The relative relativity of contracts.

The principle of relativity of contracts (Article 1257 of the Civil Code) states that contracts only produce effects between the parties who enter into them. However, the complexity of current economic relationships has led jurisprudence to moderate this principle in certain circumstances, allowing third parties, even if they are not part of the contract, to be affected by it both passively and actively. This article briefly discusses these exceptions, focusing on third parties who do not possess an absolute nature of being unrelated or “penitus extranei.”

The Supreme Court has addressed this issue on multiple occasions. A relevant example is Ruling 167/2020 of March 11, where the responsibility of the vehicle manufacturer was discussed for installing fraudulent software to manipulate emissions. The Provincial Court of Palma de Mallorca had acquitted the manufacturer, Seat S.A., considering that there was no direct contractual link with the buyer. However, the Supreme Court nuanced this stance, arguing that, given the close relationship between the manufacturer and the dealer, and the nature of the damage caused, the manufacturer could not be considered a “penitus extranei.” Specifically, the Court stated that, in the automotive manufacturing, distribution, and sales sector, “the vehicle manufacturer cannot be considered a penitus extranei, as a third party totally unrelated to the contract.” This decision underscores the economic reality and structure of the automotive market, where the manufacturer plays a crucial role in the relationship with the final consumer, despite not being a direct party to the sales contract.

The Supreme Court based its decision on three key aspects: (1) Unity of the Economic Phenomenon: The production and sale of automobiles is seen as a unitary economic process, in which the manufacturer and the dealer are significantly interconnected; (2) Consumer Expectations: The consumer buys a vehicle relying on the brand and reputation of the manufacturer, beyond the contractual relationship with the dealer; and (3) Advertising and Product Offering: The advertising and technical characteristics offered by the manufacturer create legitimate expectations in the consumer, which must be respected.

In a similar matter, the Provincial Court of A Coruña, in its Ruling 571/2023 of September 13, addressed a case of a claim for damages due to the sale of a vehicle with fraudulent software. The ruling dismissed the lack of passive legitimacy of the distributor, Volkswagen Group España Distribución S.A., considering that the vehicle manufacturer could not be considered a third party absolutely unrelated to the sales contract. The Court noted that “The fundamental elements of economic relationships in this automotive sector are the ones at the ends, that is, the manufacturer and the buyer, while the intermediate parties (specifically, the dealers) generally have less importance.”

As we can see, recent jurisprudence shows a trend towards the flexibilization of the principle of relativity of contracts, recognizing the economic reality and the interconnection of modern contractual relationships. In sectors such as the automotive industry, where production and distribution are intrinsically linked, limiting liability only to the direct parties of the contract may be inadequate to protect the rights of consumers. The recognition that manufacturers, even if not direct parties to the contract, have a responsibility towards final consumers reflects a more realistic and consumer-protective understanding of economic relationships. Even the regime of liability of the manufacturer, if acting fraudulently, could be more beneficial to the buyer than the liability regime of the seller who acted in good faith (Article 1107 CC).

A second area where the exception to the principle of relativity has been recognized is in construction contracts and housing sales. Article 1591 of the Civil Code establishes the contractual liability of the contractor of a building that collapses due to construction defects, for damages if the collapse occurs within ten years from the completion of the construction. However, initially, the jurisprudence found that the third purchaser of the house had active legitimacy against the builder or other agents of the construction to claim the amount of the construction defects found; and subsequently, this jurisprudential regime was codified through Article 17 of Law 38/1999 on Building Regulation, which grants direct action to the owner and third purchasers of the construction to demand the appropriate liability from the construction agents.

In comparative law, especially in Common Law systems, the possibility for third parties to claim in certain circumstances is also recognized, although under different doctrines and principles, such as the privity of contract and the assumption of responsibility in English jurisprudence and the special relationship in American law.

However, this flexibilization also poses challenges and possible criticisms. One of the main challenges is to clearly define the limits of these exceptions; in other words, the precise criteria to determine when a third party is not a “penitus extranei.” Additionally, the risk of overloading litigation against manufacturers and other indirect actors cannot be ignored, which would have economic implications and negatively affect certain industrial sectors.

Notably, we cite the pair of rulings composed of Supreme Court Ruling 607/2010 of October 7 and Provincial Court of Madrid Ruling 422/2017 of November 22, which resolve similar cases where the plaintiff claimed from the manufacturer, extracontractually, for the lost profit caused by the defective operation of cogeneration engines, without there being a direct contract between the buyer of those engines and the manufacturer.

In the first ruling, the plaintiff invoked the doctrine of “unity of civil fault” – or juxtaposition of contractual and extracontractual fault over the same fact – but the Supreme Court dismissed the claim, finding that (a) from an extracontractual perspective, the defective operation of the engines occurs in the typical development of the contract and, in such cases, contractual liability should prevail over extracontractual liability; and (b) from a contractual perspective, the Court found that the procedural relationship was not correctly constituted, and the seller of the engines should have been called to the procedure, in a regime of necessary passive joinder; as this party was missing, there is no procedural defendant against whom to direct the contractual action.

The doctrine of “unity of civil fault” allows treating the same harmful facts under both contractual and extracontractual angles simultaneously. Jurisprudence (Supreme Court Rulings 798/2021 of November 22, 607/2010 of October 7, 908/2005 of November 29) allows the compatibility between contractual and Aquilian actions, with the effect that the Court will decide on which to base its resolution under the principle “iura novit curia” without the resolution being flawed by inconsistency (Supreme Court Rulings of June 12 and October 22, 2007). Of course, this does not mean that the Court must apply both together, but that each type of liability will be applied separately and with exclusive effects. It may happen that in some cases it is more beneficial for the claimant to opt for the contractual regime due to its longer prescription period (Article 1964 CC), and in other cases for the extracontractual regime, due to the absence of limitations (Article 1107 CC).

However, in the referred ruling, the extracontractual action was rendered unviable because the harmful fact occurred exclusively within the contractual sphere, and the contractual action could not be examined due to the lack of necessary passive joinder; thus, the compensation claim was dismissed.

The second ruling is based on a similar factual substrate, although the plaintiff only acted extracontractually against the engine manufacturer (it is true that in the appeal proceedings, the “unity of fault” was invoked, but it is an obvious case of “mutatio libelli”). The extracontractual action was dismissed for these reasons: (a) it cannot be used when the damage occurs in the typical development of the contract; (b) it cannot be used to seek compensation for purely economic damages – that is, those that are not damages to persons or property –; adding that extracontractuality could not be used to reach areas excluded from contractual liability, as it seems that the contract excluded the manufacturer’s liability for lost profits.

As for the possible contractual action, the Ruling does not address it (“We are also not competent to address contractual actions not filed”). But the significant aspect of this judicial resolution is that it opens the door to the exercise of the contractual action under Article 1101 CC – “rectius” does not rule out its exercise – through the doctrine of the “qualified third party,” that is, the third party unrelated to a contract who is reflexively affected by it. This “qualified third party” – who is not an absolute third party or “penitus extranei” – would be entitled to file a contractual action against the manufacturer for defects in the acquired item.

The ruling indicates that the individual successor by particular title is affected by the reflective effectiveness of contracts “inter tertios” with respect to the transferred item or right. “Said with a pun, the principle of relativity of contracts is a relative principle” and the “shadow of the contract” affects third parties (Supreme Court Rulings 924/2003 and 120/2004).

It can be deduced from the pair of especially commented rulings that the individual successor by particular title of an item or right can contractually act against third parties (the manufacturer) for defects in that item or right. In such a case, the contractual compensation scope covers all the concepts of Article 1106 CC, since, although the patrimonial damage unrelated to the transferred item or right would not be claimable, the patrimonial damage caused by the defective item or right to its acquirer would be – and entirely – (e.g., a defective engine causing lost profits to its acquirer).

Article published in Legal Today on June 4, 2024.

The interested reader on this subject can refer to the entry “Concurrence and juxtaposition of responsibilities: two extreme positions,” by Pedro del Olmo, in Almacén de Derecho.