Feedback statement

“Q&A Do warranties in purchase agreements qualify as insurance?”

The Netherlands Authority for the Financial Markets (DNB) published the draft Q&A “Warranties in purchase agreements, insurance or not?”¹ (hereinafter draft Q&A) on 12 June 2018 for consultation regarding the qualification of warranties in purchase agreements. DNB appreciates that various parties have provided feedback on the consultation. As a result, the Q&A has been amended in several respects.

This feedback statement addresses in more detail the main topics arising from the responses to the consultation. It does not indicate which person or institution the responses originated from. Where the responses to the consultation led to adjustments in the Q&A, this is mentioned.

The consultation period for the Q&A ended on 24 August 2018. The Q&A is an expression of DNB’s current policy.

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Background to the consultation

DNB publishes Q&As to provide insight into certain aspects of DNB’s supervisory practice. The reason for a Q&A may be that the same questions frequently arise from the market sector regarding the aforementioned supervisory practice, or that DNB has developed certain (new) insights on the matter. Q&As do not have the force of law and are not legally enforceable.

DNB may choose to consult on a draft Q&A; this is not a requirement. Considerations that play a role in the question of whether a draft Q&A is consulted or not include (among others) the degree of complexity, the existence of potentially divergent interests, or the material impact of the issue.

¹ http://www.toezicht.dnb.nl/3/50-237227.jsp

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Consultation responses

General

The consultation was largely positively received. DNB also received responses from respondents who stated that they would be disadvantaged by the (draft) Q&A in connection with their business model. DNB has taken their position into account in the formulation.

Open norms

In the consultation response, it is noted that the criterion formulated in the draft Q&A for assessing warranties in purchase agreements still does not provide full clarity, among other things because the assessment uses open norms. DNB notes that this is correct, but that in light of the legal assessment framework of the concept of “insurance” within the meaning of Article 1:1 Wft jo. 7:944 jo. 7:925 BW, it is not possible to provide a clear demarcation. The legislator has indeed explained that with the description of the insurance concept in the aforementioned articles, he did not intend to provide a conclusive definition, but that the ultimate boundaries must be drawn by the courts. In the absence of guiding jurisprudence for situations such as those in question here, DNB can therefore provide further clarification of the concept of damage insurance within the boundaries of Article 7:925 jo 7:944 BW jo. 1:1 Wft. To clarify the open norm, the definitive Q&A will use the concept of “social views” instead of the concept “generally accepted standards”. Although this is also an open norm, this term is common in civil case law, so it may offer more guidance. In the draft Q&A, DNB also tried to indicate as much as possible how DNB will make this assessment and which factors play a role in it. The circumstances of the concrete case remain relevant, however.

Expected lifespan

In the draft Q&A, DNB indicated that one of the criteria against which DNB assesses a warranty in a purchase agreement is whether the warranty period is evidently longer than the lifespan that may reasonably be expected of the purchased product. One of the most important, repeatedly recurring questions in the consultation is whether this aims to align with the concept of conformity within the meaning of Art. 7:17 BW.

To clarify the use of the concept “expected lifespan”, the following is noted. The expected lifespan as meant here does not necessarily have to be equated with the period during which the purchaser could invoke the conformity requirement of Art. 7:17 BW. The expected lifespan may exceed that period, and is in principle to be described as the period that ends at the time when the purchaser is generally deemed to decide to replace the product in question (“economic lifespan”). Depending on the circumstances of the case, it can be stated that the expected lifespan is deemed to have been exceeded if there is clearly an unusually long period for the product in question. DNB wanted to express this with the word “evident”. DNB will supplement the Q&A on this point as a result of the consultation response by adding this explanation.

Subordination

In the consultation responses, further clarity was requested regarding the concept of “subordination”. Inherent in the starting point expressed in the draft Q&A that DNB uses in its assessment (“the warranty is generally regarded as damage insurance according to generally accepted standards”) is that no conclusive answer can be given to the question of when a warranty is subordinate to the purchase agreement. This will be assessed based on the circumstances, including the legal relationship between the parties. At its core, it means that the dominant character of the purchase agreement and the subordinate character of the warranty in question relative to it mean that the insurance element of the transaction loses independent significance and is absorbed by the “dominant” purchase agreement.

In the consultation response, the question was asked whether subordination can still be present if a warranty is agreed upon after the conclusion of the purchase agreement or if an earlier warranty is extended. DNB notes on this that as long as the warranty is a consequence of the purchase agreement, where the element of the purchase agreement is dominant, the criterion of subordination can indeed be met. It always applies that the warranty period – thus also taking into account the extension – must not evidently be longer than the lifespan that may reasonably be expected of the purchased product.

Relationship with European law

Finally, the relationship between the qualification of warranties in purchase agreements by DNB and the relationship with European law was asked about. The European insurance directives do not contain a definition of the concept of “insurance”; the concept is not a harmonized concept and is therefore interpreted nationally. The concept of “insurance” under Art. 7:925 jo. 944 BW is also a national concept. The fact that there may be European legal regulations regarding mandatory warranties and warranty periods for certain products does not stand in the way of this. On the contrary, in line with the Q&A, it is not likely that where a warranty on a product is prescribed by law (whether or not on the basis of European law), it will quickly be considered an insurance.

Nature of DNB’s opinion

The Q&A states that there is the possibility to submit a substantiated legal analysis to DNB regarding the question of whether or not licensed activities are involved. In the consultation response, it is correctly noted that DNB does not have the authority to make determinations and that DNB therefore cannot give a definitive answer ex ante on this question. Nevertheless, DNB can provide guidance by giving an opinion after the aforementioned legal analysis has been submitted; in this way, DNB can be helpful in the (licensing) process.

Nature of Q&A

It was noted in the consultation that the Q&A is in fact not a Q&A, but a binding policy rule, which must comply with certain statutory requirements regarding preparation and publication. On this, DNB notes that it has various options available to express policy, for example policy rules, Q&As, and good practices. In this case, DNB has chosen to express policy in the form of a Q&A. Q&As do not have the force of law and are not legally enforceable by DNB. DNB may also choose to consult on draft Q&As; this is not a requirement. Considerations that play a role in the question of whether draft Q&As are consulted or not include (among others) the degree of complexity, the existence of potentially divergent interests, or the material impact of the issue.