Decided on September 26, 2012 in Germany this case involves a German company that sells raw mineral materials that it extracts; the buyer is from the Netherlands and sells potatoes. The Buyer purchases minerals from the Seller to use in a bathing process in which the potatoes with lower starch content are separated from the potatoes with higher starch content. The Buyer would then sell the potatoes to farmers who used them as feed.

In 1999, the Seller found out that the clay it was extracting and selling contained high levels of natural dioxin, which prohibited the clay from being used “ ‘for the purpose of using it as an additive in the production of feed.’ ” However, the Seller did not notify the Buyer and it was not until 2004 when dioxin levels in dairy products, that were coming from animals eating Buyer’s potatoes, where too high that the Buyer became aware of the problem with the Seller’s goods.

The Buyer brought a claim under the United Nation’s CISG, an international treaty for the sale of goods. Specifically, the Buyer brought a claim under Art. 35 which states, in part, that “the seller must deliver goods which… are fit for the purposes for which goods of the same description would ordinarily be used…” After being dismissed at the trial level the appellate court found that there was a breach but that the damages were to be mitigated because the Buyer, under Art. 77 did not mitigate its losses originating from the breach.

The question on appeal to the Supreme Court of Germany is whether the Buyer did have a duty to mitigate its damages, and if so under what provision and finally, by how much should Buyer’s damages be reduced? In its analysis the Court determines that under Art. 77 alone the Buyer’s damages could not be reduced because it requires the Buyer to have knowledge of the breach and Buyer had none. Yet, the Court determined that the Buyer did have a duty to inspect the goods to make sure that they were suitable for use and the Court was not persuaded by the Buyer’s arguments that it had no reason to inspect the goods since the Seller gave them no indication to think otherwise. So, relying on Art. 7(1) the Court comes to the conclusion that a general principle of the CISG is to “safeguard good faith in international trade…” and therefore Art. 77 does apply because “a damage, which could have been reasonably avoided, is not to be compensated.”

In deciding how to allocate damages the Court determined that the breach by the Buyer and Seller were “similarly serious breaches of duty, independently contributing to the damage…” and decided to split the damages equally. This is the correct outcome? Is this a fair outcome? According to the appellate court the process used to determine the dioxin levels requires “relatively complex laboratory tests…” does this at all effect your opinion on if the Buyer’s damages should have been reduced?

 

Source: Pace Law School

Image source: Yourdictionary.com