can only properly serve the purpose of prevention, required by the right of personality, where the amount of compensation due represents a correlation to the fact that, as here, the right of personality was infringed for reasons of personal gain.

This does not mean that in such cases of shameless commercialisation of a personality the court must resort to a “syphoning-off of profits”.  But the gain aimed at and reached by the tortious act should be included in the calculation when deciding on the amount of monetary compensation due.  Where a famous personality is commercially exploited, the amount of monetary compensation due must act as a real deterrent.  The intensity by which the right to one’s own personality was injured can also be used in the calculation.  In this context it must particularly be borne in mind that the publication of the fictitious exclusive interview weighs heavily against the defendant.  On the other hand it must be remembered that monetary compensations due may not reach such a pinnacle that the freedom of the press in unduly restricted.  This will, of course, not be the case where, as here, the press is stopped from ruthlessly and commercially exploiting a particular personality.

Since the decision on the actual amount of compensation payable to the plaintiff lies with the court dealing with the facts of the case (reference), the court quashed the Appeal Court’s decision and referred the case back to the lower court.

Note

This is one of four, recent ‘Caroline’ cases which form an important part of the developing law of privacy. The entire subject, an excellent illustration of private law developing under the influence of constitutional law, is fully discussed in B. S. Markesinis, The German Law of Obligations, vol II, The Law of Torts, 3rd ed. (1998)  pp. 63 –68; 376-447; 998-1005.

©1998 University of Oxford. Since 2002: © Translation The University of Oxford and Professor Markesinis 1998. HTML edition © 1998 Gerhard Dannemann.

Bundesgerichtshof (Third Civil Senate) 10 November 1994, BGHZ 127, 378, with case note.

This case is first published in the German Law Archive courtesy of:

Translated German Cases and Materials under the direction of Professors P. Schlechtriem, B. Markesinis and S. Lorenz

Translated by Mrs Irene Snook

[The case concerns the question of the protective scope of a report prepared by an architect / building expert submitted to the owner of the building pursuant to a contract concluded between the expert’s employer and the owner of the building. The report concerned the value and state of repair of the said building.  It was used as the basis for a purchase contract concluded between the plaintiff / purchaser and the owner of the building.  After the transaction was completed, grave defects were detected in the building. Since the vendor had excluded his liability for visible or hidden defects, the purchaser sued the expert’s employer for damages. The Appeal Court dismissed the claim but the Federal Supreme Court quashed the judgment below and referred the case back for the following reasons]

1.  The Appeal Court failed to discuss whether the plaintiffs had a claim for damages as a result of a direct contractual relationship in the form of a tacitly concluded contract to supply information (Auskunftsvertrag). (References omitted).

This cannot be challenged for legal reasons since prior to the conclusion of the purchase contract the parties had no direct contacts.

2.  The Appeal Court interprets the contract to provide an expert report to the effect (§§ 133, 157 BGB) that, out of that contract with the owner, protective duties arose that the expert owed towards the plaintiffs.  For the court, the crucial point came when the son of the owner, who concluded the contract on his behalf, stated that the property valuation report was needed for the purposes of selling the property.  The inclusion of the plaintiffs within the protective scope of the contract for a report on the state and value of the property is legally sound.

a)  In particular, and in this instance, the existence of a contract with protective effect for third persons cannot be denied with reference to the fact that the interests of the plaintiffs and the person who commissioned the report were contradictory.  Where an expert report is requested from a person possessed of particular knowledge – which is certified or attested by official documents  – for the purpose of using the report in contractual negotiations with a third person, the person commissioning the report normally has an interest in it as means of evidence.  This can only be guaranteed if the report was prepared objectively, conscientiously, and in full knowledge of all facts and where its author accepts responsibility for its contents as towards third persons.  Accordingly, the Federal Supreme Court has previously decided that in such a case the juxtaposition of interests of the person commissioning the report and the third person does not rule out the latter’s inclusion in the protective scope of the contract authorising the preparation of the report (references).  It is irrelevant that the defendant, when compiling his report, was unaware that his assessment was to be submitted to that particular plaintiff.  Acknowledging his duty of care does not presuppose that the person so duty-bound knows the number or names of the persons to be protected.  It suffices that the defendant knew that his valuation was intended for a (potential) buyer. (References omitted.)

[There follow passages dealing with the particular personal qualifications of the defendant, whose professional standing, duties in respect of the expert report submitted, and the inclusion of the plaintiff in the protective scope of the contract to provide the report, were likened to those of a publicly-appointed expert.]

b)  Contrary to the doubts raised in the defendant’s reply to the further appeal, the existence of a contract with protective effects for third persons can arise even where, during inspections of the premises, the owner’s representative deliberately concealed the defects of the property.  This fact may be an indication that he was not interested in an objectively correct expert opinion on the value of the property that would take into account the interests of the buyer.  But this hidden and unrevealed reservation has no bearing on the question as to what was objectively declared when an order was made for a valuation, i.e. in respect of the purpose of the report and a possible inclusion of third persons in the protective scope of the contract.

3. [There follow statements as to the specific duties to inspect fully the object to be valued, possible breaches of these duties by the expert, and their effects. The court also deals with the vicarious liability of the architect’s/builder’s employer.]

On the basis of the undisputed facts it must be assumed that the defendant, who under § 278 BGB is responsible for the acts of the expert, has performed his contractual duties badly and that this breach led to the submission of a report whose contents were incorrect.  The Court of Appeal was convinced that an accurate expert opinion would have discouraged the buyer from concluding the purchase contract, i.e. that the defendant’s wrongful act caused the damage.

4.  The Court of Appeal held that – as towards the plaintiff – the defendant is not liable for damages according to the principles of `positive breach of contract’  (positive Forderungsverletzung). [There follow the lower court’s reasonings].

The  reasoning of the lower court is legally unsound.

a)  The Court of Appeal rightly assumed that a person commissioning a report, who deliberately intends it to reflect wrongly the actual state of repair of the object of the report, has no claim for damages against the author of the report.

Contracts for the provision of expert reports, like the one before the court, must be qualified as contracts for the production of work (§ 631 BGB). This means that in cases of an intentionally wrong assessment of real property, the person commissioning the report has either a claim for damages under § 635 BGB or a claim for positive breach of contract if the damage arose as a consequence of the first defect (Mangelfolgeschaden): in this case the original faulty report (reference).  Such a claim for damages would not be affected by the  knowledge of the commissioning person that the expert’s report is flawed, since it is only in respect of claims listed in §§ 633, 634 BGB that § 640(2) BGB requires the commissioning person, at the point of acceptance, to reserve his rights.  This provision does not apply to claims for damages (reference).  But the person who commissions the report and who deliberately brings about a misleading expert report, exposes himself to the defence of abuse of right if he later bases his claims for damages on this defect (references).  This defence of malice will be upheld even where the charge of ‘contradictory behaviour’ (venire contra factum proprium) is based on the actions of a representative  (§ 166 1 BGB) (reference).

b)  The starting point of the Appeal Court’s reasoning is also in line with the Supreme Court’s case law according to which the protected third person, who derives his rights from the contractual relationship between the initial contractual partners, has basically no wider rights than the tortfeasor’s direct contractual partner.  The courts deduced from this fact that the third person, deliberately damaged by the person liable to protect him will, under § 254 BGB, face the tortfeasor’s defence that the contractual partner was co-responsible for the damage, unless this partner was a legal representative of the third person or employed by him to fulfil his own obligations  (§ 278 BGB) (references). The same result applies for a contractually agreed exemption from liability (reference).  This limitation of the third person’s protection is based on the legal maxim expressed in § 334 BGB and the principle of good faith (§ 242 BGB).

Both arguments show that we are dealing here with merely a legal rule (reference) and not with an unshakeable principle.  As far as the maxim of good faith is concerned, this fact is self-evident.  Nothing different can be derived from the legal argument behind § 334 BGB or – as the Appeal Court held – from an analogous application of § 334 BGB.

The provisions of § 334 BGB which deal with the true contract for the benefit of a third person are of an optional nature.  According to those provisions, the promisor can use contractual defences even against the third person.  Their application can, even tacitly, be excluded as can be seen, in particular, from the nature of the covering (or underlying) relationship (Deckungsverhältnis)(reference).  There is no apparent reason for applying more stringent rules in cases like the present where, when interpreting the contract in order to establish how and to what extent a third person was protected, these legal provisions are to be applied either directly or according to their underlying maxim.  The lower court misjudged this point.

When interpreting the expert report, the Appeal Court should have considered that the “nature of this particular contract” resulted in an exception to the rule according to which the liability of a person who owes protection to a third person does not exceed his liability towards his direct contractual partner.

The defendant knew that the expert valuation had been commissioned for sales purposes.  Accordingly, not only could he expect that his report would be submitted to interested buyers. He should further assume that, given the special trust which prospective buyers normally place in the reliability and expertise of an approved expert, the statements made in his report would probably be given a greater weight than the information provided by the seller.  The maker of report should have thus assumed that his report was apt to disperse possible doubts of prospective buyers in the veracity of the seller’s information.  Herein lies the obvious and particular value that the report has for the vendor, i.e. its ability to promote the chances of a sale.  Above all, it matches the obvious interests of a prospective buyer in legal protection for his trust in the veracity of the report, especially in cases where the seller dishonestly tries to conceal the true condition of the sales object.  Where, therefore, a contract for the production of an expert report must be taken to include prospective buyers within its protective ambit, it must be assumed that the third person’s trust in the expert’s statements must be protected even where the incorrectness [of the report] was (also) instigated by the principal.  This result does not depend on the effects which this inducement has on the liability of the supplier as against the principal (references).

Such contractual interpretation will not burden the expert with an unreasonable risk of liability. More precisely, it will, certainly, render him liable for the dishonesty of the person who commissioned the report from him.  True, when providing his report, the expert can use information provided by his principal – and he will often be forced to do so – wherever he cannot himself verify the facts.  But he must then make this clear in his report (reference).  Normally, he will thereby indicate that he excludes his liability for the truth of these statements.

5.  The reasoning of the Appeal Court, in denying the defendant’s liability as towards the third person included in the protective scope of the contract, is thus legally flawed and its decision must, therefore, be quashed.

[There follow instructions as to the re-interpretation of the contract and the court’s opinion that the plaintiffs cannot be held to have been co-responsible for the damage merely because they have not personally found any defects when inspecting the premises.)

Comment

The absence in German law of any liability for negligently inflicted pure economic loss has resulted in a number of substitute legal constructions.  One such device is the so-called contract with protective effects for the benefit of third persons a judicially-created variant of the better-known notion of contract in favour of third parties.  This construction makes it possible to treat pure economic losses of third persons, created by a faulty performance of contractual (or non-contractual) duties, as damage resulting from a breach of a contractual duty.  This liability for pure economic loss, though now well acknowledged in principle, is still controversial as to certain details as well as its dogmatic basis. The above decision deals with the detailed problem whether and to what extent – as against the third person’s claim for damages – the co-responsibility of the contractual partner (in this instance, the cite own)r, to whom the faulty performance was made, should be taken into account. In the final analysis, the Federal Supreme Court did not attributed the contractual partner’s co-responsibility to the third person who incurred the damage, thus taking another step in the direction of a contractually unrelated, i.e. extra-contractual tortuous liability for certain economic loss.  But the court did not dare speak openly of a tortuous “duty of care” towards certain third persons. Instead, the Court relied on a device, not always available, to solve this problem. Thus, the Federal Supreme Court assumed that in the contract that created the duty of care towards certain third parties, the contractual debtor (expert) tacitly waived his right of set off against the plaintiff which he, the contractual debtor, had against his contractual partner (the person commissioning the report).  This waiver of the claim that stemmed from a breach of contract by his contractual partner (the owner of the land) was justified on the fact that the expert knew that his performance was intended to form the basis of the financial calculations of the purchaser of the land. For more details in English (and further references to German literature, see: Markesinis, The German Law of Obligations, vol. I, The Law of Contracts and Restitutionby B. S. Markesinis, W. Lorenz and G. Dannemann  (1997) ch. 4; vol II,  The Law of Torts, 3rd ed. (1998) chs 2 (d) (iii) and  3 1 and 2.)

©1998 University of Oxford. Since 2002: © Translation The University of Oxford and Professor Markesinis 1998. HTML edition © 1998 Gerhard Dannemann.

Bundesgerichtshof (Sixth Civil Senate) 15 March 1994, NJW 1994, 1592, with case note.

This case is first published in the German Law Archive courtesy of:

Translated German Cases and Materials under the direction of Professors P. Schlechtriem, B. Markesinis and S. Lorenz

Translated by Mr. Tony Weir, Trinity College, Cambridge

Facts: The plaintiff was injured in a traffic accident on 31 October 1988 owing to the negligent driving by the first defendant of a car insured by the second defendant.  There can be no doubt that the defendants are liable for all the harm suffered by the plaintiff in consequence, including a broken nose, a fractured elbow, damage to the tendons in his left arm, bruising to the right side of his sternum, and dislocation of the tarso-metatarsal joint in his left foot.  The last-mentioned injury involved loss of function, great pain and the need to wear orthopaedic footwear.  These problems continue.  The main issue between the parties is whether the plaintiff was bound to mitigate the damage by submitting to an operation, namely arthrodesis or fusion of the affected joint, which could improve his condition.

For his pain and suffering the plaintiff claims DM 25,000 (over and above the DM 15,000 already paid before trial) and instalment payments of DM 250 per month; for material harm he claims DM 7,316; he also seeks a declaration that the defendant is liable to him for all material and immaterial harm resulting from the accident except in so far as such claims have vested in third parties such as his social insurer.

The Landgericht ordered the defendant to pay DM 10,000 as further damages for pain and suffering and DM 5,416 for further material harm; it granted the declaration sought except as to expenditure which would have been avoided if the plaintiff had proceeded to the arthrodesis of the joint in his left foot.  On appeal the plaintiff obtained an increase of DM 1,800 in damages for his material loss, but failed as to further damages and instalment payments in respect of pain and suffering; the restriction in the declaration was upheld.  On the plaintiff’s further appeal the judgment of the Oberlandesgericht was vacated in part and the case remanded.

Reasons.

I. According to the court below the fact that in refusing to proceed with the arthrodesis which was medically recommended the plaintiff was in breach of his duty to mitigate his loss must affect the damages for pain and suffering and the declaration of liability; the operation was one which he could be expected to undergo, and it was his duty to proceed with it.

The court accepted the evidence of its appointed experts, Professor H and Dr. G, to the effect that if the plaintiff did what several doctors had recommended and proceeded to the operation, there was a 90% probability of significant betterment in his condition, with diminution of pain and improvement in function.  The operation was not unduly risky; arthrodesis might possibly lead to stress on adjoining joints in the foot, but it was unlikely that there would be overstraining of knee and hip or damage to the other leg and the spine.  It is true that for six days after the operation there would be considerable pain, but this could be allayed by normal analgesics and reduced to a level regarded as tolerable by the average patient.  The plaintiff’s objections to the position adopted by the experts were held unpersuasive: most of his quotations regarding the risks of the operation were said to be taken out of context from literature based on research conducted long ago and in view of subsequent improvements in surgical techniques were no longer reliable.

Given this failure to mitigate his damage, the lump sum of DM 10,000 as further damages for pain and suffering was fair and sufficient.  To award instalment payments as well would not be right: the plaintiff’s injuries were not serious enough, and if they were awarded the proper capital sum granted below would have to be curtailed, which the plaintiff did not want.  In view of the plaintiff’s failure to undergo the recommended operation, the declaration of the defendant’s liability must remain qualified.

Some of the appellant’s criticisms of the judgment below are cogent: the reasons given by the court do not support its conclusion that the plaintiff was in breach of his duty to mitigate his loss under § 254(2) BGB.

1. It is true, as the court held, that under certain circumstances a victim of injuries who fails to proceed to an operation which he can be expected to undergo and which would improve his condition may be held to be in breach of his duty to mitigate his loss under § 254(2)(1) BGB and have his damages reduced accordingly.  But this can only be the case if the operation is simple and safe, relatively painless and predictably curative or highly beneficial [references, including NJW 1989, 2332 on burden of proof], and an operation is not rendered mandatory just because one or more doctors conclude, after weighing up the benefits and risks, that it is desirable and so advise the victim: it is insufficient that the operation be medically indicated.

2. In holding that the plaintiff was in breach of his duty to mitigate the damage the court did not apply the right test, as one can see by considering the evidence of Prof. H and Dr. G on which the court relied.

a) Neither from the experts’ written opinions submitted at first instance nor from their oral explanations before the Landgericht was the court entitled to conclude that the operation was “simple”.  Arthrodesis involves intervention in the structure of the foot, its bones and joints, and according to the experts any operation on the tarsus must affect the joints close to it.  One cannot describe such an operation as “simple”.

b) The court below did not give sufficient weight to the fact that the plaintiff cannot be expected to go through with an operation which is likely to cause considerable pain.  The experts’ statement that “one must expect  serious pain for up to six days” after the operation indicates that it involves a degree of pain clearly in excess of that which is the inevitable and normal result of surgical intervention.

This being so, the court below should not have been satisfied with the statement of Dr. G that medication could reduce the pain to a level regarded as tolerable by the average patient.  Before the court could properly conclude that the plaintiff should undergo so painful an operation it should have sought further evidence on the nature and intensity of the pain, discovered what was meant by “controllable by normal analgesics” and “tolerable by the average patient”, and sought particulars of the nature and possible side-effects of the medicaments in question.

c) That the recommended operation was sufficiently likely to procure a “significant improvement” in the plaintiff’s condition is a conclusion which the court could properly reach on the expert evidence, which put at 90% the chance that the plaintiff would be essentially freed from pain.  Since absolute guarantees of beneficial results can never be given in medical matters, it lies within the prerogatives of the judge of fact to conclude from such a statement by a specialist that the chance of significant improvement is sufficiently great, even in the present case where experts agree that orthopaedic footwear is still required in 30% of cases  and that even if the operation is a success the plaintiff’s working capacity will be only 85% (as opposed to 75% without the operation).

But the appellant is right to criticise the court’s failure to take due account of the risks, which the experts agreed must be offset against the probable success of the arthrodesis.  The reports demonstrate that the operation may result in stress to the neighbouring joints.  If non-trivial sequelae can be foreseen, the operation should not be assumed to be risk-free, and here one cannot wholly discount the risk that Sudeck’s acute bone atrophy may develop.  The court should not have dismissed these worries with the simple observation that stress to the knee and hip joints and damage to the other leg and spine were unlikely. In treating as conclusive the experts’ view that the operation was to be recommended the court did not apply the correct test: one certainly cannot hold that an operation is one which the victim must undergo on pain of being held in breach of his duty to mitigate just because the doctors, “after considering the risks, the age of the patient and the prognosis”, decide to recommend it.

3. The appellant is also right to object to the fact that as regards the risks inherent in the proposed arthrodesis the court below relied exclusively, without seeking further elucidation, on the reports which the appointed experts laid before the court of first instance.  The court should have engaged with the objections raised by the plaintiff as regards such risks, and it was a fault of procedure not to do so.

a) In his appeal to the court below the plaintiff referred to numerous articles from the medical literature which contradicted the points made by the appointed experts and suggested that in several respects he was at particular risk in the operation.  For example, he maintained that the risk of infection was particularly high in the case of operations on the foot, and also that it appeared from the literature that arthrodesis of this joint caused a significant number of cases of pseudoarthrosis. He also referred to the fact that he already suffers from arthrosis in his ankle joint which renders any operation on the foot especially delicate.  To substantiate these concerns he produced a report an orthopaedic surgeon, one Dr. E.

b) The judge of fact must take seriously any criticisms which a party may make of reports by experts, even those appointed by the court [references], especially when the criticisms are supported by a report from the party’s own expert [references].  The court below did not meet these procedural requirements.

c) Although there is no indication that the court itself possessed adequate specialist knowledge, it held that the literature adduced by the plaintiff was based on research done so long ago that improvements in surgical techniques had rendered their findings unreliable.  But the question whether or not the views and research adduced by the plaintiff were still authoritative and whether operative techniques had indeed improved so as to counter the risks previously known to exist was one which could be properly answered only by an expert.  Since the court’s experts Prof. H and Dr G were involved only at first instance and never had sight of the objections of the plaintiff or the statements of his chosen expert, the court was bound, as indeed the parties requested, to seek further expert opinion, possibly by hearing it during the appeal.

4. The court below held that the supposed failure of the plaintiff to mitigate his loss under § 254(2) had a significant effect on his claim for damages for pain and suffering and on his claim for a declaration.  Its judgment as to the latter therefore cannot stand, nor can its dismissal of the plaintiff’s claim for a further capital sum for pain and suffering.

It also rejected the claim for instalment payments for pain and suffering, but the plaintiff’s appeal against this must fail.  The court cannot be criticised on review for refusing to grant such instalment payments although the plaintiff continues to suffer impairment: instalment payments should be granted in addition to a lump sum only in the case of the most serious injuries, which the plaintiff feels anew every day [references].

NOTE to RGZ 83, 15 ff. and BGH NJW 1994, 1592 ff.

These decisions deal with a claimant’s duty to mitigate his loss.  In the context of physical injuries, this may require him to undergo an operation if (a) it is likely to improve his condition and (b) he can properly be expected to submit to it.  In refusing to treat as conclusive the recommendations and opinions of medical men as to the benefits and risks involved in such an operation, the Bundesgerichtshof has here tightened the criteria applicable to (b).

For further details in English see B. S. Markesinis, W. Lorenz and G. Dannemann, The German Law of Obligations, vol I, The Law of Contract and Restitution  (1998), ch. 8, esp. 661 ff. See, also, vol II, The Law of Tort, 3rd ed. (1998), pp. 914 ff.

©1998 University of Oxford. Since 2002: © Translation The University of Oxford and Professor Markesinis 1998. HTML edition © 1998 Gerhard Dannemann.

Bundesgerichtshof (Ninth Civil Senate) 24 February 1994, NJW 1994, 1341

The plaintiff’s father worked as an estate agent. He was also involved in developing and selling flats. When in 1982 he requested the defendant savings bank to increase his borrowing limit for account no. 172429 from DM 50,000 to DM 100,000, the defendant requested him to provide a guarantee from his daughter, the plaintiff in this action. At this time, the plaintiff was 21 years old, earned some DM 1,150 net per month as a blue collar worker and did not dispose of any assets. On 29 November 1982, the plaintiff signed at the defendant’s premises an absolute guarantee for the amount of up to DM 100,000 plus collateral debts in order to secure all present and future claims which the defendant had against the principal debtor “arising from its business relationship (in particular from current account, credits and loans of any kind, and bills of exchange) as well as bills of exchange handed in by third parties, guarantees, assignments or subrogation”. The following day, the defendant granted the extension of the credit. At that time, the defendant had also granted to the plaintiff’s father a bridging loan amounting to DM 3 million for the construction of a multiple private dwelling. This loan was valued at some DM 2.5 million at the time when the plaintiff provided the guarantee. In 1984, the principal debtor gave up his estate agency and became a shipowner, for which he received further credits from the defendant. When his assets deteriorated two years later, the defendant called in all credits. From the day when the plaintiff signed the guarantee, the principal’s debts continued to exceed DM 100,000. The plaintiff initially filed a declaratory action, claiming that the contract of guarantee was void. When the defendant brought a counterclaim for the payment of DM 100,000 plus interest, both parties declared the main action to be settled.

The Landgericht allowed the counterclaim. The Appeal Court dismissed it. On appeal by the defendant, this Senate, by judgment of 16 March 1989 (NJW 1989, 1605 …), restored the judgment of the first instance. This judgment was quashed by the decision of the Bundesverfassungsgericht of 19 October 1993 (NJW 1994, 36 …), and the case was referred back to this Senate. The appeal did not succeed.

Reasons

I. The Appeal Court refused the action for payment on the ground that the plaintiff had a claim for compensation in pre-contractual liability, which obliged the defendant to relieve the plaintiff from the guarantee.

In the Appeal Court’s view, a bank is not required to inform about the risk involved in a guarantee. However, a bank must not trivialize the type, scope or risk of the guarantor’s liability and thereby influence his decision, in particular if the guarantor is obviously inexperienced in business matters. Precisely this had happened in this case. According to the credible account by the plaintiff’s father, the employee acting for the defendant before signature made a representation to the effect of: “Would you just sign this here, please, this won’t make you enter into any important obligation, I need this for my files.” This created the impression on the plaintiff that not much could happen to her at the end of the day. By this, the defendant’s agent had grotesquely trivialized the significance of the liability which the plaintiff had assumed. The plaintiff would not have provided the guarantee if the defendant’s employee had not trivialized the risk which was connected with this obligation.

II. These explanations withstand legal examination, as far as the outcome is concerned.
Due to the particular circumstances under which the guarantee contract was concluded with the principal debtor’s daughter, this contract offends good morals and is thereby void (§ 138 I BGB).

1. …

2. A legal transaction is void under § 138 I BGB only if its entire character, as it results from content, motivation and purpose taken together, offends good morals, for which only those circumstances are to be taken into account which prevailed at the conclusion of the contract (references omitted). The mere fact that the content of the contract placed a considerable burden on the plaintiff and only the plaintiff, cannot in itself question the validity of the guarantee. By operation of the law, the content of such a contract will as a rule be a unilateral obligation in favour of the creditor. Generally, the content and purpose of such a contract consist merely in providing the creditor with a security for certain claims against the principal debtor. By its structure, the guarantee is therefore not characterized by an appropriate and in principle equal consideration of mutual interest but, by its legal nucleus, is aimed at providing benefits to one party only.

3. Likewise, the obligation which has been assumed does not merit disapproval by the law merely because at the time of her declaration of intention, the guarantor did not dispose of the necessary income or assets for performing the obligations for which she was to be liable. The Constitution guarantees freedom of contract within the legal framework, which includes the freedom to design the rules of a contract. This forms an important foundation for the present private legal order. It follows from the freedom of contract that a person must generally be free to enter into risky transactions at his own responsibility and to undertake an obligation which can only be performed under particularly favourable circumstances, if necessary by permanent use of all the income which exceeds the protected earnings rate. This principle, which has dominated the jurisprudence of this Senate (references omitted) has been approved by the Eleventh Civil Senate of the BGH (reference omitted). As a rule, any person with the unlimited capacity to contract is in a position to realize that a guarantee implies the assumption of a considerable personal risk, to assess the consequences of such conduct accordingly, and to reach a decision on this basis. In principle, this also applies if the guarantor is a close relative of the principal debtor (references omitted).

4. However, if the guarantor assumes an obligation the amount of which exceeds by far his present and potential future income situation and assets, such a contract can be void under § 138 I BGB, if additional circumstances, which can be attributed to the creditor, levy a considerable additional burden on the guarantor and lead to an intolerable imbalance between the parties to the contract. In particular, such burdens can be caused if the creditor exploits the guarantor’s inexperience in business matters or a mental predicament, or exerts undue influence on his freedom of decision in another way.

5. The plaintiff’s father has influenced her decision to assume liability towards the savings bank in a manner which must be disapproved of by the law, i.e. which violated § 1618a BGB. These facts can be attributed to the defendant, who was at least grossly negligent not to consider such influence on the guarantor.

(a) Freedom of contract, which enjoys protection as a basic right, can justify the conclusion of risky and at the same time unilaterally burdensome contracts only if both parties are in a position to decide freely in favour of or against being bound by a contract. It is this freedom, combined with an unrestricted opportunity to understand the potential legal consequences of the obligation in question, which alone can justify why a guarantor should be bound by a decision which he reached in his own responsibility even if the legal consequences prove extraordinarily burdensome (BVerfG NJW 1994, 36 …). The danger of the guarantor’s freedom of decision being unreasonably restricted exists particularly in situations where young adults, who either have not completed their education or are at the beginning of their professional activity (in other words: who are inexperienced) are asked by their parents to assume liability in their favour for legal transactions in which the children take no legal or economic interest of their own. If parents impose such a request on them, young adults in particular, who have reached majority only a few years ago and who enjoy an undisturbed relationship with their parents, will mainly be led by the desire to accede to the parents’ request. It is in these situations in particular that emotional considerations can easily be uppermost in their minds, and that the guarantee is granted solely in full trust in the parents’ abilities and good intentions. In such situations guarantors are highly liable to repress from their minds the considerable risks which they enter into as regards their own designs on life. Young adults, who normally have little business experience, are particularly at risk in such a situation that they do not decide in a free and matter-of-fact way, but that they comply with the parents’ request out of mental predicament or without serious consideration. They will hardly be in a position to envisage the scope of the consequences, which their signature could possibly entail.

(b) If parents require their children, after they have reached majority, to provide, for the sole motive of helping their family, a guarantee which by far exceeds the childrens’ financial capacity, such a request will frequently be questionable from a moral viewpoint and be incompatible with the duties of parents which continue to exist towards adult children. The way in which maintenance obligations are designed, but even more so the provision of § 1618a BGB, which was inserted when the law of custody was reformed, make it clear that parents and children owe to each other assistance and consideration for the entire span of their lives. This norm creates true legal duties, even if their violation does not lead to immediate sanctions (reference omitted). It is the duty of consideration in particular which can necessitate that personal interests must be put aside if they are to be reasonably balanced with the interests of the other family members. If parents cause their children to provide a guarantee with the consequence that, if the risk materializes, the children will have to make substantive payments to the creditor over an unforeseeable period or perhaps for the rest of their lives, the parents thereby expose to lasting danger the children’s entire independent plans for life, which will frequently not yet have advanced beyond an early stage. Exerting such influence on children, who have reached majority, contradicts the conduct which § 1618a BGB requires for the mutual relationship between children and parents, and is fundamentally irreconcilable with generally acknowledged views on the responsibility of parents towards their adult children.

At the time of the conclusion of the contract, the plaintiff was not in a position ever to pay an obligation amounting to DM 100,000 plus interest. As an unskilled worker, she earned no more than some DM 1,150 per month. Nothing has been submitted to show that her income situation or assets could possibly fundamentally improve in the future. The plaintiff, who was 21 at the time, was also inexperienced in business matters. After having completed her Hauptschulabschluß (approximately GCSE), she was unemployed for a long time, had only temporarily performed some clerical work in her father’s office, and had just started in a position as a worker in a fish factory. It is not disputed that the granting of the credit did not serve the plaintiff’s own interests. On the contrary, the father acted solely in pursuit of his own economic interests. The risk, which he placed on his daughter, could also not be considered negligible, as he had additional obligations towards the defendant in connection with the construction of a multiple private dwelling, amounting to some DM 2.5 Million.

(c) It is true that all these circumstances primarily characterize a conduct which offends good morals in the relationship between the principal debtor and the guarantor. But these circumstances are not without influence on the legal relationship between the guarantor and the creditor bank. It is true that a bank cannot reasonably be expected to investigate in each individual case whether the guarantor was restricted in his freedom of decision, and in particular whether and in which way parents have exerted pressure on their children. However, the abovementioned danger, to which the guarantor is frequently exposed in such cases, influences the kind of conduct which the bank must show as regards the securities which the bank requires and accepts from the borrower. If a bank deems it necessary to require securities for a requested loan, and for this reason makes payment conditional on the borrower procuring a guarantee by his child for an amount which expectedly exceeds by far the child’s financial capacity, the question will necessarily arise whether the creditor was aware of the morally and legally unacceptable influence which the creditor exerted on the guarantor, or whether it deliberately closed its mind to such insight. If this is the case, the borrower’s conduct, which violates § 1618a BGB, will be attributed to the bank. This will regularly warrant the conclusion that the guarantee in itself is considered void. Therefore, the bank generally must not impose on the client the request to provide as a security a guarantee by a child which is still inexperienced, which has no own interest in the granting of the credit, and which expectedly will be unable for a longer period of time to pay the secured debt if the risk materializes. To the extent that this Senate in previous judgments did not attach the same meaning to the above-mentioned dangers for the guarantor’s freedom of decision and the resulting obligations of the bank (references omitted), the Senate no longer adheres to that view. The defendant requested the account holder to provide a guarantee by his daughter for the sum of DM 100,000. The plaintiff’s own interests were not involved. The defendant could not help noticing or even positively knew that the plaintiff would be economically overtaxed, as the defendant could not seriously assume that the plaintiff would be in a position to pay DM 100,000 plus all of the accumulated interest within a foreseeable period of time should the occasion arise. On the contrary, the general assumption must be that young adults, who have not completed their education or find themselves at the beginning of their professional development, do not dispose of considerable assets or an income which far exceeds the average, unless there is clear evidence to the contrary. This is particularly true if the parents themselves are not in a position to provide other securities to the bank and for this very reason depend on their child to provide a guarantee in order to obtain the desired credit. This is why the defendant could not help noticing that the plaintiff, through lack of experience, entered into an obligation which would utterly overtax her financially if the risk materialized.

It is also common practice in banking that the securities which need to be provided in order for the loan to be paid out are examined for their value, as without such examination the economic purpose of this security agreement can, as a rule, not be fulfilled. On the other hand, if a bank decides not to make such enquiries in cases where the children of the principal debtor provide securities for very large amounts, this will, as a rule, leave no other possible interpretation than that they were either aware of the guarantor’s financial circumstances, or that they deliberately closed their eyes towards the value which this security would provide.

6. The bank itself exerts undue influence on the guarantor if its employees trivialize the scope of the guarantee, in particular if they purport the signature to be a mere formality (reference omitted). In particular as regards inexperienced guarantors, who additionally are close relatives of the principal debtor, such conduct can create the impression on the guarantor that there is nothing serious to worry about, thereby preventing the guarantor from having a closer look at the content of the document. The representation which S, an employee of the bank, made as regards the meaning and the scope of the guarantee before the plaintiff signed the document, was apt to obscure the risk of such liability and thereby the dangers which this would impose on what the entire future would hold for the plaintiff. This conduct gravely impaired the plaintiff’s freedom to reach a matter-of-fact and balanced decision.

(a) The Appeal Court assumes that the defendant played down and even trivialized the guarantor’s liability towards the plaintiff, and therefore exerted undue influence on the determination of her will. This appreciation withholds the appeal’s attack.
(aa) … (bb) …

(cc) The Appeal Court believes that the defendant’s employee played down both the degree of the risk and the scope of the liability. Therefore, his statement was prone to create the impression on the plaintiff that not much could happen to her at the end of the day. These findings are based on an interpretation of this statement, which is a question of facts to be decided by the lower courts, and which on second appeal can only be examined as to whether they violate statutory rules of interpretation, rules of logic, empirical standards or rules of procedure (references omitted). Contrary to the view expressed by this Senate in its judgment of 16 March 1989 (= NJW 1989, 1605, …), no such violation has occurred. If the creditor declares during guarantee negotiations that the entire matter is a formality, it may frequently be obvious to the parties concerned that this is but an empty generalization which says nothing about scope and importance of the risk (reference omitted). The representations made by the defendant’s employee, however, went beyond such a declaration. It is particularly the combination of the hint that this was no important obligation and the additional statement that this declaration was needed for the files which could create the inaccurate impression on the addressee that the requested guarantee was in its essence a formality. Neither was the representation made by the employee S unambiguous enough for the plaintiff to necessarily understand it as a mere reference to the financial soundness of her father. In addition, the Appeal Court considers that at this time the plaintiff did not have the slightest experience with banking business. Thereby, the Appeal Court is right in referring to the perspective of the recipient of the declaration.

(b) But even if the father’s financial soundness was to be considered as favourable at the time, it was, in view of the entire circumstances of the disputed case, particularly reprehensible to trivialize the guarantor’s risk towards the plaintiff to such an extent.

(aa) It is not disputed that the plaintiff was to provide the guarantee in order for the credit line on the father’s current account to be extended from DM 50,000 to DM 100,000. This is why liability was limited to the amount of DM 100,000 plus interest and costs. However, since the guarantee, according to the standard form content of the document, related to all claims which the defendant had against the plaintiff’s father arising from their banking business relationship, this implied that the plaintiff also secured to this amount the credit obligation amounting to DM 2.5 million at that time which arose from the building project. By this fact, the risk which the plaintiff had incurred was instantly much higher than it might have appeared if one had looked only at the extended current account credit. It is not disputed that this extraordinarily high claim, which the defendant possessed, was not mentioned when the plaintiff was presented with the guarantee contract form.

(bb) In addition, the plaintiff was already in a position which made it particularly difficult for her to decide in a reasonable and balanced way due to the presence of her father, who had accompanied her to the savings bank with the intention of obtaining the desired credit by her signature.

…

(c) Under § 278 BGB, the bank must account for its employee’s undue influence on the determination of the plaintiff’s will. As regards the subjective requirements under § 138 I BGB, the findings made supra (5) (c) apply mutatis mutandis. The above-stated circumstances justify the assumption that the plaintiff signed the guarantee contract as a consequence of the mental predicament which she had been caused. It can be left open whether the father’s conduct sufficed for this, or whether the trivializing representations made by the saving bank’s employee were an additional cause, as the defendant must account for either conduct within the framework of § 138 I BGB (reference omitted).

Translation ©1997 Gerhard Dannemann. HTML edition ©1998 Gerhard Dannemann. This translation first appeared in The German Law of Obligations, Vol. I: The Law of Contracts and Restitution, by B.S. Markesinis, W. Lorenz and G. Dannemann, Oxford University Press 1997, where it appears as case no. 33 on pp. 232 et seq. Reproduced by permission of Oxford University Press.The contents of this page may be downloaded and printed out in single copies for individual use only. Making multiple copies without permission is prohibited.