Why is %1 rarely substituted in "%1 is not a valid Win32 application."
The error message comes from Windows itself, you can see the complete list at System Error Codes (0-499). You translate an error code returned by the API into a message using FormatMessage, which has an optional Arguments array; any %1 in the message will be replaced by the first element in this array. If nothing is passed for the arguments, the %1 will be left unchanged if the FORMAT_MESSAGE_IGNORE_INSERTS flag was used or the FormatMessage will fail if it wasn't (thanks to IInspectable for that information).
As an example of how this might get missed, consider code where an error code gets converted immediately to an exception. If the exception contains the error code but nothing else, then there is no context for knowing what to pass to FormatMessage.
The caller is doing everything right. They are calling FormatMessage, passing along the FORMAT_MESSAGE_IGNORE_INSERTS flag1), like everyone should. The caller is not in control of the message that gets created, and has no way of knowing, that it should pass additional arguments, what types they should be or how many.
This was an early design bug in the Windows error reporting system, and you'll see those placeholders in every well-behaved application.
1) See The importance of the FORMAT_MESSAGE_IGNORE_INSERTS flag.