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

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

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

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

Key CISG provisions at issue

Articles 38(1), 39(1)

Facts

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

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

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

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

Grounds for the decision

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

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

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

II. These elaborations do not withstand scrutiny.

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

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

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

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

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

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

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

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

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Footnotes

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

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

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

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Case commentary

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

Peter Schlechtriem
Albert-Ludwigs-Universität Freiburg
January 2000

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

Headnote

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

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

Comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[…]

Facts

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

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

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

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

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

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

The Reasons for the Decision

I. The [Regional] Court of Appeals held:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Footnotes

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

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

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Case Commentary

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

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

Commentary by Peter Schlechtriem¹

Translation by Todd Fox & Sonja Corterier

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

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

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

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

b) The legislative history of the CISG also supports this position. The question was already disputed during the preparations for the Hague Convention (ULIS) and seemingly decided that the exemption provision of Art. 74 ULIS in principle should also apply to non-conformity cases.⁴ In the Secretariat Commentary⁵ on the 1978 New York Draft,⁶ which served as the basis for the Vienna Conference, the example chosen to illustrate 1978 Draft Art. 65(1) (=Art 79(1) CISG) was the liability and possible exemption of a seller who failed to package the goods in accordance with the contract. However, adequate packaging was already in Art. 33 of this Draft, as well as presently in Art. 35 CISG, classified as necessary for the goods to conform to the contract.⁷ Anglo-American literature refers to the first sentence of Art. 79(4) CISG and argues on the basis of the wording of the text that this sentence clearly would not fit the case of delivery of non-conforming goods.⁸ However, this sentence only makes clear that, in applying Art. 79 CISG, one has to differentiate between the modalities of the breach of contract. There is also, of course, the possibility that the party who cannot deliver conforming goods is able to communicate the reason for this hindrance prior to the delivery. The reference to damages in the second sentence of Art. 79(4) CISG makes sense for the buyer if exemption in cases of non-conformity to the contract is principally deemed possible in such a situation.

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

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

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

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

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

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

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

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

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

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

Thus, cases in which a seller can qualify for exemption for delivering non-conforming goods under the contract are hardly conceivable.²⁴ However, that does not mean that the possibility of such cases is excluded. If, for example, foodstuffs are suspected of being poisoned or contaminated due to their origin in such a way that the buyer (foodstuff dealer) effectively cannot resell them, the seller might qualify for an exemption, provided he can prove that the goods sold by him were indeed not affected by this suspected contamination. No seller can be held liable for a general suspicion on specific goods which as a consequence renders the goods unusable and thereby non-conforming to the contract under Art. 35(2)(a) and Art. 35(2)(b) CISG. The buyer still has the remedies of price reduction and avoidance²⁵ or a claim for cure by the seller. The fact that the buyer cannot recover further damages, such as lost profits on resale and perhaps damage to good will, is a consequence of the risk connected to the goods in which he deals. The risk exists for both the buyer and the seller that such goods might become useless due to a general suspicion over which the parties and their suppliers have no influence. It is therefore appropriate that the German Federal Supreme Court left open the possibility of an exemption in cases of non-conformity of goods when the non-conformity is a consequence of a risk that can neither be attributed to the sphere of influence of the seller nor that of his suppliers.

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

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

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Footnotes

1. This is an English adaptation of a commentary by Prof. Peter Schlechtriem, published in Germany in 15/16 Juristenzeitung [JZ] 794-797 (13 August 1999). ↩︎
2. See Medico Marketing Int’l, Inc., v. Internationale Medico Scientifica, S.r.l., 1999 WL 311945 (E.D. La. 1999) available in (last visited Mar. 21, 2000) http://cisgw3.law.pace.edu/cases/990517ul. An American buyer avoided a contract due to non-conformity of medical equipment that did not meet administrative security standards. The failure to deliver conforming goods was regarded as a fundamental breach of contract that enabled the buyer to declare avoidance. ↩︎
3. Precise in distinguishing these two questions, Bernard Audit, La Vente Internationale de Marchandises, Convention des Nations-Unies 1980 No. 181 (Paris 1990) [hereinafter Audit]. ↩︎
4. Otto Riese, Die Haager Konferenz über die Internationale Vereinheitlichung des Kaufrechts, Rabels Zeitschrift für Ausländisches und Internationales Privatrecht [RabelsZ] at 53-55, 79-81 (1965); Hans Dölle & Hans Stoll, Kommentar zum Einheitlichen Kaufrecht Art. 74 § 9, 101 (indicating other sources) (Peter Schlechtriem ed., 1976); regarding the choice of words in this context, see also John Honnold, Uniform Law for International Sales under the 1980 United Nations Convention Art. 79, § 427 (3d ed. 1999); on the preparations including Rabel’s first drafts, see Ulrich Krüger, Modifizierte Erfolgshaftung im UN-Kaufrecht, Die Haftungsbefreiung bei Lieferung vertragswiedriger Ware gemäß Art. 79 CISG 84-98 (1999). Tracing the legislative history of CISG Art. 79 from ULIS to the CISG, Krüger reports in detail that already in 1935 an exemption for the seller of non-conforming goods was contemplated if the failure to comply with the contract was due to an impediment beyond his control. Later the different provisions for possible sellers’ exemptions were incorporated into one general provision. At the Hague Conference in 1964 on Uniform International Sales Law (ULIS), an effort by the German delegation to clarify the wording on the issue of exemption in cases of non-conformity led to discussions on this very issue. The American representative Honnold proposed wording, which facilitated the possibility of a construction allowing exemption in cases of non-conforming goods (which he later fought against for the CISG). The German delegation’s insistence on the principle of fault based liability, which was not adopted, made the Anglo-American delegates especially concerned that the exemption provision Draft Art. 65 (= Art. 79 CISG) could be used as a “back-door” to introduce the German principle of fault based liability. Especially an exemption for damages for hidden defects should remain precluded. See id. at 92, 93. With the choice of the word “impediment” in the drafts of the CISG, Honnold meant to exclude an exemption for damages due to non-conformity of the goods. See id. at 95, 96. Krüger’s detailed analysis, however, leads him to conclude, “in the entire legislative history of the UN Convention an exemption for damages due to non-conformity of the goods was never unanimously and explicitly excluded.” Id. at 97. ↩︎
5. Commentary on the Draft Convention on Contracts for the International Sale of Goods, prepared by the UNCITRAL-Secretariat, Document A/CONF/97/5, Art. 29, No. 5, United Nations Conference on Contracts for the International Sale of Goods, Official Records, New York 1981 (A/CONF.97/19, 53 [hereinafter Official Records]). ↩︎
6. Regarding the preparatory work of the 1978 Draft, See Ernst Von Caemmerer & Peter Schlechtriem, Kommentar zum Einheitlichen UN-Kaufrecht Einleitung Sub I. (2d ed. 1999). ↩︎
7.  See Official Records, supra note 4, at 56. However, Honnold, who (as this author) was a delegate for his country to the Vienna Conference, disagrees with this construction of the language and legislative history, pointing out that CISG Art. 79(4) would not fit cases of non-conformity. Honnold supra note 4, Art. 79 at 427. ↩︎
8. See id. ↩︎
9. See Medico, supra note 2, where the seizure was indeed the consequence of failing inspection procedures which were required as proof of conformity to safety standards; See also BGHZ 90, 198, 202 = JZ 1984, 842 (lack of a type of inspection required under regulations for the prevention of accidents for the operation of a delivered crane). ↩︎
10.  See Barry Nicholas, Impracticability and Impossibility in the U.N. Convention on Contracts for the International Sale of Goods, in Nina M. Galston & Hans Smit, International Sales 5-14 § 5.02 (1984). For the reasons for this anxiety Seesupra note 4. ↩︎
11. See id. ↩︎
12. Helga Rudolph, Kaufrecht des Export- und Importvertrags Art. 79 Rn. 12 (1996). This should especially apply to the opinion of Denis Tallon in C. Massimo Bianca & Michael Bonell, Commentary on the International Sales Law, The 1980 Vienna Sales Convention Art. 79 Anm. 2.6.2 (1987), since he particularly points to French national sales law. See also Karl H. Neumayer & Catherine Ming, Convention de Vienne sur les contrats de vente internationale de marchandises, CEDIDAC, Art. 79 Anm. 10, 529 (1993). Here the same influence of national solutions as background information. This applies as well to the German authors who still advocate the possibility of exemption from liability if the seller examined the goods with due care. ↩︎
13. See Official Records, supra note 5, at 378, para. 21, a motion from Turkey. See also the comment from Michida (Japan) in subparagraph 2 in which he pointed to the decision of the working group in January/February 1974 to strike the words “by his supplier or” “because they would thus tend to exempt the seller from liability…” and the comment from the Chairman of the First Committee. Id.at 380, para. 36. The working group, which was to resolve the dispute over the appropriate construction of the provisions. proposed two possible wordings. However, the different interpretations continued in the debate over these formulations. See id. at 410 paras. 3 et seq. This caused renewed uncertainty over the meaning of the word “impediment” for cases in which a third person was the cause for the failure to perform a duty under the contract. Regarding the consequences of this uncertainty in cases of delivery of non-conforming goods obtained from a supplier’s supplier, see Nicholas, supra note 10, at 5-10, § 5.02, who states that the choice of the term “impediment” was the result of the common wish to assure that the seller could not qualify for exemption in the case of non-conformity of the goods. ↩︎
14. See Official Record, supra note 5 at 379 para. 23 for the reasons concerning the Danish motion; see also Kruse (Denmark), id. at 380 para. 55 (the provision was meant to be an exception to subparagraph (1) “… but … in fact constituted a broadening of the party’s liability.”); Rognlien (Norway), id. at 380 para. 44 (“… wide differences of interpretations …”). The result of subparagraph (2) is in fact stricter liability. ↩︎
15. See Andreas Keil, Die Haftungsbefreiung des Schuldners im UN-Kaufrecht 143, 144 (clearly indicating that the insertion of “supplier” in Art. 79(2) CISG was misunderstood by some delegates as liability exemption and was for that reason rejected.); Albert Kritzer, International Contract Manual Art 79, 626 (1994); Frank Vischer, Gemeinsame Bestimmungen über Verpflichtungen des Verkäufers und des Käufers, in Schweizerisches Institut für Rechtsvergleichung 179 (Lausanner Kolloquium ed., 1985). Vischer reports “chaotic discussions.” The private notes of this author, written in the evening of each day of the session, show more clearly than the official protocol (which was edited by the delegates afterwards) that many misunderstandings over the meaning of subparagraph (2) prevailed which led to statements and motions to take suppliers out of the — supposed facilitated — possibility of exemption under Art. 79(2). ↩︎
16. See supra concerning the seller in this respect. The decisions of arbitral tribunals and state courts vary in subsuming suppliers and their suppliers under Art. 79(1) or 79(2) CISG, even though their arguments are almost interchangeable. See OLG Hamburg [Regional Court of Appeals Hamburg] Entscheidungen zum Wirtschaftsrecht [EwiR] 791 (1997), available in (last visited Mar. 20, 2000) http://cisgw3.law.pace.edu/cases/970228g1.html, which considers the reliability of the supplier to be part of the “general risk of procurement” (an exemption under Art. 79(1) CISG was considered and denied); Arbitral Tribunal of the Hamburg Chamber of Commerce (partial award of March 21, 1996, RIW 1996, 766-771, available in (last visited Mar. 20, 2000) http://cisgw3.law.pace.edu/cases/960321g1.html also considered the responsibility for suppliers under Art. 79(1) CISG. The seller was considered to be not as responsible for the producer or suppliers’ suppliers as he is for subcontractors and his own personnel under Art. 79(2) CISG. However, the seller was considered to bear the risk of procurement, even under adverse conditions, and therefore is held liable for its supplier. But see Arbitral Tribunal of the International Chamber of Commerce (ICC International Court of Arbitration) 8128/1995, UNILEX J.D.I. 1996, 1024-1028, 1026, available in (last visited Mar. 20, 2000) http://cisgw3.law.pace.edu/cases/958128i1.html, which based the seller’s liability for his “fournisseur” on Art. 79(2) CISG. The seller’s responsibility for his supplier is considered an integral part of his general risk of procurement. Some decisions simply leave undecided whether the responsibility for the supplier is based upon Art. 79(1) or 79(2) CISG. See Arbitral Tribunal of the Chamber of Commerce of the Russian Federation of March 16, 1995, 155/1994 — abstract in CLOUT 140 — available in (last visited Mar. 20, 2000) http://cisgw3.law.pace.edu/cases/950316r1.html (the complete reasoning is not available, therefore the general basis on Art. 79 CISG in the abstract may be misleading). The question, however, in all these cases was not one of non-conforming goods but rather of non-delivery. ↩︎
17. For a convincing argument against the possibility of exemption due to undiscoverability, see Honnold, supra note 4, Art. 79, para. 427 at 482. (If the seller buys and resells complex machinery in sealed containers examination is practically impossible; yet this (alone) should not exempt the seller from liability). ↩︎
18. See Official Records, supra note 5 at 379, para. 29; Peter Schlechtriem, Einheitliches UN-Kaufrecht 97, 98 (1981). ↩︎
19. See Audit, supra note 3 (defects resulting from the relevant instructions by the buyer concerning the material to be used). ↩︎
20. Honnold, supra note 4, Art. 79 para. 427. ↩︎
21. On the question of seller’s liability as an allocation of the risk imminent to the contract see Krüger, supra note 4, at 152 et seq., who, in cases of non-conformity, correctly interprets liability for “impediments to be considered at the conclusion of the contract” as a reasonably undertaken guarantee against damages, which must be covered in the price through a risk related price calculation. ↩︎
22. See BGH, Decision from March 24, 1999, VIII ZR 121/98 at sec. II.2.b. ↩︎
23. See LG Köln [Regional Court of Cologne] (Nov. 16, 1995) available in (last visited 20 Mar. 2000). http://cisgw3.law.pace.edu/cases/951116g1.html, aff’dOLG Köln, May 21, 1996. ↩︎
24. Regarding cases of delivery of non-conforming goods where an exemption from liability might be possible, See Krüger, supra note 4, at 166 et seq. and especially at 185 et seq. (non-conformity due to force majeure). ↩︎
25. It would have to be considered a fundamental breach of contract if the goods could only be disposed of as hazardous waste. ↩︎
26. See BGH, supra note 22 at sec. II.4.a. See also OLG Köln, Aug. 21, 1997, OLG Rspr. Köln 1998, 2-4, JMB1 NW 1998, 76-78, available at (last visited Mar. 20 2000) http://cisgw3.law.pace.edu/cases/970821g1.html. The Regional Appellate Court of Cologne held that where the buyer stored aluminum hydroxide in a silo with defective aluminum hydroxide and the use of the aluminum hydroxide would have caused damages in the buyer’s glass production, the buyer’s damages came to nothing. ↩︎

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

Bundesgerichtshof judgment of 2 April 1998, III ZR 245/96.

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 plaintiff is the receiver of the assets of the G AG. Its predecessor (G GmbH & Co.) acquired from H, the sole member of the S GmbH (hereafter called STN) all the shares in the business by a notarised contract dated the 12th October 1992. This was immediately after H had brought in to this company the real property company which owned the business premises and the buildings on them which were let to STN in accordance with § 20 of the Conversion Tax Act. The purchase price was 2.5 million DM, payable immediately.

The plaintiff demands from the defendant auditors compensation for incorrect information. The defendants had been commissioned by H to carry out a compulsory audit in accordance with §§ 316ff HGB. They had been occupied since July 1992 with the audit of the annual accounts of STN for the year 1991, drawn up by the accountant R. Their complaints led to the annual accounts being altered by R and showing a balance of 21,891,249.03 DM and an annual surplus of 2,666,467.37 DM higher than that in the earlier accounts.

The defendants by a letter of 8th October 1992 to STN for the attention of H (and a further Telefax letter of 9th October 1992 to the B GmbH for the attention of the accountant St who had been consulted by the G GmbH & Co) stated that the now current annual accounts would not be changed by them and could be confirmed by them.

Later irregularities in STN’s accounting came to light. H had at the end of 1991 incorrectly credited nine sums for a total of almost 25 million DM. The final annual accounts, for which the defendants issued a limited note of confirmation on the 30th March 1993 in accordance with § 322 HGB, showed a deficit of 11,049,361.15 DM instead of a surplus of 2,666,467.37 DM.

The claim was in the end for 2.5 million DM. In it the plaintiff alleged that the G GmbH & Co would not have acquired the shares in the business in the knowledge of the actual business yield in 1991 (or would only have done so at a symbolic purchase price of 1 DM). It was unsuccessful at first instance. The plaintiff lodges an appeal in law against this decision.

Reasons

The appeal in law leads to a quashing of the appeal judgment and a reference of the matter back to the appeal court.

I.

1. The appeal court, whose judgment is printed in [reference omitted], accepts that liability on the part of the defendants would come into consideration, because the subsequent insolvent has been included in the protected area of the audit contract between STN and the defendants. The appeal in law accepts this assessment as favourable to it. On the other hand, the reply to the appeal in law considers that the instructions for the compulsory audit, the communication about the status of the audit and the foreseeable outcome of it could not result in any protective effect in favour of third parties.

a) According to § 323 para 1 sentence 1 of the HGB the auditor of the accounts is under a duty to carry out a conscientious and unbiased examination and a duty of secrecy. If he breaches his duties intentionally or negligently, he is under a duty to compensate the company (and, if a connected undertaking has been harmed, this as well) for the harm arising from this (§ 323 para 1 sentence 3 of the HGB). In the academic literature, it is deduced from this that according to § 323 para 1 sentence 3 of the HGB ie for the area of the compulsory audit, where there is a violation of the duties of the auditor third parties are not entitled to any claims against him [references omitted].

Insofar as the duty to compensate for harm is extended to connected undertakings, this would rest – as a correlative – on this undertaking’s duty of presentation and provision of information to the auditor of the accounts for the group in accordance with § 320 para 2 sentence 2 of the HGB [references omitted]; the connected undertaking’s entitlement to compensation presupposes that the auditor is violating a duty incumbent on him and owed to the connected undertaking [references omitted]. An extension of the duty to compensate to further third parties for harm by way of interpretation or analogy would therefore be forbidden [references omitted].

Besides this, an extension of the liability to shareholders/members or creditors of the company would run counter to the goal of – in cases of negligent breach of duty – limiting the risk of liability of the auditor (§ 323 para 2 of the HGB). It would give rise to concern that the company would have to share its claims, which are in any case limited, with third parties [reference omitted].

b) The Senate endorses this in principle. Liability of the defendants to the purchaser, who does not belong to the group of persons mentioned in § 323 of the HGB as entitled to compensation, does not therefore come into consideration from this point of view. The breach of duty of which the defendants are accused certainly belongs technically to the area which is covered by the regime of § 323 of the HGB. It is therefore here a matter of the more extensive question of whether and under what conditions an auditor who is entrusted with a compulsory audit can also be made liable for appraisals, certificates or other statements which are connected with the object of audit, to persons who are not contractual parties to the audit contract and are also not included in the associated undertakings addressed in § 323 of the HGB.

aa) The appeal court takes into consideration (correctly here) the principles according to which protective duties can arise from a contract for the benefit of a third party, who himself has no claim to the main obligation under the contract. The case law has in particular accepted such protective effects for contracts by which the client commissions a report or an expert’s opinion from a person who has at his disposal a particular specialist knowledge recognised by the state (eg publicly appointed expert, auditor, tax adviser) in order to make use of it as against a third party [references omitted].

As the purpose of the report is to induce trust in and possess evidential value for the third party, a conflict of the interests of the client and the third party is not an obstacle to the latter’s incorporation into the protective area of the contract [reference omitted].

There are no difficulties about also applying these principles in cases in which an auditor of accounts is entrusted with the compulsory audit of a company provided that it appears sufficiently clear to him that on this audit a particular work product is wanted from him which is to be used as against a third party who trusts in his expert knowledge. If § 323 para 1 sentence 3 of the HGB (only) regulates a statutory liability to the company and the associated undertaking, this does not mean that contractual liability of the auditor to third parties according to the principles developed by the case law on the third party liability of experts would thereby be excluded from the outset.

Such exclusion of the possibility of creating conditions of liability (which are justified by the interests involved and take account of the principle of private autonomy) cannot be inferred from this provision in this sort of generality. A third party liability which is essentially based on the fact that it is for the contracting parties to determine against whom a duty of protection is to be established [reference omitted] is not affected by the area of direct application of § 323 para 1 of the HGB. It also does not signify, as Ebke/Scheel [reference omitted] think, a disregard of a basic decision of the legislator in favour of a limited liability of auditors expressed in this provision. This provision, according to paragraph 4 of which the duty to compensate may neither be excluded nor limited, does not pursue such an extensive purpose.

bb) Nor does § 323 of the HGB create a material exclusionary effect against liability of the auditor in the run up to the issue of the certificate. The provision does not for instance connect the liability to the issue of the certificate as such; it presupposes instead a fault-based breach of duty in the carrying out of the audit in accordance with paragraph 1 sentences 1 and 2. Whether – in the relationship of the auditor to the company – mistakes in the context of the notification of a certificate are included as well, can be left undecided. There is in any case no ground for leaving the trust (which is worthy of protection) of a third party, who has been included within the protected area of the audit contract, that such a publication is correct simply without any sanction in liability law.

cc) Certainly, the legislative intention which is expressed in § 323 of the HGB to limit appropriately the risk of the auditor’s liability needs to be considered within the framework of the auditor’s contractual liability to third parties. Incorporating an unknown number of creditors, members or acquirers of shares within the protective area of the audit task would militate against this. It cannot be assumed as a rule that the auditor will be ready to take on such an extensive risk of liability.

It is different however if the parties to the contract on the commissioning of the work (or possibly even at a later point in time) proceed on the agreed basis that audit is to be carried out in the interest of a certain third party as well and the outcome is to assist this third party as the basis for a decision. In any case, in such cases the undertaking of the task includes a conclusive declaration of the auditor that he intends to carry out the audit conscientiously and without bias in the interest of the third party as well. There is no ground in a case of this kind for denying to a third party claims against an auditor who breaches his duty in the audit [references omitted].

c) The appeal court infers from the way the letter of the 9th October 1992 was addressed that it was recognisably intended for the use of a third party; it also considers that the defendants could have reckoned on their information being of importance for decisions by recipients with a business background. These findings are accepted by the appeal in law as favourable to it. They are unsuccessfully disputed by the reply to the appeal in law which claims on the contrary that the defendants did not have to reckon with a third party basing a purchase decision on a communication regarding the expected outcome of an audit, because in the legal world if need be an intermediate status report could be a basis for a decision of that kind.

The significance to be attributed to the letter of the 9th October 1992 is a question of interpretation which the judge of fact has to undertake, taking into consideration all the decisive circumstances, which can include the discussions preceding the letter. The appeal court will in the further proceedings have an opportunity to look at the objection raised by the reply to the appeal in law insofar as the letter of the 9th October 1992 contains no certificate corresponding to § 322 of the HGB and therefore also cannot form a basis for trust which is worthy of protection.

d) The defendants also have an opportunity in the further proceedings to give a more precise basis to their objections, raised in the appeal in law, to the assumption by the appeal court that they had breached their audit duties and given an incorrect confirmation just because they had failed to obtain confirmation of the balances.

2 a) The appeal court denies that the defendants are liable even though it bases its decision on a breach of duty. This was because the plaintiff has not proved that the insolvent would not have acquired the shares in the business of STN if the deficit for the year 1991 had been known to it. The appeal in law objects (correctly here) that its case was to the effect that the shares in the business would not have been acquired on the conditions of the contract of the 12th October 1992 if the deficit for the year 1991 had been known.

Besides this the appeal court considers the statements of the witnesses called by the defendants, in particular in relation to the calculation of the purchase price in the purchase contract, to be contrary to logic and experience and does not consider the plaintiff’s argument on this issue. The circumstance that no special point of reference was established for the value of STN in the calculation of the purchase price and the piece of land included was the decisive valuation factor for the calculation of the purchase price does not justify the conclusion expressed by the appeal court that it was a matter of indifference to the purchaser whether STN had a value at all.

Even if the managing director of the subsequent insolvent should have declared in the purchase contract negotiations that the firm was no longer worth anything anyway and he did not want to pay anything for it, it does not follow from this that the purchaser would have been prepared to put its money into an undertaking which was heavily in debt by more than 10 million DM a good nine months previously. In this connection it may remain open in proceedings in the appeal in law exactly how the purchase price clause in § 4b of the purchase contract is to be understood. The decisive factor is that the annual account for the year 1991 addressed by the defendants in the letter of the 9th October 1992 revealed an annual surplus of about 2.6 million DM whilst the annual account which was later provided with a note of confirmation by the defendants documented a deficit of more than 11 million DM. It cannot be inferred from the statements of the witnesses who have been examined that such a difference did not influence the calculation of the purchase price.

In § 10 of the purchase contract the seller warrants that the principles of proper accounting had been observed and to his knowledge no liabilities of the business existed which were not evident from the accounts. The appeal in law correctly points out that this provision argues against the appeal court’s assumption that the operative value of STN was without any significance for the purchase price. In the face of this provision and the fact that STN’s inadequate financial cover existing at the end of 1991 could only be balanced by the bringing in of the business premises, it cannot be denied that the breach of duty by the defendants (which was accepted by the appeal court) caused the purchase decision on the basis which it gave. In fact, there is a prima facie case in favour of it.

b) Also, if the appeal court had doubts about whether the breach of duty caused the purchase decision, it should not have disregarded the evidence of the witness Dr. B. who was called on this issue. Even if the negotiations about the purchase of the shares in the business were concluded on the 8th October 1992, the parties to the purchase contract were only finally bound by the documentation of the 12th October 1992. Therefore events between these two points in time could still be of importance. This applies for instance to the bringing in of the real property company by the seller on the day of the documentation of the purchase contract. Further, the appeal court itself – in spite of the conclusion of the negotiations on the 8th October 1992 – proceeds decisively on the basis that the defendants’ letter of the 9th October 1992 was a ground of liability.

But then prima facie evidence which refers to the causality of this letter is also important. The prima facie evidence ought not to be left out of consideration, as the reply to the appeal in law thinks it should be, just because the plaintiff has not explained why the witness should have had such an insight into the events relating to the decision. This is because there was a letter of the 7th October 1992 written by this witness, who represented the purchaser, which the appeal court mentioned in its version of the facts of the case and from which important circumstances for the calculation of the purchase price arise.

3. The appeal in law also correctly objects to the fact that the appeal court has denied damage. The deliberations of the appeal court are based in this respect on the legally incorrect idea that the shares in the business of STN were, insofar as they concerned the operative value of the company, without significance for the calculation of the purchase price, and it was only a matter of the value of the business premises which had been included. Whether damage has resulted to the purchaser, which has asserted that if it had been correctly informed about the circumstances of STN at the end of 1991 it would not have acquired the shares in the business or would only have acquired them for a symbolic purchase price of 1 DM, can only be established by inclusion of the value of the undertaking as a whole. It cannot be ascertained solely by the purchase price which has been paid – as the claim of the plaintiff seems to suggest – nor solely by the value of the business premises which has been brought in.

II.

The Senate cannot make a decision in the case itself, because further findings by the judge of fact are necessary on the questions addressed under I. The appeal court will also have to investigate the argument of the defendants that the purchaser had been informed about the business circumstances of STN and it was in any case attributable to it as contributory fault that it had had no intermediate status report prepared. It will further have the opportunity within the framework of its new assessment to go into the question again of whether a claim by the plaintiff can be based on an information contract or on tort. Where liability which is merely based on the protective effect of the audit contract is being considered, the limitation of liability in § 323 para 2 of the HGB is to be taken into account. This is because the provisions of § 323 of the HGB – in this respect also – take precedence as a special regime over the contract law provisions of civil law [references omitted].

©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) 4 November 1997, NJW 1998, 377, 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: In this case a commune in Saxony is claiming damages in respect of the harm caused by unlawful interference with development on its land.  Shortly after the reunification of Germany the plaintiff decided, against the wishes of a number of citizens, to construct an industrial park.  It entered into a development contract with H., an architect, who entrusted the work to two named building contractors.  The plans having been approved by Ministry for Economy and Employment in Saxony and the appropriate government committee, work was due to start on the morning of 22 April 1991.  On that day, however — and, according to the plaintiff, the following day as well — demonstrators from the civic movement made it impossible for any work to be done.  The plaintiff charges the defendants with taking part in the demonstration and collaborating in a plan to disrupt the work, thereby causing damage to the contractors which they put at DM 62,909.66.  This sum the plaintiff paid to them and now, having prudently taken an assignment of the contractors’ claim, seeks to recover it from the defendants.

Reasons:

I. The court below was of opinion that the first, second, third and fifth defendants were liable to the plaintiff either in tort or in unjustified enrichment, regardless of whether the plaintiff had actually paid the sum in issue to the contractors: if it had paid, it could bring a condictio against the defendants under § 267(1) BGB as a third party who has paid off a debt due from the defendants; if they had not, they could sue in tort on the basis of the contractors’ claim for damages duly assigned to it.

The court held that the defendants were at fault and had unlawfully infringed an interest of the contractors which was protected under § 823 I BGB, namely their lawful possession of the construction machinery, interference with its use being a relevant infringement.  The members of the civic movement who foregathered on the morning of 24 April did so with the intention of disrupting the construction work.  The disruption continued until the afternoon of the following day and only came to an end when, pursuant to a conversation with the mayor’s office, the citizens were shown the documents authorising the works.  During those two days the demonstrators positioned themselves so close to the machines that the work could not proceed in safety: they were effectively blockaded.  This blockade was unlawful, and not protected as the exercise of fundamental rights under art. 5(1) and 8 of the Basic Law.  The defendants were liable as collaborators and assistants for the harm resulting from this infringement of the contractors’ protected interests, for they had all been present at least for part of the demonstration and had endorsed and helped in the blockade: the third defendant had acted as spokesperson for the demonstrators, the first defendant had furthered its purposes in an administrative capacity by making telephone calls to the authorities and so on, and the second defendant had posed in the shovel of a mechanical digger for a spectacular press photograph.

Further details were required of the loss of use of machinery and vehicles suffered by the contractors, but the claim for VAT on their losses could be dismissed right away.  There was no question of contributory fault on the part of the contractors or of the present plaintiff.

Some of the appellants’ criticisms of the decision below are justified: the judgment is not fully supported by findings of fact, some of which are procedurally flawed.  [1, 2. Procedural points; 3. Discussion of the claim in unjust enrichment, and the validity of the assignment.]

The court below was right to start out from the position that the two-day blockade of the machines allocated to the construction work was an unlawful infringement, by persons at fault, of one of the contractor’s protected interests; this in principle gave the contractors a claim under § 823 I BGB even under the conditions prevailing in the newly incorporated provinces so shortly after reunification.

a) We may leave aside the question where and under what circumstances conduct such as is here alleged constitutes an unlawful infringement of an established and operative business (on which see BGHZ 59, 30, 34 = NJW 1972, 1366), for in holding that the contractors’ lawful possession of the machinery was a legally protected interest which the blockade infringed the court below was not in error.

aa) It is established by case law that if an owner is prevented from using his property as intended, this may constitute an infringement of his ownership (BGHZ 55, 153, 159 = NJW 1971, 886).

bb) The same must be true of the right of lawful possession: if the thing possessed is to be used in a particular way and such use is unlawfully inhibited, this is an infringement of a legally protected interest under § 823 I .  The equipment which the contractors brought on to the proposed industrial park on the morning of 22 April 1991 was to be used for the work of construction they had undertaken.  Conduct of the kind found by the court below which resulted in a total blockade of the machines so that they could not be used for two full working days – no negligible or fleeting disturbance (NJW 1977, 2264, 2265) – can amount to a tortious infringement of the contractors’ lawful possession.  In the circumstances we need not ask if the contractors actually owned the machines, since the appellants do not deny that the machines were in the contractors’ lawful possession.

b) On the basis that it was right to charge the defendants with the two-day blockade and consequently with an infringement, objectively speaking, of the contractors’ possession under § 823 I BGB, the court below cannot be criticised, contrary to the view of the appellants, for holding that it was unlawful.

aa) The appellants are right, however, to argue that the blockade cannot count as the “violence” required by § 240(1) Criminal Code for the crime of oppressive coercion (Nötigung).  For demonstrators to place themselves in the immediate vicinity of vehicles, machinery and so on and thereby stymie the operations by bringing moral rather than physical pressure on the contractors’ personnel does not amount to the violence required by that provision (for details see BVerfGE 92, 1 = NJW 1995, 1141).  But this does not mean that such conduct cannot count as an unlawful infringement of a protected interest under the private law of tort.

dd) But even conduct which objectively infringes an interest protected by § 823 I BGB is not unlawful if it is legitimated as the exercise of a constitutionally protected right.  The relevant right here is the right of assembly under art. 8 GG, but it does not cover a blockade of the kind and extent found by the court below.  A defendant who deliberately uses direct pressure against a particular protected interest of another cannot normally invoke the constitutional right of assembly (BGHZ 59, 30, 35f. = NJW 1972, 1366), for this right, like that of freedom of expression of opinion, is designed to safeguard the right of a group to publicise their views by intelligible means when there is a conflict of opinions such as is inherent in a democratic society (BGHZ 59, 30, 36 = NJW 1972, 1366).

cc) Even if contained within constitutional limits, the exercise of the basic right under art. 8 GG may well infringe the rights of others.  If so, this must just be accepted.  This may be the case when demonstrations have results which, though inevitable, are unintended (such as interference with traffic movements or access to the streets, squares and other places where the demonstration is being held), or when the intentional interferences are inconsiderable and of very short duration, as when, in this case, demonstrators climbed on to the machines for a media photo-call.  But when, instead of exchanging views, presenting the other side of a dispute or making a protest as such, one actively puts pressure on third parties to prevent them from exercising their rights, one leaves the area protected by the freedom of assembly.  The right of assembly protects attempts to convert opponents to one’s own opinion, not measures designed to force others to submit against their will.  The latter is the case here if, as the court below held, the demonstrators positioned themselves right beside the construction machinery and thereby, as intended, prevented the execution of the work for two full days.

dd) Although these events took place in one of the newly incorporated provinces only a few months after reunification this does not, contrary to the view of the appellants, affect the decision that this conduct was unlawful.  The special conditions facing the citizens in the new provinces at this period of abrupt change on all fronts may indeed be taken into account in the balancing and weighting of the parties’ interests which is necessary in every case.  Nevertheless the appellants cannot usefully invoke the “confrontational culture” which existed in the DDR when, in order to bring about changes in the one-party regime, citizens made frequent and intensive use of the right of demonstration.  At the time of the events now in question the rule of law was already established in the new provinces, and it would be inconsistent with it to make the lawfulness of conduct depend on standards appropriate to conflict with the previous regime.  Under the Basic Law, which was fully in force there at the time, the lawfulness of the exercise of a fundamental right and the unlawfulness of an infringement of the legally protected interests of third parties cannot be affected by considerations of what would have been licit or desirable during the events which triggered change in the DDR.

c) There is no evidence that the defendants’ experiences with the previous regime in the DDR actually led them to think that their actions were lawful, but in any case this would be relevant only to the question of whether they were at fault (see BGHZ 59, 30, 39f. = NJW 1972, 1366).  The judgment below hints that the failure of the police to intervene may have led the demonstrators to think that their actions were justified, but, as the court held, only if such a mistake of law were unavoidable could failure to realise the unlawfulness of their actions in the given circumstances prevent a finding of fault (BGHZ 118, 201, 208 = NJW 1992, 2014).  If the defendants here supposed, without making any inquiries, that the conduct charged against them was lawful, they are guilty of negligence at least.

5. The appellants are right, however, to criticise the findings of the court below as to the extent and effect of the conduct of the several defendants against whom it entered judgment.  The court based its holding that the contractors had a good claim for tortious infringement of their lawful possession on the view that the assemblies which hindered the construction works lasted for the whole of 22 and 23 April and that, as was intended, the use of the machines for their proper purpose was wholly prevented during that period.  The findings underlying this conclusion are procedurally flawed.

a) We cannot on review uphold the appellants’ objection to the finding that, as the demonstrators intended, the blockade of the machines lasted for the whole of 22 April.  This finding was open to the judge of fact, though it was based on very slender evidence.  Nor, contrary to the view of the appellants, was it a fault of procedure that the judges whose decision was based on the evidence of M did not actually hear him give that evidence: that would be relevant only if it had had important aspects which did not figure in the written report.

b) By contrast the finding that the demonstrators blockaded the construction machinery for the whole of the following day is flawed.

6. The court below held that the defendants’ participation in the blockading measures rendered them liable in tort.  The appellants are right to object to this: the findings of fact do not satisfy the requirements of § 830 I (1) and II BGB as to the liability of joint tortfeasors and accessories.

a) The court below started out correctly by noting that the question whether a person who participates in conduct involving delictual liability falls within these provisions as a joint tortfeasor or accessory depends on principles developed in criminal law (BGHZ 63, 124, 126 = NJW 1975, 49; BGHZ 89, 383, 389 = NJW 1984, 1226).  The participation must therefore be with knowledge of the facts and at least some degree of intention on the part of the individual to commit the act in conjunction with others or to facilitate the act of another; objectively there must in addition be some actual participation in the execution of the act which in some way advances its commission and is material to it.  Thus a person who participates in a demonstration will be liable if he knows it is intended to create a blockade which infringes rights and causes harm (BGHZ 59, 30,42 = NJW 1972, 1366).

There is no need to distinguish between coauthors and accessories since in tort law both are treated alike under § 830 II BGB.  The assistance lent by an accessory need not be physical in nature — moral  support may be sufficient (BGHZ 63, 124, 130 = NJW 1975, 49) — but it must be established, consistently with the requirements of the criminal law relevant to § 830 I (1) and II BGB, that each individual was guilty of conduct which supported the unlawful infringement of the rights of another and was associated with knowledge of the facts and the intention to commit such an infringement.

b) In the light of these principles the third defendant is the only one for whose liability for participating in the blockade the court below has laid a proper foundation.  The third defendant acted as spokesperson for the demonstrators so the court could rightly hold that she not only had a significant influence on the actual course of the demonstration but also, subjectively, intended that the harmful conduct should take place.  To this extent the role and functions adopted by her in the demonstration may elucidate her inner intentions (BGHZ 63, 124, 128 = NJW 1975, 49); the court below could well base its judgment on the third defendant’s leading role in the way the demonstration developed.

c) However, the liability of the other defendants is not supported by the findings made thus far.

aa) This is clearest in the case of the fifth defendant.  On the wholly conclusory evidence of S, the court held that the fifth defendant participated in the demonstration on 22 April but it made no finding as to the nature, extent or duration of such participation.  But temporary presence at the place of the demonstration and unspecified participation in the assembly are not enough in themselves to imply co-authorship or accessoryship as regards the infringements of rights here in issue.  Mere “participation in an assembly” may be a permissible way of evincing in public one’s opinion on the matter in issue, and thus be constitutionally protected by art. 5(1) and 8(1) of the Basic Law (see BGHZ 89, 383, 395 = NJW 1984, 1226).  This is true not only of presence at mass demonstrations but also of participation in smaller and less unwieldy gatherings, provided that such participation does not go beyond what is permitted by the exercise of the rights mentioned, that the individual has no part in a project to invade rights, does not subjectively endorse the harmful conduct of the others and does not join the demonstration in knowledge of its intention to create a blockade (see BGHZ 63, 124, 128 = NJW 1975, 49).  At present there is no sufficient finding that the fifth defendant in fact contributed even morally to the infringement of the contractors’ rights in any legally relevant manner, much less any findings about his mental attitude.

bb) Nor has any sufficient foundation been laid for the liability of the first defendant.

The court below relied essentially on the evidence of S, who testified that “he had spoken with her in the street and that she had said she was one of the demonstrators”; it was error in law for the court to hold that this was evidence of intentional support for the blockade and of sufficient practical assistance.

The finding actually amounts to no more than that the first defendant attended the demonstration for a short time (indeed not even on the construction site but “in the street”, very close to where she lived), and it is not explained how such conduct, in so far as it might exceed what is permitted in the exercise of fundamental rights under art. 5(1) and 8(1) of the Basic Law, could be construed as intentional support for the unlawful measures of the blockade.  Nor is it enough that the first defendant spoke on the telephone to senior members of the commune and province, for the court did not inquire whether these calls were made in aid of the blockade or in an attempt to broker a “peaceful” solution.  In view of the first defendant’s constitutional rights it was wrong to conclude without more that she was guilty of tortious interference with the rights of others.

cc) Finally the facts found are insufficient to render the second defendant liable for relevant participation in the infringement of the contractors’ rights.  The court below founded particularly on R’s evidence that at 1630 hours on 22 April he saw the second defendant taking part in the demonstration.  Here again there is no legal justification for inferring from his brief presence at the demonstration in the late afternoon that he approved of, adopted and furthered the unlawful blockading.  Nor does it follow from the fact that he briefly climbed into the shovel of a digger in response to a photo-call; such conduct, as has already been stated above, may well be covered by art. 8(1) of the Basic Law and need not constitute a relevant unlawful infringement of the rights of the contractors.

7. Finally the court has not found with the clarity required of a final judgment what harm, if any, was suffered by the contractors.

III. The decision below must therefore be vacated and the matter remanded, with leave to the defendants to raise again by way of appeal their objections to the prior findings of that court.

NOTE to BGH NJW 1998, 377

a) Only in exceptional cases does German tort law provide compensation for negligently caused pure economic harm such as arose in this case when the construction equipment was immobilised.  Normally damages can be claimed in tort only if a particular right or legal interest, listed exhaustively in § 823 I BGB, has been infringed.  This rule has, however, proved to be unduly restrictive, so the German courts have evolved various ways  of granting compensation for pure economic harm.  Thus the courts “discovered” the “right to an established and operative business” — actually invoked by the plaintiff in this case (see II 4 a) — and included it as an “other right” under § 823 I BGB.  Again the courts gave a very wide interpretation to “infringement of ownership” and held that physical damage was not required: prevention of use is now sufficient, as the present case confirms.  Finally the courts further enlarged the scope of § 823 I BGB by holding that lawful possession is an “other right”: damage to a thing or loss of its use may now be compensated without having to ask whether the claimant was actually owner or “just” possessor.  This can be seen in the instant case: the court could deal with the interference with the use of the construction equipment in the possession of the contractors without having to decide whether they owned it or not.

b) The second issue in the case is how to accommodate the protection of the contractors’ interests (ownership or possession) and the exercise by the defendants of their right of assembly.  The court drew the line between demonstrations which simply seek to persuade people and influence opinion on a contested matter and those which are designed deliberately to bring pressure on others to prevent them using their rights as they wish.

c) The third relevant point in the decision concerns the liability of associates and assistants.  In general tort liability requires a causal contribution to the infringement and the damage.  In the case of group action the requisite contribution may take the form of moral support by the defendant for those whose acts directly cause the harm.  But it is often difficult for the victim to establish the causal effect of any such moral support, so § 830 I(1) and II BGB lay down that associates and assistants are fully liable as joint tortfeasors even if the victim cannot establish their actual causal contribution.  Such contribution is, however, presumed only of those whose association or assistance was voluntary and who with knowledge of the facts intended to act along with those who directly caused the harm.  This may not be at all clear in the case of mass manifestations that get out of control so that infringements occur which some of the participants never intended.  This was critical for the defendants here this, as some of them were eager to persuade others to their point of view but not ready to infringe their rights, such as those of the building contractors.

For further details in English see; B. S. Markesinis, The German Law of Obligations, vol II, The Law of Torts 3rd edition (with corrections and additions) (1998), ch. 2.

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

BGH NJW 1998, 751
Bundesgerichtshof judgment of 16th October 1997, III ZR 23/96 (Köln).

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

The plaintiff was until the end of 1988 a member of the board of directors of the KHG AG. On the application of the state prosecutor, the Amtsgericht (district court) ordered the arrest on the 27th February 1990 of the plaintiff and others for suspected breach of trust (Untreue) to the detriment of KHD. He was arrested on the 14th March 1990 in Italy, and brought to Germany. On the 11th May 1990 he was released from custody on conditions. The order for arrest was later revoked and the investigatory proceedings against the plaintiff discontinued. The order for arrest was based effectively on an accusation by B (who himself was in custody awaiting trial). B had claimed that he had arranged with the plaintiff at a hunting event in the Westerwald in 1983 to manipulate accounts for wood deliveries to the detriment of KHD (“the hunting hide agreement”); and that the plaintiff had received substantial sums of money for this. This accusation was substantially incorrect. At the time of his arrest the plaintiff was also managing director of the V-GmbH and had a consultancy contract with the P firm, at an annual fee of 50,180 DM. This firm terminated the contract on the 11th May 1990 with immediate effect after the press had reported the arrest of the plaintiff. On the 15th May 1990, the plaintiff and the V-GmbH agreed to cancel the managing director’s contract. The Amtsgericht decided that the plaintiff should be compensated for the harm resulting from the arrest from the 14th March to the 11th May 1990 in accordance with the Compensation for Measures related to Criminal Prosecution Act. The plaintiff claimed as material harm his loss of earnings with the V GmbH and the P firm and legal and other expenses. The Ministry of Justice of the defendant state (Land) accepted liability for material harm in the sum of 16,664.64 DM. This sum consisted of part of the legal and other expenses.

In the present claim the plaintiff seeks amongst other things compensation for loss of earnings due to the termination of the consultancy contract with the P firm, further legal costs and a finding that any further harm resulting from the termination of the consultancy contract should be compensated.

Grounds

II. The investigating state prosecutor when examining whether an order for arrest should be made against the plaintiff, stated there was strong suspicion of breach of trust (§ 266 of the Criminal Code and § 112 (1) sentence 1 of the Criminal Procedure Code). The appeal court regarded this as a culpable violation of official duty on his part. That satisfies legal examination in the end result.

1. According to the case law of the Senate certain measures by the state prosecutor, which include application for issue of an order for an arrest are not to be examined in official liability proceedings for their “correctness” but only as to whether they are justifiable [references omitted].

Proceeding from this legal principle, the appeal court held that the assumption by the state prosecutor that there was strong suspicion at that time of breach of trust by the plaintiff was unjustifiable. It interpreted the statements of B, on which the state prosecutor principally based his assessment, as meaning that the plaintiff and B in their conversation of August / September 1983 (the hunting hide agreement) had agreed to a future manipulation of accounts. This would mean that the manipulations would only have begun after this point in time. In reality, so the appeal court found, it was already obvious at the point in time of the application for the order for the arrest (on the basis of witness statements and other documents on the investigatory proceedings) that accounting manipulations of this kind had been going on since the nineteen sixties. In these circumstances, the accusation made by B was incredible from the start, and the application for the order for arrest was unjustifiable.

This assessment can only be examined by the court hearing the appeal in law by considering whether the judge of fact misunderstood the concept of justifiability, violated rules of logic or general principles of experience and considered all the circumstances which were of significance for the judgment [references omitted]. The appeal in law does not reveal mistakes of this kind. Insofar as it complains of a violation of rules of logic it puts its own assessment of the facts in place of those of the appeal court in a manner which the rules about appeals in law do not permit. The procedural objections raised by the appeal in law in this connection have been examined by the Senate and not considered to be decisive. No ground was therefore found here either (§ 565 a of the Civil Procedure Code). It accordingly has been established in a binding manner that the assumption of strong suspicion on which the application by the state prosecutor for an order for arrest was based was unjustifiable and making the application for an order for arrest was therefore contrary to official duty.

2. The appeal court also, without any legal error, found the investigating state prosecutor to be culpable. In this connection it basically assumes that no blame as a rule attaches to an official if a collegial court with several legal experts sitting on it has regarded the official action as objectively lawful [references omitted]. According to the view of the appeal court, this general principle, from which the Senate has repeatedly permitted exceptions [references omitted], did not apply here. There are no legal grounds for objecting to this in the end result.

(a) The appeal court denied that the principle applied here, even though the civil chamber of the Landgericht regarded the conduct of the state prosecutor as justifiable and therefore as objectively in accordance with his official duties. It considered that the chamber basically proceeded in this assessment from a legally flawed approach. Whether this is correct does not need to be considered, because in any case there is another ground for the said principle not applying here.

The principle is based on the consideration that a better understanding of the law cannot as a rule be expected and demanded from an official than from a collegial court with several legal experts sitting on it [reference omitted]. This justifies a denial of culpability only in those cases in which the collegial court – after careful examination – has affirmed the legality of the official action. If on the other hand the collegial court has merely approved the action on the basis of a yardstick for testing – here the yardstick of justifiability – which is reduced in comparison with the official’s own duty of testing, this does not necessarily mean that the conduct of the official should be assessed as lawful. Whilst therefore in cases like the present one the official himself has a duty to regulate his conduct entirely by the yardstick of legality, the judicial examination in the official liability proceedings decides merely on the basis of the reduced yardstick of justifiability whether he has acted in accordance with his official duty. In such cases the principle becomes subject to a further exception over and above the group of cases decided by the Senate so far. The defendant state cannot therefore successfully rely in the present case on the first instance judgment for saying that no accusation of culpability can be levelled at the investigating state prosecutor.

(b) The appeal court was also right in not considering itself to be required to apply the general principle by the decision of the 14th great criminal chamber of the Landgericht in the proceedings concerning the complaint about arrest. This is because a comprehensive and careful examination of the issue of lawfulness which could justify the application of the principle did not, according to the findings of the appeal court, take place in those proceedings. The appeal court explained in this respect, in its assessment as a judge of fact of the circumstances which influenced the proceedings concerning the complaint about arrest, that the criminal chamber had “tested in an extremely summary fashion” the question of strong suspicion “and instead of this, concentrated on the question of the…danger of flight”. It concludes this from the fact that the decision by the chamber was issued on the same day as the decision by the Amtsgerichtthat there would be no review. In a “fast-track” procedure of this kind, a dependable formation of opinion by the collegial court was not possible in the light of the scope of the documentation. This assessment, the real core of which was not addressed by the appeal in law, is confirmed by the content of the decision about the complaint:

The Amtsgericht in the original order for arrest had suspended its execution. The state prosecution service complaint against this only disputed the exemption from arrest. The attention of the criminal chamber was therefore principally directed to the question of whether the danger of flight was to be assessed as so small that a suspension of execution should be considered. It is true that the criminal chamber was also obliged of its own motion to examine the question of strong suspicion. In this respect however it contented itself, according to the wording of its decision, with referring to the order for arrest and pointing out that this was essentially based on the testimony of the co-accused B, who severely incriminated the plaintiff. This reasoning makes it clear that the assessment of strong suspicion which influenced the order for arrest and formed the basis of the application for the order for arrest, and which the appeal court regarded without any legal error as unjustifiable, has left its mark on the decision by the Landgericht about the complaint.

On the basis of the findings made by the appeal court the starting point must accordingly be that the criminal chamber did not assess the established facts of the case carefully and exhaustively; or it formed its conclusion that there was strong suspicion from facts established on the basis of procedural irregularity. In such cases the general principle does not apply [references omitted].

3. The statements of the appeal court about the extent of the claim for official liability awarded to the plaintiff and about the calculation of the period covered by the declaration are not challenged by the appeal in law.

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

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)).

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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.