Definition and Fundamentals of Cover Purchase
Der Cover Purchase is a legal term from German contract law that is of essential importance in the context of statutory claims for damages in case of performance disruptions under sales law. A cover purchase occurs when the buyer of goods, after withdrawing from the contract or rejecting a defective performance, purchases the owed item elsewhere—such as from a third party—and claims the costs incurred to compensate his loss from the original seller. The cover purchase thus represents a key instrument for damage mitigation (damage minimization) and damage calculation in sales law.
Legal Principles of the Cover Purchase
Statutory Basis
The legal basis for the cover purchase is found in particular in §§ 280, 281, 283, 437 no. 3, 440, and § 326 BGB (German Civil Code). It is closely linked to damages in lieu of performance. In the event of a breach of duty by the seller—for example, non-delivery, late delivery, or delivery of defective goods—the buyer may, after unsuccessfully granting the seller a reasonable period for supplementary performance or if such a period is exceptionally unnecessary, withdraw from the contract and fulfill his duty to mitigate damages by executing a cover purchase.
Requirements for a Cover Purchase
The prerequisites for a permissible cover purchase are in particular:
- Performance Disruption: The seller has either not performed the owed service at all or has performed it non-contractually (for example, non-delivery, delay, or delivery of a defective item).
- Setting of a Deadline: The buyer must generally grant the seller a reasonable period for supplementary performance (§ 281 para. 1 BGB), unless setting a deadline is exceptionally unnecessary.
- Withdrawal or Rejection: The customer must exercise their right of withdrawal or finally reject the defective performance.
- Execution of the Cover Purchase: The buyer acquires a similar, but often more expensive, item from another supplier to meet their needs.
- Causality and Amount of Damages: The additional amount incurred by the cover purchase (cover purchase price minus original purchase price) must have been causally caused by the seller’s breach of duty.
Legal Effect and Basis of Claim
The cover purchase puts the buyer in a position to claim the additional expenses incurred as damages. The legal basis for this is in particular § 281 para. 1, para. 2 in conjunction with § 280 para. 1 BGB (in case of delay or non-performance) or § 437 no. 3, § 440 BGB (in case of material defects). The difference between the original purchase price and the higher price paid for the cover purchase represents the compensable damage.
Example:
Buyer K purchases a computer from seller V at a price of 1,000 euros. V does not deliver despite a deadline and K’s withdrawal. K purchases an identical computer from retailer H for 1,200 euros. K can demand the difference of 200 euros as damages from V.
Functions and Limits of the Cover Purchase
Functions
- Damage Mitigation: The cover purchase is a means of fulfilling the obligation to minimize damage (cf. § 254 BGB), as the creditor (buyer) is expected to avoid greater losses (e.g., production stoppages) through rapid replacement purchase.
- Calculation of Damages: The actual price paid during the cover purchase serves as an objective basis for determining damages.
Limits
Certain limits apply to recognizing the cover purchase as a measure entitling to damages:
- Reasonableness of the Price: The replacement purchase price may not be unreasonably high; the injured party must, according to § 254 BGB, limit the effort and price of the replacement purchase to a reasonable amount.
- Timing of the Cover Purchase: The cover purchase must take place within a reasonable period in connection to the breach of duty and withdrawal.
- Comparability of Goods: The goods acquired through the cover purchase must be comparable to those originally owed. For differing products, there is no full entitlement to damages.
- Right of Choice: The buyer is not obliged to make a cover purchase, but may also claim other compensation (e.g., loss of profit).
Cover Purchase in Relation to Other Methods of Damage Assessment
The cover purchase is a form of concrete damage assessment. Alternatively, the injured party may also calculate damages on a notional basis, i.e., according to the market price for procurement (abstract), if no actual purchase has taken place. However, the concrete cover purchase takes precedence if a purchase has actually been made.
Cover Purchase in Case of Defective Delivery
Liability for Material Defects
In cases of material defects, the buyer also acquires the right to a cover purchase after withdrawal and failed supplementary performance (cf. § 437 no. 3, § 280, § 281, § 440 BGB). The buyer may claim the additional expenses required to procure a defect-free item as damages.
Assertion and Proof
The buyer bears the burden of presentation and proof for the requirements of the cover purchase, particularly for breach of duty, withdrawal, execution of the replacement purchase, reasonableness of the purchase price, and the extent of damages.
Cover Purchase in International Sales Contracts
In international contracts of sale, such as under the UN Sales Law (CISG), the cover purchase is regulated in Art. 75 CISG: Here too, the injured party can claim damages equal to the difference between the cover purchase price and the contract price, provided the cover purchase is made in a reasonable manner and within a reasonable time.
Distinction from Other Legal Institutions
The cover purchase must be distinguished from the Right to Self-Remedy (§ 637 BGB) in contracts for works and services, where the customer commissions a third party to remedy defects instead of the contractor. There are also clear differences to withdrawal without damages and to compensation for lost profit.
Special Features of the Cover Purchase
Public Tenders and Cover Purchase
Especially in procurement law, the question arises as to whether and to what extent the principal may conduct a cover purchase in the event of performance disruptions. Special form requirements and thresholds apply here, which may make a cover purchase possible but, in practice, more complex.
Tax Treatment
A cover purchase may have consequences for VAT and income tax, as the additional expenses and compensation claims must be properly recorded in accounting.
Summary
The cover purchase is a central legal concept in German sales law, enabling the buyer, in the event of a performance disruption, to protect his financial interests through a claim for damages. The prerequisite is that, after withdrawal, he acquires comparable goods from a third party in order to assert enforceable additional costs as damages against the original seller. Attention must be paid to the reasonableness of the price and timing, as well as the fundamental comparability of the goods purchased. Comparable regulations also exist in international law, whereby the specific circumstances of the individual case are always decisive.
Frequently Asked Questions
Who is liable for damages in the context of a cover purchase?
In the context of a cover purchase, it is generally the original seller who is liable for damages, provided they have breached their obligation under the purchase contract, e.g., by non-performance or poor performance (delay or delivery of defective goods). The buyer must have granted a reasonable grace period to the seller or such a period is dispensable under statutory provisions (§ 281, § 323 BGB). If a cover purchase is made after the deadline has expired or after unsuccessful rectification/remedy of defects, the buyer may claim compensation for the additional costs (difference between the original and cover purchase price) and any further expenses caused by the breach of contract from the original seller. A prerequisite is always that the breach of duty can be attributed to the seller, for example, not in cases of force majeure or contributory negligence by the buyer.
Must a grace period always be set before a cover purchase?
As a rule, setting a grace period is strictly required before the buyer may make a cover purchase and claim the resulting additional amount as damages. A grace period serves to give the seller one last opportunity for proper performance of the contract and is enshrined in law in § 281 and § 323 BGB. Exceptions exist only in specifically regulated cases, such as when the seller definitively refuses to perform, a deadline setting obviously offers no prospect of success, or if a fixed-date transaction (“Fixgeschäft”) exists. The grace period must be reasonable and offer the seller a realistic opportunity to perform. If the grace period is omitted without the presence of an exception, a claim for damages under the cover purchase can generally not be successfully asserted.
For which damages is the seller liable in the cover purchase?
In a cover purchase, the seller is primarily liable for the so-called price difference damage, that is, the difference between the agreed purchase price and the higher price the buyer had to pay due to the cover purchase. Besides the pure price difference, indirect damages are also compensable, as long as they are adequately causally linked to the seller’s breach of contract and are not excluded under § 280 para. 1 sentence 2 BGB. These may include transport costs, expenses for searching for substitute suppliers, and any additional costs for faster procurement. Interest on the financed additional amount or lost profits may also be possible heads of damage if a concrete contract of resale with a third party is proven. Liability may be limited by individual contractual clauses but must not contravene mandatory law.
What proof must the buyer provide regarding the cover purchase?
The buyer bears the full burden of presentation and proof with respect to the concluded cover purchase and the resulting amount of damages. He must document that and under which conditions the replacement purchase was concluded, for example by submitting contracts, invoices, and payment receipts. Furthermore, the buyer must prove that the cover purchase was necessary and suitable (“economically comparable”) and was carried out within reasonable bounds. A speculative or unreasonably expensive cover purchase is not at the seller’s expense; the buyer must rather adhere to the duty to minimize damages (§ 254 BGB). Additionally, the buyer must show that the price difference is exclusively attributable to the seller’s breach of duty.
When is a cover purchase considered disproportionate?
A cover purchase is considered disproportionate if the buyer obtains a replacement under significantly different conditions, although, with reasonable effort, he could have received a better offer. Case law requires that the buyer remains within economically reasonable limits, and, in fulfilling the duty to minimize damage, must examine alternatives. A replacement purchase at a significantly higher price that is due, for example, to acquiring considerably higher-quality or unnecessary additional services may result in the seller not being required to cover the full excess price. It is not sufficient that the cover purchase occurs ‘in some way’; the economic efficiency and reasonableness of the replacement purchase play a decisive role in the amount of reimbursable damages.
How does the statute of limitations for the damages claim in cover purchase cases apply?
For damages claims arising from a cover purchase, the regular limitation periods for performance disturbances in sales law generally apply. For movable property, the limitation period according to § 438 para. 1 no. 3 BGB is three years, commencing at the end of the year in which the damage and the injuring party (seller) became known or should have become known without gross negligence (§ 199 BGB). For defective goods, the limitation period may be shortened to two years (§ 438 para. 1 no. 3 BGB), unless dealing with purchase of a building, etc. For the question of limitation, the crucial point is when the claim arose—this is usually after the expiration of the deadline or final refusal to perform. Buyers are required to assert any claims promptly and within the limitation period to avoid losing their rights due to lapse of time.
Is there a claim for advance payment for the cover purchase?
The law generally does not provide a claim for advance payment for the execution of the replacement purchase in the context of a cover purchase. The claim for damages usually arises only after a cover purchase has actually been made and can be proven. However, specific contractual arrangements or agreements may provide for an advance payment. In individual cases, where significant damage is imminent and liquidity hardship is proven, an advance may be enforceable by way of interim relief; in practice, this is rare. As a rule, the buyer is obligated to pre-finance the replacement purchase themselves and then assert the resulting damages retrospectively.
