German Civil Code update for sale of digital products

On 25 June 2021, the Bundestag adopted far-reaching amendments to the general law of obligations and sales law with effect from 1 January 2022. In doing so, the legislator is fulfilling its obligation to transpose two EU Directives. The Sales of Goods Directive repeals the Consumer Sales and Guarantees Directive, which for years shaped the case law on the interpretation of national sales law. This became necessary after the European Union had identified e-commerce as an important factor for growth in the single market. The new Directive aims to harmonise the right of Member States to promote contracts involving digital goods and services. In addition, the Digital Content Directive specifies a separate contract type for contracts involving data as the object of performance, such as streaming services, software-as-a-service solutions and social media platforms.

Despite criticism, new concept of material defect for B2B contracts too

The concept of material defect in section 434 German Civil Code (BGB) is being fundamentally redrafted. This entails a partial departure from the current subjective understanding of defects. The amended version of section 434(1) German Civil Code requires that, upon transfer of risk, the item must comply with the subjective (subsection 2) and objective (subsection 3) requirements for conformity and the assembly requirements (subsection 4) of the provision. The item meets the subjective requirements if it is of the agreed quality, is suitable for the use required by the contract and is handed over with the agreed accessories and agreed instructions. The item satisfies the objective requirements if it is suitable for the normal use and is of the usual quality.

As a result, an item may be considered defective if, despite adhering to the agreed quality, it is not suitable for normal use as well. Unlike the old legal situation, the objective and subjective requirements must now be met cumulatively. It is precisely where the quality is determined in detail by the seller and buyer in the case of complex sales items that statutory warranty rights may arise despite compliance with these agreements. This will not always lead to appropriate solutions, particularly in B2B. It is true that the underlying Directives apply only to consumer contracts. However, despite criticism, the German legislature has chosen to apply these very consumer-friendly rules also to contracts where the buyer and seller are both businesses (B2B) or consumers (C2C) in order to maintain a uniform concept of material defect. In light of this, specimen contracts and general T&Cs must be checked by sellers and updated where necessary.

Stricter consumer sales law

The special provisions in sections 474 onwards of the German Civil Code for sales contracts between businesses and consumers are being comprehensively reformed. The amended versions of sections 475b and 475c German Civil Code now lay down new rules for the sale of goods “with digital elements”. The new section 476(1) sentence 2 German Civil Code makes it considerably more difficult to make what is known as a negative quality agreement. In connection with the objective requirements for the new defect term, this amendment may cause problems for businesses. Even if the seller delivers an item of a quality in accordance with the contract, it may still be defective. As regards contracts with consumers, the legislature has now laid down very strict, and in some cases unclear, conditions for any contractual agreement deviating from this, in general T&Cs for example, which must be taken into account in the future contractual arrangements.

In addition, the amended section 475e German Civil Code provides that the two-year warranty period be suspended for four months after the initial occurrence of the defect and for two months after an attempt at repair has been made on the basis of warranty or guarantee. This may ultimately lead to a significant extension of the limitation period. Finally, the previous six-month reversal of the burden of proof onto the seller relating to the defective nature of the goods upon handover was extended to one year.

New rules for contracts for digital products

The importance of contracts for digital goods and services is reflected in the new version of sections 327 onwards of the German Civil Code, applying to contracts entered into from 1st January 2022 and earlier contracts where the supply of the digital product occurs from that date. What matters here is not the content, but the digital form. While the amendments primarily apply only to contracts between businesses and consumers, they also play a role in the business operator’s recourse against its supplier, so the impact is huge. The law provides for a special warranty right which supersedes the special rules of the sales law or rental law and thus takes precedence. A distinction is made between one-off provision through a purchase model and permanent provision. The new rules also cover digital parts of popular service packages, such as a streaming subscription when buying a smart TV or the satnav system when buying a car.

Payment with bitcoin and data also a “contract for consideration” for the first time

For the first time, the legislator also takes into account cryptocurrencies such as bitcoin. A contract for consideration for digital products also exists where the consideration is the “digital representation of a value”. At least in this respect, the previously unresolved question of whether payment by bitcoin constitutes a purchase or an exchange contract has become obsolete. In addition, the new rules also cover contracts that provide for the disclosure of consumers’ personal data instead of a fee. This is particularly relevant to social networks.

Following heated debate, update obligation leaves issues unresolved

In addition, according to the new version of section 327f German Civil Code, the business operator is liable for providing, during the “relevant time”, the updates necessary to ensure that the digital product is in conformity with the contract. These include functional and security updates, but also compatibility updates, for example after an update to a new version of the operating system. These new rules have led to a heated debate in the legislative process. It is not yet clear how the update obligation is to be implemented in practice and what is meant by the “relevant time”, i.e. how long such updates must be provided in the case of software purchases. Digital products are often based on multi-polar contractual relationships. In general, the seller of a digital product is not also the manufacturer of the hardware, software or individual application. However, as the retailer’s relationship with wholesalers and manufacturers remains unregulated, it will often not be possible for the retailer to make the updates that will be contractually due, thus creating a conflict which will also hardly help consumers. The business operator may even be liable for damage if necessary security updates are not made. As a result, retailers will have to ensure in the contracts with their suppliers and manufacturers that these parties will meet the relevant update obligations.

Some answers and even more new questions

The amendment to the German Civil Code will keep legal practitioners, businesses and courts busy with many unresolved individual issues for the next few years. Some changes were long overdue, given the ever-increasing importance of the digital Single European Market. The decision by the German legislature to apply the provisions of the consumer-protecting Sale of Goods Directive to B2B contracts leads to legal uncertainty and a particular need for legal advice. Also, the feasibility of the update obligation in practice is still unclear. In any event it is clear that given the extensive adaptations, virtually all specimen contracts and general T&Cs must be reviewed.