The Seller’s Liability in the Event of Lack of Conformity of Goods

Author:Age Värv and Piia Karu

1. Introduction - 2. The seller's liability according to German law - 3. The seller's liability according to Estonian law - 4. The seller's liability according to the CISG - 5. Conclusions

1. Introduction

If the seller delivers to the buyer goods not conforming to the contract, the buyer may resort to various legal remedies. In the case of consumer sale, the law of the EU member states has been harmonised by Directive 1999/44/EC 1 , under which the buyer may demand the repair or replacement of goods, to have the price reduced, or to have the contract rescinded. The directive does not regulate the issues of compensation for damages; according to its Recital 6, this directive's objective is to approximate national legislation governing the sale of consumer goods, without, however, impinging on provisions and principles of national law related to contractual and non-contractual liability.

In Estonia, issues regarding a contract of sale are governed by the Law of Obligations Act 2 (LOA), in which the regulation of the contract of sale mainly derives from the United Nations Convention on Contracts for the International Sale of Goods 3 (CISG) and the German Civil Code 4 (BGB). According to the LOA, strict liability is applied as a rule upon breach of contract, which means that the obligor is released from liability only in cases of force majeure. The legal literature in Estonia has adopted a position regarding the contract of sale that the seller who has delivered to the buyer defective goods cannot be released from liability even in cases of force majeure, which essentially means the seller's absolute liability.

The authors of this paper believe that such interpretation stems from the Estonian legislator not having taken account of Recital 6 upon the transposition of Directive 1999/44 - in this case, in the part that excludes the impact of the directive on the national principles related to contractual liability. There is no uniform regulation of the liability of an obligor in breach of contract in the Member States regarding either the content of damages or the standard of liability to be applied 5 , and that is why the extent of the seller's liability may vary from one Member State to another. On the one hand, it need not be acceptable from the standpoint of consumer protection; on the other hand, though, empirical studies 6 show that differences in the laws of the Member States may also produce problems for entrepreneurs. 7

The authors of this paper are of the position that, even if the seller's absolute liability could be justified on grounds of consumer protection, such a rigid approach is still not appropriate. The paper shows that the recognition of the seller's absolute liability may at least in certain cases lead to an unjust result. For that purpose, the paper sets out to examine the standard for liability of a seller delivering to a buyer a defective movable in the Estonian and German law and in the CISG as exemplified by the following case 8 :

A buyer buys from the seller a two-month-old puppy. Four months after the delivery of the puppy, it becomes evident that the dog has an anomaly of the ankle in a hind leg, which would lead to excessive bowleggedness in the dog. Such an ankle can be treated in a surgery during which a metal plate is inserted in the dog's leg. The metal plate is permanent and, because of this, the dog has to be taken to the veterinarian twice a year for check-ups from that moment on. The cost of the operation exceeds the sales price of the puppy more than twofold. The buyer demands from the seller compensation for the price of the operation and the cost of the two checks each year. Does the seller have to compensate for the damages?

2. The seller's liability according to German law

In the BGB, the general issues related to legal remedies are regulated in the general part; §§ 434-435 govern the lack of conformity of a thing, and § 476 addresses the risk of accidental destruction and damage of a thing in relation to its delivery to the buyer. The legal remedies that the buyer can apply in response to a seller who has delivered defective goods are listed in § 437, found in the special part, Clause 3 of which sets out the buyer's right to demand compensation for damages according to §§ 440, 280, 281, 283, and 311a.

Section 280, contained in the general part, is central to the issue of compensation for damages; according to its Subsection 1, if the obligor breaches a duty arising from the obligation, the obligee may demand damages for the damage caused by the obligor, except if the obligor is not responsible for the breach of duty. According to § 276, 'responsibility' may refer to the obligor's intentional act or negligence (that is, fault-based liability), or also the obligor's higher degree of liability if the obligor has given a guarantee or assumed a procurement risk. The provision of a guarantee presumes a relevant agreement 9 or other circumstances based on which one may infer that the seller has given a guarantee (for example, previous advertising of the goods). 10 Subsection 276 (2) specifies that a person acts negligently if he fails to exercise reasonable care - for this reason, the courts apply an objective standard in evaluation of the culpability of a person, proceeding not from the usual knowledge and abilities of a particular obligor but from those of a person acting in the field. 11

Three types of claims for compensation for damages are distinguished among on the basis of BGB § 280: compensation for damages along with the claim for the performance (Schadenersatz neben Leistung, § 280 (1)), compensation for damages caused by the obligor's delay in performance (§ 280 (2)), and damages in lieu of performance (Schadenersatz statt Leistung,§ 280 (3)). 12 The buyer can request the last if the seller has not cured the goods during an additional period set by the buyer or the curing of the defect is excluded according to § 275 (for example, curing the defect is impossible). In such a claim, the obligor's liability is specified by BGB § 311a (2): if the circumstance that excludes the performance was already present at the time of entry into the contract, the obligation to compensate for damages is excluded if the obligor was not aware of the obstacle to performance when entering into the contract and is not responsible for his or her lack of awareness.

This means that a claim for the compensation of damages can be considered only after the seller is deemed responsible for the circumstances because of which the defect cannot be cured (the seller being aware of or having to be aware of the defect and the impossibility of cure in itself do not give reason for the claim for the compensation of damages 13 ).

In the case described above, the buyer claimed that the anomaly of the ankle of the dog was caused by a genetic abnormality and concluded that the defect existed already at the time of the delivery of the puppy. According to BGB § 90a, animals are not things but they are governed by provisions that apply to things. The court (the Bundesgerichshof, or BGH) noted that the anomaly of the dog's hind leg could be thus regarded as a defect under BGB § 434. The court established that if the defect was indeed caused by a genetic abnormality, the seller could not cure it - it would be possible to avoid the excessive bowleggedness of the dog via a surgery but the genetic abnormality could not be removed. As a result, only the buyer's claim for damages in lieu of performance (under the Schadenersatz statt Leistung) could be considered and the seller has to compensate for damages only when responsible for the circumstances that render curing the defect impossible.

The court noted that, in the case at hand, it was questionable whether a seller raising dogs as a hobby was an entrepreneur as defined in BGB § 14, which would mean that the contract being disputed could be regarded as consumer sale and that would entail the seller's obligation deriving from BGB § 476 to prove that the defect appeared after the dog was delivered to the buyer. At the same time, the court noted that the issue was not decisive in the dispute since the buyer's claim for compensation for damages was excluded anyway.

The BGH established that the buyer could not demand compensation for damages from the seller because the seller was not responsible for the defect under the BGB's § 437 (3), the second sentence of § 311a (2), and the second sentence of § 280 (1). The BGH first substantiated its judgement by asserting that it had not been proven that the seller had provided a guarantee regarding genetic defects of the dog.

The BGH also established that the seller was not liable for the genetic abnormalities of the dog (§ 280 (1)) if said seller could not be blamed for negligence in breeding - in other words, provided that the seller had proceeded from breeding principles based on contemporary law and experience. The BGH concluded that, since the seller was a recognised expert in dog breeding in Germany and had decades of experience in it, selling nearly 50 puppies each year both in Germany and abroad, there was no reason to presume that the seller had acted contrary to the above-mentioned principle.

In addition, the BGH mentioned that the seller who had pursued dog raising and breeding as a hobby for 30 years prior to the case at hand did not notice the puppy's abnormality before it was delivered to the buyer and that the defect was discovered by the veterinarian (i.e., a specialist) hired by the buyer only four moths later. Also, the buyer had had the veterinarian examine the puppy several times. Even if the alleged genetic problem could be detected in a puppy of two months' age via a relevant X-ray, for example, the seller could not be expected to carry out such a test without an obvious need. Hence, the BGH concluded that the seller had been unaware of the genetic problem of the puppy...

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