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The basics of liability for material errors and guarantees for the smooth functioning of things in bilateral contracts

In the previous articles, we briefly discussed individual general legal concepts of contract law, and provided an insight into the topic and based on our findings explained their usefulness or (non)applicability for the Dieselgate affair. The content of the article undeniably belongs to contract law as such. Due to the legal scope and importance, however, we will discuss the issue in a special article.

In the case of a bilateral contract, each contractor shall be liable for material errors in its performance. For the material and legal errors of fulfilment shall apply mutatis mutandis the provisions of the Code of Obligations on liability for material and legal errors on the seller’s liability. It is the most important general legal concepts of law and a consequence that is essential of the topic discussed, which is why we pay the most (also theoretical) attention to them. In any case, this does not mean that we do not neglect the guarantee for the smooth functioning of things or that this one is less important.

The concept and purpose of the generally applicable concepts for liability for material errors, or frequently guarantees for material errors mean the responsibility or the obligation of the transferor to guarantee and be liable to the recipient for material errors with a bilateral payment obligatory legal transaction on the agreed and delivered thing, if the delivered thing has such error that it does not have explicitly agreed or in legal transactions objectively assumed properties, which would cause the recipient the risk of not being able to use things in an intended manner, because the thing has no useful value at all, or is this useful value significantly reduced. It is a necessary consequence of the characteristics of payment legal transactions and the generally applicable concept of law which is specific to the things or performance of the concluded contract the object of which is a thing. It is about protecting the interest of the recipient of the thing (the buyer at the sale contract) that led him to conclude the contract – that is, the interest in the (correct) fulfilment and the protection of the principle of the balanced value of duties as the basic principle of bilateral payment contracts. Enforcement of claims for liability for material errors (elimination of errors, termination of contract or reduction of price) often does not eliminate all the negative consequences caused by incorrect performance (performance by material errors) in the sphere of a contract loyal party. In order to effectively protect the interests of a contract loyal party, the law must, in addition to warranty claims, also recognize the right to recover those manifestations of damage or damage to the extent in which the enforcement of the warranty claims does not completely eliminate the negative consequences of a defective performance.

A warranty against error is the debtor’s responsibility to the creditor that the thing will provide certain benefit and that no one has the right to do things that would disturb the creditor. There is also no reason for a party to guarantee performance when does not receive payment for its performance (the so-called interest of equivalence). The warranty has an objective meaning; claims arise regardless of who is guilty of incorrect fulfilment. The rules for the purchase contract are considered as a guiding principle for all types of contracts. In comparative law, it is debatable whether a party is entitled to claim only warranty claims upon incorrect performance, or can refuse the fulfilment upon incorrect performance and demand proper performance without fulfilling the specific conditions applicable to warranty against errors. The two institutions could be strictly separated, but the law does not mention whether it can depend on the creditor whether he will use the first or second institution, which makes it necessary to take into account the “causa”, if the meaning of the contractual relationship is such that fulfilment upon incorrect performance can be considered as a failure to fulfil obligations.

Legal theory further defines material errors as those which have any irregularity or a different characteristic which must be interpreted broadly (in terms of quality, it may refer to an internal component (technical characteristics, chemical, physical properties) or to an external appearance (aesthetic point of view), to utility and function, to the condition and/or to the origin. The properties may be (specifically) prescribed or (separately) agreed upon. It can be about standards when they don’t have the mandatory (cogent) character. When there is no agreement or regulation, the usual features (normal properties – depending on the purpose of the use of the thing) are taken into consideration. General use is relevant as such, but particular specific use must be known or should be known to the transferor.

Theory classifies the forms of damages for performance by material errors by the criterion of the good on which the damage occurred and the proximity of the causal link between the infringement and the damage into three groups:
– damnum quoad rem (damage to the thing itself, direct damage). It’s about damage that can be successfully eliminate by exercising rights arising from liability for material errors;
– domnum circa rem (damage due to trust): this is a damage caused by the buyer’s dispositions, legal and actual, done on the basis of the trust that the thing has no error or that the seller will properly carry out the fulfilment (deliver the thing without error) and these dispositions, however, have proved unnecessary, useless, and possibly harmful, because of the error of things (e.g. transport, safe-keeping, storage, installation, processing costs, costs of congestion – reduction of the production process, payments to third parties due to delays or failure to provide things, lost profits and specific and abstract damages upon termination of the contract (it is an indirect damage closely related to the object in satisfaction which cannot be eliminated by liability claims for material errors);
– damnum extra rem (reflex damage): this is damage to goods other than the goods purchased, which is judged according to the general rules on liability for breach of contract; such an arrangement was also enforced by Code of Obligations.

As liability for material errors is by legal nature a specific form of business liability for damages, compensation for direct damage caused by an error (reduction in the value of a thing) can only be claimed if the assumptions of liability for material errors are met and only through the use of warranty claims (sanctions). In general, and for the purpose of this section, the assumptions of liability for material errors, which under current law comprise a breach of obligations under a bilateral contract, i.e. the object of the fulfilment has an error that appears within the specified (guarantee period), an error or cause of the error must exist during the passing of the risk of accidental destruction to the creditor, the creditor did not know and was not obliged to know about the error, the inspection of thing and the notice was made within the specified period, and claim was brought within the statutory time limit.

As previously stated (law theory), warranty has an objective meaning, and claims arise regardless of who is guilty of incorrect fulfilment and are tied to the warranty period and the review of things and notice within a specified period, but in certain situations the seller’s fault (lack of diligence) is nonetheless alternative assumption of liability for material errors, as the buyer does not lose warranty claims even when he has failed to fulfil an obligation to promptly inspect the thing or an obligation to notify the seller about error within a specified period of time, or even when error is revealed after six months from delivery of the thing (expiry of the ordinary warranty period after Code of Obligations), if the error was known to seller or could not remain unknown to him.

Theory specifically in relation to warranty claims (note: although in fact they are not) also defines warranty claims based on warranty statements – a guarantee provided by the product producer, for which the theory also states that it does not interfere or change the rules of civil law regarding the guarantee. It is up to the party to choose the basis of the claim put forward. It is about the customer receiving an additional guarantee from the warranty (added: additional guarantee from the manufacturer – producer of the product).

Mistake and warranty are different legal institutions; the misapprehension is a contractual error and the warranty error is a performance error. The warranty on material errors can only be claimed if the claiming party was unaware of such errors at the time of the conclusion. However, it is not always necessary for a party to be mistaken in this connection. Both parties are well aware that the future thing may have mistakes and misapprehensions. Warranty arrangements are also not lex specialis with respect to the mistake arrangement. If the assumptions are made, the party has the right to choose between one institution or another. There can be no obstacle for the creditor to dispute the validity of the transaction if he is mistaken about the object, but proving it for him will be quite difficult.

According to Code of Obligations and Law on Consumer Protection, there is a right to claim under the flawless operation guarantee (in the case of so-called technical goods or goods referred to in Article 15b of the Law on Consumer Protection or if the seller promised a guarantee – i.e. a voluntary basis guarantee) or from liability for material errors. These are two different legal institutes, which often cover the same cases in practice, but differ in law and provide consumers with different legal protection. It should be emphasized that the decision on the type of institute is at the discretion of the buyer, but both should not be enforced at the same time.

Source: Master’s thesis Legal Aspects of the Dieselgate Affair, 2016 by Damjan Merhar

2019-08-15T09:37:43+02:00
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