Yacht damage dispute clarifies product liability implications under EU directive

Introduction
Facts
Legal issues
Decision
Comment

Introduction

The Utrecht Subdistrict Court has provided further guidance under EU Directive 85/374/EEC regarding product liability in a significant dispute for yacht insurers.(1)

The key issue was whether damage suffered by a yacht which caught fire as the result of a safety defect in an air conditioning control panel should be considered damage to the defective part only, or damage to the yacht itself. The German yacht insurer argued that it was entitled to full recovery of the damage caused to the yacht, whereas the Dutch shipyard which had sold the newly built yacht maintained that recovery should be limited to the damage to the air conditioning control panel.

Facts

The owner entered into an agreement with the Dutch shipyard, a yacht dealer, for the purchase of a motor yacht. Subsequently, the seller instructed a foreign shipyard to build the vessel. However, within three months of delivery, a fire caused damage to the vessel. After expert investigation it was established that the fire was caused by an electrical defect in the control panel of the air conditioning system.

The yacht insurer indemnified the insured and sought recovery from the seller of the yacht. The court held that the fire had been caused by a short circuit in the control panel of the air conditioning system.

Legal issues

According to Article 7:24 of the Civil Code, where an object has been supplied pursuant to a consumer sale agreement but falls short of expectations based on that agreement, the owner is entitled to compensation for damages from the seller. However, under Article 7:24(2), the seller cannot be held liable where the failure in performance under the purchase agreement is due to a defect referred to in the articles concerning product liability. Hence, in cases involving product liability, the insurer can hold the seller liable for the defective part only (in this case, the control panel of the air conditioning system), limiting the insurer's chances of recovery. The question at issue, then, was whether the case concerned product liability.

Product liability is at issue when:

• a product has a safety defect which causes death or personal injury; or
• the product has caused damage to another object which is usually intended for private use or consumption and which has been used or consumed by the person suffering the loss, principally for private purposes (Articles 6:185 and 6:190 of the Civil Code).

The shipyard contended that the air conditioning control panel must be differentiated from the yacht itself, thereby leaving the yacht insurer with only limited recovery options. However, the court agreed with the insurer.

Decision

The Utrecht Subdistrict Court held that since the fire had originated in the control panel of the air conditioning system, it could be assumed that there was a safety defect. The question remained as to whether the yacht should be considered 'another object' and therefore separate in relation to the control panel. In other words, was the yacht defective as a consequence of the air conditioning being defective or did the defect affect the air conditioning only?

The court held that, in accordance with Article 6:187 of the Civil Code, a 'product' is a movable object and should be considered a product even after its incorporation into another movable or immovable object. Therefore, the control panel of the air conditioning must be considered separate to the yacht. However, the question of whether the yacht should be considered 'another object' and therefore separate from the control panel could not be answered on the basis of the definitions on product liability in the Civil Code. Moreover, EU Directive 85/374/EEC does not define 'another object'.

The court therefore reverted to the general provisions regarding property law. In December 2012 the Supreme Court (ProRail/Rijswijk Wonen NJ 2013/571) ruled that an object could be considered part of the main object if:

• the two objects were constructed specifically for each other; or
• the main object would be incomplete if that specific component were missing, meaning that the main object would no longer be suitable for its designated use.

The court held that the yacht without the air conditioning control panel would still be suitable for its designated use. However, the control panel was specifically designed for use in the vessel, with a measured recess having been made in the wooden panel against the back wall of the crew cabin where the control panel was placed. Therefore, the control panel of the air conditioning system was part of the yacht and could not be considered another object pursuant to Article 6:190 of the Civil Code.

The court held that the damage to the vessel did not result from product liability; therefore, the seller need not limit its liability on the basis of Article 7:24(2).

Comment

The decision provides guidance for yacht insurers and increases the possibility of successful recovery. Previously, there was no clear ruling in the Netherlands regarding the question of what should be considered 'another object' within Article 6:190 of the Civil Code and, indirectly, within Article 9(b) of the directive.

The court attached great value to the fact that the control panel was constructed to fit the vessel and therefore the air conditioning system must not be considered 'another object'. Further, the judgment is in line with the directive. However, the applicability of national provisions may not affect the impact of the directive, as for both categories of damages – as mentioned in Article 9 – a reasonable and full compensation for damage caused by the defective product should be guaranteed.(2)

For further information on this topic please contact Tessa Mentink or Robert Hoepel at AKD by telephone (+31 88 253 5000) or email (tmentink@akd.nl or rhoepel@akd.nl). The AKD website can be accessed at www.akd.nl.