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Commentary

Compliance with local law; seller's obligations and liability

Annotation to German Supreme Court decision of 2 March 2005 [VIII ZR 67/04] [1]

Peter Schlechtriem
December 2005

I. The question whether the seller, in order to meet the obligation to deliver goods in conformity with the contract under Art. 35 CISG, has to comply with local -- mostly public -- law requirements for the use or marketing of certain goods to be observed (only) in the (seller's) export country or in the (buyer's) import country or those valid (only) in the third country to which the goods are destined to be delivered, is of great importance in transborder commerce. Unless the parties have agreed on respective terms in their contract,[2] In applying the Convention on the International Sale of Goods -- CISG -- the German Supreme Court (BGH) had already in 1995, in the well-known case of mussels slightly tainted with cadmium, which could be sold and consumed under the food laws of the exporter's (seller's) country (Switzerland) but not -- allegedly -- under the food laws of the importing country (Germany), decided that the seller's laws apply.[3] The Austrian Supreme Court (OGH) had followed the German BGH.[4] On the other hand, however, a U.S. District Court reviewed an arbitration award in a case, where mammography devices imported from Italy, which did comply with Italian safety standards, but not with U.S. Governmental Safety regulations and, therefore, were seized by the FDA. The court held after a thorough analysis and discussion of the German BGH decision and its reasoning that the arbitrators in deviating from this decision had not "exceeded their powers ... in manifest disregard of the law," so that in the end the goods were regarded as not being in conformity with the contract, thus constituting a (fundamental) breach of contract by the Italian seller.[5] Legal writers also have objected to the German and the Austrian decisions.[6] It was with some anticipation, therefore, that one awaited the next case to be decided, which could give the German Supreme Court an opportunity to reconsider its opinion.

This opportunity came with the case reported and commented upon here. The court had to decide the variant -- varying from the Mussels case -- that in the seller's (export) country at the time of passing of risk (decisive for conformity or non-conformity under Art. 36(1) CISG) a public law restriction did not yet exist, but was issued only later, so that a strict application of the ruling in the Mussels case would have necessitated the conclusion that the goods, being in compliance with the laws of the seller's country at the decisive date, were, therefore, in conformity with the contract: The seller, a wholesale meat trader having its place of business in Belgium, had sold pork in April 1999 to a German merchant. This merchant, in turn, had resold the meat to another trader (obviously in Germany, too), to whom it was delivered directly, and who had resold and sent it to the final purchaser in Bosnia-Herzegovina. (Only) during the period of time when the meat (shipped in three installments in April and May) had arrived at its final destination in Bosnia-Herzegovina (June 1999) had the Federal Republic of Germany (on June 11, 1999) enacted a regulation on account of a widespread suspicion that pork of Belgium origin might be contaminated with dioxin; this regulation -- simplified here to its core results -- regarded Belgian pork produced during a certain period of time as not merchantable, unless administrative certificates to the contrary were issued and could be presented. The authorities of the European Union, too, issued a decree to the same effect, but it was not until July 28, 1999 that Belgium, i.e., the seller's country, enacted a respective regulation, providing for the seizure of meat. The German (first) buyer, sued for the purchase price, asserting as part of his defense that in Bosnia-Herzegovina, too, around the end of June/ beginning of July a regulation had been enacted prohibiting resale of Belgian pork unless a certificate testifying that the pork was free of dioxin were presented, and that the absence of such a certificate had resulted in a destruction of the meat by the authorities.

The Court of Appeals had regarded the pork as non-conforming with the contract, although at the time of passing of risk it was under the seller's, i.e., Belgian law, then still merchantable and usable; the suspicion of contamination with dioxin in itself was enough to render the meat unfit for use and, thereby, non-conforming. The Supreme Court, however, adhered verbally to its previous line in the Mussels case that the public law regulations in the seller's country were decisive (sub II.3.b), since it could not be expected of the seller to be knowledgeable about all regulations in the buyer's country or -- in case of direct delivery to a subpurchaser -- a third country. Strict application of this rule would have meant that the pork would have been in conformity with the contract at the time of passing of risk -- here under Art. 67 sentence 1 CISG --, for the Belgium regulation had been enacted only after this date. The court avoided this consequence of its former ruling, however, by arguing that non-conformity (at least in regard to two installments) existed already before the passing of risk, but could then -- only -- not yet have been detected; this, so the court reasoned, did not hinder its relevance, since, as Art. 36(1), 2nd half-sentence CISG states, "recognizability" of the non-conformity does not matter. The Belgian regulation showed that the suspicion of dioxin-contamination affected meat of animals slaughtered between January 15 and July 23, 1999, and, therefore, even before the date of passing of risk:

"That the suspicion became known and led in Germany, the European Union and in Belgium to administrative measures of precaution only weeks later, does not alter the existence of features, potentially harmful for the human health, at the time of passing of risk."

Therefore, it did not matter -- so the court went on -- whether the meat was indeed contaminated by dioxin. Only one installment, which was delivered on May 7, 1999, but was produced already on January 12, 1999, i.e., before the period of time, when the dioxin contamination had occurred, and which consequently was certified to be safe, had to be qualified as merchantable and, therefore, in conformity with the contract (so that the buyer had to pay for it).

II. The decisions elegantly avoids an open overruling of the holding in the Mussels case, but it cannot really conceal the change in direction: If non-merchantibility of the Belgian meat in European countries was caused already by the suspicion of its dioxin-contamination (and, therefore, non-conformity existed before the passing of risk), then the Belgian regulation and the date of its issuance, i.e., the public law requirements of Belgian law, did not matter at all. The Belgian regulation then, firstly, only confirmed the suspicion of contamination during a certain period of time and before passing of risk, facilitating its prove; secondly, the regulation proved that this suspicious meat was not merchantable and, therefore, not in conformity with the contract; thirdly and finally, it enabled the seller to prove -- if necessary -- that other installments were not tainted and therefore (presumably) conforming to the contract. In other words: Not whether and where public law enactments had regulated the merchantibility mattered, but (only) the non-merchantibility of certain installments on account of their being suspected of being contaminated by dioxin: "... for re-saleability and merchantability only the suspicion, which became obvious later and could not be refuted by the seller and which rendered the goods unfit for trading" were of importance (in regard to the meat produced during a certain period). Even if Belgium never had enacted the respective regulation: the suspicion of dioxin-contamination and the hindrance of resales in Europe of the affected meat resulting from this suspicion would have been enough to cause non-conformity under Art. 35(2)(a) and (b) CISG, if the meat was destined to be resold in Europe.

The decision states, therefore, that the suspicion of ingredients possibly harmful to human health and the resulting "non-saleability" in itself can constitute non-conformity regardless of whether the suspicion was, in the end, founded or not. Public law reactions to such a suspicion only facilitate the proof of the suspicion and of its consequences for the conformity or non-conformity of the goods. Since such suspicions occur frequently and -- often -- are widely spread by the media, the decision is of great importance for such situations. And one waits with great interest for a case, where the Supreme Court will have to decide on a suspicion, which has not led to public law regulations, but has, nevertheless, infringed the merchantability of the suspected goods.

Since the suspicion had spread throughout Europe -- i.e., to the seller's country as well as the countries of the buyer and the country of the pork's final destination -- the verbal incantantations of the ruling in the Mussels case and its citation in headnote a) of the decision, that the public law requirements in the seller's country were decisive,[7] were truly superfluous, if not misleading. Only if the suspicion and the resulting public law regulations would have arisen and, respectively, been enacted solely in the seller's country without impeding the use and resale of the meat in the purchaser's country or/and in the country of its final destination, would the ruling of the Mussels case had become decisive -- and it would have become obvious then that it could no longer be held up. Because: Why should the buyer have been entitled to refuse payment of the purchase price, if he could have delivered the goods into the country of their final destination and resold them there without any problems, the Belgian suspicions and enactments being without any adverse effects on the merchantibility of the goods in this country? The concern sometimes voiced that a seller must not export goods of lesser qualities to countries with lower standards, which perhaps even tolerate health risks for their population,[8] is certainly of high moral validity, but its enforcement is not a matter of sales law based on agreements of private parties and their autonomy to contract and to shape the content of their contracts.[9]

Questionable -- but again not to be decided here -- would have been the non-conformity only, if the meat were to be re-sold and delivered to a country, in which only such a suspicion had arisen and perhaps had triggered administrative measures there, thus preventing or infringing resale and use of these goods in that country alone. Unless the contract itself contained respective terms -- Art. 35(1) CISG --, the conformity or non-conformity would then be a matter of the implied agreements under Art. 35(2), in particular its (b) CISG. Here the argument of the German Supreme Court could carry weight that the seller need not always be aware of circumstances like public law regulations in the buyer's country or a third country of destination. The protection of the seller regarded as necessary, on which this argument is based, can be achieved, however, by the restriction of Art. 35(2)(b) in its second half-sentence, namely that the buyer could not reasonably expect the seller to know all and to adhere to all public law regulations or other local or regional (special) restrictions of merchantability, based, e.g., on tradition, customs or religious beliefs. In case of an all-European, perhaps even worldwide, suspicion of contamination by dioxin this exception certainly would not apply.

The decision annotated here should be, however, cause for re-consideration of the ruling in the Mussels case: Could the pork contaminated by dioxin and, therefore, not fit for human consumtion and not merchantable in the buyer's country as well as in the country of final destination nevertheless be regarded as in conformity with the contract, if the legislator and/or the administration in the seller's country would have not reacted at all, perhaps even -- not unthinkable -- in order to protect the interest of national exporters? Headnote a) of the decision, which emphasises the "re-saleability" (Wiederverkäuflichkeit) as decisive for conformity (although verbally claiming "to follow BGHZ 129, 75," i.e., the Mussels case), raises hopes that the turn-around has already been prepared. For "re-saleability" -- merchantability -- is determined by the circumstances and public law requirements in the buyer's country or -- in case of direct delivery to a sub-purchaser in a third country -- in the sub-purchaser's country. In the comparable case of goods encumbered with industrial or intellectual property rights of third parties, this principle is encoded in Art 42(1) CISG.


FOOTNOTES

1. The following comments are a translation of a German case note in Juristenzeitung 2005, 846-848. The translation deviates from the German original only where this seems to justified for linguistic reasons or to explain concepts not readily to be understood by a non-German reader or to give more references.

2. As to respective drafting proposals, cf. James M. Klotz/John A. Barrett, International Sales Agreements, An Annotated Drafting and Negotiating Guide, International Edition, Kluwer Law International, The Hague London Boston 1998, pp. 286-290.

3. BGH of March 8, 1995, BGHZ 129, 75, 81 = <www.CISG-online.ch> no. 144 [the Mussels case].

4. Cf. OGH April 13, 2000, IHE 2001, 117, 120 = <www.CISG-online.ch> no. 576.

5. Medical Marketing International, Inc. v. Internationale Medico Scientifica, S.r.l., U.S. District Court, E.D. Louisiana May 17, 1999, <www.CISG-online.ch> no. 387

6. Cf. Lurger, Die wesentliche Vertragsverletzung nach Art. 25 CISG, IHR 2001, 91, 99 et passim; Schwenzer in Schwenzer/Schlechtriem (eds.), Commentary on the Convention on the International Sale of Goods (CISG), Oxford University Press, 2nd ed. 2005, Art. 35a with further references in fn. 58; Schlechtriem, Vertragsmäßigkeit der Ware und öffentlichrechtliche Vorgaben, IPRax 1996, 388 et passim; idem in Internationales UN-Kaufrecht, Mohr (Siebeck) Tübingen, 3rd. ed. 2005, pp. 103-105.

7. Cf. for the non-controversial case, where the same public law regulations were in force in the export- and in the import-country, Schwenzer ibidem (supra fn. 6), Art. 35 para 17.

8. Cf. Hof s'Gravenhage (Netherlands) April 23, 2003, <www.CISG-online.ch> no. 903; the remarks are superfluous obiter dicta, for the flour (to be exported from Belgium to Mocambique), containing some cancerogenous chemical prohibited in the EC, was non-conforming under Art. 35 (1) CISG with the sales contract, for the contract expressly provided for "EEC flourwheat type Aigles du Nord with bread improver," thus clearly referring to EC health standards.

9. The EC or any nation could prohibit the export of such goods, making it a punishable crime to violate such a prohibition -- this would be the correct legal tool to take account of moral commandments.

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Pace Law School Institute of International Commercial Law - Last updated December 5, 2005
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