Changes to the German Civil Code from January 1, 2022: New Contract Law

New concept of material defects, Section 434 BGB

A significant innovation is the change in the definition of material defects for all purchased items in Section 434 BGB. According to Section 434 (1) BGB in the new version ("n.v."), an item is free of material defects, if it meets the subjective requirements, the objective requirements and the assembly requirements. This first paragraph probably contains the most relevant change: the priority of the agreed quality, as previously stipulated in Section 434 (1) BGB in the old version, has been abandoned. Going forward, the subjective, objective and assembly requirements must be fulfilled cumulatively and therefore have equal priority. Consequently, an item may also be defective if it complies with the agreed quality but, for example, the usual quality is not given.

Subjective requirements, Section 434 (2) BGB n.v.

The subjective requirements are defined in more detail in Section 434 (2) BGB, as amended.

„(2) ¹ The item corresponds to the subjective requirements, if it

1. has the agreed quality,

2. is suitable for the use presupposed according to the contract and

3. is handed over with the agreed accessories and the agreed instructions, including assembly and installation instructions.

² The condition according to sentence 1 number 1 includes the type, quantity, quality, functionality, compatibility, interoperability and other features of the item for which the parties have agreed requirements."

In comparison to the previously applicable Section 434 (1) sentence 1 BGB in the old version, Section 434 (2) sentence 2 BGB n.v. now standardizes which features are part of an "agreed condition" (type, quantity, quality, functionality, compatibility, interoperability and other features).

Objective requirements, Section 434 (3) BGB n.v.

The objective requirements are described extensively in Section 434 (3) BGB n.v.

„(3) ¹Unless otherwise validly agreed, the item complies with the objective requirements if it is

1. suitable for ordinary use,

2. has a quality which is usual for goods of the same kind and which the buyer can expect, taking into consideration

a) the nature of the item and

b) the public statements made by or on behalf of the seller or any other link in the contractual chain, in particular in advertising or on the label,

3. corresponds to the condition of a sample or specimen provided by the seller to the buyer prior to the conclusion of the contract, and

4. is handed over with the accessories including the packaging, the assembly or installation instructions and other instructions that the buyer can expect to receive.

²The usual condition according to sentence 1 number 2 includes quantity, quality and other characteristics of the item, including its durability, functionality, compatibility and safety. 3The seller shall not be bound by the public statements referred to in sentence 1 number 2 letter b if he or she was not aware of them and could not have been aware of them, if the statement was corrected in the same or equivalent manner at the time of conclusion of the contract or if the statement could not influence the decision to purchase.“

Unless otherwise contractually agreed, in order to meet the objective requirements, the item must in particular be suitable for normal use and have a quality that is customary for items of the same type and that the buyer can expect. This means that, in principle, an objective product standard must be determined for each product; this will present not inconsiderable challenges in practice.

Insofar as the criterion of durability is now also expressly mentioned as a characteristic of the usual quality in Section 434 (3) sentence 2 BGB, as amended, the explanatory memorandum to the Act clarifies that this does not introduce a durability guarantee (Section 443 (2) BGB). The seller is only liable for ensuring that the item has a corresponding ability to retain the required functions under normal use at the time of transfer of risk and not for ensuring that it actually retains its required functions and performance under normal use (Federal Parliament [BT] Printing Matter 19/27424, p. 24). However, this alone also means that sellers must continuously check whether their product still meets the evolving objective product standard.

In view of this, it can be assumed, particularly in B2B contracts, that the contractual agreement of positive and negative product characteristics is becoming even more important. In B2C relationships, however, a restriction of Section 434 (3) BGB is only permissible to a limited extent. Negative quality agreements are only possible under the strict formal requirements of Section 476 (1) sentence 2 BGB n.v.

„(2) (…) ²The agreement shall be effective only if

1. the consumer was specifically informed of the shortening of the limitation period before making his contractual declaration that a certain characteristic of the goods deviates from the objective requirements, and

2. the deviation within the meaning of number 1 was expressly and separately agreed in the contract.“

The consumer must be informed of the specific deviation of a certain characteristic of the goods from the objective requirements before submitting his contractual declaration. As a rule of thumb, consumers do not have to determine the deviation themselves (for example, by comparing it with the objective requirements). Furthermore, this deviation must be expressly and separately agreed.

According to the explanatory memorandum, for example, the mere unchecking of a box by the consumer in online commerce is not sufficient. Nor is inclusion in the general terms and conditions as one of numerous other agreements  able to meet the requirements (see BT Printing Matter 19/27424, p. 42). On the other hand, there is probably nothing to be said against individual clauses pre-formulated for a large number of contracts. This results in a need to revise a large number of general terms and conditions.

New delimitations in sales law: goods with digital elements (Sections 475b et seq. BGB) and digital products (Sections 327 et seq. BGB)?

In addition, the German Civil Code now contains two new terms to be distinguished from analog goods: "goods with digital elements" and "digital products".

Accordingto Section 327 (1) sentence 1 BGB, digital products are digital content (e.g., an e-book) and digital services (cloud service).

Goods with digital elements are physical objects that contain or are connected to digital products in such a way that they cannot fulfill their functions without these digital products, Section 327 (3) sentence 1 BGB. The legislative materials cite a smartwatch as an example. This can only fulfill its functions by means of software.

For consumer contracts of all kinds of digital products, the German Civil Code provides a new, independent set of rules in Sections 327 et seq. BGB, which also regulates the warranty for defects.

In contrast, contracts for the sale of goods with digital elements continue to be governed by the law on sales, which now provides for corresponding special provisions in Sections 475b et seq. BGB. Sections 327 et seq. BGB and the special "digital" sales law apply directly only to B2C relationships. B2B relationships are only affected in the context of possible recourse claims in the performance chain (see below under 4.).

In practice, difficulties in delimitation are to be expected. Especially in the case of mixed contracts, it is difficult to determine whether a good with digital elements or an independent digital product is involved. If the latter is the case, a so-called "package contract" must be assumed. Package contracts are consumer contracts of any kind that provide for the provision of other items or services in addition to the provision of digital products in a contract between the same parties, Section 327a (1) sentence 1 BGB. Such contracts are subject to a "split" regulatory regime: Sections 327 et seq. BGB apply only to those parts of the contract that concern the digital products. An example of this would be a contract for the purchase of a television that additionally provides a video streaming service. While the purchase of the television is subject to sales law, the provision of the streaming service is governed by Sections 327 et seq. BGB.

In the new regulatory complexes of Section 475b BGB and Sections 327 et seq. BGB, the updating obligation is of particular importance. This will be dealt with in a follow-up article.

Extension of the rules on the Compensation of removal and installation costs - only knowing is harmful

The regulation of subsequent performance has also undergone changes. These relate in particular to the eligibility for compensation of removal and installation costs in Section 439 (3) BGB, as amended.

„(3) If the buyer has installed the defective item in another item or attached it to another item in accordance with its kind and intended use before the defect became apparent, the seller shall be obligated within the scope of subsequent performance to reimburse the buyer for the necessary expenses for removing the defective item and installing or attaching the repaired or delivered defect-free item. Section 442 (1) shall apply with the provision that the installation or attachment of the defective item by the buyer shall take the place of the conclusion of the contract for the purposes of the buyer's knowledge.“

Going forward, only the positive knowing of the buyer of the defect at the time of installation or attachment of the defective item is detrimental with regard to the eligibility for compensation of removal and installation costs. Grossly negligent ignorance of the defect by the buyer no longer has a limiting influence on the buyer's rights.

In contrast to sales law, in the context of supplementary performance for contracts on the provision of digital products pursuant to Section 327l BGB the entrepreneur has the right to decide on the type of supplementary performance and no modalities are specified.

„Section 327l[1] Supplementary performance

(1) ¹If the consumer demands subsequent performance from the entrepreneur, the latter shall restore the contractual condition and bear the expenses necessary for the purpose of subsequent performance. ²The entrepreneur shall carry out the subsequent performance within a reasonable period of time from the moment the consumer has informed him or her about the defect and without significant inconvenience for the consumer.

(2) ¹The claim according to paragraph 1 is excluded if the subsequent performance is impossible or only possible for the entrepreneur with disproportionate costs. ²In particular, the value of the digital product in a defect-free condition and the significance of the defect shall be taken into account. ³Section 275 (2) and (3) shall not apply.“

In determining whether the contractor incurs disproportionate costs, it is necessary to consider whether and to what extent the chosen method can be used for other similar cases.

Effects on recourse in the performance chain

The changes in warranty law naturally also affect claims in the supply chain. Here, too, a distinction must be made according to the type of product. If the subject of the supply relationship is a digital product, the special recourse provision of Section 327u BGB applies. If the contract relates to a product with digital elements, the provisions of sales law apply, Sections 445a, 478 BGB.

Recourse in contracts for digital products, Section 327u BGB: principles

Previously, a legally regulated possibility of recourse in the supply chain, in addition to other contractual claims, was only provided for in sales law (Sections 445a, 478 BGB).

Going forward, there is such a no-fault claim for reimbursement of expenses for all supply relationships that fall within the scope of Sections 327 et seq. BGB.

The recourse claim requires that the last contract in the supply chain is a consumer contract and that both sales partners are entrepreneurs. If these prerequisites are met and the consumer asserts warranty rights in relation to his contractual partner, the latter can turn to his sales partner.

It is particularly important to note that this recourse provision cannot be deviated from to the detriment of the entrepreneur, Section 327u (4) BGB. Therefore, such agreements are permissible which improve or facilitate the legal position of the buyer, e.g. direct manufacturer's warranty; lump-sum settlement. This restriction is weakened by the fact that the obligation to inspect and give notice of defects pursuant to Section 377 of the German Commercial Code (HGB) shall remain unaffected. With regard to the right of recourse, this means that it may be forfeited if the customer in the supply chain does not give notice of a defect within the relevant period. This obligation to give notice of defects also applies mutatis mutandis to product defects within the meaning of Sections 327 et seq. BGB.

A limitation period of 6 months is provided for the right of recourse. In the event of violations of the obligation to update, it shall commence upon fulfillment of the consumer's claims.

Recourse for contracts for digital products, Section 327u BGB: liability issues for "old contracts”

Increased liability risks potentially arise from the intertemporal effect of the new regulations. Article 229, Section 57 of the German Introductory Act to the German Civil Code (EGBGB) regulates the temporal applicability of the new regulations.

Accordingly, Sections 327 et seq. BGB as well as the new sales law regulations are relevant only for the contracts, which are closed starting from January 1, 2022.

However, Article 229 EGBGB, Section 57 (2) provides for an important exception to this rule. For consumer contracts of any kind that have the provision of digital products as their object but were concluded before January 1, 2022, Sections 327 et seq. BGB in the new version already apply if said provision takes place in 2022.

At the same time, the possibility of recourse under Section 327u BGB only applies to contracts concluded on or after January 1, 2022.

This can lead to a situation in which the seller has only limited recourse options due to an old contract with its contractual partner, but on the other hand is already liable to its customer under the new regulations. This is because, on the one hand, no special right of recourse is provided for contracts that are not sales contracts. On the other hand, the updating obligation of Section 327f BGB in particular is unknown to the previous law. The final seller may therefore not be able to pass on deficiencies in the fulfillment of the updating obligation in its chain of performance: in the final seller's respective sales relationship, such updates were not legally owed.

It remains to be seen how this problem will be solved by the legislator and the courts.

Recourse for contracts for goods with digital elements, Sections 445a, 478 BGB

With regard to contracts for goods with digital elements, recourse in supply chains pursuant to Section 445a BGB remains possible, irrespective of whether the last customer is a consumer.

Thereby, only the limitation period for recourse claims is further extended. It remains unchanged that the statute of limitations occurs at the latest two months after the fulfillment of the buyer's claims according to Section 445b (2) sentence 1 BGB. What is new, however, is that there is no maximum duration of the limitation period – in the old version, this suspension of expiration was limited to 5 years. Now it applies indefinitely. Here, too, the obligation to give notice of defects pursuant to Section 377 HGB continues to apply.

Outlook

Overall, the fully harmonizing nature of the two directives is intended to create more legal certainty, especially in international trade with digital products. Whether the legislators have succeeded in doing so remains to be seen. For retailers, there is an urgent need for action, especially with regard to their general terms and conditions. 

The authors would like to thank legal trainees Ani Astabattsyan and Xenia Odinzow for their active and valuable contribution to this article and research assistant Julian Rettmer for his help in translating this piece.