Source: http://cisgw3.law.pace.edu/cases/030822s1.html
Timestamp: 2019-04-22 18:48:09+00:00

Document:
"1. Non-compliance with the contractual description that the goods are free from genetically engineered components constitutes a fundamental breach.
"2. Contractual exclusions of liability are valid if they limit the remedies of the other party to the avoidance of the contract and do not provide for a full exclusion of all remedies."
A Swiss company bought food-shaper products for making vegetarian escalopes from a Belgian supplier with a view to their exclusive resale to a producer company. It subsequently terminated the contract since the goods contained, contrary to a contractual warranty, genetically modified organisms (GMOs), and sought damages before the lower court.
The Court of Appeal of the Canton of Basel-Stadt, ruling on the dispute as the higher court, held that the CISG was applicable in accordance with its article 1 (1) (b). It did not view the choice of Swiss law by the parties as excluding the application of the CISG within the meaning of article 6. Any such exclusion would have had to be expressly agreed.
The court reaffirmed the existence of a fundamental breach of contract within the meaning of article 25 CISG. It concluded that the buyer had the right to declare the contract avoided in accordance with article 49 (1) (a) CISG and was entitled to claim damages. In spite of the contractual warranty concerning the absence of GMOs, a clause in the contract limiting the seller's liability for product defects to the total invoiced value was deemed admissible within the meaning of article 6 CISG.
The seller objected that only samples of the goods had been taken, which did not prove that all the goods were defective. The court did not uphold that objection, ruling that the buyer had the right to terminate the contract in its entirety and that the buyer's claim for damages should be determined on that basis.
I. In December 1996, company M and W AG, whose legal successor is the Claimant [Buyer], Company P AG, concluded a contract with Respondent [Seller], Company P T I M Belgium N.V., for the delivery of so-called Food Shaper products, which were to be exclusively re-sold to Company B AG in Basel. Various documents, containing previous correspondence, in particular between the [Seller] and B AG, were attached to the contract. On 20 February 1997, vegetarian schnitzel produced from goods originating from the [Seller], were subjected to an examination. In his report dated 14 March 1997, the Cantonal Chemist from Bern came to the conclusion that the sample contained DNA from genetically modified soy. Therefore, the handing over of these products to consumers was prohibited. After various telephone conversations and faxes, the [Buyer] informed the [Seller] that [Buyer] would no longer accept the Food Shaper products and declared the contract avoided. Thereafter, [Buyer] brought an action before the Civil Court of Basel-Stadt for the recovery of damages arising from the cancellation of the contract.
The Court of First Instance partially approved the claim of [Buyer] against [Seller] in its judgment dated 1 March 2002. The [Seller] was held liable to pay Swiss franks [CHF] 324,760.05 plus interest of 5% since 23 November 1998. The additional amount [Buyer] sought and the [Seller]'s counterclaim were dismissed. The [Seller] appeals against this judgment in due time by written application for dismissal of the claim and admission of its counterclaim. In contrast thereto, the [Buyer] seeks confirmation of the judgment of the Court of First Instance. During the proceedings of the Appellate Court of 22 August 2003, the representatives of the parties explained their legal positions. Reference is made to the court record for the content of these proceedings. The facts result from the judgment of the first instance and from the following reasoning.
II. 1. The [Buyer] is located in Switzerland and the [Seller] is located in Belgium. Therefore, the issue of forum becomes relevant. In this regard, in Clause 10.6 of their "Supply Agreement", the parties have agreed upon the Courts of the Canton of Basel-Stadt and have also declared Swiss law to be applicable. For the question of the jurisdiction of the court in the present case, the Convention on the Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters (the Lugano Convention) is authoritative (Art. 1 Lugano Convention). Art. 17 of the Lugano Convention sets out that in the case of an agreement on jurisdiction between parties, at least one of which is located in the sovereign area of a member State, the court chosen has exclusive jurisdiction. Due to this provision, the Civil Court of Basel-Stadt is rightfully hearing the present claim.
It is in dispute whether, under the choice of law as made in the present case, the choice of Swiss law in general, or exclusively the Swiss law of obligations, is intended. A reference solely to the latter would be, in itself, permissible, but would have had to be made explicitly. As this was not done by the parties, the United Nations Convention on Contracts for the International Sale of Goods (CISG), which came into force in Switzerland on 1 March 1991, is applicable (cf. Schlechtriem/Ferrari, Art. 6 CISG, para 21 et seq). The CISG is applicable, according to its Art. 1(1), to contracts of sale of goods between parties whose places of business are in different States (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State.
Contrary to the opinion of the previous instance, the applicability of the CISG cannot be based on subparagraph (a) of this provision, as at the time of the conclusion of the contract, Belgium had not yet ratified the Convention, which, according to Art. 100(2), is only applicable to contracts concluded on or after the day on which the Convention came into force for the relevant Contracting State. In contrast, the previous instance (also) rightly relied on Art. 1(1)(b) CISG, as Art. 116 IPRG [*] subjects the contract primarily to the law chosen by the parties, in this case Swiss law.
2. Among other things, the parties are in dispute about whether the [Seller] committed a breach of contract. The [Seller] is of the opinion that it delivered in accordance with the terms of the contract. Although it was mentioned in the attachments to the contract that the product had to be free from genetically modified organisms (GMO), for [Seller]'s part, it was made quite clear that the possibilities to test for such absence of GMO were limited. [Seller]'s product had been produced from the harvest of 1996. Back then, there was no such thing as GMO, as the Monsanto soy beans did not enter the market until later on.
"This is to certify that all soy protein ingredients used in the production of Protein Technologies International Food Shaper products covered under the terms of this audit by SGS on behalf of B of Switzerland are free of genetically modified soybeans."
With this declaration, the [Seller] had warranted that all "soy protein ingredients" and thereby all ingredients used in the manufacturing of Food Shaper products for Bell Coop were free from genetically modified soy. The [Seller] did not abide by this warranty. This can be seen from the examination report of the Cantonal Laboratory Berne dated 14 March 1997, the examination by the Laboratory for Food Chemistry at the University of Berne ordered by C Switzerland and its final report dated 27 March 1997, as well as from the expert report of the Cantonal Laboratory of the Sanitary Department of Canton Basel-Stadt dated 26 January 2001, with additions dated 18 June 2001, ordered by the Court of First Instance. The [Seller] claims that the positive signals lie between 0.1 and 1% and hence within the area of unavoidability, which is what eventually prompted the Swiss authorities to declare goods with positive signals in this area up to 1% as GMO-free. However, this declaration limit was first introduced in 1999, whereas, in the present case, the legal position of 1997 is authoritative. Thus the [Seller] breached the contract. Therefore, it is only of secondary interest that, since 1999, such products apply as, but are not, GMO-free. As a result, even in the case of contracts concluded after 1999, the significance of a particular warranty of a party would have to be examined.
3. Furthermore, the previous instance rightly affirmed the presence of a fundamental breach of contract by the [Seller] in accordance with Art. 25 CISG. The [Seller] asserts that, at the beginning of its contractual obligations, it was not possible to foresee the consequences of an "unavoidable feature of the goods, utterly impossible to be proven at the time of the conclusion of the contract, and hardly worth to be considered due to its small amount". Furthermore, from 4 June 1997, genetically modified RR soy beans, subject to a correct declaration, were allowed to be imported, processed and sold in Switzerland. Fundamental to the agreement of the parties was the delivery of the substance Food Shaper, whereby the GMO-freedom was only a peripheral matter. This opinion cannot be followed in view of the fact that, according to an expert report dated 26 January 2001, even the smallest contamination in the first quarter of 1997 was to be legally objected to and further processing in Switzerland was not permitted. It is also evident from the correspondence of the parties, in particular the declaration of guarantee of the [Seller] dated 31 October 1996, that fundamental significance was attached to a GMO-free product. It can therefore be assumed -- as the previous instance did -- that a fundamental breach of contract was committed by the [Seller] and the [Buyer] was thereby entitled, under Art. 49(1)(a) CISG to avoid the contract concluded with the [Seller].
"In the event [Seller]'s liability is finally established, [Seller] will replace the defective goods or if such replacement has become impossible, [Seller] will give an equivalent financial compensation, such compensation cannot exceed the invoiced value of the original transaction."
It is debatable whether this limitation of liability is to be observed even if the [Seller] has expressly warranted a certain feature of the goods. Thereby, it must be assumed that, although exemption clauses are generally not reconcilable with a warranty, as the simultaneous existence of both agreements is impossible from a legal point of view. This, however, only applies to the unlimited contracting-out of guarantees, while a restricted exemption appears indeed to be possible (Giger, Berner Kommentar, para 21 on Art. 199 OR [*]). Thus -- despite the warranty of freedom from GMO -- it was still permissible in the present case to limit the liability for delivery of defective goods in such a way that, although the buyer can avoid the contract, it does not have any further rights to additional damages. Thereby, the maximum amount of any possible damages has been obvious right from the very beginning.
5. With respect to the extent of the damages, the [Seller] is of the view that only parts of the goods, in which traces of genetically modified corn were actually found, could be regarded as unusable. However, only samples were taken, while a possible contamination of the remainder of the goods cannot be established. The [Buyer] was neither expected to examine the entire goods, nor could it have been expected to process the unexamined goods and sell them with the risk of being re-accused of the forbidden distribution of genetically modified organisms. For this reason, the [Buyer] is allowed to avoid the contract in its entirety, although as a consequence thereof, the book value of all goods delivered will apply as the maximum amount of liability. This value was estimated at CHF 379,118.70 in the judgment of the Court of First Instance, which was not disputed by the [Seller] in the appeal and is therefore to be confirmed. The customs invoices, which have been taken into account as further damage in the previous instance, are already included in the book amount of CHF 6.98 per kilogram of goods; the [Buyer] cannot claim these as damages a second time. The commission and the storage costs of the goods, which have been claimed, go beyond the "invoiced value of the original transaction" and therefore, according to Art. 5.5 Supply Agreement, cannot be allowed. The justified claim of the [Buyer] therefore amounts to CHF 379,118.70. The [Seller]'s counterclaim in the amount of CHF 184,526.45, which has been recognized by the [Buyer], is to be deducted from the total amount, which finalizes the counterclaim and confirms its dismissal by the previous instance. Interest of 5% since the submission of the claim on 23 November 1998 is due on the resulting judgment sum of CHF 194,592.25, which the [Seller] does not dispute.
6. As a consequence the [Buyer] has to bear three quarters of the ordinary and extraordinary cost of the claim in the first instance and the expert proceedings. With respect to the counterclaim, the decision on costs from the first instance is to be confirmed. The ordinary costs of the proceedings in the second instance are to be borne equally by the parties, while their extraordinary costs in this regard are to be offset.
- In partially allowing the appeal, the [Seller] is ordered to pay CHF 192,592.25 plus 5% interest at since 23 November 1998.
- The additional claim and the counterclaim are dismissed.
- The [Buyer] has to bear three-quarters of the ordinary costs of the claim and the expert proceedings in the first instance and the [Seller] one-quarter. With regard to the ordinary costs of the counterclaim, the judgment of the Court of First Instance is affirmed. The [Buyer] has to bear its own extraordinary proceeding costs of the first instance and has to pay to the [Seller] 50% of its extraordinary proceeding costs of the first instance.
- The ordinary costs of the proceedings at second instance with a charge of CHF 30,000.00, plus outlays, are borne equally by the parties. The extraordinary costs of the second instance are offset.
Under the requirements of Art. 43 et seq of the Federal Law on the Organization of the Administration of Justice [OG], this decision can be appealed against due to violation of Federal Law within 30 days of its publication. The statement of appeal is to be submitted to the appellate court in three copies in good time. Reference is made to Art. 55 OG regarding the requirements as to content. The Federal Court will decide on the admissibility of the legal proceedings.
Whether in addition to, or instead of the appeal, other legal proceedings (e.g., public law complaints to the Federal Court) are admissible arises from the applicable legal provisions.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, the Claimant of Switzerland is referred to as [Buyer] and the Respondent of Germany is referred to as [Seller]. Amounts in the currency of Switzerland (Swiss franks) are indicated as [CHF].
Translator's note on abbreviations: IPRG = Gezetz über das Internationales Privatrecht [Swiss Code on Private International Law]; OR = Obligationenrecht [Swiss Code of Obligations].
** Mariel Dimsey is a Research Assistant and Teaching Assistant at the University of Basel, Switzerland.
*** Daniel Nagel has been a law student at Heidelberg University since October 2002 and an exchange student at Leeds University in 2004/2005.

References: Art. 17
 Art. 6
 Art. 1
 Art. 100
 Art. 1
 Art. 116
 Art. 25
 Art. 49
 Art. 199
 Art. 5
 Art. 43
 Art. 55