Source: http://cisgw3.law.pace.edu/cases/950821g2.html
Timestamp: 2019-04-22 10:18:35+00:00

Document:
"The . . . case involved litigation between German and Spanish parties over the delivery of a shipment of pepper. The pepper contained approximately 150% of the maximum concentration of ethyl oxide admissible under German food and drug law. Here the buyer . . . prov[ed] that it had an express agreement with the seller that the goods must be fit for human consumption in Germany. Consequently, the Elwangen District Court held the seller was in a fundamental breach." Koch, Pace Review of the Convention on Contracts for the International Sale of Goods (1998) 236.
[Seller] brought action against [buyer] for payment for a part consignment of 9 metric tons of paprika pepper powder. [Buyer] counterclaimed for damages for breach of contract. [Seller] is a Spanish company exporting spices, amongst other things, to Germany. [Seller]'s business transactions with German customers are concluded via import and wholesale representative G [seller's representative] in the name of and with power of attorney of the [seller].
The parties - who had an ongoing business relationship - agreed in August of 1994 that [seller] was to provide [buyer] with 80 metric tons of Spanish paprika pepper, harvested 1994, guaranteed 100% pure (approximately 60 metric tons sweet paprika and 20 metric tons hot paprika) at a price of DM [Deutsche Mark] 3.02 per net kilogram, delivered CIF Schwäbisch Gmünd-Reitprechts [Germany]. The paprika pepper was to be delivered in installments of at least 5 metric tons following the [buyers] telephoned request.
"As delivered up to now, minimum 60 Asta".
"Delivery in 25-kg sacks on pallets. Certificates that the goods are free from aflatoxins and salmonellae to be enclosed with every batch."
At the same time, the parties (with [seller's representative] acting as an agent) concluded a contract over the delivery of Spanish paprika pepper flakes at a price of DM 5.60 per net kilogram. Delivery was to be made in installments of at least 1 metric ton at a time. Each delivery was to be accompanied by certificates on the absence of aflatoxins and salmonellae.
Up until November 1994, [seller] had delivered 12 metric tons of the agreed 80 metric tons of paprika pepper powder to the [buyer]. [Buyer] paid the price for these deliveries.
On 23 November 1994, however, the following consignment reached the [buyer]: 5 metric tons of sweet paprika pepper, 3 metric tons of hot paprika pepper, and 1 metric ton of paprika pepper flakes. [Buyer] assigned this delivery the number 292. The payment of the price of this delivery, which the [seller] billed with invoice no. 145-P on 17 November 1994, is the issue of [seller]'s claim.
[Seller] sent [buyer] a certificate dated 28 November 1994 with respect to this delivery (the certificate was not issued by a chemical institute, but by [seller] itself).
"We are already familiar with the issue of eto-treatment. [Seller] has assured us on several occasions that it is not treating its goods with ethylene oxide and does not even possess the facilities for such treatment. Unfortunately, we are unable to provide you with a confirmation of this from the [seller] today, as both today and yesterday are public holidays in Spain (...)."
On 13 December 1994, [buyer] commissioned an [expert] in Filderstadt [Germany] to test the paprika products (sweet, hot and flakes alike) for remains of ethylene oxide. According to the report of 20 December 1994, the spices contained the following traces: hot paprika pepper less than 0.05 mg/kg, sweet paprika pepper less than 0.05 mg/kg, and paprika pepper flakes less than 0.05 mg/kg.
[Buyer] subsequently requested the [expert] to test the spices for chlorine ethanol. According to the report of 12 April 1995, the goods contained the following traces: hot paprika pepper 2.96 mg/kg, sweet paprika pepper 3.99 mg/kg, and paprika pepper flakes 1.44 mg/kg.
"We hereby ask you to take back the delivered merchandise. As noted in our fax of 9 December 1994 we will ask you, respectively your partner, to reimburse us for all our costs and damages (...)"
"With respect to our telephone conversation as well as your fax, we once again strongly point out that while traces of ethylene oxide have been found in the spices, this is decidedly not a result of treatment with ethylene oxide. Such treatment causes a contamination of at least 40 mg/kg. (...) The firm of A. has been trying to find the cause for the contamination for the last three weeks and has already contacted the respective specialists at the University of Madrid. (...) In the meantime, we have informed the [seller] and asked it to take back the consignment in question, as they clearly contain more ethylene oxide than permissible under [German] law (even though in our opinion these limits have been set completely arbitrarily). This matter is absolutely not concluded ... "
"We ask you to pick up the delivered goods and to provide us with substitute merchandise before Monday, 2 January 1995, noon. After this point in time, we will no longer to able to uphold our normal course of business (manufacture of mixtures, delivery obligations). Should you not provide us with spices until that date, we would have to buy substitute material from other sources. It goes without saying that you would have to guarantee compliance with the German LMBG [Lebensmittel- und Bedarfgegenständegesetz (Food Safety Law)]."
"Summing up, I unfortunately have to say that there is no news. For us, the most important issue was your statement that you [seller], and/or your Spanish business partner are unable to provide substitute goods. We therefore once again stress that we ask you to collect the non-conforming goods stored by us for you (...)."
By fax of 12 January 1995, [seller's representative] announced that it would pick up the spices on the same day or the day after.
By fax of 13 January 1995, [seller] notified [buyer] that the goods would be collected on 16 January 1995. In its letter of 16 January 1995, [buyer] informed the [seller's representative] that part of the delivery 292 had already been packed before [buyer] had received the warning from its industry association. This part of the delivery would gradually have to be collected from the [buyer]'s customers and exchanged for uncontaminated goods.
"Furthermore we hereby declare avoidance of the installment contract concluded with you (respectively with [seller's representative]) because of your evidenced unreliability. We will invoice our damages for breach of contract separately."
The [seller] claims that the delivered goods (registered as delivery 292) did not contain remains of ethylene oxide or chlorine ethanol in an amount higher than 0.02 mg/kg. [Seller] says it did not treat the delivery in question with ethylene oxide or 2-chlorine ethanol in the course of the so-called extraction process. Furthermore, [seller] contests the assertion that the [expert] received a sample of delivery 292 for its analysis. Moreover, it maintains that it is not the obligation of a non-German seller to inquire about German standards on food safety.
"The incoming deliveries will be examined by an independent, state-registered institute as to whether they comply with safety requirements under German food safety law (especially with respect to salmonellae, aflatoxins and pesticides). During the quarantine period, the goods remain in the [seller]'s possession. After receipt of the safety-certificate and release by [buyer]'s quality assurance unit, [buyer] will take delivery of the goods. The 30-day period allowed for payment starts from this date. (...)."
[Seller maintains that] [buyer]'s complaint of 27 December 1994 was therefore issued too late. An examination of the goods was ordered by the [buyer] only on 13 December 1994. Moreover - as conceded by the [buyer] itself in an earlier letter - [buyer] was no longer able to make complete restitution of the goods.
The [seller] asks the Court to order the [buyer] to pay the [seller] DM 29,760.00 with interest of 5% from 23 November 1994.
The [buyer] asks the Court to dismiss [seller]'s claim. By way of counterclaim, [buyer] is asks the Court to order the [seller] to pay the [buyer] DM 159,765.00 with interest of 12% from the date the action was pending in Court.
The [seller] asks the Court to dismiss the counterclaim.
[Buyer] maintains that it notified [seller] of the non-conformity of the goods in time, and did not breach its obligations. The arrangement of March 1994 was only to be applied to the earlier contract, not to the one currently in dispute.
[Buyer holds that] the goods delivered on 23 November 1994 were not fit for the purposes for which the goods would ordinarily be used and not fit to be sold in Germany. According to the [expert]'s analysis, the spices were contaminated with ethylene oxide (respectively the resulting toxic chlorine ethanol) far beyond the limits tolerated in Germany. [Seller's representative] admitted this much in its fax of 27 December 1994. On 27 December 1994, [buyer] had received the first of the [expert]'s reports. On this very day, [buyer] informed the [seller's representative] of the result and asked it to collect the goods. The contamination with ethylene oxide represents a hidden non-conformity.
[Buyer maintains that] the parties agreed that [seller] would take back the goods in question. [Seller] did not comply with [buyer]'s request to deliver an uncontaminated replacement. On 11 January 1995, the [seller's representative] even informed [buyer] that they were unable to deliver substitute merchandise at this point in time. [Buyer claims that] it is therefore entitled to damages under Art. 74 CISG. In order to keep its business running and comply with its delivery obligations, [buyer] had to enter into a substitute transaction and buy 68 metric tons of paprika pepper powder at a price of DM 5.25 per net kilogram. The difference between the price agreed with the [seller] is DM 2.23. This leads to damages of DM 151.640,00 for 68,000 kg. Moreover, [buyer] suffered a loss of profit of at least DM 7,000.00 because it did not have any paprika pepper powder at its disposal until it received the substitute shipment. [Seller] furthermore needs to reimburse [buyer] for the cost of the chemical analysis (DM 1,125.00). The overall damages amount to DM 159,765.00.
[Buyer holds that] it was entitled to declare the entire contract of August 1994 avoided.
[Seller] is of the opinion that the counterclaim needs to be dismissed because firstly, the delivered goods were examined too late and secondly, the goods were fit to be sold in Germany. The substitute transaction entered into by the [buyer] concerned goods that were not of the same quality, but of higher quality. At that point in time, [buyer] could have obtained equivalent quality at a price of DM 3.02 per kilogram.
The Court has international jurisdiction (according to Art. 2 of the Convention of 27 September 1968 on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters [Brussels Convention], and by way of Art. 18 of the same Convention by the [buyer]'s uncontested appearance in Court, see also � 39 ZPO [German Civil Procedures Act]).
A. The law applicable to the contract between the parties is the Convention on Contracts for the International Sale of Goods (Art. [1(1)(a)] CISG: Germany and Spain are Contracting States).
German law finds supplementary application, as the rules of private international law lead to the law of the Federal Republic of Germany. (This is because the contract between the parties was concluded by an agent residing in Germany (therefore the relevant "closest connection" test under Art. 28 EGBGB [German Private International Law Act] leads to the application of German law).
B. [Buyer] is not obliged to pay the price for the delivery that took place on 23 November 1994 (Art. 53 CISG).
At the time of the delivery, the goods contained an amount of ethylene oxide which was not permissible under German Food Safety Law. The seller is, at least, cut off from relying on any claim that the amount did not exceed the admissible limit. [Seller] therefore did not deliver goods which were of the quality required by the contract (Art. 35(1) CISG). As the goods were not fit to be sold in Germany due to their high amount of ethylene oxide, the breach of contract was also fundamental: [buyer] was substantially deprived of what it was entitled to expect under the contract (cf. Art. 25 CISG and BGH [*] NJW [*] 1995, 2099, 2100). After [buyer] gave notice of the high proportion of ethylene oxide, [seller] agreed to take back the goods in question.
1. At the time of the conclusion of the contract the parties were in agreement that the goods had to be fit to be sold according to German Food Safety Laws. This can be drawn from [seller]'s concessions in connection with [buyer]'s letter of 7 March 1994.
[Seller] has a long-standing business relationship with the [buyer] and regularly exports goods to Germany (with the [seller's representative] acting as an agent). [Seller] had provided the [buyer] with spices already before the contract of August 1994. After it had been ascertained that part of the goods had been infected with salmonellae, [buyer] informed the [seller] that from now on it would let an independent, state-registered institute examine the deliveries as to whether they were fit to be sold under German Food Safety Laws (especially with respect to salmonellae, aflatoxins and pesticides).
[Seller] agreed to this procedure. The [seller] is of the opinion that this arrangement also applies to the contract of August 1994. We cannot follow this opinion, as in the contract of 2 August 1994 the parties explicitly chose a different arrangement; the obligation to provide certificates on the absence of aflatoxins and salmonellae was put on the [seller].
Under these circumstances, it is beyond doubt that the parties were in agreement when they concluded the following contract of August 1994 that the ordered goods had to comply with German Food Safety Laws (cf. BGH NJW 1995, 2101 at ccc).
[Seller] therefore cannot claim that it is unfamiliar with German Food Safety Laws (especially as the [seller]'s agent is familiar - or should be familiar - with those regulations).
2. It is undisputed that according to German Food Safety Standards the spices may contain a maximum of 0.02 mg/kg ethylene oxide or chlorethanol. The goods delivered exceeded those limits. Even if these limits had not been exceeded, the [seller] would be cut off from relying on this, as the parties agreed that [seller] would take back the delivered goods.
On 27 December 1994, [buyer] notified the [seller's representative] that the delivered spices had been found to contain ethylene oxide. [Buyer] asked the [seller] to take back the goods and announced that it would claim damages for breach of contract. The [seller's representative] then admitted that the goods contained ethylene oxide (cf. fax of 27 December 1994: "as they clearly contain more ethylene oxide than is allowed under [German] law ..."); the [seller's representative] only denied that the contamination was a result of a treatment with ethylene oxide. [Seller's representative] also informed [buyer] that it had asked the [seller] to take back the queried goods.
It is undisputed that as a result, the [seller] offered the [buyer] to take back the goods (cf. [seller]'s concession as well as [seller]'s letter of 13 January 1995).
From a legal standpoint, the following can be said: [Seller's representative] is the [seller]'s commercial representative with power of attorney to conclude contracts in the name of the [seller] (�� 54, 55, 84, 91 HGB [German Civil Code]). However, in case of doubt, a commercial representative is not entitled to modify an existing contract or acknowledge complaints as legitimate. Nevertheless, [seller's representative]'s declaration of 27 December 1994 can be attributed to the [seller], because [seller] agreed without reservations to take back the goods as recommended by its representative. This consent - interpreted according to the understanding of the party receiving the statement, that is, the [buyer] - was an acknowledgment of the claim that the delivery of 23 November 1994 did not conform with the contract.
Even though [seller] claims that it took back the goods out of good will and without recognition of a legal obligation, this is unsubstantiated by the parties' correspondence. Nor does the [seller] explain how such a reservation was made orally (when ? by whom? to whom?).
The agreement on the taking back of the goods leads to the conclusion that [buyer] is not obliged to pay for the delivery of November 1994, irrespective of the question whether the goods were in conformity with the contract or not.
3. The fact that [buyer] declared in January 1995 that it was unable to return all of the delivered goods does not entitle [seller] to renounce the agreement. According to Art. 82(1) CISG, the buyer loses the right to declare the contract avoided if it is impossible for its to make restitution of the goods substantially in the condition in which it received them. This rule does not apply if the goods or part of the goods have perished or deteriorated as a result of the examination provided in Article 38 - or if the goods or part of the goods have been sold in the normal course of business or transformed by the buyer in the course of normal use before it discovered or ought to have discovered the lack of conformity (Art. 82(2)(b) and (c) CISG). These requirements are met in the present case.
a) [Buyer] discovered the non-conformity of the goods on 27 December 1994, when it received the [expert]'s report dated 20 December 1994. On the same day, it gave effective notice of the non-conformity to the [seller] (by way of fax to the [seller's representative] on 27 December 1994).
b) [Buyer] was not obliged to have discovered the lack of conformity any earlier. While it is true that the [buyer] is held to examine the goods within as short a period of time "as is practicable in the circumstance" after delivery was effected on 23 November 1994 [Art. 38 CISG], it was not to be expected that the [buyer] have parts of the delivery examined for traces of ethylene oxide by an expert, because earlier deliveries by the [seller] had not been contaminated by ethylene oxide.
The contamination with ethylene oxide represents a hidden non-conformity. After [buyer] received the briefing by the German Spice Industry Association, it had to consider the possibility that the delivered goods contained traces of ethylene oxide; but this information cannot be equated with knowledge of the non-conformity. [Buyer] reacted within a short period of time, with its letter to the [seller's representative] of 9 December 1994 and by engaging the [expert] on 13 December 1994.
c) In the period between the delivery and the point in time when [buyer] obtained knowledge of the maintained non-conformity, the [buyer] packed the delivered goods in small amounts and delivered them to various warehouses (cf. [buyer]'s notice to [seller's representative] in the letter of 16 January 1995). This conduct represents a normal course of business in the meaning of Art. 82(2) CISG.
d) According to the [buyer]'s unchallenged statement, it was able to restitute the delivery of November 1994 in January 1995 and is still able to do so. This is as far as a restitution is not hindered by rights of third parties which are in possession of parts of the delivery and have received such possession through [buyer]'s normal course of business.
The [buyer]'s counterclaim is principally justified. However, as further determinations are necessary with respect to the extent of the damages, the chamber is forming a judgment on the basis of the cause of action according to � 304 ZPO [German Civil Procedure Act].
[Buyer] claims damages for failure to deliver 68 metric tons of paprika pepper powder (of the 80 metric tons agreed to in the contract, 12 metric tons have been delivered without complaint and have been paid for by the [buyer]).
[Buyer]'s counterclaim is basically justified.
[Seller] was obliged to effect a substitute delivery after it consented to take back the queried goods and after [buyer] - by way of letter to [seller's representative] as an authorized recipient - fixed an additional period of time for performance by the [seller] of its obligations until 2 January 1995 (Art. 47(1) CISG). It is irrelevant whether this period was unreasonably short, because [buyer] waited with its declaration of avoidance under Art. 49 CISG until its letter of 18 January 1995. The additional period of time fixed for performance under Art. 47 CISG and the further time created by the waiting period can together be rated as a "period of reasonable length" in the meaning of Art. 47(1) CISG (cf. von Caemmerer/Schlechtriem, Kommentar zum einheitlichen UN-Kaufrecht, 2nd ed., Art. 47 n. 12).
According to Arts. 26, 49(1)(b) and 73(1) CISG, [buyer] was therefore entitled on 18 January 1995 to declare the contract avoided with respect to the amount of 9 metric tons.
Thus it is irrelevant whether [buyer]'s contention that [seller's representative] on 18 January 1995 declared in a phone conversation that the [seller] was unable to deliver uncontaminated substitute goods is true (cf. Art. 47(2) line 1 and Art. 49(1)(b)(ii) CISG). It is furthermore irrelevant whether such a statement by [seller's representative] can be attributed to the [seller].
[Buyer] is therefore entitled to demand damages for breach of contract according to Arts. 74 and 75 CISG at least with respect to those 9 metric tons (Art. 45(1) and (2) CISG).
[Seller] is responsible for the performance of its contractual obligations (Art. 79 CISG) independently of whether the goods were contaminated with ethylene oxide through a treatment in the plant of the [seller] or in any different way. In the latter case, [seller] was able to examine the goods before delivering them to the [buyer].
"If one party's failure to perform any of its obligations in respect of any installment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future installments, it may declare the contract avoided for the future, provided that it does so within a reasonable time."
These requirements are met in the present case. The [seller] was obliged to deliver substitute goods within a reasonable period of time in exchange for the 9 metric tons which it had promised to take back (because of the contamination with ethylene oxide maintained by the [buyer]). [Seller] did not perform this obligation, even though [buyer] informed it in the letter of 28 December 1994 that it would not be able to fulfil its own delivery obligations towards its customers should substitute merchandise not be available until 2 January 1995.
[Seller]'s non-performance of this obligation constitutes a fundamental breach of contract. Under a reasonable interpretation of the overall circumstances, [buyer] had to conclude in the second half of the month of January 1995 that [seller] was unable to deliver uncontaminated paprika pepper of the 1994 harvest which conformed with German Food Safety Regulations (cf. in particular the circular by the German Spice Industry Association of 7 December 1994 as well as the fax by [seller's representative] on 27 December 1994, 12 January 1995 and 16 January 1995).
It would be unreasonable to demand that the [buyer] be bound to the contract with the [seller] with the uncertainty of how long [seller] would be unable to provide goods which conformed with the requirements of the contract.
The contract entered into by the parties does not provide for long intervals between the installments. According to the contractual agreement, [buyer] was entitled to demand on call the overall amount of 80 metric tons in installments of at least 5 metric tons. The wording of the contract would have allowed [buyer] to call for the delivery of the entire amount in just two installments. [Buyer] would have acted within the stipulations of the contract had it requested the entire remaining amount of 68 metric tons - be it after the first delivery, be it in December of 1994 or in January of 1995. Under these circumstances, it cannot be assumed that [buyer] would have called for a part of the remaining contractual amount at a point in time when the [seller] was finally able to deliver merchandise that complied with the requirements set by German Food Regulations.
[Buyer] declared the contract avoided within a reasonable period of time after [seller] failed to provide [buyer] with substitute goods (in its letter of 18 January 1995).
C. The determination with respect to the amount of damages suffered by the [buyer] and the costs of the legal proceedings will be made in a final decision.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, the Plaintiff of Spain is referred to as [seller] and the Defendant of Germany is referred to as [buyer]. [DM] indicates monetary amounts in German currency (Deutsche Mark).
Translator's note on other abbreviations: BGH = Bundesgerichtshof [Federal Court of Justice, the highest German Court in civil and criminal matters]; Brussels Convention = 1968 European Community Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters; EGBGB = Einführungsgesetz zum Bürgerlichen Gesetzbuche [German Code on the Conflict of Laws]; HGB = Handelsgesetzbuch [German Commercial Code]; NJW = Neue Juristische Wochenschrift [pre-eminent German weekly law journal]; ZPO = Zivilprozessordnung [German Code on Civil Procedure].

References: Art. 74
 Art. 2
 Art. 18
 Art. 28
 Art. 25
 Art. 82
 Art. 82
 Art. 49
 Art. 47
 Art. 47
 Art. 47
 Art. 47
 Art. 49