Spanish Supreme Court in the diesel affair: joint and several contractual liability of all companies belonging to a corporate group and reverse piercing the veil to the detriment of subsidiaries?

In the case nº167/2020 of 11/3/2020, the Spanish Supreme Court (Tribunal Supremo, TS) ruled that the company acting as manufacturer of a vehicle equipped with software that manipulated the car´s NOx emissions (in this case the Spanish subsidiary Seat S.A.) is liable vis-à-vis the final customer for the damages caused by the breach of contractual obligations, even in the event the sales contract on the defective car has exclusively been agreed upon between the final customer and an authorised distributor in which the manufacturer was not holding any shares. In the present case, this led to the strange result that the plaintiff was not only entitled to challenge the sales agreement for breach of contract and to obtain compensation for material damages (car´s depreciation and the costs of financing), but also for moral damage suffered due to the – so the TS literally – “hassle, uncertainty and the unease provoked by the breach of contract”.

Contrary to the legal aspects discussed before German and Austrian Courts and recently also the ECJ in relation with the diesel affair, the issue resolved by the TS is peculiar in several aspects. Because in the first place, there was no legal discussion on an eventual liability for tort – for instance for damages caused by immoral injury – committed by the Spanish manufacturer itself or in any way attributable to latter by any legal criteria whatever. To the contrary, the TS, taking recourse to some of its previous case law ruled on the mass distribution of real property, established an express exception of the principle of the relativity of contractual relationships, by extending the contractual liability to the manufacturer not being a party to the sales contract. The legal basis for this result seems a bit vague and due to the lack of any clear legal criteria to follow, hardly offers any legal certainty for future comparable cases, because it is only based on general socio economic considerations („doctrine of the principle of the relativity of contractual relationships stems from the period of the entry into force of the Spanish Civil Code / economic and social change from a feudal society into an industrialised society with complex manufacturing processes and legal channels of distribution”).

On the other hand, apart from this sparse legal reasoning on contract law, the ruling contains also highly questionable hidden statements concerning the reverse piercing of the corporate veil in corporate groups. Because despite the fact that the manipulated engines and software had not been produced by the sued Spanish subsidiary of the Volkswagen group, and latter denied expressly any knowledge of the facts or its contribution to it, the Court hold it sufficient that the internal relations within the group were no visible to the final customer, consequently all companies belonging to a corporate group must assume the responsibility for actions taken by other group companies, and furthermore, it would be burdensome for the final customer to sue the actual author of the fraud, the mother company Volkswagen AG, because it is domiciled abroad.

Consequently, the TS – without explicitly admitting it and without being really aware of its legal consequences – seems to establish a groupwide liability of all companies belonging to a group for defective products via the loophole of contract law. Certainly it is true that in extreme cases, it may be justified to make an exception of the legal independence of corporations and to pierce the corporate veil in the case of breach of certain specific duties to act or to abstain from acting. However, a general structural liability based on the mere affiliation to a corporate group is incompatible with the liberty of establishment, at least in the case of cross-border corporate groups, especially in cases such as the present one, where a subsidiary whose participation in the fraud has not been proven is held liable for the bad faith and the breach of groupwide organisational duties by its mother company. Thus, in a comparable case in connection with the diesel affair (13 O 136/18 of 4/9/2019), for instance the Regional Court of Frankfurt am Main (OLG FFM) denied a liability of a subsidiary (a German importer and authorised distributor for Skoda) for wilful deceit committed by its mother company Volkswagen AG with the legal argument which we believe true that the mere affiliation to a corporate group is no sufficient fur such a attribution of knowledge and in last instance also liability.

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