(Non)applicability of the institute of liability for material errors and faultless operation guarantee in the Dieselgate affair

In previous articles, we examined the institutes of liability for material errors and warranties for faultless operation of goods, as well as contract of sale and consumer sales. In this article, we will determine the potential (non)applicability of the institute of liability for material errors and guarantee for faultless operation, specifically directly in the examined Dieselgate affair.

The largest affair in the history of the Group undoubtedly also represents an affair in the sense of scope of material errors as such, to the detriment of end customers companies and, particularly, consumers as an especially vulnerable group of customers, which we focus on in the article. Of course, this is not only about damage to customers, but about wider public (environmental, fiscal, etc.) damage.

We believe that this is clearly a material error as defined by law, as the cars in question do not have the normal, prescribed and (contractually) agreed characteristics. In our opinion, vehicle exhaust gases or emissions fall under the normal characteristic of the subject of fulfilment, as they are prescribed characteristics, defined by technical and other regulation (standards) or by other professional rules. Suitability of goods for normal use must also be assessed in light of ordinary goods of the same type and in light of the seller’s statements on the characteristics of the goods, which it has provided particularly via advertisement, product presentation or indications on the goods themselves. Diesel engines built into vehicles that turn out to have pollution emissions while driving significantly (up to 40 times) higher than prescribed or stated (in promotional material or brochures an individual vehicles, for example) by the seller, also do not have the characteristics and qualities that have been explicitly agreed upon or prescribed (the latest being, for example, the vehicle type-approval). The specific decision on an individual case of a vehicle, considering the specific circumstances of the specific case of the seller, the buyer, and the subject of sale – vehicle, rests with the courts. We would like to add that for the general importer and representative of vehicles in Slovenia, according to statements made, the definition of the characteristics of the vehicle as a material error under Slovenian law is not in dispute for the seller. However, in addition to the serial scope, the material error primarily involves an expert and technical issue or answers, on which many things will depend (although courts do not have this specific expertise). We find as indisputable (publicly acknowledged fact by the Group) that the (million) material errors in question occurred intentionally (planned and deliberate), which is otherwise not a legally relevant criterion for them. Generally, material errors are not “built into the goods” intentionally, which gives the case in question special or additional (or unusual in the case) dimensions.

In any case, the Consumer Protection Act, with the sanction of nullity, prohibits exclusions of liability or reduced liability of sellers, as it is defined as mandatory (peremptory) by this act, in general (when it does not involve a consumer), and the case law restrict the possibility of limitation of liability (which exists under the Obligations Code). The case law is clear: an exclusion of seller’s liability is inadmissible if it conflicts with the contents of the specific transaction, which in the case in question means if it is in conflict with the explicitly agreed characteristic. To put it another way: by the nature of the goods itself, it is not permitted to exclude the seller’s liability for the contractually agreed characteristic with a contractual clause.

We believe the material errors are hidden (hidden type). The buyers could not determine the errors despite daily use of vehicles, and could not determine such errors during a normal check when taking possession of the vehicle. Also, the buyers did not know about and could not know about such sophisticated errors that had been so carefully/intentionally built into the vehicle (software and hardware). The above is further corroborated by the fact that the errors were not detected by official institutions’ tests or the profession; the errors were generally (publicly) discovered in September 2015 when the affair broke. Consumers can not in any way be blamed for not noticing or detecting specific hidden errors themselves.

Guarantee for material errors is the most important legal institute of an objective nature (no exculpation is possible on fault-based grounds). However, it is severely limited in real life by strict deadlines. Given the fact that vehicles produced since 2009 (until 2015) are the subject of the affair, the guarantee – generally speaking – is generally inapplicable. This is particularly the case with commercial contracts or so-called non-consumer purchases, as the guarantee period under the Obligations Code is only 6 months. The Consumer Protection Act stipulates a two-year period for new vehicles and a one-year period for used vehicles. Claiming guarantee is therefore the best option for vehicle owners – consumers – who purchased their vehicle during this period. All others, and there are many of them, are excluded from the guarantee system. The sellers, regardless of whether they were aware of the vehicle error or not (according to publicly known information, they were not aware, but the opposite can be determined/established in a specific case), are liable for material errors during the guarantee period.

A further important question (primarily factual) with significant legal consequences is when the buyer became aware of or discovered the error, i.e. when the deadline for notifying the seller of the error begins (generally, a short eight-day period or immediately for commercial contracts, or two months for consumers). In this preclusion period, the key assumption is the seller’s liability for material errors. One extreme (which we do not advocate) is that the buyer detected, or could have detected, the error when he received the relevant information from public reporting (i.e. as early as September 2015). The other extreme, in our opinion, is that the buyer – particularly a consumer – is still not informed of it today. Fact is, the sellers did not inform the buyers in the Republic of Slovenia; this was done by the general importer as the representative of the manufacturer. However, as it turned out later, the general importer and representative also addressed the substance of the notification of errors by consumers. We believe – of course, case law will provide its answers or opinions in a specific case – that a notification from the vehicle distributor (importer) should also be sufficient, of course, if the seller successfully proves when such so-called service notice was submitted to an individual buyer (in the event of a buyer’s objection, the court will have to examine this issue; the fact is that the manufacturer’s letters were sent without listed dates and by ordinary mail – as such, they can not be objectively and verifiably traced or confirmed). Of course, it is possible (although we do not lean towards such a specific duty of inquiry or due diligence by the buyers on a case by case basis, especially given the fact of a specific and publicly acknowledged systematic abuse of customer rights by the manufacturer itself) that the specific case will show reasonable grounds that the buyer discovered the error on his vehicle manufactured by the Group or learned about it at some intermediate time; as an example, we refer to a public portal, a link on the German website of the Volkswagen Group (http://info.volkswagen.de/de/de/home.html?tab=check-own-car), where the buyer could (or had to, we can not make a final judgement) make a specific inquiry and inquire whether the vehicle with his (exact) chassis number (i.e. his specific vehicle) was a vehicle at issue (with a diesel engine at issue). 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 the error in entered codes from type-approval tests). These are extremely diverse, interlinked and interesting questions that case law will have to answer in specific cases. In any case, it is also beyond dispute in case law (i.e. Judgement of the Administrative Court of the Republic of Slovenia, ref. no. U 927/2004 from 1 March 2006) that it is sufficient (on time under the law) for the buyer to notify, for example, the authorised importer (and not necessarily the seller).

The legal standard of insignificant error represents a departure from the possibility of legal claims for guarantee for material errors. According to our assessment, the material error is in no way insignificant (should not be). If permitted vehicle emissions are exceeded by up to 40 times, it is not possible to even consider the insignificant material error in terms of its concept (by nature), since the issue in question in is not about the insignificant nature (characteristic) of vehicles. In theory, too, the notion of insignificance of error must be interpreted strictly, but also in accordance with the principle of diligence and fairness if the buyer were to withdraw from the contract because of an insignificant error; however, insignificant error does not mean (is not the same) that the error is minor (even as such, it can cause a reduction in the value of the goods, requiring repair or causing damage). We fully agree with all of the above and conclude that although there would be minor discrepancies in vehicle emissions or exhausts, (even) this does not yet (automatically and especially considering the millions of vehicles at issue on the market and in traffic) mean that this is an insignificant (material) error.

Here we present a decision from Slovenian case law for consideration: Decision of the Supreme Court of the Republic of Slovenia, ref. no. II Ips 1001/2008 from 7 May 2015. The plaintiff’s vehicle undoubtedly has an error, a deficiency. However, judging by actual findings of lower courts, this error is not of a nature that could result in withdrawal from the contract of sale and the recovery of purchase price. The fact that crackling or clicking of the clutch does not affect the usability or safety of the vehicle, and that the vehicle in question can be used without problems in accordance with its purpose, points to a minor, insignificant error or contractual non-conformity. In accordance with the principle de minimis non curat lex, such errors have no effect on the validity of the contract of sale and any claims arising from its rescission, despite any eventual inconvenience they may cause. We believe that “crackling of the clutch” is not comparable to environmental emissions exceeded by up to 40 times, but also that it is only a matter of time (in the case of crackling clutch) when it will fail, which can occur while driving, which can actually also cause (other) greater damage. We would also like to highlight the case law of the Court of Justice of the European Union, specifically the case of Soledad Duarte Hueros v. Autociba SA, Automóviles Citroën Espana (Judgement of the Court of Justice of the European Union, no. C-32/12 of 3 October 2013), which held that a leaking roof (a car with a folding roof) does not constitute a significant material error. This is a kind of surprising judgement or just a concretisation of the case for a specific climate and geographical environment, in which there is significantly less rain than in the Republic of Slovenia. We believe that the roof of a vehicle (errors of the roof, resulting in a leak, which does not mean that it leaks only rain) is an essential part of the vehicle and thus represents a significant error.

In relative terms and with respect to the time parameters of the affair, a short guarantee period at the principle (legal) level is resolved by the provision of Article 465 of the Obligations Code, which is only at the principle level (in practice, we doubt the success of the realisation of guarantee claims on this basis); the meaning and purpose of the arrangement is that the guarantee period, if the seller knew of the error (was aware of it or could not remain unaware of it), are beyond dispute. In the specific case and according to publicly known information, the sellers (legally separate entities) were not aware of the error – the fraud perpetrated by the Group. The question – depending on the circumstances of the case and the trial – is whether the sellers could still (and on the basis of what, for example, being directly legally or economically related to the parent company – the Group) knew (the standard of diligence of the sellers as legal person pursuing economic activities is higher here, due diligence of a good businessman) of the error. If (subsequently, in a particular case) it would be nevertheless established that an individual seller could at the minimum not remain unaware of the error, this could be of a great benefit to a specific consumer, since in this case the guarantee is limited to a much lesser degree – with only the lifetime of the vehicle, of course within the error that the seller was aware of (and not all others that may exist).

Guarantee claims by an individual consumer (available against the seller) – those that can (even) be considered with such restrictive, strict arrangement of guarantee for material errors – are favourable, particularly in the sense of additional (special) protection of consumer rights. By law, the consumer has the full possibility of an alternative (considering that a national, more favourable law takes precedence over Directive 1999/44/EC on certain aspects of sale of consumer goods and related guarantees), i.e. a choice of claims (Judgement of the Celje Higher Court, ref no Cp 133/2015 from 27 August 2015). In addition to the general legal provisions (the aforementioned directives) and principles (in particular the general principle of proportionality and the obligation to prohibit abuse of rights: participants in contractual obligations must refrain from exercising their rights that would make it difficult for other participants to fulfil their obligations), we particularly emphasise the legal orientation of some case law, which looks at claims in terms of the principles outlined – more broadly, actually, and, in all cases, the consumer does not, or could not, have fully alternative choice between all possible claims.

Based on case law, e.g. replacement (of goods) can mean replacement of individual parts and only then the vehicle as a whole. A buyer is entitled to a change of vehicle only if the vehicle has such functional error that it can not be used and no repair is possible. However, if the person with guarantee obligations is willing to repair the vehicles, a claim for replacement may constitute an abuse of the guarantee rights (e.g. Judgement of the Supreme Court of Justice of the Republic of Slovenia, no. II Ips 591/2002 from 27 November 2003 – otherwise directly related to the institute of warranty, which has similar claim options as in the case of material errors). Furthermore, the case in question (Judgement of the Supreme Court of the Republic of Slovenia, no. II Ips 968/93 from 6 April 1995) involved an error in varnish, limited to the left front fender. This error could certainly be eliminated with an appropriate repair, thereby preserving the value and functionality of the vehicle. The defendant admitted the error and offered a repair, which was rejected by the plaintiff. In such a situation, insistence on a claim for replacement of a vehicle is not justified. The purpose of guarantee sanctions is to protect the buyer when there are material errors on the subject of sale. The protection refers to ensuring normal or agreed upon characteristics of the subject of sale. If protection can be achieved in a way that is easier for the seller, insisting on the choice of a more severe guarantee sanction is contrary to the principle of the prohibition of abuse of rights (Article 13 of the Obligations Act, Article 7 of the Obligations Code). A claim for enforcement of such a guarantee sanction can not be granted legal protection. The purpose of the law is to ensure that the buyer can exercise appropriate guarantee claims. The choice of appropriate claim is up to the buyer. Restriction of choice, arising from the principle of prohibition of abuse of rights, grants an equal position to both parties.

There is (as yet) no newer and applicable case law, particularly applicable in this concrete case, specific in scope and motives and representing a world-wide fraud perpetrated by a vehicle manufacturer. To allow rectification of errors or not, with arguments for and against that it is, or will be, most likely necessary if (and because) VW, through distributors in the Republic of Slovenia, promises to rectify errors, specifically more broadly – outside guarantee and warranty periods (software and hardware) – for the buyer, specifically with the assumption that a repair/replacement is, or will be (in accordance with Article 3 of the Directive on certain aspects of the sale of consumer goods and associated guarantees), completed within a reasonable time and without any significant inconvenience to the consumer, taking into account the nature of the goods and the purpose for which the consumer required the goods. The question that arises is whether to replace only the engine of the vehicle or the vehicle as a whole with a new engine. Repair or replacement can not be claimed if they are not possible. However, modern contract law systems exclude a (subsequent) claim for performance. The United Nations Convention on Contracts for the International Sale of Goods (CISG), for example, excludes the buyer’s claim for repair if such a request is unreasonable, considering all circumstances. Unreasonableness is assessed by weighing the buyer’s interest for repair against the seller’s interest. A claim is unreasonable particularly when the cost of repair is unreasonably high compared to the cost of replacement or when such cost is not reasonably proportional to the seller’s benefit arising from the rectification of error. The Court of Justice of the European Union received two previous questions regarding a subsequent claim for performance. The first was if a buyer, having installed the purchased goods into another object in accordance with their purpose, but the goods are defective, can as part of a claim for replacement request that the seller remove the defective goods (and install new goods) or bear the cost of such removal. The second was how to interpret the objection of disproportionality, by which the seller may refuse the buyer’s claim for replacement or repair: either as relative disproportionality, which means that replacement is compared to repair, or as absolute disproportionality, meaning that repair and replacement are disproportionate, and may be rejected by the seller.

In light of the above, we believe that the seller must first be required to rectify an error (repair or replacement, so-called subsequent performance), which must occur within a reasonable time after the guarantee claim is made. In any case, a months-long or full-year period for rectification of error is unreasonably long, considering the specific error and also the method of its (planned) fraudulent installation into vehicles by the manufacturer from 2008/09 onwards. The so-called self-imposed deadline for the Group and its distributor for rectifying other errors (also generally and those not covered by the guarantee or warranty period under the law) is another matter. Although the distributor also provides rectification of errors more broadly (even beyond the guarantee for material errors) within a reasonable period, which we believe should have / should become at least (already) too long (inappropriate in this sense). There are no legal consequences regarding the above self-imposed deadline in connection with civil remedies; however, in any case the standard of a reasonable deadline under the highlighted directive (in terms of eliminating material errors when the guarantee exists – is legally valid) remains and will have to be filled by Slovenian case law, taking into account the specific circumstances of the concrete case (it does not exists). There is German case law on this subject under consideration, stating that a reasonable deadline may be a month or two, three at the maximum, but no longer in any event (summarised from: Rechtsgutachten zu Verbraucheransprüchen infolge manipulierter Schadstoffwerte bei Personenkraftwagen, URL: http://www.vzbv.de/sites/default/files/downloads/Rechtsgutachten-VW-manipulierte-Schadstoffwerte-KFZ-Oktober-2015.pdf (18 April 2016), p. 15, 40.). If the seller fails to comply with the reasonable deadline, the buyer consumer can reject the rectification of error. In this context, we present/emphasise the provision of Article 39 of Consumer Protection Act, under which the seller must fulfil the claim for an indisputable error claim within 8 days (as observed, the seller does not consider this to be an undisputed error).

A further concern arising regarding the claims of buyer is what happens if the vehicle can be repaired (in terms of the scope of the material error) within a reasonable time (can be technically), but such repair will result in (cause) others errors and irregularities on the vehicle. There are speculations in the public (including professional) that after the material error in question is rectified the vehicle will not (can not) have the same performance and that fuel consumption will increase because of the intervention on the vehicle. We believe that if this happens (but the answer, concrete and final, will be given by the competent experts in mechanical engineering, and in particular through ongoing litigation by competent court experts), this will constitute a new material error or irregularity on the vehicle, as the seller usually also promised – as two essential things at the time of sale of vehicles (based on promotional material or catalogues) – that the vehicles have high performance (a buyer usually buys a vehicle with consideration of this characteristic – based on the precisely agreed horsepower) and economical (specifically, relatively low fuel consumption or at least a specifically guaranteed average consumption for so-called mixed driving – in the city and longer distances). Considering the above, we believe that the rectification of the emission error is a unique (impossible) phenomenon, since it will cause other (in our opinion significant) material errors on the vehicle (if this occurs, which is otherwise a matter of expert assessment of a specific profession). In such an event, we believe that a buyer will be undoubtedly entitled to a new, faultless vehicles with (all) agreed-upon characteristics. However, in this context, we find that we do not fully understand – or in other words, have a hard time understanding – what and how the seller or manufacturer truly mean by the rectification of error (which they call differently). We believe that if the prohibited defeat device (within the meaning of Regulation No 715/2007) is removed from vehicles, vehicles will not meet the emission standards (logically). Therefore, the manufacturer will have to remove the unacceptable defeat device and suitably adjust the engine to meet these standards as well as the guaranteed (specially guaranteed) characteristics of proportionally low exhaust and environmentally friendly vehicles. If that is possible, we believe that, logically, also the changed fuel consumption and the impact on the engine power of these vehicles. Thus, both will need to be carried out. However, we believe this will not be sufficient to ensure that the vehicle – in a wider sense – will be without irregularities, while in a narrower sense it will be again subject of consequent/secondary material errors. It can become (as will become fully apparent with time) a kind of vicious circle, and in this sense the buyer must each time retain (have) all the rights under the guarantee for errors.

Regarding the withdrawal from the contract (for which a written statement of the buyer is sufficient), which is a legally possible claim for guarantee under the Consumer Protection Act, even on a completely alternative basis (with respect to other claims), but limited in practice by the principle of proportionality and the principle of abuse of rights, as previously highlighted, we believe that it can in fact cause concrete and material harm to the buyer – consumer. The buyer undoubtedly benefited from the vehicle (its use, despite it being defective), or has received an economic advantage from it upon their withdrawal from the contract, which will make it possible for sellers to claim, in addition to the defective vehicle, compensation for the use of the vehicle (in this part, it is up to them to claim the benefit by way of an objection or counter-claim, substantiate it and also establish it). The buyer will have a further problem if they damaged their vehicle (or if the vehicle was damaged while under their responsibility). The buyer must reimburse the seller for the benefit of the goods, even when they are not able to return the whole goods or part of them, but the contract has been rescinded, and they can only withdraw from the contract if they can restore the condition of the goods in which they received them. On the other hand, the seller is obliged to return the purchase price, with appropriate compensation in our opinion – specifically, the compensation for the use of money received from the purchase price (which is legally defined as interest on late payment from the moment of receipt of the purchase price – use and until the return to the buyer). Given the public position of sellers and distributors that the presentation of a material error under Slovenian law is under dispute in this specific case (which is not indisputable for them), a withdrawal from the contract will actually not be easy and will not end with a buyer’s unilateral written statement to the seller, and will therefore require an appropriate declaratory action as well as an action for performance by the buyer. Otherwise, if a material error is presented, is duly (promptly) notified, and when the buyer asks the seller to rectify the error and the seller refuses to do so, case law recognises the right to withdraw from the contract (e.g. mutatis mutandis to Judgment of the Ljubljana Higher Court, ref. no. II Cp 3119/2013 from 9 April 2014).

A request for a reduction of the purchase price itself is somewhat logical and realistic, requiring in principle an action in rem, whereby most cases will also involve an action for performance (given the fact that the contracts are mostly realised – vehicles delivered to buyers who paid the full agreed-upon purchase price for the vehicles to the seller). Case law distinguishes between the nature of this claim and attributes to the claim under the Consumer Protection Act the possibility of enforcement without the intervention of a court – by a unilateral declaration of will. The purchase price is reduced proportionally between the value of the non-defective vehicle and a defective vehicle, in conjunction with the time of conclusion of the contract. This will not be possible without proper evidence, at least in civil procedures, such as (more or less expensive) opinions of a court appraiser. This, in our view, represents a significant procedural and economic obstacle to buyers’, in particular consumers’, access to their legally recognised rights. Here, we agree that the concern that in such claims it is necessary to take into account that the error must nevertheless be rectified, otherwise the vehicles would not meet the prescribed standards (and could result – we might add – in a public ban on use of such vehicles).

Regarding the guarantee for faultless operation of the goods, we should mention the fact that it is (also) limited in terms of time, since it is generally valid for two years after the purchase of the vehicle. Such a guarantee can be claimed wider than liability for material errors under the Consumer Protection Act, specifically against the seller, the manufacturer, and the importer. The consequences are actually the same as in guarantee for material errors. Both institutes can not be applied simultaneously. Considering the intention and purpose of guarantee for (hidden) material errors, and the intention and purpose of guarantee for faultless operation of goods, we believe that, considering the fact that in the case of vehicles in question an error clearly existed (was installed) at the time of production of the vehicles and was (objectively and by the seller’s knowledge) present in vehicles upon delivery to buyer, it is more appropriate to consider the errors as material errors than under the guarantee for faultless operation of the goods, in which the intention and purpose is different – error (also objectively) can (also) occur at a later time, after delivery to the buyer and after their use, a fault or irregularity can occur in functioning and the goods themselves. We therefore believe that for this subject matter it is more appropriate to consider the guarantee and the rights and obligations of buyers and sellers arising from this institute than under the warranty. In the light of practice and experience, however, we find that so-called warranty claims can also be successful, especially given the fact that they are always (economically and legally and, in specific cases, usually stronger) backed by a manufacturer who made warranty commitments in the same declaration, with the buyer having no obligation to notify the error when claiming warranty (limited by a warranty period and a deadline for filing an appropriate warranty claim). The law defines the reasonable deadline for rectification of errors at (as much as) 45 days. This probably derives from the meaning of warranty, as the basis of some additional voluntary guarantee by the manufacturer that the technical goods will function flawlessly.

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

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