Disassembly and installation costs
With the German ‘Act for the Reform of the Construction Contract Law and for the Change of Liability for Commercial Liability’, significant changes to commercial liability came into force on 1 January 2018. These changes primarily affect suppliers (sellers), while customers (buyers) now enjoy a stronger position.
If a buyer receives a defective product, Section 437 of the German Civil Code (BGB) provides different warranty rights to the buyer, the most significant of which being supplementary performance and compensation, in practice. These two rights essentially differ at one point: in the case of supplementary performance, the seller has a duty to redo the work or redeliver the product regardless of negligence or fault, while compensation requires fault on the part of the seller.
Previous differentiation by consumer or company for disassembly and installation costs
Under Section 439 Para. 2 BGB, the seller is responsible for the costs incurred in redoing the work or redelivering the product – regardless of negligence or fault. According to the ruling by the European Court of Justice (ECJ), this includes compensation for disassembly and installation costs.
But because disassembly and installation costs were considered compensation and not supplementary performance under the German warranty system, the German Federal Court of Justice (BGH) limited the implementation of the ECJ’s ruling to the application area of the directive: until now it was only in business-to-consumer (B2C) transactions that disassembly and installation costs were to be compensated for as part of supplementary performance regardless of negligence or fault. In business-to-business (B2B) transactions, by contrast, disassembly and installation costs were considered compensation that was subject to the seller assuming fault.
New: disassembly and installation costs always part of supplementary performance regardless of negligence or fault
Legislators in Germany have now changed this – and these changes will affect suppliers. Under German law in future, compensation of disassembly and installation costs will now be considered an obligation falling under supplementary performance regardless of negligence or fault, even in B2B transactions.
In warranty claims, replacement costs are regularly the most expensive claims in the supply chain. Florian Overbeck, expert in liability insurance at Funk, provides some insight into this: ‘The legal change will significantly impact suppliers – including in cases involving recourse for recalls and other actions taken in the field. Successful recourse along the supply chain previously required each link in the chain to be at fault. But in future it won’t matter which party in the supply chain is at fault for the defect.’
Recourse in the sales chain easier in future
Another change is that it will now be easier to claim recourse in the sales chain. If a newly manufactured product is sold and found to have a defect, the seller which is then responsible for bearing the costs of replacing the defective product as part of supplementary performance can now seek recourse from its supplier. End sellers and intermediary retailers will be able to pass on the costs they incur in their own supplementary performance along the sales chain to the originator of the defect in the final product that was sold.
Planned legal changes will not take retroactive effect
The new regulations will not affect existing legal relationships and will only apply to contracts that have been concluded from 1 January 2018. All existing cases of liability, and those in future which rely on contracts concluded before the law went into force, will continue to be subject to the old legal conditions.For suppliers, the change to Section 439 BGB means that it will be much more difficult to defend themselves against warranty claims, which ultimately will result in higher warranty costs. On the other hand, obtaining their own recourse will be easier, and this will impact the cost calculations in each case. In warranty claims in future, legal defence strategies will focus on new questions, such as the disproportionality of supplementary performance.
Effects on insurance cover
Florian Overbeck weighs in: ‘The planned legal changes will mean that replacement costs that were once considered compensation will now be considered part of supplementary performance under warranty law, which is generally not covered by insurance.’
That said, the current wordings for Funk clients include as part of the replacement cost clause as a module of extended product liability the rule that insurance cover will also be provided if the replacement costs ‘are incurred in the course of fulfilling a legal obligation of the policy holder to its customer to redeliver a product or correct a product defect.’
The wordings for Funk clients therefore do not need to be adapted. Insurance cover for disassembly and installation costs is then provided even when these costs are considered part of warranty law rather than compensation once the legal change takes effect.