Commercial Law and Legal Ethics – The Baltic States On Their Way Towards the European Union

Den nachfolgend abgedruckten Vortrag hat Rechtsanwalt Thomas Krümmel aus dem Berliner Büro der Sozietät in Tallinn / Estland vor Vertretern der Anwaltschaft aus Estland, Lettland und Litauen und in ähnlicher Form am 04.11.2000 in Warschau auf der Tagung „Mitteleuropa auf dem Weg zum acquis communautaire“ gehalten, die veranstaltet wurde von der ARGE Internationaler Rechtsverkehr im DAV und der Europäischen Rechtsakademie in Trier in Zusammenarbeit mit den Anwaltskammern Tschechiens, der Slowakei, Ungarns, Polens und der Kammer der Polnischen Rechtsbeistände.

Die behandelte Richtlinie finden Sie  im Volltext unter http://europa.eu.int/eur-lex/en/lif/dat/1999/en_399L0044.html mit der Möglichkeit, sie dort auch in allen anderen EU-Sprachen zu lesen.

 

Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees

 

Introduction

The Directive on the Sale of Consumer Goods and Associated Guarantees (hereafter referred to as „the Directive“), has been welcomed by an author in Germany as an essential step ahead on the way to the Creation of European Civil Law.

Arguably, in view of the enormous diversity in the legal systems and traditions in Europe, any attempt to standardize important sectors of Civil Law in the EC member states is an important step. Whether it is essential will, however, depend on more subtle factors than the standardization itself. The number of loopholes left open for the national legislator upon implementation can gravely affect the unifying qualities of a directive; practicability of the rules in place is a decisive element; and at least from the European perspective, the progress made towards European Civil Law will never be greater than the member states‘ preparedness to part with national or regional niches and reservations. Speaking today to a public from future EC member states, I would identify as absolutely crucial the easiness for new members to adopt already existing European legislation as acquis communautaire upon accession to the EC treaty. The specialities of your legal systems compared against EC law alone will already confront you – like any other new member state before you – with difficulties galore. How much more complicated will things become when you „inherit“, along with all the European legal instruments, a lot of non-systematic and exceptional rules that were introduced uniquely because Germany or the United Kingdom or Portugal would not go along with anything else?

With your kind indulgence, I shall now introduce to you what we believe is a typical European directive, by briefly highlighting not only the key provisions, but also some of the points to which I have just referred as „departing“ somewhat from the straight road to the future vision of European Civil Law. I shall then take the liberty to present to you my personal conclusions, especially with regard to the fact that I have the honour of speaking to future EC law practitioners. I secretly hope that you will not agree with all of my statements so that we will have a lot of matter for discussion.

 

The Reasons Behind the Directive (Recitals)

The Consumer Goods Directive can serve as a model for the system by which many everyday aspects of our national legal orders and, indeed, economic practices are standardized and reorganized.

You will have noticed that about a third of the text of Directive 1999/44/EC consists of introductory recitals, referring not only to the basis in primary European legislation on which this directive is founded (Art. 95 of the EC Treaty [as amended], providing the adoption of measures for the approximation of legal provisions in member states which have as their object the establishment and functioning of the internal market), but also highlighting the particular motivation for the adoption of this specific Directive.

Above and beyond the harmonization within the internal market as an area without internal frontiers in which the free movement of goods, persons, services and capital is guaranteed, two key objectives may be identified: the creation of subjective con-sumer rights in favour of every citizen within the European Union (recitals 4 to 6), and the making of an important contribution towards the realization of a common European Law of Contract (expressed in recitals 5 and 23).

As a matter of fact, the European Parliament, in two resolutions of May 1998 and May 1994, has clearly formulated the objective of creating a unitary European Codi-fication in the field of Civil Law, and asked the Commission to commence work on a European Civil Code. Needless to say, this is a long-term task not only for the present, but also for the generations to come. However, the pressure under which European harmonization measures already put existing structures in the member states is sure to further increase with the creation of more directives like the one at which we are looking today, and this has already been criticised as the danger that the specific properties of the national legal orders might be „diluted“.

Nevertheless, it is early days yet for the European Civil Code, as even with the a-mendments brought about by the Treaty of Amsterdam, the EC Treaty does not provide a general competence of legislation; I would refer you to Art. 5 (1) of the EC Treaty (as amended) under which the Community shall act within the limits of the powers conferred upon it by the Treaty and of the objectives assigned to it therein; as a matter of fact, in areas outside of its exclusive competence, the Community may only take action in accordance with what is called the principle of subsidiarity. Therefore, in real terms, the Directive is not as revolutionary as one may perhaps assume.

Those of you not too familiar with European directives may be interested to see that the majority of the recitals not only sets out the general political strategy which led to the adoption of the Directive, but contains a rather concise commentary of the legal considerations behind nearly each of the individual provisions. This method is a pre-requisite imposed upon the European legislator by the EC Treaty (Art. 253 of the EC Treaty [as amended]), and normally proves to be very useful as a help to construing a provision in later cases of doubt or conflict.

You may also wish to note that one of the clear intentions of Parliament and Council was to keep the Directive, wherever possible, parallel to the UN Convention on the International Sale of Goods (CISG) so as not to create disparity on the international level by harmonization in the European field. In effect, some of the articles are exact copies of CISG provisions.

 

Scope and Definitions (Art. 1)

The outset of the Directive is quite classical in that it contains a certain number of basic definitions. These fulfil two main functions: first, since the Directive does not cover sales contracts in general, and does not refer to any possible kind of consumer goods, the definitions impose important limits on the ambit of the Directive; onlyconsumer protection is at stake rather than the general field of sales transactions of goods. Second, the Directive is addressed at all of the member states who are under the obligation to implement its provisions, i.e. transform them into their respective national laws, until 1 January 2002. Clearly, specific legal terms like that of the “guarantee” will have a different meaning and scope of application in each one of the individual member states. Therefore, the Directive defines certain standard vocabulary as the basis for all of its provisions. As one may imagine, such definitions quite often create for the national legislator a substantial amount of difficulties, a lot of which is caused or furthered by national legal tradition. For example, when it comes to implementing the “guarantee” definition in Art. 1 (2) (e), this will perhaps be found not too difficult in a country like the United Kingdom where codification is relatively scarce, and where one is therefore used to extensive and sometimes lengthy definitions in practically every legal document. However, in countries like France or Germany where the overwhelming majority of law is written, such terms and definitions are more likely to collide with already existing and codified legal institutions.

In Germany, for instance, the consequence is that with each Directive in the field of Civil Law, especially relating to consumer protection, the Articles of our Civil Code, the Bürgerliches Gesetzbuch, are complemented by highly specialized definitions which, in the view of a number of authors, greatly affect the structure, clarity and readability of the law. Others will, of course, argue that this simply is the price that must be paid for efficient consumer protection.

If one attempts to sum up the various definitions contained in Art. 1 (2), it will be seen that the Directive only refers to contracts of sale of tangible, movable items between consumers and commercial sellers. The harmonization does not catch real estate sales contracts, contracts between business and commercial individuals or contracts between private sellers and professional purchasers. The object of the harmonization is a large part of the law on the sale of goods: the term of the defect of quality, the right of warranty, warranty deadlines, the requirement to give notice of defects (as a legislative option) as well as formal requirements to guarantees accompanying the sales contract, to name but a few. The Directive does not catch damages claims, nor does it have any effect on national rules on the passing of the risk.

The key term for the provisions of the Directive is the definition of the “consumer” in Art. 1 (2) (a), and of the “seller” in Art. 1 (2) (c), to the effect that only sales contracts concluded by the private consumer are caught by the Directive, and that the consumer’s counterpart is the “commercial seller” who sells consumer goods in the course of his trade, business or profession. Additionally, the producer of consumer goods is defined by Art. 1 (2) (d), thereby creating a link to the Product Liability Directive 85/374/EEC.

If you look at the definition of “consumer goods” in Art. 1 (2) (b), you may sense the struggle between member states’ representatives in the setting-up phase of the Directive. Even today’s text with the exceptions that it contains was not sufficient to the requirements of some of the member states. For instance, Germany initially insisted that the Directive should contain a specific exception regarding second-hand items (which are now generally within the scope of the Directive), and the UK claimed that Art. 1 (3) be inserted, excepting second hand goods sold at public auction from the Directive’s field of application. You will also notice that the guarantees caught by Art. 1 (2) (e) only cover those given without extra charge; this also was a requirement voiced by the Common Law countries where the so-called “satisfaction guarantee” for which an extra charge is imposed upon the consumer appears to play an important role.

The Directive does not always presuppose that the consumer goods in question already fully exist. There are two exceptions: Art. 1 (4) includes contracts for the supply of goods which have yet to be manufactured or produced, and Art. 2 (5), the so-called IKEA clause, refers to goods which first have to be installed by the consumer himself. Anyone who ever experienced the hardship of putting together do-it-yourself furniture accompanied by instructions reminiscent of those for a Japanese toaster will be quite grateful.

 

Conformity with the Contract (Art. 2)

Under Art. 2 (1), the seller must deliver goods which are in conformity with the con-tract of sale. This corresponds to Art. 35 CISG by virtue of which which the seller has to deliver goods to a buyer which fulfil the requirements of the contract and are therefore in conformity with the contract.

Art. 2, which should be regarded as the central provision of the Directive, is based on a legal presumption. It is presumed that consumer goods are in conformity with the contract if they comply with the characteristics set out in Art. 2 (2) (a) to (d), i.e., with the seller’s description, with the consumer’s requirements of fitness for the purpose, the general concept of fitness for the purpose, and with a normal degree of quality and performance which the consumer can reasonably expect. It follows from this that a consumer good will not be in conformity with the contract if it fails to fulfil only one of these four prerequisites. The Directive does not specify any further details regarding the conformity so that one must expect this to remain a matter for the courts who are likely to base their assessment on the provisions contained in Art. 35 (2) CISG.

To “written law countries” like Germany, the Directive’s conformity concept will come as a drastical change in as much as their legal orders may contain fine distinctions with regard to the difference between the due and expected and the real condition of a good or item. For example, German Civil Law until now distinguishes between a defect proper (Mangel) and the absence of a warranted quality (Fehlen einer zugesicherten Eigenschaft), giving rise to different categories of remedies.

Of the four elements of the presumption in Art. 2 (2), two deserve to be further highlighted:

Art. 2 (2) (b) expressly requires that the seller must have accepted the purpose for which the sold consumer good must be fit. This reflects the concern voiced by some of the member states that specific additions of purpose might be unilaterally imposed upon the seller, thereby taking consumer protection somewhat too far. The seller must also have positive knowledge of consumers’ requirements regarding the purpose for which the good must be fit; however, there is no requirement for a specific agreement between the buyer and the seller concerning a specific possibility of use of the sold good, or a specific warranty of the seller that such possibility is given. Evidently, from the consumer’s perspective, it will be quite difficult in practice to bring sufficient evidence that the seller has consented of a specific purpose for which the good must be fit. Therefore, any understanding between the consumer and the seller to this effect will forcibly have to be documented in some kind, i.e. have been recorded in writing or at least witnessed by third parties.

In Art. 2 (2) (d), the presumption contains a relatively new concept in European consumer protection. The inclusion of “public statements” into the conformity term largely exceeds the scope of what most Europeans today understand as principles of conformity. The term is, of course, aimed at advertising or commercials not only by the seller (which would be customary and usual), but also by the producer or his representative. This appears to be based on the idea that a consumer will arguably make his decision to purchase, e.g., a car, rather because of the producers advertising than because of the car salesman’s fast-talk. But as you can also see, this im-mediately caused concern that the seller’s responsibility might be excessively engaged; Art. 2 (4) contains exceptions in the seller’s favour, however imposing upon him the the burden of proof that one of these exceptions applies – that may be difficult when it comes to questions like whether or not the decision to buy the consumer goods could have been influenced by the public statement.

 

Presumption of Non-Conformity (Art. 5 [3])

It follows from Art. 3 (1) that the point in time at which the consumer goods must have been in conformity with the contract is that of their delivery. It goes without saying that the majority of defects in consumer products will not yet be known to the purchaser at the time that the item is delivered to him, but rather weeks or even months later. Unavoidably, this created the necessity for a clause with “retro-active effect”. The European Parliament and Council extensively debated any possible option for this, also in connection with the question of whether the passing of the risk from the seller to the consumer should be caught by the Directive. As you know, they decided against it in the end (cf. Recital 14), and also expressly chose to refer to the time of delivery rather than to use a legally more precise term, simply because member states should not be deprived of the possibility to preserve special provisions of national law, e.g., on mail order purchases or on default in taking delivery.

In the end, another presumption was chosen and codified in Art. 5 (3). The two pre-requisites are: the lack of conformity must exist; and it must become apparent within six months of delivery. If both are fulfilled and no evidence is brought to the contrary, the lack of conformity is deemed to have existed at the time of delivery. It may be expected that the struggle for when precisely a lack of conformity has become apparent or not, and what degree of knowledge the consumer must have had, will continue on the national level in the member states‘ legislation processes. An exception is made for cases in which the presumption is incompatible with the nature of the consumer goods or the nature of the lack of conformity.

 

Remedies in Cases of Lack of Conformity (Arts. 3 and 4)

The European legislators chose to introduce a two-step-system of consumers’ remedies in cases of lack of conformity:

In a first step, the consumer may choose to have the goods either repaired or replaced free of charge. Only where this is impossible or disproportionate, the con-sumer may make use of his right, in a second step, to have the purchase price appropriately reduced or have the contract rescinded. Whether and when that is the case will depend on whether changing over to the second step remedies will impose disproportionate and unreasonable costs upon the buyer. This does, however, not mean that the buyer may decide instead of the consumer which remedies may be taken; as follows from Recital 11 of the Directive, this question should be determined objectively.

When reading Art. 3, you will notice that some of the terminology used will soon require further specification. What, for the purposes of consumer protection, precisely is impossible, disproportionate, unreasonable, or a significant inconvenience? Especially regarding the latter term, it will be difficult to come to a conclusion as any lack of conformity and the pursuit of a remedy therefor is an inconvenience to the consumer, as it is highly arguable whether a seller should be allowed to make only one or half a dozen attempts at repairing a defective good, and as the degree of inconvenience may well depend upon the nature of the good and the purpose for which the consumer will require it (motor vehicle vs. electrical toothbrush!).

The remedies which the Directive provides are not exclusively in favour of the consumer. Art. 4 contains a right of redress in favour of the seller, enabling him to pursue remedies against the producer or a previous seller in the same chain of contracts or against any other intermediary. However, this may be quite problematic in practice. As follows from Recital 9 of the Directive, this is not intended to affect the principle of freedom of contracts between the seller, the producer, a previous seller or any other intermediary – or, in other words: unless national law provides otherwise, it is well possible for the previous sellers to only sell goods to the final seller under the condition that he waives his right of redress.

 

Commercial Guarantee (Art. 6)

The Directive expressly provides not only a definition, but also states the detailed requirements of the contents of a so-called “commercial guarantee”, i.e. a guarantee which exceeds the statutory warranty rights applicable to the sale of consumer goods, resulting in the obligation of the seller or producer to reimburse the purchase price, to repair or replace the merchandise, or to take care of it in any other way, in cases of lack of conformity. Interestingly, the rather detailed formal requirements contained in paragraphs (2), (3) and (4) of Art. 6 do not bear any direct relation with the validity of the guarantee. In fact, under Art. 6 (5), any infringement of these formal requirements will have no effect on the consumer’s right to rely on the guarantee and to require that it be honoured.

 

Time Limits (Art. 5)

Art. 5 (1) provides that the seller shall be held liable under Art. 3 where the lack of conformity becomes apparent within 2 years as from delivery of the goods. It is important to note that this is not a limitation of actions proper, but a substantive deadline: upon its expiry, the consumers’ right substantively ceases to exist (as opposed to limitation where the right itself still exists, but its holder is barred from pursuing it). That is quite consistent as any limitation of actions contained in the Directive would forcibly have to collide with similar national limitation provisions. However, it still was necessary for the European Parliament and Council to set forth, in Art. 5 (1), that this substantive time limit is the minimum which must be available to the consumer: should there exist a national statutory limitation period (formal or substantive), that period is not to expire before two years from the time of delivery, thereby ensuring that the consumer is given the minimum of two years for pursuing the remedy.

Personally, I anticipate a number of serious difficulties for national legislators to align existing national law governing the start of the limitation period with the imple-mentation of the Directive, where the rather general term of “delivery” is the only criterion to which the start of the limitation period may be connected. It should be noted that if the introduction of the two-year-liability for lack of conformity is not exactly revolutionary, it still rather drastically affects current law and practice in many of the EC member states including Germany, where the statutory limitation period today is of six months. It remains to be seen how producers and sellers will commercially react to this change in the system. Verifying and remedying defects in a consumer good of the more perishable sort like, e.g., a simple filter coffee machine, may be quite tedious a process, and producers will not view this as a great help in their apparent tendency to manufacture goods which should be replaced by the “next generation” already after a year or so rather than be repaired.

Art. 5 does, however, also contain a limitation clause which aims at improving the situation of the seller – if the member states are prepared to oblige, that is. The national legislator can but does not have to provide that the consumer must inform the seller of the lack of conformity within two months from the date on which it was detected (it being understood that the consumer is thereby not obliged to actively examine the good for a lack of conformity). The introduction of that regulation would at least be able to limit surprises for the seller to a certain extent. Note, however, that this is merely an option for member states. The European Commission had initially wanted to introduce the provision as mandatory so as to make up for the consumer’s rather generous right to choose from no less than four remedies for non-conformity; this was no longer pursued when the remedies were later restructured to give way to the two-step system which we have just seen. But if you look at Recitals 19 and 20, you can clearly sense the European legislator’s discomfort with that solution. The Commission must establish a report on the experiences made with the two-month option by 7 January 2003, and it is felt by many – probably including the Commission – that this is far too short a trial period to allow for the gathering and evaluation of comprehensive information with the option. A phenomenon which, I dare say, is not at all rare in today’s legislative workings in Brussels and Strasbourg.

 

Binding Nature and Minimum Protection (Arts. 7 and 8)

Arts. 7 and 8 contain provisions of a kind which has become quite customary in other consumer protection directives of the EC. They encompass the prohibition of any contractual terms or agreements which are concluded with the seller before the lack of conformity is brought to his attention which directly or indirectly waive or restrict the rights resulting from the Directive. This not only catches any waivers which may be contained in general conditions of contract (the famed „small print“), but also applies to agreements which have become quite customary in some member states, such as “sold as inspected by purchaser” which do not expressly exclude consumers’ rights, but which eventually lead to the same result.

The provision enables member states to provide slightly different rules for the sale of second-hand goods, but only as regards a possible time period for the seller’s liability; this is a compromise reached in the European Council, and falls in line with other exceptions concerning second-hand merchandise as may be found in Recital 16 and Art. 5 (3) of the Directive.

Furthermore, there is no possibility for the selling party to escape into the application of the law of a non-member state so long as the contract has a close connection with the territory of the member states. This practically rules out the taking of any advantage from the provisions of Private International law to the consumer’s detriment.

Art. 8 clarifies that standards set forth in the Directive are but a minimum protection. They do not affect other contractual or non-contractual remedies which the consumer may have under national legislation, nor do they prohibit member states to adopt or maintain in force more stringent provisions to ensure a higher level of consumer protection, so long as those provisions are compatible with the EC Treaty in the field of sale of consumer goods.

 

Conclusions and a Look Ahead

We have selected the Directive on the sale of consumer goods and associated guarantees for presentation within today’s seminar for a number of reasons. First, it is a European legal instrument in a field typically covered – and, it may be safe to say, today practically dominated – by European legislation. Consumer protection is one of the most important objectives within the workings of the Single Market, and this Directive therefore belongs to a part of legislation which is not only extremely active, but also submitted to frequent change. When the Baltic states accede to the EC Treaty, the acquis communautaire will include legal instruments like this Directive and it will be mainly these by which the citizens in the Baltic states will almost immediately and directly be affected (and judge the advantages or disadvantages of being part of the EU).

The second reason to introduce you to the Consumer Goods Directive is that its structure is quite classical, and may serve as a good practical example to illustrate what European legislation looks like, to complement the introduction given to you this morning by colleague Thomas Zerdick.

Third, this Directive – like many other European legal instruments – highlights and illustrates the difficulties that the European Parliament and Council regularly have in juggling national customs, traditions, special interests and conventions in the individual member states with the objectives defined by the EC Treaty and the jurisprudence of the European Court of Justice (ECJ). A Directive even in the field of consumer protection – which should be commonly recognized as being to the advantage of the greatest parts of the population within the Single Market – first and foremost is a big compromise rather than a clean-cut and easy-to-apply solution. Clearly, it is as great a challenge for new member states acceding to the EC Treaty in the future to implement into their national legislations the multitude of such legal instruments already existing, as it will be to a future enlarged European Community to reach a practicable and reasonable extent of agreement among an even larger number of players in the game.

Along the same lines of thinking, one may well take another look at the question of how far we really are on the way to a European Private Law, especially with regard to the still prevailing multitude of exceptions and transitional periods as well as, of course, at the actual state of implementation of already existing directives. Some European countries, like, e.g., Italy – a regular defendant in court action brought by the Commission in the ECJ for non-implementation of secondary EC law -, still have a long way to go when it comes to implementing all of the Directives already existing and still bound to be passed.

Above and beyond these more general considerations, I think it is safe to say that the Directive on the Sale of Consumer Goods and Associated Guarantees in any case brings with it a number of substantial deteriorations in the situation of manufacturers and traders. We have seen that within the first six months, the burden of proof for the non-conformity of the goods is reversed to the detriment of traders and producers. The seller will have great practical problems to prove that the consumer has damaged or misused the goods. The concept of conformity is substantially enlarged by the inclusion of public statements such as advertisements and product information. The time limit for remedies is, by the standard of most member states, substantially increased, and with it the extent of the risk for traders and producers to have to respond to claims. It is likely that traders will try to transfer as much of that risk as possible upon the producers. It is more than likely that both producers and sellers will want to seek compensation for that risk by increasing sales prices. In the end, the consumer might well have pay for any improvement in his situation.

On the other hand, with the implementation of this Directive, overall consumer pro-tection in the field of sale of goods will doubtless have reached a very high level, and this will, of course, be greatly welcomed by large parts of the European population.

Arguably, one danger remains (which, like many other danger, will very probably work much to the advantage of our profession!) – and that brings me back to my introductory remarks. If you look at, say, the complexity of provisions on the formal requirements for a commercial guarantee, it is not unlikely that more and more EU citizens, whether they be consumers, sellers, producers or other, will forcibly require legal guidance in order to understand, make use of and cope with the fruits of these developments. Already today, we have scores of entrepreneurs walking into our practices who urgently require advice even on the more basic consequences of recent European legislation, by far not restricted to questions centering on the forthcoming introduction of the Euro. Arguably, directives like the one I have dealt with here not only contribute to making the EU a modern and more reliable place, but they also make it much less practical in everyday life.

It is with this in mind that the organizers of this seminar would like to invite you to further our contacts and to partake, already today, as much as possible of the ongoing developments in the European Union. Personally, I am convinced that this will be to your professional and, not least, financial advantage from the day that your countries join us as EU member states.