When drafting and negotiating technology agreements of almost any sort between German companies and US or UK companies (or companies from other common law based countries), particularly on software, one of the various Groundhog moments that one experiences is the never-ending discussion on everything that is “warranty”. Ultimately, the problems in coming to terms with each other on that subject are to a large extent the result of several misunderstandings on what the term “warranty” means for the lawyer on the other side of the table. So let’s try to shed some high-level light on the issue.
Under US law (having done my “research” looking up legal dictionaries and Ken Adams (Ken Adams is always great when having to try to understand the quirks of US style contract language; cf. also a short but true post on common-law vs. civil law terminology) a “warranty” appears to, inter alia, be – without absolute precision, plus depending on context – “any affirmation of fact” and/or “a promise” made by one of the parties to an agreement, let’s say about a piece of software. There may be implied “affirmations of fact” and/or “promises”, all or at least some of which the party may disclaim, and there may be express warranties that the party actively makes. From this, one may deduct, it follows naturally that a party, say the seller, will generally give as few express warranties as possible and will disclaim any implied warranty he possibly can. Makes perfect sense.
Not so in German law. Let’s use the “seller sells a license in standard software” situation to compare.
1. “Warranty” vs. “Gewährleistung”
The first and, in my opinion, most important point to understand is one of language and how it is used. When a German law educated lawyer reads “warranty” he or she will, generally, not understand the term to refer to an “affirmation of fact” or a “promise”, but to relate to what German law knows as “Gewährleistung”. This is the be-all and end-all of why it is so difficult to get the “warranty obstacle” out of the way. “Gewährleistung” is not a “affirmation of fact”, and even less a “promise” that a contractual party makes or refuses to make. Read this official (yes, it is bad even by government standards) translation of section 433, 434 of the German Civil Code:
Section 433 – typical contractual duties in a purchase agreement
(1) By a purchase agreement, the seller of a thing is obliged to deliver the thing to the buyer and to procure ownership of the thing for the buyer. The seller must procure the thing for the buyer free from material and legal defects.
(2) The buyer is obliged to pay the seller the agreed purchase price and to accept delivery of the thing purchased.
Section 434 – Material defects
(1) The thing is free from material defects if, upon the passing of the risk, the thing has the agreed quality. To the extent that the quality has not been agreed, the thing is free of material defects
1. if it is suitable for the use intended under the contract,
2. if it is suitable for the customary use and its quality is usual in things of the same kind and the buyer may expect this quality in view of the type of the thing.
Quality under sentence 2 no. 2 above includes characteristics which the buyer can expect from the public statements on specific characteristics of the thing that are made by the seller, the producer (section 4 (1) and (2) of the Product Liability Act [Produkthaftungsgesetz]) or his assistant, including without limitation in advertising or in identification, unless the seller was not aware of the statement and also had no duty to be aware of it, or at the time when the contract was entered into it had been corrected in a manner of equal value, or it did not influence the decision to purchase the thing.
(2) It is also a material defect if the agreed assembly by the seller or persons whom he used to perform his obligation has been carried out improperly. In addition, there is a material defect in a thing intended for assembly if the assembly instructions are defective, unless the thing has been assembled without any error.
(3) Supply by the seller of a different thing or of a lesser amount of the thing is equivalent to a material defect.
Hence, the legislator
(a) says that if you sell something it may, “upon the passing of the risk” (i.e. when you first give/deliver(/make available the software to the customer), not be “defective”. Otherwise the contract has not been properly performed.
(b) gives the parties a statutory definition of what a “defect” is or may be, depending on background and context.
Therefore, it’s not about a contractual party making a promise or expressing or implying an affirmation of fact. Rather, it is about saying that if the software that the seller sells in our example (or that the licensor licenses; but that is a discussion for another post) does not function properly, the seller has not fulfilled his or her main contractual obligation. Bearing that in mind, it immediately suggest itself why German companies tend to fight tooth and nail over the issue. For them, the seller wanting wants to disclaim everything this is equal to saying “I want your money, but am in no way liable for you receiving a functioning product. I if does not work, I’ll keep your money anyway, and you are left without remedy. Have a nice day”.
One the other hand, the statutory “Gewährleistung” is no “promise” that the goods sold under it will continue to function forever or even a certain time. Such a promise would be a “Garantie” in German law terms. A “Garantie” is indeed somewhat similar to a “warranty”, at least in that it must generally be actively given. The “Gewährleistung” only says that the goods in question must be free of relevant defects when delivered.
2. “Term” of the Gewährleistung
In many German lawyers’ minds the “Gewährleistung” has a “term” like a warranty may have, as in that if the purchased item breaks down during the term there is a statutory “Gewährleistung” claim. That is not the case, however (again using the official government translation):
Section 438 – Limitation of claims for defects
(1) The claims cited in section 437 nos. 1 and 3 become statute-barred
1. in thirty years, if the defect consists (…);
3. otherwisde in two years.
(2 )In the case of a plot of land the limitation period commences upon the delivery of possession, in other cases upon delivery of the thing.
This means the claims arisen from the “Gewährleistung” cannot by brought forever but fall under the statute of limitation relatively quickly, for software 24 months after it was first delivered to the customer. To demonstrate that a claim has first arisen, though, requires proof that the defect was already there (if maybe hidden at that time) when the purchased item was delivered.
3. Claims and remedies
As explained above, a breach of the “Gewährleistung” means that the contract in question has not (yet) been performed, the seller having failed to meet his or her obligation to deliver the purchased item without defects. Consequently, the first and main “Gewährleistung” claim for the buyer is that he or she may require the seller to fulfil that obligation by re-delivering the item free of defects. This may be done by fixing the defect or by delivering a new item.
If (and, ultimately, only if) the seller fails to do that the buyer may
(a) reduce the price to what the item is objectively worth in its defective state; or
(b) withdraw from the contract entirely (in some case partially).
In addition to, but independently from, these claims the buyer may claim damages that he or she has suffered as a result of the defect being there, provided that the seller has acted at least negligently when delivering the defective item.
The damages aspect – but at least equally important the “withdrawal from the agreement” remedy and also the “reduction in price” claim (problems for revenue recognition) – are obviously difficult to accept for US companies.
None of the issues involving warranty and “Gewährleistung” are easy to resolve, of course, as the fundamental ideas underlying the differing concepts are difficult to reconcile. And we have not even mentioned the “Gewährleistung” for the purchased item being free of third party rights, the interplay between “Gewährleistung” und “Garantie”, the problems that certain German law principles create for US-GAAP based revenue recognition and all the other usual suspects.
Ultimately, one of the parties will have to give up part of its natural position. Yet, the first and foremost task, especially for the lawyers involved, is to make a serious attempt at understanding the background of the other party’s requirements.