The German Federal Ministry of Justice and Consumer Protection (“BMJV”) recently proposed a draft bill to amend liability for defects under the sale of goods law in section 439 of the German Civil Code (“BGB”). The draft law seeks to address the inconsistency that in B2B transactions sellers’ culpability is required for liability for removal and reinstallation costs, whereas in B2C transactions culpability is not required. However, the draft law abandons the principle that a contractual partner only owes another contractual partner damages if the damage or loss has been caused by a culpable breach of duty. It contains far-reaching changes to the rules on liability for defects in the context of purchase contracts.

For instance, the draft bill includes a provision that a seller must remove the defective item and install a non-defective item or compensate the purchaser for the expenditure required in this regard as part of supplementary performance (including in transactions between businesses). The draft bill also codifies the interpretation of section 439 of the BGB in line with EU directives with regard to B2B transactions (section 439(3), BGB-E).

At the same time, a seller incurring expenditure of this kind when selling a newly manufactured item will have a right of recourse against its upstream supplier (section 445a, BGB-E), which represents an extension of the supplier recourse provisions applying to the sale of consumer goods under section 478 of the BGB to transactions between businesses.

Liability for removal and installation costs irrespective of fault

Clearly, implementation of the above changes would have far-reaching consequences for manufacturing companies, distributors and retailers. Although according to the BMJV’s comments, it aims to improve the legal situation for contractors who have purchased defective construction material and installed it under a contract for services, the impact will be felt far beyond these types of transactions. Wherever purchased products are integrated as parts into other products in a manner consistent with their purpose (in addition to the construction industry, this also affects the automotive and engineering industries), sellers will be liable for the removal and installation costs for such products irrespective of culpability, and can demand compensation accordingly from their upstream suppliers for the expenditure involved.

It is not clear at the present time what the implications are regarding the cost risk for manufacturers and distributors and the impact this will have.