An amendment to purchasing law entered into effect on January 1, 2018. If products sold are defective, the seller now has to reimburse the cost of dismantling the defective item and installing the replacement item (Section 439(3) German Civil Code new version). This applies irrespective of fault and irrespective of whether the buyer is a private individual (for this area (B2C), this has already applied to date) or a business (in the B2B area, this is a new provision). Dealers that do not produce the products they sell themselves are thus faced with a considerable deterioration with significant economic implications. Suppliers of C parts, depending on their intended use, will particularly be exposed to risks that may be disproportionate to the margins that are typically earned.
In view of the amended law, how should dealers react?
- First of all, they should assess their risks: All dealers should check for themselves the risk level of damage (= obligation to bear the cost of dismantling and installation) and the amount of potential cost. The urgency of a need for action arises from the determined product of probability and amount of damage occurring.
- Opportunities for action on
the sales side are limited.
- Contractual exclusion of the new statutory provisions will hardly be possible. In the B2C sector, contractual deviations are inadmissible and ineffective. In B2B, individual contractual deviations (i.e., deviations outside of General Terms and Conditions) are legally permissible. Since most contracts concluded by businesses fall under the very broad definition of Section 305 Civil Code, however, such individual contractual agreements will be rare in practice. An exclusion in General Terms and Conditions will probably be ineffective (even if this has not been explicitly stipulated by the legislator).
- Contractual modifications may be considered, however, in the B2B sector. It could make sense for sellers to grant themselves the right to choose whether to reimburse the cost or to carry out the dismantling and installation work at their own expense. The law does not provide for such a right to choose. It cannot be predicted at the moment whether such a clause in General Terms and Conditions would prevail before the courts. In any event, however, it can largely be expected to be ruled effective where buyers install the product themselves (i.e., where the product is not resold to customers and then installed by them or by their customers). As always when it comes to General Terms and Conditions, careful design is required with mutual interests borne in mind. If the buyer resells the item, additional design effort will be required so that the clause does not put the buyer in a position to reimburse its own customer, while the seller insists on carrying out the dismantling and installation.
- Only necessary expenses are to be reimbursed, also without explicit agreement. This may be specified with respect to business customers, however, by means of a clause stipulating that customers must first obtain several offers or ask the seller for an alternative offer before placing an order. If the buyer then does not order from the cost-efficient provider without good reasons, the difference may then have to be borne by the buyer.
- For buyers, supplier
selection becomes more important as the law provides for recourse
for dealers that have reimbursed the dismantling and installation
- Recourse is only possible, however, to the extent that German law is also applicable in relation to the supplier. If the supplier has its registered office outside Germany, this will usually only be the case if the application of German law has been agreed in the contract. Choice of law provisions is thus gaining importance. If foreign law applies, it must be examined in the individual case whether it provides for a similar right of recourse. If the UN Convention on Contracts for the International Sale of Goods (CISG) applies, which is frequently the case if no choice of law provision has been agreed in the contract, a right of recourse irrespective of fault also applies. This right of recourse does not correspond to that of the Civil Code, however, and has some disadvantages from the dealer's point of view. The choice of law provision should also be accompanied by an agreement on jurisdiction or arbitration.
- In addition, a right of recourse is of no use if the supplier is not solvent. Solvency verification and protection (possibly additional hedging by collateral to be provided) is thus becoming increasingly important.
- Finally, dealers should consider whether the additional risks of no-fault reimbursement are already or may be covered by their insurance. The German Insurance Association's model terms and conditions on product liability insurance provide for the assumption of dismantling and installation cost in Article 4.4. Dealers should obtain written confirmation of a possible coverage of this risk.
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.