Reform of the German Law of Obligations in Sale Contracts

by Dr. Götz-Sebastian Hök Berlin  and Wolfgang Jahn¹⁾
 

A) Reasons for the reform 

The Deutsche Bundestag, the lower house of the German Parliament, enacted the modernisation of the law of obligations on Nov.10, 2001. It came to force on  Jan. 1, 2002. By fulfilling the duty to transform the European guideline for the purchase of consumer products (EC-G 1999/44) ²⁾ into national law, the legislator took the chance to adjust the main provisions of the BGB³⁾ , which is more than 100 years old, to meet modern demands. Thus, the legislator has gone far beyond a simple transformation of the guideline, after the reform the central  regulations of the guideline are applicable not only to consumer products but to all contracts of sale. 

Another motive of the reform, particularly with respect to contracts of sale, is to adjust the provisions dealing with them to correspond with the ones concerning contracts in general.  German law of obligations draws a strict  distinction between its general provisions for all types of contracts (Allgemeines Schuldrecht), which, for example, regulate cases of impossibility, and provisions for special types of contracts like sale, service, lease and manufacture contracts (Besonderes Schuldrecht). In the past many problems arose from the weak interplay of these provisions. The general rule, which is, that, if something is regulated in the special provisions for a particular type of contract, then the general provisions are not applicable, led to dissatisfying results. That was why  German jurists back in the early  20th century, established several legal constructions like precontractual liability (culpa in contrahendo, positive Forderungsverletzung),  in order to overcome these inconsistencies only a few years after the BGB had come to force in 1900. These legal constructions   were later accepted by a long standing tradition of judgement and now find their source of law in the civil code itself (§ 280 BGB).

Particularly in the case of sale contracts, these inconsistencies led to subtle but idle questions like: Is it a feature of a house that its owner can see a lake nearby or is it a feature of the lake that it can be seen? (This is not exaggerated.) The legislator hoped to overcome discussions like this one by giving up the distinction between the lack of a guaranteed feature (Fehlen einer zugesicherten Eigenschaft) and a simple defect (Fehler) and by establishing one kind of defect for all situations.  From now on goods are defective, if their real quality differs from the quality agreed upon by the parties of the contract (§ 434 sub. 3 BGB). If no explicit agreement is drawn between the parties, objective criteria are decisive, like the questions: of what quality can an ordinary buyer of that type of product reasonably expect the product to possess, or what quality and description is a common standard. Unlike the former law it is now the seller’s duty to deliver faultless, not defective goods.

The other main feature of the reform with respect to contracts of sale is, that the old limitation period of six months, which was always criticized as being unjustly short, because it did not start at the time the defect occurred, but at the time the product was delivered, is extended to two years (§438 sub 1 Nr.3). Furthermore, the distinctions between a contract about sale of specific goods and sale of generic goods  and between sales of tangible and intangible goods have become totally irrelevant.

B) General parallels and differences between a contract of sale under Civil and Common Law

On one hand, this adjusts a German contract of sale to the common law understanding of  contracts in general,  according to which the parties guarantee mutual fulfilment of their contractual duties in a proper form , whereas under old German law the seller also could fulfil his contractual duty with defective goods, thus giving cause to other legal remedies. On the other hand, this adjusts a German contract of sale to Art. 35,46 CISG (Convention on International Sale of Goods), which basically provides that the seller has to deliver goods which are of the quality, quantity and description required by the contract, otherwise the buyer can demand delivery of substitute goods. This assimilation is not an unintended side effect of the reform, as it was a goal of the legislator to adjust the German law of sale to international sales law. However, this motive does ignore the fact that in most cases the provisions of the CISG are not applicable, as most parties tend to exclude them by their general conditions of business.

Apart from these new parallels, the main difference between a German contract of sale and an English contract of sale under the Sales of Goods Act (1979) remains unchanged. The fundamental difference is that - (apart from the aforementioned distinction within the German law of obligations itself, the one between its general and special provisions) - civil law also draws a clear-cut distinction between the law of obligation (Schuldrecht) and  the law of property (Sachenrecht); whereas under English law property is transferred by  the contractual obligation itself. To make this clearer: in legal German a contract of sale (Kaufvertrag) as a term of art refers to the law of obligations solely. Though, according to § 433 BGB, the seller is obliged to transfer the property of the goods sold to the buyer, this is an obligation only and nothing more than an obligation; the property is not "automatically" transferred. This requires a second contract which consists of the transfer of possession as an objective and factual element and the corresponding declarations of intention of both parties to do this as a subjective rather than an "ideal" element (according to § 929 BGB: Einigung und Übergabe). Though in most practical cases both contracts are made at the same time, this differentiation is not of pure academic value only, because a defect in one contract does not automatically nullify the other (Abstraktionsprinzip). This is rather the exception. 

C) The new contract of sale 

1.) Defects

However, the new understanding of a defect is not limited to the delivery of non-compliant goods (discussed above) and to defects in the traditional sense, as the new § 434 BGB also establishes a  liability for statements made in public commercials. According to this provision,  a product is defective if it does not match with the description of the product given by the seller or his agents in public statements. This refers to advertising statements and merchandise descriptions, but is not supposed to include rather unobjective commercial puffs. (Turning on one’s T.V. it is still foreseeable that this distinction will be hard to draw.) If no statement giving a specific and characteristic description of the product exists, the general criteria mentioned above (see the questions at the end of A II) are decisive in order to determine what the parties had agreed upon if they had made an explicit agreement about the quality of the product. Furthermore, from now on it is also considered a defect, if the product is assembled in an incorrect way or if the assembly instructions are wrong or misleading. (This is the so-called:"Ikea-Law.").

Finally, liability under § 434 BGB is excluded by § 434 BGB (at the end of sub. 1, sentence 3), if the description or the advertisement have not influenced the buyer’s decision, or if they have already been corrected at the time the contract is drawn, or if the product is installed correctly in spite of the misleading assembly instructions (§ 434sub.2, sentence 2 BGB at the end). 

2.) Legal remedies

In the case of a defective product the legal remedies of the buyer are regulated in § 437 BGB. Basically, the buyer has the choice between claiming for a repair of the old or delivery of a new, not defective product (according to §§ 437 Nr.1, 439 BGB). This is an innovation of high practical relevance, because under the old law a similar claim was given to the buyer in cases of contracts about generic goods only (former § 480 BGB). This choice does not exist, if either repair or delivery are impossible, meaning disproportionate. In that case, this claim is limited to the part which is possible,  or is totally excluded, if both are impossible (§ 439 sub. 3 BGB). This claim, which in analogy to its German name "Nacherfüllung" might be named postperformance, has priority over all other remedies of the buyer such as: 

a) price reduction
(Minderung according. to §§ 437Nr.2, 441 BGB), 

b) rescission
(Rücktritt according. to §§ 437Nr.2, 440, 323,326 sub. 5 BGB), 

c) counterclaim against price
(Mängeleinrede according. to §§ 438 sub 4,5; 218 BGB),

d) to claim for damages and compensation for wasted expenditure
(Schadensersatz und Ersatz vergeblicher Aufwendungen according. to §§ 437 Nr. 3, 440 BGB)

Thus it can be said that the postperformance claim of the buyer in one sense is also a right for the seller, as in most cases it will be more advantageous for him to repair the product than to take it back. Though this so called "principle of priority of the postperformance claim" (Vorrang des Nachbesserungsanspruchs) is nowhere stated in the law explicitly, it can be derived from the rule that all other remedies have as a prerequisite that the buyer sets the seller a period of time after which the buyer can refuse postperformance. 

Another aspect illustrating this principle can be derived from the two years limitation period for the remedies mentioned above (§ 438 sub 1 Nr. 3 BGB). Theoretically, the rights to rescind the contract and the right to reduce the price according to §§ 437 Nr.2, 323 BGB themselves can not be subject to any limitation period. German legal theory does not only recognise claims (Ansprüche) but also special rights, which transform an already existing legal relationship into another form of legal relationship (Gestaltungsrechte). The right to rescind the contract and to reduce the price belong to the latter one, as they influence the contract directly. But, according to § 194 BGB, it is only claims which can be subject to any time limitation provisions. However, as both remedies have as a prerequisite that the buyer gives the seller a chance to replace the product with a new one or to repair the old one, which are claims, they are indirectly  subject to the new two years limitation period, running from the time the product is delivered (§438 sub 1 Nr.3). After this deadline has passed and the claim has become statue-barred, the buyer only has a remedy, if he has not paid the price yet. He has a counterclaim (Mängeleinrede) against the price claim of the seller, according to §§ 438 sub 4,5; 218 BGB. Unlike the former law, this remedy no longer depends on a previous notice of the defect given within the limitation period  from the buyer to the seller (Mängelanzeige). 

The last remedy of the buyer in cases of delivery of a defective product is to claim for damages caused by the product and wasted expenditure (§§ 437 Nr. 3, 440 BGB). As mentioned above (see A II), the fundamental new feature of this claim (at least for a German lawyer) is that the delivery of a defective product is a defect, which seems to be a matter of course for a common law trained lawyer. According to §§ 276-278 BGB, this claim requires that the defect is the seller’s fault. However, with reference to this requirement, the burden of proof lies with the seller, who must prove that the defect is not his fault. This is noteworthy, as it is an exception to the general rule, that every party has to prove the facts underlying that party’s claim. The reason for this exception is that in most cases it would be impossible for the buyer to prove the seller’s fault, because as a customer he has no information about the internal business affairs of the seller’s company. 

3.) Contracts about consumer products

a) Modifications of the contract of sale

§§ 474-479 BGB include the provisions, which transform the European guideline (EC-G 1999/44) for consumer products into national law and which apply to all contracts of sale between a consumer (§ 13 BGB) as buyer and an entrepreneur (§ 14 BGB) as seller concerning all movable things (§ 474 BGB),-(things in this sense meaning only tangible things like a light-bulb and unlike electricity). The basic aim of this guideline is protection of the consumer which is reached by limiting the principle of autonomy of the contracting parties (Privatautonomie). For example: the legal remedies of the buyer (just discussed above) can not be waived by the buyer before a defect has been discovered (§ 475 sub 1 BGB), neither by an individual agreement (Individualabrede) with the seller nor by standard terms for multiple contracts (Allgemeine Geschäftsbedingungen). This nullifies most widely used contract clauses which try to exclude all liability of the seller. However, according. to § 475 sub 3 BGB, this rule does not apply to the damage claim discussed above (§§ 437 sub 1 Nr.3, 440 BGB), which can be waived by the buyer in advance. Moreover, the new limitation period of two years can not be shortened (§ 475 sub 3 BGB), if the contract is about a new product. Otherwise it can be shortened to one year. This exception will have a major impact on the used car sales  industry. 

Finally, § 476 BGB provides that, if a defect occurs within the first six months after the product has been delivered, it is legally assumed that the product was already defective at the time of delivery.  This means that the burden of proof with respect to this requirement for all the legal remedies mentioned above, lies with the seller. 

b) The liability to recourse 

In modern business, many parties are members of the contract chain between an end user and the manufacturer: The manufacturer contracts with a wholesale dealer, who contracts with a retail dealer, who contracts with an end user. Therefore, in the case of delivery of a defective product, the question arises who has recourse against whom. In general this is regulated in §§ 478, 479 BGB. However, one has to keep in mind that most practical cases will also be influenced by special regulations codified in the German commercial code (Handelsgesetzbuch), a discussion of which would be beyond the scope of this article. 

§ 478 sub 1 BGB provides that an entrepreneur, who has entered into a contract with a consumer, who later reduces the price or rescinds the contract, if the entrepreneur himself wants to take up proceedings against his supplier, does not have to give the supplier a period of time after which the entrepreneur can refuse postperformance, but can claim for damages, reduce the price or rescind the contract directly.  In this way, the provision establishes an exception to the principle of priority of postperformance.

§ 478 sub 3 BGB provides that such an entrepreneur, who additionally had to pay the consumer’s wasted expenditure according to § 439 sub 2 BGB, can have recourse for these payments. Like most claims caused by a defect, this one also becomes statute-barred after two years. Finally, it is to be stressed that §§ 478, 479 only apply in cases of the delivery of newly manufactured products. 

C.) Cosmetic changes

Contrary to the dramatic changes discussed above, the reform also includes some rather cosmetic ones, which lie within the scope of this article, as more and more sale contracts are influenced and governed by them and as they illustrate the process of modernisation. During the last twenty years, the legislator has step by step enacted some rather short laws in accordance with other European guidelines than the one for consumer products. These are: the law for standard contract terms (AGB-Gesetz now §§ 305-310 BGB), the one for e-commerce (Fernabsatzgesetz now §§ 312b-f BGB; EC-G 1997/7), the one for consumer credit (Verbraucherkreditgesetz now §§ 491-495 BGB; EC-G ), and the law on doorstep and distance selling: (Haustürwiderrufsgesetz now §§ 312 BGB; EC-G 85/877). These are now all included in the civil code.