Sales Law Goes Digital

I. Introduction

The law on the sale of goods will be fundamentally changed with effect from 1 January 2022. This is based on the implementation of the "Directive (EU) 2019/771 of the European Parliament and of the council of 20 May 2019 on certain aspects concerning contracts for the sale of goods" (“Sale of Goods Directive” – "SGD"), which replaces the Consumer Goods Directive underlying German sales law since the reform in 2002. With the SGD, the EU takes into account the advancing digitalization and its importance for trade and the economy by introducing new regulations for the sale of digital products, such as smartphones and smartwatches, but also vehicles with navigation devices and other electronic accessories. The new regulations are to be applied to all sales contracts concluded from 1 January 2022.

II. Overview of the Main Changes

Although the SGD only directly affects consumers, its transposition into German law also has a significant impact on business transactions. The changes are as numerous as they are ramified. In addition, there are the changes (also effective as of 1 January 2022) due to the implementation of the SGD's sister directive, the so-called "Digital Content Directive" ("Directive (EU) 2019/770 of the European Parliament and of the council of 20 May 2019 on certain aspects concerning contracts for the supply of digital content and digital services"), the provisions of which apply exclusively to contracts for digital products such as streaming offers.

The main changes resulting from the SGD are:

• Expanded general definition of material defects:

In the future, for the contractual conformity of every purchased item – whether analogue or digital – not only the specifications agreed with the buyer must be fulfilled, but at the same time in particular also the objective requirements, i.e. the purchased item must also be suitable for normal use and have a customary quality. Thus, in the future, the buyer may be entitled to warranty claims for material defects and, if applicable, claims for damages, even though the object of sale has the quality agreed between the parties. In the future, in this respect (only) a so-called negative quality agreement between the contracting parties will help to the effect that a purchased item is also in conformity with the contract if it has a quality which falls short of the usual quality. Such an agreement is permissible – even though it is still unclear which requirements have to be met in terms of content and form in individual cases.

• Introduction of an obligation to update for sellers of goods with digital elements: 

If there is a consumer goods purchase contract for goods with digital elements – i.e., goods that cannot fulfil their function without the digital elements, e.g. the smart TV, the smartphone or also the smart watch – the purchased item will in future only be free of defects if, with regard to the digital elements, the agreed and required updates are provided during the relevant period under the sales contract. This is based on the consideration that digital products – unlike analogue goods – only function (properly) after the time of purchase if the software underlying or integrated in them is continuously updated.

There is no maximum time limit for this update obligation; it exists as long as it corresponds to consumer expectations. If a sales contract for goods with digital elements provides for a permanent provision of the digital elements – e.g., traffic data in a navigation system, the cloud connection for a game console or a smartphone app for the use of various functions in connection with a smart-watch – the update period may not be less than two years from the delivery of the goods.

Thus, the purchase contract ultimately becomes a continuing obligation with regard to the digital elements. However, sellers will often not be able to carry out their update obligation themselves because they are not software or hardware manufacturers, so that the update will often have to be carried out by the manufacturer (who is not involved in the purchase contract). In order to avoid warranty liability due to a breach of the update obligation, sellers must mirror this update obligation in the contracts with their own (upstream) suppliers and manufacturers.

• Removal of the time limit on supplier recourse:

The provision on the absolute limitation period for material defect recourse claims against the seller's upstream supplier (previously: five years) will be removed without replacement. This applies to both the B2C and B2B transactions. According to the legislator´s reasoning, this is intended to motivate manufacturers to cooperate in providing updates in the interest of secure networked devices.

Especially in view of the new update obligation, the liability of the (final) seller is indeed likely to be pushed back even further in time, so that the removal of the limitation may well be in their interest: A time limit on recourse would possibly deprive the seller of the possibility to hold his supplier/manufacturer harmless. On the other hand, manufacturers are likely to continue to have an interest in a time limit on the recourse of their entrepreneurial customer in the future, so that (final) sellers should definitely keep this in mind when negotiating and concluding contracts with (upstream) suppliers from 2022 onwards.

• Extension of the reversal of the burden of proof:

In pursuit of the sustainability objective, the current duration of the reversal of the burden of proof in favour of the consumer is generally – and not only for digital products – doubled from six to twelve months. As before, this provision cannot be waived.

• Extension of the statute of limitations for claims for material defects in the sale of consumer goods:

Claims for a breach of the obligation to update do not become time-barred before the expiry of twelve months after the end of the period of the obligation to update. If the parties have not validly agreed expressly and separately on a deviation from the expected duration of the updating, the seller cannot ultimately determine with certainty the end of its liability for a breach of its updating obligation.

Claims for material defects in sales contracts for goods in which digital elements are provided on a permanent basis also become time-barred only after the expiry of twelve months after the end of the respective provision period. Here, too, the following applies: If the parties have not agreed on a fixed provision period, it ultimately remains open until when the seller is liable – because the duration of the provision corresponds to the period that the consumer can expect based on the nature and purpose of the goods and their digital elements, taking into account the circumstances and the nature of the contract.

• Extension of the requirements for guarantees:

In future, guarantee declarations must contain further information, e.g., that the guarantee is an obligation that exists in addition to the statutory warranty. In future, the guarantee declaration must be made available to the consumer on a durable medium at the latest at the time of delivery of the goods.

• Knowledge of the buyer of consumer goods harmless:

In connection with a sales contract on consumer goods, neither the buyer´s positive knowledge of defects at the time of conclusion of the sales contract, nor his grossly negligent ignorance excludes warranty claims for material defects according to the new law. In B2B transactions, however, claims for material defects remain excluded if the buyer is aware of the defect.

III. Conclusion and Recommendations for Action

The parallel introduction of the new general concept of defects as well as the extended concepts of defects for consumer contracts for the sale of goods with digital elements on the one hand and for consumer contracts for digital products on the other hand ultimately leads to a three-way split of the law on material defects, not necessarily making the legal situation clearer. Moreover, many new definitions and conceptual delimitations and, consequently, of the applicable provisions from one another will only be filled out by case law in the course of the coming years; until then, there will inevitably be some legal uncertainty. This, for example, also applies to the indeterminate legal terms "customary use" and "usual condition" in connection with the new general concept of defect.

In any case, businesses already need to take action with regard to their contracts:

1. B2B

• If businesses (on the sales side) want to prevent the application of the objective defect concept in B2B contracts, they must put all general terms and conditions (“GTC”) as well as framework agreements with their B2B customers to the test and – if an amendment of an existing agreement can be negotiated with the respective contractual partner – include a negative quality agreement with respect to individual purchase contracts concluded under these framework agreements from 1 January 2022. In the case of new GTC or future amendments to GTC and new framework agreements, the deviation must be addressed immediately in the contract.
• With regard to supplier recourse, there may be a need for adjustment or for initial agreement on the part of the seller with regard to a maximum time limit.
• Furthermore, on the purchasing side, companies should ensure as far as possible by means of possible contract adjustments or by means of regulations in the case of new contracts, that their own (upstream) suppliers are equally obliged to fulfil contractual obligations towards them as they themselves are towards their customers, in particular with regard to the fulfilment of the update obligation.

2. B2C

• Firstly, on the sales side in B2C business, the update obligation must be contractually represented (GTC as well as individual contracts). Furthermore, any warranty declarations must be adapted to the new legal requirements.
• Then, taking into account the increased requirements, explicit and separate agreements concerning the deviation of a purchased item from the objective requirements must be implemented (negative quality agreements). Thus, the contractual documents with consumers must be designed in such a way that the consumer is aware when making his contractual declaration that he is acquiring an object of purchase which deviates or may deviate from the objective requirements for the conformity with the contract.
• The foregoing applies both to general characteristics of the item of sale as well as to the scope and duration of the updating of its digital elements. In this context, where possible, sellers should at the same time expressly and separately agree with their consumer buyers on the duration of the updating as a deviation from the objective requirements for the digital elements – so that the end of the seller's liability for a breach of its updating obligation can be determined.
• In consumer sales contracts for goods where digital elements are provided on a permanent basis, sellers should also, as far as possible, specify the period of provision of digital elements in the contract with the buyer in order to avoid disputes about the duration of their liability for defects in the digital elements from the outset.

_{Published: October 2022}