On February 10, 2021, the German government published a draft law to implement the EU's Sales of Goods Directive. The new regulations shall apply to sales contracts concluded from January 1, 2022. The aim is to make German sales law fit for products with digital content and smart functions, for example smartphones, smartwatches, smart TVs, smart home and household appliances.
New concept of a material defect
The most important innovation is the definition of a material defect. Unlike in the past, it is no longer sufficient for the object of sale to be free of defects if it complies with the quality agreed by the contracting parties. In the future, it must also meet the objective (customary) requirements and the assembly requirements. An item can therefore be defective even though it has the contractually agreed quality. In B2B transactions the parties can deviate from the statutory regulation by mutual agreement; in the case of the sale of consumer goods however subject to strict conditions only.
According to the draft law, a product meets the so-called subjective requirements if it (1.) has the agreed quality, (2.) is suitable for the use stipulated in the contract and (3.) is handed over to the customer with the agreed accessories and instructions.
Whether the product objectively has a defect depends on whether the product (1.) is suitable for the usual use, (2.) has a quality which is usual for products of the same kind and which the buyer, taking into account the nature of the product and the public statements of the seller or retailer concerning the product, e.g. in advertising or on the product label, can be expected, (3.) corresponds to a sample provided by the seller before the conclusion of the contract, and (4.) is delivered packaged and with accessories, assembly or installation instructions as well as operating instructions necessary for the use of the product.
In the future, therefore, a product may also be defective even though it has the agreed quality and thus meets the so-called subjective requirements. This can regulated differently by means of a quality agreement in the contract in which it is stated which (objectively expected) properties the product does not have. While such a provision can be made without further ado in B2B transactions, i.e. transactions between entrepreneurs, this will only be possible under strict conditions in the case of purchases of consumer goods (B2C). The consumer must be informed prior to the conclusion of the contract that a certain characteristic of the product deviates from the objective requirements and the deviation must be expressly agreed in the contract. A general notice, such as in form contracts or general terms and conditions, is not sufficient. It shall also not be sufficient to mention the deviation only as one of several characteristics of the purchased item in the product description. Rather, the contractual documents must be designed in such a way that the consumer is aware, when concluding the contract, that he/she is purchasing a product that deviates or may deviate from the objective (customary) requirements of the product. In e-commerce, a tick box or a button that the consumer can click or otherwise confirm could be sufficient.
Providers of web stores or online marketplaces are recommended to adapt the design of the product offers to the new requirements. How a deviation of the product from what might normally be expected can be effectively agreed upon should be examined on a case-by-case basis. However, the biggest challenge will be to identify an objective product standard for each product. The new regulation could therefore certainly lead to sellers in B2B business contractually stipulating numerous existing and non-existing product properties as a precautionary measure in terms of an individual agreement on quality. After all, which property is customary for a product, i.e. can be objectively expected from the product, is a question that one can argue about very well, depending on the respective product. In B2B contracts for the sale of goods, it is even more recommended to stipulate the product's properties in the contract, if necessary, by referring to technical specifications. The contractual agreement on the product characteristics (quality agreement) will become more important than before in order to define the quality requirements that the buyer can expect and that are decisive for any warranty claims.
Sale of consumer goods: obligation to update/provide updates for products with digital elements
The new law introduces regulations for the sale of products with digital elements to consumers. If the digital element is crucial for the functionality of the product, it shall be considered as an integral part of the purchased item. This includes not only smartphones, smartwatches, digital voice assistants, smart TVs and stereo systems, but also, for example, digital household appliances, vacuum robots or game consoles.
Sellers are therefore obligated to inform the consumer about updates for the period of the product's usual use and application and to provide them. The duration of the period may vary depending on the product and its lifecycle; this is not specified by law. In any case, the period shall be at least the statutory warranty period of two years; it cannot be shortened by agreement.
Whether the seller is obliged to provide updates for the digital elements must be determined by interpreting the purchase agreement. In case of doubt, it shall be assumed that the seller is under an obligation to provide updates for the digital elements. For this reason, a contractual provision is recommended in the future to regulate the scope and period of the updates.
If the seller does not fulfill his/her obligation to provide updates, the product does not meet the objective requirements and is therefore considered defective. The seller is responsible for providing information about existing updates and the provision of updates to the buyer. However, the seller may also provide the updated through a third party, such as for example the manufacturer. The costs of the update are borne by the seller and should therefore be taken into account when calculating the purchase price.
Sale of consumer goods: strengthening consumers' warranty rights
Regardless of the type of product, the new law strengthens consumers' warranty rights:
Deadline no longer required for withdrawal and compensation for damages
In the case of consumer goods purchases, the buyer will no longer have to set a deadline for subsequent performance in order to withdraw from the contract and claim damages. A (fictitious) reasonable period begins to run as soon as the consumer notifies the seller of the defect.
It remains unclear in the draft explanatory memorandum to the new law, how this is to be reconciled with the consumer's right to choose the type of supplementary performance - repair or replacement. At least as long as the consumer's right to choose exists, it must therefore be required for the start of a reasonable period that the consumer requests the seller to provide subsequent performance and in doing so makes use of his right to choose, in addition to the mere notification of the defect.
New statute of limitations for defect claims in consumer goods sales
In future, defect claims will not become time-barred before two months after the defect has occurred. This is intended to ensure that consumers can assert a claim for a defect even if it does not occur until the end of the warranty period. If a defect occurs on the last day of the two-year warranty period, the warranty claims will not become time-barred until a further two months have elapsed. Sellers should therefore calculate with a warranty period of 26 months.
Extension of the reversal of the burden of proof
The period of the reversal of the burden of proof, which makes it easier for the consumer to prove the defect of a product, has also been extended. In future, if a defect occurs within one year after handover of the product, it will be presumed in favor of the consumer that the defect already existed when the consumer purchased the product. Previously, this period was shorter, only six months.
Originally Published 24th May, 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.