The essential elements of a contract are the goods and the purchase price. In principle, the sales contract is concluded when the buyer and seller agree on the goods and the purchase price. The fundamental and essential obligation of the seller is to hand over the goods to the buyer in such a manner that the latter obtains the right of ownership (Article 435 of the Obligations Code). Another important obligation of the seller is the liability for defects, which is concretely defined (enacted in law) by the Obligations Code in Articles 458 to 466.

In the article, we focus on key theoretical emphases of the institute of seller’s liability for errors. In upcoming articles, we will focus on the manufacturer’s guarantee for faultless operation, and then infer potential (non)applicability of this institute, specifically in direct relation to the discussed affair, while considering consumer rights as lex specialis, which are more favourable in principle and examined in a separate article.

Liability for errors
Liability for arrors generally covers errors of goods that were present at the time when the risk was assumed by the buyer, regardless if the buyer was aware of them or not. However, the seller is liable also for errors that become apparent after the risk is assumed by the buyer if they are caused by something that existed before that time. An insignificant error is not taken into account. This is one of the fundamental liabilities – obligation of seller (in case of fulfilment with error). The seller’s liability for errors is an obligation relationship, in which the seller – whose subject of performance (goods handed over to the buyer) is defective – is obligated to rectify the negative consequences of such errors in a legally protected sphere of the buyer, and the buyer is entitled to request rectification of such negative consequences. This is a special type of seller’s liability for errors (breach of contractual obligations for correct performance – without errors).

The basic presumptions of liability, which will be detailed below, are therefore general (positive) and special (positive and negative). The general are: the goods that are subject of performance of seller’s conduct have an error, and the cause of the error originates in the seller’s sphere. The special are: negative – the buyer was not aware of the error and was not obligated to be aware of the error at the time of conclusion of contract; positive – timely notification of the error in the case of latent errors – the error becomes apparent within the 6-month warranty period, with judicial enforcement of claim within a 1-year (preclusion) warranty period. There is also a negative presumption, specifically that an insignificant error is not taken into account.

Below, we define these presumption in terms of their essence in legislation and legal theory.

The goods have an error if they lack the characteristics necessary for their normal use or transaction, if they lack the characteristics necessary for special use for which the buyer is making the purchase, of which the seller was aware, or should have been aware, if it lacks the characteristics of features that were explicitly or implicitly agreed or prescribed, and if the seller handed over the goods that do not match the sample or model, unless the sample or model was shown for information purposes only. Normal characteristics primarily include those that are in commercial transactions the most common characteristics of goods of a specific type, as well as characteristics defined/prescribed by technical and other regulation, or defined by other codes of conduct of the profession (for new goods, these represent rules that apply during the conclusion of contract, while for used goods, these represent rules that applied when the goods were manufactured). Determination of the goods that are subject to the seller’s performance is an essential (necessary) element of a sales contract. In order for the sales contract to be validly concluded, the contracting parties must determine (specifically define) the goods that are subject to the seller’s performance obligation. The manner of determining (characteristics, features) the goods that are subject to the sales contract depends on the type of goods and the manner used in commercial transactions for concluding sales contracts for such type of goods. The characteristics of goods can be explicitly or implicitly agreed. An insignificant defect is not taken into account. The difference between apparent and latent error is essential due to the (timely) notification (immediately, within 8 days, related to different actual times) of the seller by the buyer.

It is assumed that the cause for the error originates in the seller’s sphere (i.e. sphere of the party whose performance is defective). If a (latent) error become apparent within the warranty period, it is assumed that the cause (already) existed when the risk of accidental destruction or damage to the goods was assumed by the buyer. The time when the above risk is transferred is regulated by the Obligations Code, specifically the moment when the goods are handed over by the seller to the buyer, or when the buyer enter creditor’s delay by accepting the goods. The seller can (only) waive liability if it proves that the cause for the error does not originate in its sphere. Examples include improper use of the goods by the buyer, on which the seller generally has no influence; however, the seller must foresee that the buyer as layman usually does not know any potential special (more complex) rules regarding the use of the goods, which requires that the seller adequately informs the buyer of these rules on use of the goods (instruction manual). Correct use of the goods that have the characteristics of permanent goods (e.g. real property) includes maintenance.

The buyer must not know, or must not allow the possibility to know (or should know); this is a negative presumption that the goods do not have the usual characteristics and contractually agreed or prescribed characteristics. The purpose of this presumption is explained by the circumstance that the seller should not be liable for an error if the buyer agreed to the error. It is assumed that the buyer (when concluding the contract) had agreed to purchase the goods with such characteristics and had not considered them an error (adding: at all). The buyer is therefore obligated to perform due diligence, which is only possible when the buyer could (adding: actually) inspect the goods when concluding the contract, and had not been deceived by the seller’s statement that the goods have no errors or that they have specific characteristics or features.

The basic dutys of the buyer in relation to the discussed institute are the inspection of the goods and notification about any errors, which are regulated by Articles 461–465 of the Obligations Code.

The buyer is obligated to either normally inspect the goods received or put them inspected as soon as possible, considering the normal procedure, and to notify the seller of any apparent errors within eight days, or immediately for commercial contracts, otherwise the buyer waives any rights to this error. If the inspection is conducted in the presence of both parties, the buyer must immediately inform the seller of any comments on apparent errors, otherwise the buyer waives any rights to this error (warranty claims). A timely notification of error is the presumption of seller’s liability for errors – presumption for warranty claims. But the seller has to claim and prove this. The purpose of the notification of error is to allow the seller to become aware of the error and to determine its cause. The reason for the protection of this seller’s interest no longer exists if the seller is aware of or should have been aware of error (if the seller carried out its due diligence according to Article 465 of the Obligations Code).

If after the buyer accepts the goods an error become apparent, which could not be determined with normal inspection upon the acceptance (i.e. latent error), the buyer must notify the seller of the error within eight days of finding error, or immediately for commercial contracts, otherwise the buyer waives this right. The seller is not liable for errors that become evident six months after the goods were handed over, unless the contract stipulates for an extended period. A timely notification for latent errors is therefore a presumption of seller’s liability for such errors, and thus a presumption for the buyer’s warranty claims (a preclusive period). If the buyer fails to notify the seller of the (latent) error, the seller’s liability for this error no longer exists. In addition to the above, error must become evident within the warranty period, which is a further presumption of the seller’s liability, intended to protect the interests of the latter (which do not exists if the seller was aware or should have been aware of errors, if it carried out its due diligence, as stipulated in Article 465 of the Obligations Code).

Regarding the notification of errors, the Obligations Code (Article 464 of the Obligations Code) requires that buyer details error in detail and allows the seller to examine the goods. However, if the seller received the notification of errors with delay or did not receive it at all, it is sufficient if the buyer used reliable means (which by law include registered mail, telegram or another reliable means) to send the notification to the seller.

The buyer can (adding: using out-of-court or judicial means) utilise the exception under Article 464 of the Obligations Code to request that the seller rectify error or hand over other goods without errors (performance of contract), request a decrease of the purchase prices, or withdraw from the contract. In any case, the buyer is entitled to claim damages. In addition and independently of the above, the seller is also liable to the buyer for damage that occurred because of error on other goods, specifically in accordance with the general rules on liability for damages. These are warranty claims, i.e. rights of the buyer to request restitution (reimbursement) from the seller who is liable for errors of the goods for this (direct) damage (defect), which results in a lower value of the goods, in a way that corresponds to the type of this damage.

The order for enforcing individual warranty claims is not specified by law, but it is restricted with an additional presumption under Article 470, paragraph 1, of the Obligations Code (the buyer can withdraw from the contract only if it provided the seller with an appropriate performance deadline). If the seller failed to perform its obligations correctly by this extended deadline (i.e. did not repair the goods and did not replace the goods with non-error goods), the buyer can choose between all three warranty claims. To enforce the right for a proportional decrease of purchase price, such additional presumption (with an appropriate extended deadline) is not defined under the Obligations Code.

With the claim for performance, the situation is the same (equivalent) as the situation that occurs if the buyer rejects the goods and demands (correct) performance. The claims (for rectification of error or for other goods without errors) are mutually exclusive, meaning that the buyer can claim either one and is entitled to choose which one. On the other hand, how to rectify an error is a choice of the seller, who must with the chosen method achieve the (correct) results – to eliminate error, so that the goods (after error is rectified), have the characteristics of a correct performance. If the buyer executes the claim for other goods without errors (and it is objectively possible to replace the goods for equivalent goods), the buyer must return the defective goods to the seller, with mutual obligations (the buyer must return the goods in the condition in which they were accepted).

The claim for proportional decrease of purchase price has the characteristics of (unilateral) right to establish, change or terminate a legal relationship, as it changes the contractual (obligation) relationship between the buyer and seller, whereby the purchase price (content of buyer’s obligations) is appropriately reduced. The buyer must judicially enforce (appropriate statement of claim) the statement for exercising this right within the statutory period of one year of the notification of errors. If the buyer exercises this right, its obligation to pay the purchase price is altered by an appropriate decrease of the purchase price. If the buyer had already paid the full purchase price before exercising this right, it has a claim of restitution for the return of the purchase price difference. The purpose of the right/claim is to protect the principle of equal value of charges as the fundamental principle of bilateral contracts (against payment). We should mention here that this claim, as well as all other warranty claims, can be executed (by mutual agreement between parties) out of court (of course, only in the event of an agreement between parties or out-of-court settlement).

A withdrawal from the contract is a right that gives the right holder (the party entitled to withdraw) the legal option to terminate (dissolve) the legal relationship (contract) with a unilateral declaration of intent, addressed to the opposing party. The buyer’s notice of withdrawal (due to a defect) becomes effective when received by the seller (Article 14, in relation to Article 28 of the Obligations Code). The Obligation Code distinguished two different legal positions regarding the withdrawal from a contract by unilateral notice. The first is under Article 470, paragraph 2, of the Obligations Code, whereby the buyer must submit a special (explicit) statement to execute its right of withdrawal (in this case, the buyer can withdraw from the contract without providing an extended deadline, if the seller, after receiving notification of errors, informed the buyer that it will not fulfil the contract, or if the circumstances of the case clearly indicate that the buyer can not fulfil the contract by the extended deadline). The second legal position is under Article 470, paragraph 1, of the Obligations Code, whereby the buyer has to provide the seller with an additional appropriate deadline for the performance of contract, as a special (explicit) notice of withdrawal, considering the presumption under Article 471 of the Obligations Code, is not necessary. A special (negative) presumption is described in Article 475, paragraph 5, of the Obligations Code; specifically, if the buyer can not return or restore the goods to the conditions in which they were received (unless the cause does not originate in the buyer’s sphere). The legal consequences of withdrawal are evident in the dissolution – termination of a sales contract and the rights and obligations arising from it. If an individual contracting parties partially or fully fulfilled its obligations, it has a claim of restitution towards the opposing party.

The theory, considering the analogous application of Article 639, paragraph 3, of the Obligations Code (provision of work contract), gives the buyer the right that is not directly regulated by the Obligations Code in sales contracts, or in provisions of a sales contract, specifically a (fourth) right or claim to rectify error at the expense of the seller, if the seller fails to rectify error by the appropriate deadline. The buyer is not obligated to give the seller an adequate period if the seller’s actions indicate that it will not rectify error within the appropriate (extended) period.

The buyer’s rights – claims, if it notified the seller of error on time, are extinguished after one year from the time the buyer sent a notice, unless the seller’s deceit prevented the buyer from exercising said rights – claims. The period is preclusive (only the right is terminated). A special rule on the period for exercising claims (warranty claims and damage due to breach of trust; note: not indirect damage) on the basis of seller’s liability for errors precludes the application of the statute of limitation of commercial damage claims. The rule of one-year period does not apply to claims that arise on the basis of later termination (dissolution) of contract, caused by the execution of buyer’s right to withdraw from the contract due to errors (i.e. claims of restitution). The above also does not apply to buyer’s claims for reimbursement of indirect damages. Warranty claims – the right to request rectification of error, the right to rectify error at the seller’s expense (with a monetary claim for the costs of rectifying error), and the right to request other goods without errors – must be enforced in court. For both claims that have the characteristics of (unilateral) right to establish, change or terminate a legal relationship, the right to withdraw from the contract due to defects can be exercised with a unilateral statement of intent, addressed to the opposing party, while the right to request proportional decrease of purchase price has to be enforced in court. Despite the different legal theories, the predominant position is that the short period for exercising warranty claims – after which the claims are extinguished – is set to protect the seller’s interests, and is considered by the court only at the objection of the seller (and not ex officio). Considering the preclusive nature of the period, it is not subject to the institutes of interruption of the period. The seller’s deceit does not necessarily mean intentional actions to deceive the buyer (within the narrower sense of the word), but is understood more widely, i.e. any seller’s actions to deceive the buyer, preventing timely judicial enforcement of the buyer’s rights. Substantive complaints (on their own) for the reduction of purchase prices and payment of compensation for damage (due to trust) are permissible even after this period.

This strict limitation of liability for incorrect performance (particularly in terms of short warranty period and warranty claim deadline), as defined by the Obligations Code, is unique in comparative law.

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