To make the contract stand you would have to have medical proof and/or testimony from a Vet. Or a behavioral specialist.
Sounds like if the breeder sold the mother because of this problem then they are not an experienced breeder.
Granted sometimes genetic defects are not always apparent, any GSD that is bred should be of the greatest health standard and temperament or they should not be breed. Do you know what litter this was for the breeder and the dam?
I personally would not take another pup from the breeder.
Did the contract state that the dog was being sold as an excellent companion dog or something like that?
A dog that is timid or reacts out of fear is an unstable dog. It's best to protect the children. It sounds like you've sought expert advice and I would do what they say, but forget about the breeder!
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