CROATIAN NORMATIVE SOLUTIONS FOR THE TRANSPOSITION OF DIRECTIVE 2019/771

1. Scope of application

The transposed legal solutions provided in Directive 2019/771 firstly apply to contracts of sale.[17] Article 376 paragraph 1 of the OA regulates that “by a contract of sale a seller undertakes to deliver to a buyer ownership of a thing, and the buyer undertakes to pay him the price”. Also, the norms that regulate the buyer’s right in case of a lack of conformity apply to all contracts for consideration unless otherwise provided for certain cases. One of those cases is the performance contract since the Croatian legislator has provided different legal solutions for a lack of conformity.[18] This is important from the aspect of Article 3(2) of Directive 2019/771 which regulates that “contracts between a consumer and a seller for the supply of goods to be manufactured or produced shall also be deemed sales contracts for the purpose of this Directive”. Consequently, the Croatian legislator had to regulate that in the case of consumer contracts for the delivery of goods yet to be made or produced the seller is liable for a lack of conformity in accordance with the rules prescribed for the contract of sale, regardless of whether, under the general rules, it is a contract of sale, a performance contract or another type of contract. This means that in the case of B2C performance contracts norms that regulate a lack of conformity under a performance contract would not apply.

Although the norms of the OA regulating a lack of conformity do not apply to consumer contracts for the supply of digital content and digital services, while ACD does, they do apply

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to the sale of smart goods.[19] Accordingly, those norms apply both to the consumer and commercial sale of smart goods but with some specific solutions for consumer contracts. For example, the OA regulates that in case of a doubt, it is presumed that the digital content or digital service is part of a consumer sale contract (Article 400(8) of the OA) while this presumption does not exist for commercial contracts or C2C contracts.

Directive 2019/771 allowed member states to exclude from the scope of the directive the sale of second-hand goods sold at public auctions and living animals. The OA does not exclude living animals but when it comes to the goods sold at public auctions, the OA only regulates that the seller is not liable for any lack of conformity of goods sold in a public enforced sale (Article 409 of the OA). Public auctions and public enforced sales are not necessarily the same kind of sale. Although a public enforced sale is usually a public auction, the emphasis is on the non-voluntary sale of goods during the enforcement procedure.[20] So, it can be said that the exception to the application of the norms that regulate a lack of conformity exists only for those public auctions that are a part of the enforcement procedure. However, both new and second-hand goods can be sold this way.[21] Additionally, the norms that regulate a lack of conformity generally do apply to second-hand goods[22] but they would not apply to those sold in a public enforced sale.

2. The term “lack of conformity”

While transposing Directive 1999/44 in the OA, the Croatian legislator failed to completely comply with the goals of the directive in defining when the lack of conformity exists.[23]

Having in mind that the new directive is a maximum harmonization directive, one might say that it is not possible to introduce a different regulation from the one prescribed in Articles 6 to 8 of Directive 2019/771. Those articles set out the main criteria under which it is estimated whether the seller’s performance is with or without any lack of conformity. Directive 2019/771 distinguishes subjective requirements for conformity (Article 6) from objective requirements for conformity (Article 7) and a lack of conformity resulting from incorrect installation of goods. [24] But in setting out each criterion, the European legislator enumerates the requirements for conformity in a positive way by regulating what requirements are supposed to be met. In Croatian private law, those requirements are normatively regulated in a negative sense because the norm itself starts with the wording “the lack of conformity exists…”.[25]

Also, the OA does not explicitly use the terms subjective or objective criteria.

Article 401(1) of the OA[26] regulates that a lack of conformity exists if the goods: do not fit the description, type, quantity, and quality or do not possess the functionality, compatibility, interoperability and other features as required by the sales contract; are not fit for any particular purpose for which the consumer requires them and which the consumer made known to the seller at the latest at the time of the conclusion of the sales contract, and in respect of which the seller has given acceptance; are not delivered with all accessories and instructions, including those on installation, as stipulated by the sales contract and, are not supplied with updates as stipulated by the sales contract. Through this paragraph, Article 6 of the Directive has been transposed.

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Additionally, according to Article 410(2) of the OA a lack of conformity also exists if the goods do not fit the purposes for which goods of the same type would normally be used, taking into account, where applicable, any existing Union and national law, technical standards or, in the absence of such technical standards, applicable sector-specific industry codes of conduct; the goods do not correspond to the quality or the description of the sample or model that the seller made available to the consumer before the conclusion of the contract; the goods were not delivered along with such accessories, including packaging, installation instructions or other instructions, as the consumer may reasonably expect to receive; the goods are not of the quantity and do not possess the qualities and other features, including in relation to durability, functionality, compatibility and security, normal for goods of the same type and which the consumer may reasonably expect given the nature of the goods and taking into account any public statement made by or on behalf of the seller, or other persons in previous links of the chain of transactions, including the producer, particularly in advertising or on labelling; the goods are incorrectly installed or mounted and the installation or mounting service forms a part of the sales contract and was carried out by the seller or under the seller's responsibility; the goods that were intended to be installed or mounted by the buyer are incorrectly installed or mounted, and this was due to the shortcomings in the installation instructions provided by the seller or, in the case of goods with digital elements, provided by the seller or by the supplier of the digital content or digital service.

This means that Article 401(2) of the OA combines the objective requirements for conformity regulated in Article 7 of Directive 2019/771 with the incorrect installation of the goods referred to in Article 8 of Directive 2019/771. The reason for such an approach can be found in the regulation of the term “lack of conformity” in a previous version of the OA[27] which was more alike to the legal solutions from the 1978 OA.

Furthermore, Directive 2019/771 introduces third party rights[28] in Article 9 as a possible reason for a lack of conformity. This norm emphasises intellectual property rights which might limit or prevent the use of the digital content or digital service relevant for the goods with embedded digital content or digital service. Also, it has to be noted that by this novelty, regulation of the lack of conformity for the first time includes the seller’s liability for the legal defects on the European level. The major particularity in the regulation of third party rights is the alternative approach of the EU legislator.[29] It leaves member states an option not to include this solution in their private laws if they already regulate nullity or right to rescind the contract if third party rights limit or restrict the use of digital content and digital services.[30]

In Croatian private law a set of norms regulate the seller’s obligations in case of third party rights under which the buyer has, among other rights, the right to terminate the contract.[31]

While transposing Directive 2019/771 the Croatian legislator has been confronted with a problem of the wrong translation of Article 9 in the Croatian version of the directive. The words relating to nullity and termination of the contract were translated as “null and void” as a consequence of third-party rights.[32] Nevertheless, Article 9 of Directive 2019/771 has not explicitly been implemented because the rules on legal defect can apply since they provide a right to terminate the contract.[33]

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3. Liability of the seller in case of a lack of conformity

When it comes to the liability of the seller, several conditions have to be met in order to legally establish his liability. First, a general prerequisite of the seller’s liability is a lack of conformity itself as defined in the previous chapter. According to Article 400(1) of the OA, a lack of conformity has to exist at the moment of the passing of the risk to the buyer. Directive 2019/771 does not use the same terminology. Article 10(1) of Directive 2019/771 uses the words “when the goods were delivered”. One might say that Croatian approach of the regulation of this moment in time is wider because the goods might not be only delivered but they can also be given personally to the buyer, for example in the store.[34] Additionally, the seller is liable for any lack of conformity which becomes apparent after the transfer of the risk to the buyer if it arose as a result of the cause that existed previously (Article 400 (2) of the OA). In the case of goods with digital elements, the risk passes to the buyer at the moment in which the one-time delivery of digital content or digital service is performed or when the continuous delivery of digital content or digital service started (Article 400 (6) of the OA).If the item is to be installed or mounted by the seller or a person for whom he is responsible, the risk passes to the buyer at the time the installation or mounting is completed (Article 400 (7) of the OA).

The moment of the passing of the risk, as a part of the first prerequisite is in connection with the burden of proof.[35] Under Croatian law it is presumed that any lack of conformity of the goods, including goods with digital elements, that appeared within one year from the moment of the risk transfer existed at the moment of passing the risk to the buyer, unless the seller proves otherwise or if the contrary can be derived from the nature of the item or the nature of the defect (Article 400 of the OA).[36] Such regulation of the burden of proof is, with good reason, regulated differently for commercial contracts.[37] Since such level of protection of buyers in commercial contracts is not needed, the presumption exists only for the period of six months. Additionally, in the case of consumer contracts for the sale of goods with digital elements, if the continuous supply of digital content or digital service is provided during a certain period, the burden of proof that there is no lack of conformity of digital content or digital service is on the seller within two years, but in the case of continuous delivery of digital content or digital service for a period longer than two years, the burden of proof that there is no lack of conformity of digital content or digital service is on the seller for the entire period for which the delivery is contracted (Article 400(11) of the OA).[38]

The second prerequisite for the liability of the seller concerns the knowledge of the existence of the lack of conformity. Knowledge of the seller of lack of conformity is not relevant, which means that he will be liable even if he did not know that the lack of the conformity existed.[39]

On the other hand, the seller will not be liable either if the buyer knew of the existence of the lack of conformity or it could not remain unknown to him at the time of the conclusion of the contract. Article 402(2) of the OA regulates that “it is presumed that the buyer could not have been unaware of the defects that a prudent and diligent person having the average knowledge and experience characteristic of a person of the same occupation and profession as the buyer could easily have noticed during a usual examination of the goods”. In addition, the OA regulates that this provision is not applicable to consumer contracts, which means that the trader

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has to prove that the consumer as a buyer knew or must have known that he was buying goods with a lack of conformity in order to avoid his liability.

The seller is liable for any lack of conformity which becomes apparent within two years of handing over the goods to the buyer, i.e. six months in the case of commercial contracts (Article 404(2) of the OA).[40] According to Article 10(3) of Directive 2019/771, member states may introduce longer time limits.[41] However, the Croatian legislator opted for a minimum protection of consumers.

Another important novelty introduced in Directive 2019/771 creates new seller’s obligations and liability concerning updates to digital services and content of smart goods. Although the obligation to provide updated goods is regulated along with subjective requirements for conformity in Article 6 of Directive 2019/771, the transposition of that legal solution is not the one dealing with the updates. Those basic subjective requirements for conformity became a part of the norm regulating the existence of conformity as previously explained, and such legal solution is applicable to all contracts. But when it comes to a legal solution that regulates the seller’s obligation to supply with updates, including security updates, that are necessary to keep those goods in conformity, it is transposed through a special norm.[42] Article 401a of the OA introduces the seller’s obligation for those future updates, but only for consumer contracts.

Under Croatian private law it is possible to limit or to exclude the seller’s liability. Such disposition can be based on a contractual provision. Such contractual provisions shall be null if the seller already knew of the existence of the lack of conformity and he failed to notify the buyer, and in a case where such contractual provision was imposed by the seller because of his monopolistic position.[43] Consumers are even better protected in case of a possible exclusion or limitation of the seller’s liability. Such provisions in consumer contracts will not be binding on consumers before the moment of notifying the seller about the lack of conformity.[44]

Overall, it is stipulated that if the buyer, which is not necessarily the consumer, has renounced his right to terminate the contracts, still has other rights (Article 408(4) of the OA).

The seller’s legal position has been changed by the transposition and special regulation of the right to redress.[45] Additionally, Article 18 of Directive 2019/771 stipulates that “the person against whom the seller may pursue remedies and the relevant actions and conditions of exercise, shall be determined by national law”. First of all, Article 422a of the OA regulates that the seller in respect of whom the buyer has exercised the rights concerning liability for a lack of conformity may exercise the rights concerning liability for a lack of conformity in regard to his seller (the previous seller). The first condition is that the seller is authorized to exercise the rights towards the previous seller only if the preconditions of liability for a lack of conformity are met in the relationship between him and the previous seller.[46] The second condition is that the seller has informed the previous seller without delay that he has repaired or replaced the item to the buyer, reduced its price or that the contract with the buyer has been terminated, and provide him with all the information important for assessing liability for material defects. The final condition is that no more than two years has passed since the transfer of risk between the previous seller and the seller.[47] The legal nature of the presented legal

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solution is not mandatory and the OA in Article 422a(5) explicitly stipulates that the previous seller and the seller may agree on other deadlines, exclusion, limitation or extension of liability.

A parallel set of rules regulating possible seller’s liability are those regulating commercial guarantees of durability of goods. Under those rules[48], both the seller and the producer are liable for any lack of conformity arising from the warranty statement.

4. Buyer’s rights

The centrepiece of the regulation of lack of conformity as a special aspect of sale of goods on the EU level are without any doubt buyer’s (consumer’s) rights. Before elaborating on legal remedies, it is of importance to draw attention to the buyer’s obligation to notify. Article 12 of Directive 2019/771 stipulates that “Member States may maintain or introduce provisions stipulating that, in order to benefit from the consumer's rights, the consumer has to inform the seller of a lack of conformity within a period of at least 2 months of the date on which the consumer detected such lack of conformity”. In Croatian private law such an obligation existed even in the 1978 OA[49] and is in a way a part of legal tradition. It is not a surprise that even while transposing Directive 2019/771 the Croatian legislator decided to keep this obligation of the buyer. The regulation of the obligation to notify is not the same for commercial contracts and consumer contracts. In case of a visible lack of conformity[50] the buyer in a commercial contract must notify the seller within eight days and consumer within two months. The same timeframe exists for consumers in case of a hidden lack of conformity[51], while the buyer in a commercial contract must notify the seller about the lack of conformity immediately. Only the buyer who has notified the seller is entitled to legal remedies.

A crucial change for Croatian private law is the regulation of the hierarchy of legal remedies.

Although the transposition of Directive 1999/44 in the OA at first glance gave the opportunity for a free choice of remedy, a more careful observation of the norms leads to the conclusion that the buyer was not entitled to choose termination of contract as the first and only remedy.[52] The new legal solution resulting from Articles 13 to 16 of Directive 2019/771 provides a clearer distinction between the legal remedies available to the buyer.

Under Article 410(1) of the OA, the buyer, in the event of a lack of conformity, is entitled to have the goods brought into conformity, to receive new goods without the lack of conformity, to demand a proportional price reduction, or to declare a termination of the contract.

Additionally, in each case the buyer is also entitled to have the damage repaired according to the general rules on liability for damage, including damage sustained by his other goods.[53]

The buyer may choose between repair and replacement, unless the remedy chosen would be impossible or, compared to the other remedy, would impose disproportionate costs on the seller, taking into account all circumstances, such as the value the goods would have if there were no lack of conformity, the significance of the lack of conformity, and whether the alternative remedy could be provided without significant inconvenience to the consumer.[54]

If one of the conditions is met, the seller might refuse to replace or to repair the goods (Article.

410(4) of the OA).

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When it comes to the repair and replacement, they must be free of charge and performed within a reasonable time[55]. However, the buyer must make the goods available to the seller, and the seller is obliged to accept them, and bear related costs. Also, the seller has the obligation to install the goods and even replace installed goods and must bear the costs of such removal and installation.

The buyer is entitled to a price reduction or termination of the contract when replacement or repair did not occur.[56] The buyer is entitled to terminate the contract only if he has previously given the seller additional reasonable time for contract fulfilment (Article 412(1) of the OA).

Also, the buyer need not allow a reasonable time if the seller has informed him that he will not fulfil the contract, or it is obvious from all circumstances that the seller will not fulfil the contract. The contract will be terminated ex lege if the contract is not fulfilled by the seller during the given additional time unless the buyer has explicitly declared that he maintains the contract to be in force.[57] Transposition of Directive 2019/771 has resulted in a special provision applicable only to consumer contracts. New Article 413a of the OA stipulates that if the seller fails to fulfil the contract in a reasonable time, the consumer is entitled to declare that the contract is terminated. This means that in consumer contracts termination of the contract depends on the consumer’s disposition.[58] It is not regulated how this disposition has to be done, for example if it has to be presented in a written form.[59] In general, this approach in consumer contracts is different from traditional legal solutions of termination of contract ex lege if the contract is not fulfilled in additional reasonable time. While transposing Directive 2019/771 the Croatian legislator kept some legal solutions on termination of contract such as the loss of the right to terminate the contract[60] and legal consequences of the termination which have been slightly changed.[61] Article 419(3) and (4) of the OA additionally stipulate that if the buyer has terminated the contract, the buyer must return the goods to seller at the seller’s expense, while the seller must reimburse the buyer.