(Non)applicability of contract law institutes to the affair Dieselgate

In the previous article, we briefly discussed individual general legal institutes of contract law. In this article, we will examine this subject more closely and explain, based on our findings, their (non)applicability to the Volkswagen emissions affair – Dieselgate, the biggest affair in the history of the Volkswagen Group.

Fundamental error
This affair includes elements of fundamental error according to Article 46 of the Obligations Code. Fact is, we believe this is a fundamental error, as advertised and prescribed (standards) characteristics on vehicle emissions of harmful substances are actually significantly higher (as much as 40 times), particularly when used in traffic, which is what vehicles are essentially and basically intended for. This is an error regarding the characteristics of the subject, while buyers could also be victims of an error in motive (if they decided to make purchase (also) on the basis of advertising of environment-friendly vehicles). How much emissions and discharges are exceeded by a particular vehicles is actually a technical question and a matter for an expert witness, appropriate expert’s opinion and report; however, according to our opinion, this fact does not change the finding that this is (must be) a fundamental error. The error exists regardless of the sellers’ knowledge (or lack thereof) on vehicle characteristics, as this is not a legally significant element when asserting an error. In this regard, we believe that buyers can not be accused of any negligence (at all), as they could not have or should have found the error (we believe that it would be different situation with, for example, fuel consumption, which buyers can more easily measure or monitor through re-fuelling quantities and distances covered with said quantities). The error is therefore also justifiable.

For a mistaken client to effectively assert an error when concluding a transaction, two conditions must exist: fundamental nature of the error and its justifiability. This is confirmed by case law (e.g. Decision of the Supreme Court of the Republic of Slovenia ref. no. II Ips 117/2007 from 18 June 2009). We find, as an essential legal problem of the institute of error, that asserting an error is significantly limited – linked to the subjective deadline of one year after the entitled person (injured buyer) found out about the grounds for challengeability (i.e. existence of fundamental error), or the objective deadline of three years after the conclusion of the contract. The latter deadline for asserting fundamental error eliminates all cases when the purchase of vehicle was made over three years before the affair or three years before the (court) assertion of fundamental error (considering the fact that vehicles with modified software and technical equipment were on the market and included in legal transactions since 2008/09 onwards, this includes only half of the affiar period). In terms of the former, subjective deadline, we find that it is extremely short, particularly considering the specificity, public disclosure of the affair, and the scope of the fundamental error. In this regard, we find as essential the following: even though there are certainly buyers who have purchased the contentious vehicle within the last three years, and the affair has been known since September 2015, the subjective deadline for filing a lawsuit to annul the contract began at that time, and certainly (in any event) not before. We believe that this deadline could have started for every individual buyer only when (even later) that specific buyer was informed by the contractual seller of the fact that the purchased vehicle has essentially different characteristics from those prescribed or advertised, or at best (if at all) when the buyer, considering public information, had to and could (in accordance with the principle of diligence in legal transaction, lowest form of standard of good manager) seek this information and inquire if the vehicle with the specific chassis number is contentious (vehicle with a contentious diesel engine). There is some information circulating publicly that the type of engine is listed on the engine itself (however, it is difficult or actually impossible to access this code in the vehicle, and it is impossible to determine errors in entered codes from type approval tests). We are more inclined to the subjective deadline, which would be (the most) favourable for the end buyer/consumer in the relationship to the seller (even though the actual underlying fraud is that of a third party – manufacturer); however, we have to consider that the seller is the party that should, becoming aware of the true essential characteristics of the vehicle sold, inform the buyer of the findings, which would represent the only sensible and correct start of the subjective deadline. On the other hand, we can also deem the notification by the distributer and agent for these vehicles as the start for the subjective deadline (the advantageous fact for the buyer/consumer is that it did not receive the notification by registered mail, nor did such notifications include a date). Answers to these questions will have to be provided by case law, since they depend on a case-by-case basis (and specific circumstances) and examination of facts regarding when a specific buyer concretely and actually could or should become aware/determine the grounds for challengeability due to fundamental error regarding the specific subject (vehicle) of contract.

In relation to the affair in question, we determined the existence of elements of fraud under Article 49 of the Obligations Code. The vehicle manufacturer directly admitted to the fraud (carried out and publicly admitted in this specific case for vehicles involved/discovered). The manufacturer usually (if ever) is not a contracting party – vehicle traders are authorised sellers as legally separate persons, separate business entities. The seller could only be liable for the fraud if it know, in a specific case, of the conduct of the group, which is not realistic considering the public information, current actual situation, and the group’s business model. A fraud is an action by which a party causes another party to be mistaken, in order to conclude a legal transaction; in the wider sense, this includes the actions of the manufacturer, who, following the logic of the matter and organised marketing network, achieved increased sales (as was its goal) with false promises about vehicle characteristics, but (only) increased sales for individual (legally separate) other entities (authorised vehicle traders).

In the narrower sense of the Obligations Code, we can not talk about a fraud by co-contracting parties (individual sellers), considering the fact that they did not even know of the fraud. In this regard, it is also impossible to challenge contracts due to defective intention – fraud. If it were discovered that, regardless of the above, traders knew of the fraud, our opinion on the deadlines for challengeability by lawsuit because of an error (previous paragraph) applies to this particular situation (fraud).

However, according to case law (e.g. Decision of the Ljubljana Higher Court ref. no. I Cp 2777/2014 from 4 February 2015), a fraud is a qualified form of error, and the deceived party is entitled to damages even if it does not challenge the contract. The key legal nonsense, according to our opinion regarding the fraud, remains; specifically, considering the fact that the vehicle manufacturer admitted the fraud (publicly), a direct legal action against its conduct, on the basis of “deceitful” legal transactions for the purchase of vehicles from the same group, can not be successfully initiated under the institute of fraud, as the manufacturer is not a party in individual, usually sales contracts. There is some publicly available information that the first judicial decisions were issued in the Federal Republic of Germany (Germany). When parties (buyers) filed a lawsuit against a vehicle trader to annul the contract, the court decided that the trader was not guilty for the manufacturer’s fraud (according to the court’s findings, there is no data or indication that traders were aware of manufacturer’s manipulations). Here, we should point out that the Republic of Slovenia uses the same, so-called continental European, legal system.

In our opinion, the nullity sanction – as the most severe sanction – does not (or should not) really be considered in this case (even considering the theory of escalating invalidity of contract), even though it takes into account elements of indisputable fraud (or manufacturer’s fraud) and the fact – if it exists and will be asserted by any buyer – that the contract was concluded because (intention) of advertising about the compliance and fuel economy of vehicles, whereby (if and which) (compulsory) environmental regulations were violated, which – according to our opinion – include appropriate prescribed European environmental standards. We are aware that this is the most severe sanction for a contract; however, we are also aware that the concrete judgment is left to individual courts in specific cases.

With the institute of nullity, any dilemmas regarding deadlines are irrelevant – the right to assert nullity is never extinguished. Nevertheless, in theory, if nullity could be asserted, there may arise dilemmas on convalidation or conversion, if mistakes can be fixed and restored (harmonised with applicable compulsory regulations and contracts). Considering this option, we believe that such a severe sanction and its consequences (claim in restitution) would actually and legally be (more) harmful than beneficial for buyers. This would simply be a significant encroachment with a wide scope onto contractual relationships, as contract are and were mostly performed (vehicles delivered, used by buyers for a short or long period of time, generally paid before delivery, by cash, by business credit or third party, e.g. lessor, which remains the owner until the lease expires). However, this is “just” one of the vehicle characteristics – emissions and discharges into the environment (which, by itself, considering the scope of the difference and mass multi-million harm to buyers, is definitely not actually and legally insignificant), considering that vehicles should have been (and are, in my experience, too) normally drivable (meeting the conditions for normal and intended use), and are (according to public guarantees and distributer’s statements) technically safe. Last but not least, buyer had (have) benefited – vehicles were (are) used for their basic purpose, and traders would probably claim for recovery of benefits/enrichment, which would, according to our opinion, actually additionally harm the injured parties – buyers. We can definitely expect such claims as well, but their results are quite questionable and uncertain in our opinion; ultimately, the courts will have to examine the reason/nullity sanction, weighing it by virtue of office, whereby, in addition to violation of compulsory regulation (non-compliance with standards, if and to what extent in a specific case), the principal immorality and reprehensibility of deceitful conduct of the Volkswagen Group could play a role.

The alleged absence or impossibility of this sanction has no effect in any way on the existence of trader’s liability for material defects, existence of liability for damages, and criminal consequences for Volkswagen Group’s conduct. Our opinion in this regard is confirmed mutatis mutandis by case law (Decision of the Supreme Court of the Republic of Slovenia ref. no. II Ips 284/95 from 26 March 1997), which determines nullity on a case-by-case basis, considering the provisions of the Obligations Code and other regulation. In principal, our legal order attempts to preserve the validity of legal transactions. The nullity of legal transaction is the most severe and extreme sanction. When determining the nullity of a legal transaction, the court must analyse the violated norm, its purpose, and the intensity of encroachment onto general and particular interests. A party’s conduct has to be examined from the perspective of unlawfulness (violations of peremptory regulation) and from the perspective of immorality. Another important circumstance is whether or not the legal transaction was performed. In this regard, it is also necessary to determine whether or not the nullity sanction with establish the situation intended by the norm. If nullity does not contribute to the resolution of forbidden situation, another solution has to be found within the framework of legal options. The only prohibited consequence of conduct in this particular court case is unpaid tax; according to the court, it is rectifiable in terms of administrative law (also in relation to the discussed subject, inadequate tax is a rectifiable consequence, but is not the only one; environmental pollution remains – at least until the eventual rectification of mistakes). In the discussed judgment, the court considers as relevant the fact that nullity would have consequences not only in the relationship between the litigating parties, but also on the buyer (third party), which is also the case in the situation discussed in the master’s thesis (the buyer suing the seller for nullity of contract is actually encroaching on the relationship between seller and manufacturer, as the seller, if not aware of the unlawful conduct by the manufacturer, has (particularly) damage claims towards the manufacturer).

In regards to termination of contract due to non-performance, we agree with the legal theory in principle that a decision has to be made in the specific case whether the issue is non-performance (whereby the buyer gives the seller an appropriate additional deadline for the performance of obligations, and then the contract is annulled) or (just) incorrect performance with a defect (when the buyer can/must use warranty claims). We believe only the latter can be reasonably considered. Purchase contracts were (in essential part – delivery of subject and payment of purchase money) performed, however, there is (albeit essential) defect in characteristics of the subject. In this part, considering the consequences of an annulled contract, as it is essentially performed, each party is entitled to a return of what was given, and each party owes the other party compensation for benefits (use of vehicle) received from what must be returned or compensated. Consequences of an annulled contract, if they were to happen, do not benefit the buyers per se as the significantly weaker legal subjects. Our opinion is reinforced by the provision of Article 110 of the Obligations Code, as an individual legal transaction can be considered mutually performed in the essential part, which excludes the possibility of withdrawal from the contract. Even though the purpose of this provision is to prevent termination of contract due to insignificant causes, which, in our opinion and in itself, vehicle emissions and discharges – exceeding those advertised and prescribed by over 40-times – are certainly not. Based on legal theory, which we agree with, it is necessary to examine and proceed from the cause of the contract: is the purpose of contractual relationship such that defective performance can be deemed non-performance. Case law (Decision of the Supreme Court of the Republic of Slovenia ref. no. II Ips 389/2000 from 25 April 2001) otherwise states that a non-performed (one) ninth of an obligations represents an insignificant part. Opinions on concrete cases will be formed by case law.

Source: Pravni vidiki afere Dieselgate [Legal Aspects of Dieselgate] (master’s thesis), 2016, Damjan Merhar

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