Hanseatisches Oberlandesgericht Hamburg 26 November 1999

Translation [*] by Annemieke Romein [**]

Translation edited by Dr Loukas Mistelis [***]
Judgment of the Hamburg Court of Appeal
In the name of the people
In the matter of:
a Brazilian plc. [Seller], Plaintiff in first instance, Defendant in appeal vs. Ms. X
[Buyer], also acting under the name Textil Import-Export, Defendant in first instance,
Plaintiff in appeal
The Court of Appeal Hamburg, first civil chamber has held, pursuant to the oral
hearing held on 5 November, that:
- Pursuant to the appeal of [buyer], the judgment of the District Court [Landgericht]
Hamburg, Chamber 11 for business cases, is reversed:
- The action is denied.
- [Seller] is ordered to pay the costs of the proceedings.
- The judgment is provisionally enforceable.
- [Seller] may prevent execution by providing security or by depositing DM
19,000.if [buyer] does not provide security itself in same amount before execution.
- The judgment charges [seller] with DM 70,002.80.
Facts
The Brazilian plaintiff [seller] claims payment from defendant [buyer], a textile trader
in Hamburg, for two deliveries of jeans trousers, alternatively payment of the surplus
gained by [buyer] from the sale of the goods, by which sale [buyer] took justice into
its own hands. [Buyer], on the other hand, claims avoidance of the contract on the
ground of breach of contract by [seller] and sets off [seller]'s claim for payment
against a claim for damages for defective delivery, i.e., delivery of poor quality.

[Seller]'s legal predecessor, company X S.A., produced textiles by order of its

customers under customers brand and label. [Buyer] especially sells jeans under its
own label "Shamo". These jeans are mostly produced in countries with low wages,
according to its own specifications.
After several deliveries, defendant/buyer ordered approximately 17,000 ladies and
mens jeans on 11 and 14 January 1993, enclosing extensive production specifications
(compare Exhibit B.1). Delivery was supposed to take place between the end of
February and the end of March 1993. [Buyer] received both deliveries, which are the
subject matter of this dispute, in May 1993 by air carriage. [Buyer], who had
cancelled the first order after unsuccessfully setting time limits because of delays in
delivery (compare Exhibit B.3), accepted the goods at seller's request. [Seller]'s legal
predecessor billed [buyer] for the first delivery of supposedly 8,900 jeans by invoice
of 19 April 1993, amounting to US $75,183.00 (Exhibit K 1 A) and for the second
delivery of supposedly 8,160 jeans by invoice of 5 June 1993 amounting to US
$69,664.00 (Exhibit K 1 B).
By fax of 17 May 1993 (Exhibit B 4) [buyer] confirmed to have received two
deliveries of 890 + 816 cartons of jeans during the previous weeks. In the case of the
second delivery however, six cartons were missing; this was also the case with the
packing list which was not enclosed with the second delivery. Moreover, [buyer]
found upon opening of the cartons that a lot of jeans were labelled with the wrong size
tag so that [buyer] had to re-measure the size, which caused much extra work.
Because [buyer] was allegedly still occupied with controlling the goods, it could not
sell the jeans and thus the invoice cannot be paid until it has determined which costs
are incurred as a result of this.
By fax of 19 May 1993 (Exhibit B 5) [buyer] reclaimed again and proposed to
[seller]'s sales manager to come to Hamburg and check the deliveries himself. This
proposal was not followed.
By fax of 1 September 1993 (Exhibit B6) [buyer] completed the list, which indicates
all defects [and problems relating to the deliveries].
By fax of 10 September 1993 (Exhibit K 3) [buyer] offered to pay US $71,534.63 if
[seller]'s legal predecessor would acknowledge the counterclaim for defaults in
delivery mentioned in the debit notes (Exhibit K 4). The parties did not reach an
agreement. By fax of 22 September 1993 (Exhibit B 9) [buyer] informed [seller], inter
alia, that it could collect the goods at any time, that [buyer], did not have sufficient
storage room and could not store the goods any longer. Since the goods were not
collected, [buyer] sold the major part of the goods between April 1995 and November
1996.

In connection with [buyer]'s claim for damages in set-off against [seller]'s claim, the
parties have stated undisputedly that the average sale price per pair of jeans would
have amounted to DM [Deutsche Mark] 24.95 and [buyer]'s lost profit would have
amounted to 5% of the net sale price.
[Seller] pleaded: Contrary to [buyer]'s argument, the jeans were delivered according
to contract. The price was US $8.75 per pair of jeans, excluding the 1,460 men's jeans
stated on the invoice of 19 April 1993 for which a price of US $7.35 was agreed. The
goods did not show signs of damage, the jeans were not cut or damaged in any other
way. Moreover, [buyer] did not claim damages immediately or within a reasonable
period. It would also be wrong to say that [buyer] only accepted the goods under
explicit reservation of all of its rights. [Buyer] did not file counterclaims until three to
four months later, namely by fax of 10 September 1993 (Exhibit K 3).
[Seller] requests: That [buyer] be ordered to pay [seller] US $145,495.00 plus 4%
interest since the date of filing of the claim.
[Buyer] requests: That the claim be denied.
[Buyer] pleaded: On the one hand, [seller] has charged it too high a price, as it
follows from the listing submitted in the proceedings as Exhibit B 21; the agreed price
amounted to only US $7.90 respectively, $6.50. On the other hand, the amount of
jeans delivered was less than the amount of jeans billed.
More specifically, [buyer] is not obliged to pay the purchase price since the jeans
showed defects. On the contrary, it is for this reason entitled to claim compensation
for damages, which supersede the claim for the purchase price and which can be setoff against that claim. [Buyer] inspected the goods at random after delivery on 10 and
13 May 1993. The part examined turned out to be defective. These complaints were
communicated by fax of 17 May 1993 (Exhibit B 3). The examination of the complete
delivery of jeans took some time because every pair of jeans had to be re-measured.
During this examination, it became clear that every single pair of jeans from both
deliveries was defective. The paper labels with respect to size attached to each pair of
jeans did not correspond with the textile size labels stitched into the jeans. All jeans
were one size or two sizes too big or too small; 80 to 90% of the cartons were labelled
in such a way that the size could not be determined, neither from the paper labels nor
from the textile labels nor from the actual size; all legs were one or two sizes too long;
and the other sizes, such as waist, turned out to be not in accordance with the contract
specifications, so that the jeans could in total be classified as wrongfully cut.
Moreover, some parts were affected by fungus/mould or were stained with bleach, so
that these jeans would have to be disposed of anyway.

The offer to pay a remaining amount of US $71,534.63 upon acknowledgement of the

debit note, was made before [buyer] had an opportunity to gain clear knowledge of the
extent of the defaults. When the legal predecessor of [seller] did not respond to the
settlement offer, [buyer] informed [seller] by fax of 22 September 1993 that the goods
could be collected at any time. [seller]'s legal predecessor responded by saying that it
was willing to solve the problems in a commercial manner, but only after settlement
of both disputed invoices in full.
Because of increasing storage problems, [buyer] announced that it would initiate a
special sale of jeans of all second class quality, in order to cover its costs, if [seller]'s
legal predecessor did not suggest another solution. In the end, [buyer] disposed of
1,582 jeans infected with fungus and sold the remaining 15,419 jeans as special items
of second class quality to mainly the Czech Republic with a total loss of DM
91,225.35.
By regular sale it would have gained DM 24.95, which is uncontested, for 17,001
jeans delivered in conformity with the contract, in total DM 424,174.95. The pure
profit would have amounted to 5%, which is also uncontested, therefore in total DM
21,251.55. The loss was increased by the fact that the exchange rate of the dollar since
its rate of DM 1.50 increased in the meantime.
Moreover, the claim for the purchase price has become time-barred.
In its judgment of 23 December 1998, the District Court upheld the claim for DM
70,002.80 plus 4% interest since the day of starting proceedings, after proof was
submitted by hearing witness X. The reason behind this was that the claim for the
purchase price under the provisions of the applicable United Nations Convention on
Contracts for the International Sale of Goods of 11 April 1980 (hereinafter referred to
as CISG) had lapsed. The evidence showed that the [seller] committed a fundamental
breach of contract because the goods did not meet the contractually agreed quality
requirements. The [buyer] timely notified the breach of contract pursuant to article 39
CISG and timely issued a statement of avoidance pursuant to article 49(2)(a) CISG.
As a consequence of the valid avoidance of the contract under article 49(1)(a) CISG,
the [seller] lost its right to payment of the purchase price under article 81(1) CISG.
The [seller] does, however, have a claim for payment of the profits which were
generated out of the sale by way of taking justice into its own hands, under article
88(3), second sentence, CISG in the amount of DM 70,002.80. The obtained surplus
amounted to DM 91,255.35, but the claim for payment of the surplus is balanced with
[buyer]'s lawful claim for damages under articles 45, 74 CISG to the amount of DM
21,151.55. [Buyer] would undisputedly have gained a profit of 5% of the sales price,
which would have led to an amount of DM 21,251.55 at the total sales price of DM
424,174.95. [Buyer] does not have any further claim for compensation for damages.

The interest claim is justified under article 74 CISG in connection with 288 BGB
(German Civil Code).
[Buyer] appealed the above judgment of the District Court which was served upon it
on 4 January 1999, with a writ which was delivered on 4 February 1999 and which
was substantiated with a statement of 2 March 1999.
The [buyer] pleads: The appealed judgment is incorrect because the amount of
damages awarded to [buyer] under article 74 first sentence CISG is set too low. The
claim for damages is not in any way consumed with [seller]'s counterclaim for
payment of the sale surplus by way of taking justice into its own hands, as the District
Court calculated lost profit by taking 5% of the gained profits of the proceeds of sale.
On the contrary, [buyer] could claim damages for breach of contract on the grounds of
the delivery of defective goods by [seller]. In calculating the damages for nonperformance [breach] of contract, it is assumed that [buyer] could have gained profits
in the amount of DM 424,174.95 by selling the goods that were not in default, from
which amount the price should be deducted, which price [buyer] should have paid to
the [seller] had the contract been fulfilled ordinarily; this leads to a difference of DM
221,152.40 at a dollar exchange rate of DM 1.52, which would lead to damages for
[buyer] in the amount of DM 203,022.55 caused by not fulfilling the resale. If one
would assume that approx. DM 21,000.- of this amount would be pure profit, then the
remaining amount of approx. DM 183,000.- accrues to [buyer] as general expenses of
[buyer]. The damages, lost profits included, amount to approx. DM 203,000.-, which
amount exceeds [seller]'s claim by DM 91,255.35 and thus [seller]'s claim has expired
by way of the explained set-off. Even if the uncontested price and profit data only
concern average figures and therefore only approximate amounts, it has been
sufficiently proven that [buyer] has suffered damage by the imperfect delivery, which
damage supersedes in any case [seller]'s claim for payment. In this respect there is no
need for a penny-precise calculation of the damage. As a consequence, the appealed
judgment should be amended and the claim denied.
[Buyer] claims: To amend the judgment of the District Court [Landesgericht]
Hamburg dated 23 December 1998 and to fully dismiss the claim.
[Seller] claims: To dismiss [buyer]'s appeal.
[Seller] pleads: The Hamburg District Court has, in as far as it allowed the claim,
ruled correctly. The District Court has clearly explained that [buyer] did not prove to
have more damage than the net profit, increased with some increased employment
costs for extensive inspection of the goods or extra storage costs. It remains
undisputed that [buyer] would have earned only DM 21,000.- with the entire deal

anyway. It is to be disputed that [buyer] actually incurred general costs in the amount
of DM 183,000.- and could not cover these costs with the claimed loss of income.
Moreover, it is pointed out as a precaution that, contrary to the argumentation, in the
judgment of the Hamburg District Court the claim for the purchase price has not
lapsed and is justified in the amount of, as ordered by the District Court, DM
70,002.80. The District Court has leaned too heavily on the statement of witness [X],
who worked for a long time for [buyer], to establish a fundamental breach of contract.
It is not correct that the goods were by-and-large not in conformity with the agreed
quality. In any case, [buyer] has lost by way of lapse of time the right to claim breach
of contract for non-conformity of the goods. A period of two or three weeks would
anyhow have been appropriate; the examination of the goods should not have taken
months. In this respect, the declaration of avoidance of the contract was not submitted
within the proper time limit.
Furthermore, [seller] disputes the argument of period of limitation for legal remedies
and claims for damages. Pursuant to article 3 of the Approval Act of 5 July 1989 to
CISG, claims of the seller for breach of contract become time barred within six
months after the delivery of the goods under 477, 478 German Civil Code. The
Approval Act does not mention 479 German Civil Code thus [buyer] is not allowed
to set-off a possible claim for damages in spite of 478 German Civil Code.
Taking the above into consideration, [buyer]'s appeal must remain unsuccessful.
Due to further details with respect to the facts and the dispute, reference is further
made to the explained content of the reciprocal submitted pleadings of both parties
and Exhibits thereto.
Grounds for the decision
I. The appeal filed by [buyer] is admissible, is filed in accordance with formal
requirements, is sufficiently accounted for and filed within the time limit, and is
successful. The [seller] is not entitled to the payment as claimed from [buyer]. The
[seller] wrongfully disputes in appeal the fact that the Hamburg District Court did not
allow its claim for the purchase price (see 1.). [Seller] is furthermore not entitled to
the awarded claim for the profit gained by [buyer] by reselling the defective goods in
the amount of DM 70,002.80 exclusive legal interest of 4% which was awarded to it
by the District Court. This claim is fully set-off against [buyer]'s claim for damages on
the ground of non-performance ex articles 45, 74 CISG (see 2.).
1. The District Court correctly denied [seller] in first instance its primarily stated
claim for payment of the purchase price of the jeans ordered by [buyer]. [Seller]'s

objections in appeal are dismissed. [Seller]'s claim for the purchase price has lapsed in
accordance with article 81(1) CISG on the ground that [buyer] pursuant to article
49(1) CISG rightfully avoided the contract.
[Seller] has committed a fundamental breach of contract under articles 25, 35(1)
CISG. The breach results from the fact that the goods delivered by [seller] did not
comply with the contractually agreed quality. In so far as [seller] argues that the
District Court has come to the wrong conclusion because of procedural mistakes in
that the Court followed without question the testimony of witness X, who was
employed with [buyer] for a long time, this objection is denied. The circumstance that
the witness was an employee of the [buyer] does not justify attaching no probative
value whatsoever to his testimony. This is especially the case against the background
that his testimony is consistent with undisputed elements of the course of events and
that [seller] has not brought forward concrete facts that the explanation of the witness,
which is trustworthy according to the appraisal of the District Court, should not be
followed.
Also [seller]'s objection that the [buyer] did not sufficiently specify the defect and
provide notice of it within the time limit, is unjustified. The District Court thoroughly
dealt with this objection of [seller] in its judgment. The Court of Appeal
[Oberlandesgericht] concurs. With respect to the motivation, reference is made to the
relevant arguments in the appealed judgment (compare page 8 et seq. of the
judgment). More specifically, there are no grounds to allow [seller] to have the period
for functional inspection of the goods as argued by [buyer] verified by a surveyor for
appropriateness.
When one assumes that [buyer] was entitled to wait until the beginning of September
1993 with the checking of the goods, then the notification of avoidance as required by
article 49(1) CISG dated 22 September 1993 (compare Exhibit B 9) was also in time
in the sense of article 49(2) CISG. As a consequence of the timely declared avoidance
of the contract, [seller] has lost its claim for the purchase price, article 81(1) first
sentence CISG.
2. [Seller] is also denied its claim for payment of the proceeds of the resale of the
goods which [seller] did not take back as allowed by the District Court. Although
[buyer] is obliged under article 88(3). second sentence, CISG to pay [seller] the
balance which it achieved by the sale in the amount of DM 91,255.35, this claim for
payment has lapsed by the set-off declared by [buyer] against the claim for damages
for breach of contract under articles 45, 74 CISG (see also b).
a) Pursuant to article 88(3) 2nd sentence CISG, the [buyer] is obliged to pay
[seller] the proceeds it gained out of the resale of the goods which are the

subject of dispute. [Buyer] has submitted Exhibits B 10 - B 18 as evidence of

the proceeds gained from the sale and has summarized the calculation methods
in the specifications pursuant to Exhibits B 19 and B 20. From these documents
a total profit of DM 91,255.35 (compare Exhibit B 20) gained by [buyer] can
be deduced. [Seller] has not submitted specified objections against this
statement. On the other hand, [buyer] has not demonstrated that it was entitled
to deduct further costs such as agent costs or carriage costs as meant in article
88(3), first sentence, CISG from this amount. [Seller] had in this respect a
claim for payment of DM 91,255.35 under article 88(3), second sentence,
CISG.
b) [Seller]'s claim under article 88(3), second sentence, CISG has lapsed by
way of the declared set-off of [buyer] against a claim for damages for breach of
contract under articles 45, 74 CISG which claim [buyer] retained
notwithstanding the avoidance of the contract (compare article 81(1), first
sentence, CISG).
[Buyer]'s claim for damages on the ground of breach of contract by [seller]
under article 74, first sentence, CISG exceeds the claim for payment of the
excess profits in the amount of DM 91,255.35. As a consequence, [seller]'s
claim for payment has lapsed completely by set-off.
The damages which [seller] must pay on the grounds of breach of contract are
not limited to the lost profit under article 74 CISG, but fundamentally
comprises the total damages caused by non-performance (compare
Staudinger/Magnus, 13th edition 1994, article 74 CISG, paras. 20 et seq.).
[Buyer] can claim as damages for breach of contract the difference between its
interest in fulfilment of the contract and the costs saved by not having to do
something in return. Contrary to the context of article 76 CISG which allows
falling back on the market price, this difference can basically be calculated in a
concrete manner (compare Staudinger/Magnus, op. cit. article 74 CISG, para.
25). Since it is undisputed between the parties that [buyer] received proceeds in
the amount of DM 424,174.95 from the resale of the delivered undamaged
goods, the price difference in the purchase price to be paid by [buyer] to itself
amounts converted to DM 212,152.40 to 203,022.50. The difference in the
amount is the basis of the calculation of the damages for breach of contract,
which damages [seller] owes [buyer] (compare for calculation of damages on
the side of seller for non-purchase by the buyer BGHZ 107,67,69 et seq.).
[BGH = Bundesgerichtshof = Federal Supreme Court of Germany; BGHZ =
official collection of BGH judgments in civil matters. The cited case is dated 22
February 1989.]

Contrary to the view of the District Court, the claim for damages is not limited
to 5% of the net profits gained by the resale as is undisputed between the
parties. It is not correct that the costs which [buyer] saved by the nonperformance of [seller] also comprise the so-called basic salary [N.B. this
comes from the Latin fixum: basic salary] costs (general expenses), i.e., those
expenditures which are connected with maintaining a company ready for
operation, maintaining/preserving the installation and distribution complex and
the operational management. The Federal Supreme Court of Germany
explained in the above mentioned judgment of 22 February 1989 (BGHZ
107,67,69) that for calculation of the damages suffered by the seller caused by
non-purchase of the buyer, it is correct that also basic costs form part of seller's
price calculation; however, it should not be overlooked that we should put the
seller by way of payment of damages for breach of contract in such a position
which it would have had if the buyer would have fulfilled its obligations
correctly; in this respect the party who is obliged to pay damages must explain
and if necessary give evidence that if the contract would have been fulfilled
correctly, the basic costs would have been higher than the costs for actual not
taking over of the goods.
This argument is valid because it is assumed that general company expenditures
generally arise. This Court sees therefore no reason not to apply the reasons
expressed by the Federal Supreme Court of Germany for calculation of
damages for breach of contract by the seller in case of non-acceptance of the
goods by the buyer to the case in which the buyer can claim damages for
imperfect delivery. This Court finds itself to be in line with the judgments of
the Court of Appeal [Oberlandesgericht] Stuttgart of 13 December 1956 (JR
1957, 343, 344) and of the Court of Appeal [Oberlandesgericht] Mnchen of
28 August 1958 (MDR 1959, page 300), which judgments already applied these
principles for calculation of damages claimed by the buyer for breach of
contract by the seller, before the above mentioned judgment of the Federal
Supreme Court [Bundesgerichtshof] of Germany.
Consequently, the basic costs (general expenses) may not be deducted from the
price difference between sale and purchase price in the amount of DM
203,022.55, and thus in any case there remains an amount which exceeds
[seller]'s claim with DM 91,255.35 and this amount is susceptible for
compensation of the damages. To be deducted from the amount of DM
203,022.50 are VAT [Value Added Tax], which leads to a deduction of approx.
DM 176,500.-, and further only the special expenses which arose for [buyer],
i.e., such costs which are involved with accepting and reselling the goods
bought from [seller]. Irrespective of the fact that [buyer] in the present case
would have to bear part of these special expenses anyway, it does not show nor

it is proven by [seller] that the costs which [buyer] saved by not fulfilling this
deal, exceed the amount of DM 80,000.-.
Even if one would deduct the present special expenses by net 40% of the
purchase price or 20% of the sale price, which would be very generous indeed
(compare Court of Appeal [Oberlandesgericht] Stuttgart JR 1957, 343, 344
where the special expenses were estimated at 20% of the purchase price) this
would lead with approx. DM 77,000.-, or just DM 74,000.- -- to an amount
which, if saved would not lead to such a reduction in the amount of damages
which can be awarded to [buyer], that it would not lead to the amount as
claimed by [seller] against which claim [buyer] has set-off its own claim.
If one would deduct from the remaining difference between the purchase and
sale price in the amount of approx. DM 176,500.- (after deducting VAT) the
estimated special expenses in the amount of DM 80,000.-, then there would still
remain a claim for damages in the amount of more than DM 95,000.-, thus
exceeding [seller]'s claim amounting to DM 91,255.35, as a consequence of
which the set-off as declared by [buyer] causes [seller]'s claim to lapse
completely.
[Seller] argues in response without success that [buyer]'s claim has become
time-barred.
[Buyer] is not only entitled to set-off the claim for damages for breach of
contract against the purchase price, but also against the claim for payment of
the profits from the sale (by taking the law in its own hands) under article
88(3), second sentence, CISG. The set-off is considered a general principle in
the meaning of article 7(2) CISG in any case in so far as two reciprocal claims
arising from the Convention are facing each other (compare
Staudinger/Magnus, op. cit., article 81 CISG, para.15 and article 4, para. 46
with further references). It remains to be seen whether [buyer]'s right to retain
the profits of the sale for reasons of having a claim for damages against [seller]
can be derived directly from the Convention (in this way
Staudinger/Magnus, op. cit. article 88 CISG, para. 25, similar
Herber/Czerwenka, UN-Kaufrecht 1991, article 88, para. 8) or whether the setoff is dealt with by the applicable national law (compare v.
Caemmerer/Schlechtriem/Eberstein, UN-Kaufrecht, 2nd ed. 1995, article 88,
para. 32). Also on the grounds of the applicable national law, [buyer] has
maintained its right by way of timely notification of defect under 479 German
Civil Code to set-off its claim for damages for breach of contract against the
claim for payment of the exceeding profits from the sale. Contrary to [seller]'s
view, it remains irrelevant that article 3 of the Convention Act of 5 July 1989

on the CISG with respect to the question of the period of limitation only refers
to 477, 478 German Civil Code and not to 479 German Civil Code; then
these paragraphs only determine the period of limitation for claims arising out
of non-conformity of the goods, and not for claims to set-off.
II. [Seller] as the party against whom the Court ruled is ordered to pay all costs
of the proceedings.
Other (additional) judgments follow from 708 no.10, 711 Civil Procedural
Code. 546 Civil Procedural Code demands the fixture of the efforts.