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Recent decision of the German Supreme Court concerning warranty law

Recent decision of the German Supreme Court concerning warranty law: The reduction of the purchase price excludes subsequent termination of the contract for major damages.

The German Supreme Court decided on 9 May 2018 (Reference: VIII ZR 26/17) that a purchaser who initially reduced the purchase price due to a defect in the product cannot later ask for termination of the purchase contract because of the same defect, invoking the so-called « significant compensation » for higher compensation.

The factual context of the decision was as follows:

The plaintiff, a Ltd. Company, concluded a leasing agreement on a new vehicle manufactured by the defendant and put for sale.

The leasing company acquired the vehicle from the defendant at a purchase price of EUR 99,900.00 and handed it over to the plaintiff.

Shortly after handover of the vehicle, various defects repeatedly occurred. The defendant was asked seven times to repair the vehicle’s defects.

From the plaintiff’s point of view, all the defects which occurred were due to quality problems, prone to cause breakdowns (so called « Monday car »). On appeal, it stated in its submissions to the defendant that the purchase price would be reduced by 20 %. In the following period, the plaintiff again complained of two new defects.

The plaintiff then changed its claim: The claimant no longer demanded reimbursement of the excessively high purchase price despite the reduction granted, but compensation instead of full execution of the contract in accordance with § 437 No. 3, § 281 Paragraph 1 Clause 3 Clause 5 BGB (so-called « significant compensation »).

In the case of so-called « significant compensation », the purchaser returns the defective item and the seller must pay compensation for non-execution of the entire contract. In contrary to the so-called « small compensation », which provides for the reimbursement of the difference between the defective and a defect-free item, the « significant compensation » can only be claimed when the breach of contract is significant (cf. § 281 Paragraph 1 S. 3 BGB).

Before the first courts, the plaintiff was found in favour. Both the regional court and the higher court of Stuttgart assumed that the plaintiff could still effectively demand compensation instead of full-execution of the contract despite the reduction in the purchase price, and therefore demand the retroactive termination of the contract.

The German Supreme Court decided on the contrary:

The purchaser who has made use of his right to the reduction of the purchase price – in accordance with the guarantee right given to him by law – expresses his attention to keep the item despite the inherent defect and to maintain the purchase contract within the balance restored by the reduction of the purchase price. The expression of the purchaser’s consent to the price reduction is an essential component of this right and binds the purchaser to the price reduction. By claiming the price reduction, the purchaser has used his legal right to choose whether he wants to maintain or terminate the purchase contract.

With his action to reduce the price, the purchaser expressly declared his attention not to retroactively terminate the purchase contract, but to keep the vehicle at a reduced purchase price, even though he considered that the vehicle was likely to carry defects. According to the Supreme Court, it was no longer possible for the plaintiff on the basis of the same defect to claim compensation instead of full-execution of the contract (§§ 437 No. 3, 281 Paragraph 1

Sentence 3 BGB) and consequently termination of the purchase contract (§ 281 Paragraph 5 BGB).

The decision of the Federal Supreme Court confirms the opinion prevailing so far regarding the alternative relationship between termination of the contract and price reduction (cf. KG, decision of 29.10.2009, Ref. 1 U 41/08; Jauernig/Berger, BGB, 16. Aufl. 2015, § 441 Rn. 7; Palandt/Weidenkaff, § 441 Rn. 8). In theory, German warranty law provides the purchaser with various legal remedies against defective products. For instance, according to § 437 No. 2 BGB the purchaser can terminate the purchase contract or reduce the purchase price « instead of termination » (cf. § 441 para. 1 sentence 1 BGB). The price reduction according to § 441 BGB is possible if the conditions for the termination are met. However, the wording in § 441 para. 1 sentence 1 BGB also makes it clear that contract termination and price reduction are in an alternate relationship to each other. The BGH rightly decides that when a purchaser decides to reduce the price, he expresses at the same time his attention to stick to the contract.

This decision shows that of all remedies existing for the same defect, it is necessary to examine in detail which of these is the most relevant to invoke. In the present case, the purchaser would in theory still have had the possibility to claim the so called « small compensation ». Moreover, the claim for « significant compensation » would still have been possible if that remedy had been for a defect other than the defect on the basis of which the price reduction was previously claimed.

Julia Dressel                                                                                                 20 June 2018