IOVERVIEW

Germany is a civil law jurisdiction whose main private law codifications are the Civil Code (Bürgerliches Gesetzbuch, or BGB) and the Commercial Code (Handelsgesetzbuch, or HGB). Business contracts are governed by the BGB to the extent that the HGB does not contain special rules. Both the BGB and the HGB are available in English language as official convenience translations.2

Both these codifications originate from imperial times (1900 and 1897, respectively) and have been largely unaffected by political turmoil and upheavals. Although both the BGB and the HGB have been amended several times, many of the core principles remain the same, especially those that can be traced back to Roman law.

Germany has a well-established court system providing easy access to legal recourse, especially in private law disputes. B2B disputes may be resolved at special chambers for commercial matters. This court system works very well, although the high caseload remains an issue (in 2017 alone, more than 1.2 million new cases were filed).3 Attempts to reduce this caseload include the recently introduced collective action for declaratory relief.

For private law disputes, the highest court is the Federal Court of Justice (Bundesgerichtshof, or BGH) in Karlsruhe, which – just like its predecessor, the Imperial Court (Reichsgericht, or RG) – has played a fundamental role in refining and developing German law. While lower courts are technically not bound by the BGH's legal opinions, they usually consider them to be persuasive authority, and follow them regardless.

In addition to statutory and case law, German law can also draw from a rich body of legal literature, including several commentaries on the BGB and the HGB. A commentary on the BGB in English language is currently in the works.

II CONTRACT FORMATION

The basics of contract formation under German law have largely remained unchanged over time, with case law being settled and statutory law undergoing only a few reforms.

i Freedom of contract

The fundamental principle in German contract law is the principle of freedom of contract, which is part of the broader concept of 'private autonomy' and thus protected by the Constitution. Freedom of contract means that as a rule, parties can shape their legal relationships as they see fit. They can choose whether or not to conclude a contract at all, and they can choose whatever content they like (with some exceptions).

The BGB provides the user with a legal framework for the most common standard types of contracts. These include sales contracts, works contracts, service contracts, lease agreements, and loan agreements. In B2B relationships, parties have broad discretion to deviate from this framework, and to adapt it according to their wishes. In B2C relationships, this discretion is considerably limited.

ii How to conclude a contract

Unless specified otherwise, contracts do not have to be in writing, nor do they have to be notarised (exceptions include sales contracts for real estate). They can be concluded orally, and courts will not hesitate to enforce such contracts if their existence can be proven. For practical reasons though, parties may be well advised to document their agreement in writing – both to obtain clarity about the exact content of their relationship, and to serve as evidence in a potential dispute.

Contracts are concluded by two concurring statements of intent – offer and acceptance. These statements have to contain the essential terms and conditions of an agreement, in particular the key performance obligations. A party can declare its intent either expressly or by implied conduct. For example, case law has confirmed that a contract between a real estate business and a utility can be concluded by the former sending a purchase offer and the latter providing the requested amounts of electricity and water.

In general, mere silence (as reaction to an offer) will not qualify as a statement of intent. It can qualify as such, however, when there is a business practice to that effect, as is the case with the so-called 'commercial letter of confirmation' in B2B relationships. Broadly speaking, if a party to such a relationship sends a written summary of previous negotiations to the other party as an offer, then the other party is deemed to have accepted this offer unless it explicitly rejects it.

iii Relativity of contractual obligations

As a rule, contracts are only effective between the contracting parties themselves, and have no effect on third parties. The contracting parties may agree though that a third party obtains certain rights (but not certain obligations) by virtue of the contract.

In some cases, third parties may obtain rights even if the contract does not explicitly say so. One example are freight contracts between a sender and a freight forwarder, for which the HGB stipulates that the recipient – albeit not party to the contract – has certain rights against the freight forwarder. Other examples include life insurance or casualty insurance.

iv Standard terms and conditions

Famously (or notoriously), German law submits standard terms and conditions to legal review. As a result, clauses from standard terms and conditions can be invalid if they unreasonably disadvantage the other party. This applies not only in B2C relationships (where the purpose is to protect the consumer as the presumably 'weaker', less sophisticated party), but also in B2B relationships. Examples for invalid clauses would include a stipulation which excludes all liability for gross negligence by a party's directors.

To exacerbate the issue, standard terms and conditions are interpreted against the drafter. This leads to an interesting mechanism: As the most disadvantageous outcome for the drafter would be the invalidity of the clause, courts will first check whether there is any interpretation of the clause that could make the clause invalid. Usually, this is a hypothetical interpretation that is extremely favorable for the drafter. Only if there is no such interpretation, then – as a second step – the clause is interpreted to the benefit of the drafter's counterparty.

While this review generally leads to reasonable results, it adds a certain unpredictability in the drafting stage. For this reason, opponents of the review mechanism frequently argue that it discourages parties from choosing German law to govern their contracts.

iiiCONTRACT INTERPRETATION

The basics of contract interpretation, too, have mostly remained unchanged over time. International private law has become largely determined by its EU framework though. Within this framework – especially Article 3 (3) of the Rome I Regulation – commercial parties are free to choose the substantive law that shall govern their contractual relationship.

Germany has adopted the Convention for the International Sale of Goods (CISG) as national German law. Hence, where a sales contract between, for example, a German and a Russian company calls for 'German law', this will be the CISG unless the parties agree otherwise.

Under German law, interpretation of contracts starts with the wording. In this context, the parties' statements of intent are – to use a common phrase – interpreted in the way the recipient had to understand them on the basis of good faith and common usage. German law does not use the contra proferentem rule, except when interpreting standard terms and conditions (see above). Courts will also consider the history of the parties' negotiations, pre-contractual statements, and practice from existing business relationships when interpreting contracts, as well as the purpose of the contract.

If the parties have a mutual concurring understanding which deviates from the wording, this understanding takes precedence – falsa demonstratio non nocet. If the parties have inadvertently omitted to cover an essential point in their agreement, courts can apply a supplementary interpretation. Broadly speaking, they will ask what the parties would have agreed, had they been aware of the gap.

ivDISPUTE RESOLUTION

Dispute resolution in Germany is, to a large part, governed by the Code of Civil Procedure (ZPO), which provides a well-established framework for disputes between two or a handful of parties. Arbitration is reasonably common as a way to resolve B2B disputes, while collective redress is still in its infancy.

i Litigation

Germany has a large number of courts, providing easy access to legal recourse. Private law disputes will either have District Courts (for disputes up to and including €5,000) or Regional Courts as courts of first instance, with Regional Courts and High Regional Courts serving as courts of appeal, respectively. The highest court for private law matters is the aforementioned Federal Court of Justice.

General course of the proceedings

There is no minimum value for cases. Parties can (and do) file claims for payment of a few Euro or less, if they are so inclined. Lawsuits are commenced by submitting a statement of claim in writing, and paying an advance on the court fees. Once the advance has been paid, the court will take care of serving the claim to the defendant. Court fees can be recovered if and to the extent that the claimant succeeds.

The court language is German. Recently, English-speaking chambers have been set up for commercial disputes in some courts (e.g., in Hamburg, Frankfurt and Bonn) to encourage parties to such disputes to make use of the German state court system, rather than resorting to arbitration.

Litigation is still predominantly paper-based. As case files are not open to the public – only hearings are – there was and is no need for the courts to have electronic files. In fact, until recently, lawsuits and other submissions could not be filed electronically, but had to be submitted as hardcopies (or by fax). This has changed now, but although the respective IT infrastructure has been set up and is working well, it will take some time for lawyers to break away from old customs.

Jurisdiction

The ZPO's rules on jurisdiction are largely aligned with the respective EU rules (Regulation 1215/2012 – 'Brussels Ia'). In general, parties can be sued at their seat of business. Unlike EU law though, the ZPO does not provide for general jurisdiction at the seat of one of several joint debtors.

If an action is brought before a court that does not have jurisdiction, the court may still become competent if the defendant does not challenge the lack of jurisdiction in due time.

Commercial parties may conclude choice of forum agreements, selecting a particular court to have exclusive or non-exclusive jurisdiction over their dispute. In cases where the Brussels Ia Regulation applies, the agreement must meet the formal requirements stipulated therein though, as the BGH has recently confirmed. At the Regional Courts, B2B disputes may be referred to the special commercial chambers; this is not a matter of choice of forum though.

Costs

For any dispute or dispute stage above the District Courts, parties must be represented by lawyers. Their fees, too, can be recovered if the claimant succeeds; however, the recoverable amounts is limited to the statutory fees. While the statutory fees are tied to the amount in dispute, they will often end up lower than fee arrangements where lawyers are paid by the hour. In such cases, the respective party will have to pay a part of the fees from its own pocket, even if its case succeeds in court. Contingency fees (and quota litis arrangements) are only allowed under exceptional circumstances, which will rarely if ever apply in B2B disputes.

Enforcement

German court judgments can be enforced throughout the EU. Since the introduction of the Brussels Ia Regulation in early 2015, no formal recognition procedure is necessary any more for such enforcement. The same applies vice versa (i.e., to the enforcement of foreign EU judgments in Germany). Enforcement may only be refused if the judgment is manifestly contrary to the public policy of the country in which enforcement is sought. Judgments from non-EU countries can be enforced in Germany (and vice versa) if there is some treaty to that effect, or if reciprocity is guaranteed through other means. This is the case, for example, for Japan, but not for Russia.

ii Alternative dispute resolution

Arbitration is common as a way to resolve B2B disputes. Germany is a signatory to the New York Convention, and has adopted the UNCITRAL Model Law. German courts take an arbitration-friendly approach when it comes to recognising and enforcing arbitral awards, both national and foreign. In addition, court support of arbitration proceedings (e.g., with regard to interim measures) is provided efficiently and with high quality.

In fact, in some areas, especially post-M&A disputes, arbitration has become so popular that practitioners are beginning to feel a certain dearth of precedence from the BGH. This will be somewhat remedied by increased publication of (redacted) awards addressing these areas.

As an interesting addendum to the UNCITRAL Model Law, the ZPO provides a special type of legal recourse where the parties can request a binding decision on whether a particular dispute is covered by an arbitration agreement or not. This allows the parties to swiftly obtain clarity about the scope of such agreement without having to commence a full-fledged litigation (or arbitration).

Recent legal developments in arbitration include the question whether cartel damage claims are covered by boilerplate arbitration clauses. While this was answered in the positive by a court of first instance, this answer may have to be reassessed in light of recent case law by the European Court of Justice. The BGH has not yet addressed this particular matter.

German law is equally open for other ways of alternative dispute resolution. Mediation and adjudication are both in use, also for B2B disputes (legislation aimed at further promoting mediation was introduced in July 2012). In fact, even in pending litigation, judges are supposed to seek for opportunities for amicable solutions, at any stage of the proceedings. This practice permeates into arbitration as well: German arbitrators will usually see no issue with sharing their preliminary assessment of the case (at the parties' request), and with providing suggestions as to how a settlement could look like.

iii Collective redress

While collective redress has been extensively discussed at the EU level for years, the German legislator – to general approval of legal scholars – has shown little ambition to take action. Any opt-out mechanism would arguably be at odds with the German constitution, which guarantees access to justice for everybody; an opt-out mechanism could potentially lead to a party having its claims litigated without getting a chance to participate in the proceeding.

Still, in November 2018, the German legislator introduced a new type of claim: the 'model claim for declaratory relief'. With this type of claim, large groups of consumers can opt in to certain lawsuits (brought by qualified organisations) whose goal is to determine, for example, whether a car manufacturer breached the law with regard to emissions data. The outcome of this lawsuit is then binding for follow-on damage claims, but consumers who have opted in must still file such claims themselves.

While there is no tangible outcome yet, the model claim has turned out to be fairly popular in terms of numbers, with several hundred thousand consumers participating in the various proceedings.

In addition, parties may bundle their claims by transferring and assigning them to dedicated claims vehicles. This approach can be efficient if several parties have been affected by the same or similar infringements. Accordingly, it has become quite popular for cartel damage claims.

vBREACH OF CONTRACT CLAIMS

Breach of contract means non-compliance with a contractual obligation.

Contractual obligations come in different types: (1) main performance obligations, which determine what kind of contract the parties have agreed (e.g., to deliver and hand over a steam turbine in a sales contract); (2) ancillary performance obligations (e.g., to provide instructions on how to operate the turbine); and (3) ancillary obligations to take account of the rights, legal interests and other interests of the other party (e.g., to inform the purchaser about possible health issues from turbine operation). Breach of any type of these obligations can give rise to claims.

When determining breach, German law does not distinguish between material and non-material breaches. Even minor breaches may give rise to damage claims (if the injured party can prove causation). Some remedies, however, require that the breach crosses a certain materiality threshold. This may be true, for example, with the right to terminate a joint venture agreement for cause.

The burden of proof for breach is largely on the claimant's side. As a rule, the claimant must prove and establish breach, damage, and causality. If breach is established, however, it is upon the defendant to prove absence of fault. In addition, depending on the specific issue at hand, claimants may be able to rely on various types of prima facie evidence or factual presumptions which case law has developed over the years, for example when they seek to establish that specific purchases of theirs were affected by cartel infringements.

viDEFENCES TO ENFORCEMENT

German law provides numerous possible defences against breach of contract claims. A few are discussed below by way of example. Some of these defences will be considered by courts ex officio; others must be explicitly raised by the defending party.

i Prescription

The latter is true for the assertion that a claim is time-barred. The general limitation period is three years and begins at the end of the year in which the claim arose and the obligor became aware of the facts giving rise to the claim. Even if the obligor does not become aware of these facts, claims become time barred ten years after arising.

As a result, limitation periods will often end on 31 December. Shorter limitation periods may follow from statutory law in some cases (e.g., buyers' claims resulting from defective goods: two years as a rule) or from agreements to that effect. Unlike the Principles of European Contract Law, German statutory law does not prescribe a general minimum limitation period.

Limitation periods can be suspended in particular if the parties are negotiating about the respective claim, or if one party has commenced court proceedings (whether at the state courts or in arbitration). For cartel damage claims, the limitation period is suspended as long as antitrust authorities are investigating the matter.

To avoid unnecessary disputes about what actions constitute negotiations, parties can explicitly agree on extending limitation periods to find time for amicable solutions. Otherwise, as a party cannot be forced to negotiate, taking the dispute to court will usually be the only way to guarantee suspension of the limitation period.

ii No valid contract

When claiming for breach, claimants must establish (and, if necessary, prove) that there is a contract. Defendants may then argue that the contract is invalid as a matter of law. There are several reasons why this could be the case – including lack of proper representation of one party at contract formation, breach of formal requirements, or breach of public policy.

Defendants may also try to declare their statement of intent void. They may be entitled to do so if they had erred with regard to the meaning of their declaration, with regard to essential characteristics of the product, or in cases of deceit, or in cases of duress.

iii Impossibility

For performance obligations, defendants may argue that performance is impossible – objectively or subjectively, legally or factually. Relatedly, defendants may also argue that performance requires an effort that would be grossly disproportionate to the claimant's interest in performance (a common example from textbooks is a jeweler's obligation to deliver a wedding ring that fell into the ocean).

If argued successfully, impossibility will free defendants from their performance obligation. Whether they are liable for damages is a different matter, and a question of contractual risk allocation. Damage claims for monetary compensation are not affected by the impossibility defense. In other words: a party may not escape damage claims by arguing that it has no money, unless it is ready to file for insolvency.

viiFRAUD, MISREPRESENTATION AND OTHER CLAIMS

German case law has long accepted that parties can claim damages for breach of a pre-contractual duty (culpa in contrahendo). Since the early 2000s, this notion has also been reflected in statutory law, which now explicitly states that even mere negotiations for a contract create a pre-contractual relationship obliging the parties to respect each other's legitimate interests. For example, where a franchisor negotiates with a potential franchisee, he must inform his potential partner if the revenues he is communicating are only estimates rather than established fact, otherwise he is in breach.

In practice, claims for culpa in contrahendo frequently involve breaches (or assertions thereof) of obligations to inform the other party about relevant circumstances. As a rule, each party is responsible for conducting its own research. On the other hand, case law acknowledges that there must be some limit to that rule, like when there are 'unknown unknowns' which are accessible to the other party only – as is the case with undisclosed conflicts of interest. Among the most numerous examples from practice are cases where advisors mediated financial investments without informing their customers that they received kick-back payments.

Some breaches may also give right to tort claims, for example, if a product causes harm to the purchaser's property. Mere pecuniary loss can be recovered in tort only under specific circumstances, for example, where the breach qualifies as a criminal offense (like fraud). Pecuniary loss can also be recovered in tort if the breach qualifies as intentional damage contrary to public policy, but the threshold for such claims is high. In practice, claimants will usually put their emphasis on contractual claims, as these are easier to establish.

viii REMEDIES

Parties have a number of remedies for breaches of contract.

i Performance

The most basic remedy is a claim for performance. In sales contracts and works contracts, the purchaser or client generally has to grant the seller or contractor an opportunity to remedy the defect. This does not bar the purchaser or client to claim compensation for the damage that has occurred because of the defect, like property damage (e.g., a defective steam boiler in a power plant damaging adjacent piping systems).

ii Rescission or termination

Depending on the severity of the breach, a party may rescind or terminate a contract for cause. For example, a purchaser may terminate a sales contract inter alia if the seller fails to remedy the defect, or refuses to remedy the defect, or if the circumstances are such that the purchaser cannot be reasonably held to be bound by the contract any more. This is the case even if the seller did not act culpably.

iii Damage claims

German law on damages demands that the injured party is put in the position it would be in if not for the damaging event. This has a number of ramifications.

Full compensation

Injured parties are entitled to full compensation. This means, inter alia, that obligees of monetary damage claims can be entitled to interest, which compensates them for the disadvantage that the respective monies were not provided to them earlier. The BGB provides for default interest at a rate of five percentage points above the base interest rate, although the obligee may be entitled to even higher interest.

Damages include lost profit. In practice, the difficulty for the injured party lies not in establishing that profit was lost at all, but in establishing the amount – for which the injured party bears the burden of proof. The BGB eases this burden somewhat by permitting an abstract calculation, under which those profits are considered to be lost that, in the normal course of events or the particular circumstances of the individual case, could be expected with reasonable probability.

Even besides and beyond lost profit, the exact amount of damage claims can be difficult to establish. Examples may include cartel damage claims, where it may be difficult to determine the exact amount by which market prices were increased by the cartels. In this respect, injured parties find help in the ZPO, which allows courts to rule – at their discretion and conviction, based on an evaluation of all circumstances – whether and in what amount damage has arisen. In a recent decision, the BGH has confirmed that this principle also applies to cartel damage claims.

No enrichment through damages

The flipside of the abovementioned principle is that the injured party must obtain no enrichment through damage claims. Under German law, damage claims are not meant to punish or sanction parties in breach.

As a result, German courts will not grant punitive damages. In fact, some legal authorities argue that punitive damages are at odds with German ordre public, and German courts will not declare foreign judgments enforceable to the extent that such judgments contain punitive damages. The German Supreme Court – which, unlike the BGH, exclusively deals with constitutional matters – has reserved its judgment on the question of ordre public, and has decided that claims for punitive damages can at least be served to defendants in Germany.

In addition, injured parties cannot request damages to the extent that they have already obtained an advantage from the damaging event, and have been compensated for the loss. For example, some businesses harmed by cartel infringements may be able to pass on the price increases to their customers. In this case, they cannot claim the respective amounts as damages from the cartel infringers. The burden of proof rests on the defendant though.

Limitation of liability

Somewhat deviating from the principle of full compensation, parties can agree on a limitation or exclusion of liabilities. For example, joint venture contracts frequently exclude lost profit from the scope of damages.

Parties cannot exclude liability for intentional misconduct in advance though. In addition, limitation clauses that are contained in standard terms and conditions will be subject to the legal review explained above. If such a clause excludes all liability for gross negligence by a party's directors, it will be invalid – possibly toppling the entire limitation of liability, and bringing the parties back to the default rules.

Repairs

If goods under a sales contract or works under a works contract are defective, the purchaser or client is entitled to repairs. As the default rule, the party in breach may undertake these repairs itself (or hire appropriate agents to do so). Under specific circumstances, the purchaser or client party may request monetary compensation.

While this general rule is clear, there is some debate about how the amount of this monetary compensation is to be calculated. The purchaser or client will usually claim the amount that is necessary to pay for the respective repairs. Until recently, they could do so even if they had no intention of actually undertaking these repairs. In a judgment from early 2018, however, the BGH ruled that at least in works contracts, this is not an option. Instead, the purchaser or client can only claim the difference in monetary value (i.e., between the value as it is and the value as it would be but for the defect). While there is no corresponding case law for sales contracts yet, there is no discernible reason why these should be treated any different.

ix Conclusions

Germany has a highly developed and refined legal system where claims can be enforced through efficient courts, complemented by a thriving and well-supported arbitration scene. Challenges include the questions of how to maintain a supply of precedents throughout all areas of law, and of how to properly serve the demand for collective redress. Concerning the latter, the upcoming months will provide valuable insights as to how the new model proceeding fares in practice.


Footnotes

1 Maximilian F Sattler is a senior associate at Baker & McKenzie Partnerschaft von Rechtsanwälten und Steuerberatern mbB. The author would like to express his appreciation for the supporting research provided by Mr David Weiß, law clerk thereat.