Contracts, negotiation and enforcement in Germany: overview

A Q&A guide to general contracts and their negotiation and enforcement in Germany.

The Q&A gives a high level overview of the key legal concepts including, contract formation with general discussions as to authority, formal legal requirements, formalities for execution, the requirements for deeds and notarisation, and powers of attorney. It also considers the status of contractual terms, variation and assignment of contracts, and enforcement of the contract. The enforcement section covers remedies and liability, exclusion of liability, and cross-border/jurisdictional matters.

The Q&A is part of the global guide to contracts, negotiation and enforcement.

Contents

Formation of contracts

Authority and capacity

1. What are the authority/capacity rules for entering contracts, for different commercial entities?

In general, commercial entities must be represented by a person authorised to enter a contract as they cannot act by themselves under German law. To be flexible and to reflect the needs of commercial entities in day-to-day business there are various forms of authority that can be granted:

  • Authority on the basis of a law. This is authority to represent the company (that is, management board members, managing directors and holders of general commercial powers of attorney (Prokurist)). The type of authorisation and its limitations, if any, can be seen from public registers and is, to a certain extent, mandatory in relation to statutory representatives of a company (organschaftliche Vertreter).

  • Authority on the basis of an individual contract. This applies to persons without general authority to represent the company or in some cases it is intended to grant to the person greater scope for action. Its content may range from the grant of an individual power of attorney for a specific transaction to full authorisation for all types of transaction.

  • Authority on the basis of apparent authority. This includes both apparent authority or agency by estoppel:

    • apparent authority exists where the represented party is not aware of the actions of the person who gives the impression of authority but ought to be aware of these actions if due care was exercised. The counterparty must have the understanding that the represented party is aware of and accepts the actions of the apparent representative;

    • agency by estoppel means that the represented party is aware of and accepts the actions of the person whose actions are to be deemed those of an agent. The business partner understands this acceptance as meaning that the represented party will accept actions that count against him.

    In both cases the party represented on this basis can both claim on the actions made on this basis and be liable for those actions.

Special rules apply for cases of insolvency:

  • If the other party requests (or has already requested) the opening of insolvency proceedings before conclusion of the contract, or if insolvency proceedings are opened against the assets of this party, the power of representation of the debtor party or company involved will be partly restricted.

  • For the duration of the preliminary insolvency proceedings (that is, the period between filing the request and the court decision on the opening of insolvency proceedings), the competent court generally appoints a preliminary insolvency administrator to supervise and support the debtor. The appointment of a preliminary insolvency administrator is publicised at insolvenzbekanntmachung.de.

  • In relation to the power of representation issue, a distinction must be made between the "weak" and the "strong" preliminary insolvency administrator:

    • Weak preliminary insolvency administrator. As a rule, the insolvency court appoints a weak preliminary insolvency administrator. In this case, the powers of management and disposal remain with the debtor. This means that the debtor can continue to conclude contracts with legal effect. However, disposals by the debtor are only effective with the consent of the preliminary insolvency administrator;

    • Strong preliminary insolvency administrator. In practice, the appointment of a strong preliminary insolvency administrator is the exception. In this case, the powers of management and disposal over the debtor's assets fully devolve to the preliminary insolvency administrator.

Where a contractual authorisation or authorisation by virtue of apparent authority is concerned, the counterparty to a declaration made by the representative can reject it immediately if no original power of attorney is presented when the declaration is made. If this rejection follows without undue delay, the declaration of intent given by the representative is invalid.

For powers of attorney in general, see Question 15.

Formal legal requirements

2. What are the essential requirements to create a legally enforceable contract?

For a legally enforceable contract to be created there must be two corresponding declarations of intent. These are known as offer and acceptance. The declarations of intent must be sufficiently specific (for example, the offer must contain all the essential elements to be valid). In addition, the party giving the declaration must have capacity both to act and to contract (Rechts- and Geschäftsfähigkeit). This is the case where the party can be the holder of rights and duties, and can also carry out transactions with legal effect.

The invitatio ad offerendum (invitation to treat) is not an offer but an invitation to make an offer (this is assumed particularly in the absence of a specific recipient of the offer, such as with window displays). In this case, the buyer makes the offer to buy and the seller can accept or reject it.

With a few exceptions (see Question 6), there is no requirement that these declarations of intent take a particular form (that is, they can also be made orally or even by implication (for example, by sending the goods ordered, paying the invoice sent, and so on)). An acceptance that contains even just minor amendments to the original offer does not constitute acceptance under the German Civil Code, but is a new offer to conclude a contract on the amended terms and conditions. This offer must then be accepted by the party that made the original offer (which, again, can be done by implication).

It should be noted that where the German Civil Code applies, a declaration of intent can be revoked only up until the point in time when it is received by the other party; therefore, the revocation must reach the other party at the same time as the revoked declaration of intent at the latest.

 
3. What are the main forms of contract?

Contracts can be concluded in various forms. In general, it is not necessary to formalise the content of a contract. In addition, not all documents to the agreement must be collated to agree to them. If the parties specify the documents sufficiently accurately or attach them for example as annexes, they can become part of the agreement by reference alone and do not necessarily need to be handed over. In practice, a lot of agreements are also concluded orally or even by implied behaviour.

 
4. How are preliminary agreements used in your jurisdiction?

In Germany, preliminary agreements are normally concluded to improve the structuring of negotiations on major projects. There is no uniform standard so every single case must be closely examined as to whether and to what extent the preliminary agreement contains binding provisions.

These agreements typically provide for the commercial benchmarks of the main agreement (yet to be negotiated in detail) such as duties of confidentiality and arrangements on which preliminary agreement provisions are intended to be binding. In many cases, an exclusive negotiating period is also agreed. In the majority of cases the agreed content is not yet binding. However, in negotiations on the main agreement reference is frequently made to the provisions under the preliminary agreement in these cases as well, so that a de facto binding effect is obtained too. To the extent the provisions are not expressly designated as being non-binding, their content can be enforced just as with every other agreement.

 
5. Can negotiations become legally binding in any circumstances? What are the principles and rules (if any) on pre-contractual liability and good faith in negotiations?

Freedom to contract is highly important in the German legal system. For that reason, negotiations are not binding in the sense in which a contract becomes binding. If a duty (for example, the duty of good faith) is violated in the course of negotiations or on the initiation of business contact, parties may be liable for damages based on contractual negotiations but not based on conclusion of contract. That is assumed if there are disparities in the information that the relative parties have and the better informed party fails to enlighten the other party on an essential point on which the other party is either unable to independently obtain the information or cannot be expected to obtain it.

Formalities for execution

6. When are written contracts required and for which assets/interests?

Contracts can generally be concluded in Germany without particular requirements as to form. There are just a few types of contract for which German law does stipulate form requirements, and most stipulated form requirements are limited to the requirement of notarisation (see Question 13).

However, if, for example, a rental contract for a private dwelling is concluded for a fixed period of more than one year without observing the written form, the law provides that the contract is to be considered as having been concluded for an indefinite period. The law also requires that the written form be observed for other types of contract, such as when a business is founded in the form of a partnership, when an independent guarantee is issued, or when a receivable assured by mortgage is assigned.

It can be contractually agreed that written form is required for amendments or changes of a contract. However, importantly, German law allows for simple written form provisions to be cancelled and, therefore, rendered ineffective even just by implication. Written form clauses contained in standard business terms (see also Question 26) can also be invalid, and individually agreed provisions in any case always take precedence over standard business terms. This means that the only way to perpetuate the written form requirement for a contract is by specifically agreeing an eligible written form provision.

 
7. Are there different formalities for different types of contractual document?

German law distinguishes between statutory and contractual written form requirements. If the written form is required by statute, the document must be authenticated by the issuer personally by means of his signature or by a handwritten mark certified by a notary. In the case of a contract, both parties must sign on the same document. The written form can be substituted by the electronic form and by notarisation. Where the written form requirement is merely a contractual stipulation, it is sufficient for the declaration of intent to be transmitted by means of telecommunication and, in the case of a contract, by exchange of letters.

The concept of a document/deed (Urkunde) is not consistent in German law. A document in terms of criminal law is not consistent with a document in terms of civil or procedural law, and even within the civil and procedural law the term is not consistent.

 
8. What are the formalities for the execution of documents by companies, foreign companies and individuals?

Companies

There are no particular requirements as to form that apply generally to all companies. In principle, one representative acts for a company, which is bound by the representative's declarations. This is subject to the condition that the intent of the representative to act on the company's and not on his own behalf is express, apparent or implied. This can be done, for example, by using addenda to the signature or by applying a stamp (although this is not a requirement).

Where a limited liability company such as a GmbH or an AG is concerned, the legal form must be specified if requested. Otherwise there is a fundamental risk of unlimited liability being constituted on the basis of principles of apparent authority (see Question 1).

Foreign companies

There are no different or special regulations for foreign companies. Therefore, in that regard it is not the company's registered seat that is relevant but the correct specification of the company represented, including its legal form and the intent to represent from the perspective of the recipient.

Individuals

Individuals can act on their own behalf or on behalf of others. There is nothing in particular that must be observed in that respect either.

 
9. What is the status of electronic and faxed signatures in your jurisdiction?

Electronic and faxed signatures are sufficient to comply with a contractual written form requirement agreed between the parties (see ). However, electronic and faxed signatures are not sufficient to comply with a statutory written form requirement.

Deeds

10. When are deeds required in relation to contracts?

Most legal transactions in Germany do not require a particular form but there are some inconsistencies. For example, the articles of association for the purpose of founding a limited liability company (GmbH) require notarisation whereas a contract to found a partnership generally just requires the written form.

Differing from other legal systems, there are no statutory or other substantive requirements on company stamps in the German legal system, even though they are certainly used in the normal course of business. Stamps offer the advantage that documents bearing a company stamp can readily be associated with a specific company. In addition, the intent to represent is usually evident with the use of a stamp. However, a company stamp cannot replace a personal signature where one is required.

 
11. What are the legal formalities for a deed?

There is no consistency on this with regard to deeds in German law (see Question 7). For the purposes of civil law, the German Federal Court of Justice defines the German term Urkunde as follows: "… written embodiments of thought containing statements on legal transactions or legal relationships, regardless of the nature of the written form". This means that it is not decisive whether the notarial form, the written form (handwritten signature) or text form (recognisability of the person making the declaration) is taken. No special formalities apply.

 
12. What are the legal requirements for the execution of deeds?

There are no legal requirements for the execution of deeds under German law. In particular, company seals are not prescribed under German law and are therefore not a legal requirement for the execution of a deed. Even if internal guidelines provide for such, formal requirements of this kind do not take effect in external relationships.

Notarisation

13. Is notarisation required for contracts in your jurisdiction?

Notarisation may be a prerequisite if it is stipulated for the validity of contracts such as for the conveyance of property. Otherwise, it provides evidence of the agreement which may be required at a later point in time (particularly in litigation).

In German law there are only very few contracts where notarisation is mandatory. These include, for example, contracts to transfer title in or to grant security over real property. Notarisation also applies where, for example, real estate is to be contributed to a company or real estate as part of a contract of sale requiring, among other things, that an obligation to transfer ownership be entered into. This also applies to the transfer of shares. Where a contract must be concluded in a specific form, the power of attorney to conclude the transaction must in general also extend to the form specified for the transaction. However, it is quite possible here for different notarial forms to apply to the contract and to the power of attorney.

 
14. What are the legalisation requirements in your jurisdiction and how is it carried out?

The HCCH Convention Abolishing the Requirement of Legalisation for Foreign Public Documents 1961 (Hague Apostille Convention), which applies to all public documents with the exception of documents created by consular staff, applies in relation to its signatory states. The Hague apostille confirms the authenticity of the document. The original document must be submitted and the apostille is affixed by a competent authority of the issuing state.

In addition to the Hague Apostille Convention, there are also bilateral agreements that provide that no formalities, not even the Hague apostille, must be observed for certain documents.

Where neither the Hague Convention nor any other convention applies, legalisation in the sense of certification for legal purposes is done by embassies and consulates. The decision on whether certification is necessary is taken by the authority to which the foreign document is to be presented. The documents must also be submitted in the original. Foreign-language documents must also, as a rule, be presented in translated form from a translator certified and publically appointed or recognised in Germany. The application for legalisation must be submitted to the responsible authority.

In general business transactions an apostille is mainly used for international contracts that are subject to particular form requirements, such as for the transfer of shares. In these cases, the power of attorney to conclude the notarial transaction must then generally also be issued in notarial form.

Powers of attorney

15. What are the main types of powers of attorney in your jurisdiction?

The scope of contractually agreed powers of attorney depends in principle on what has been specifically agreed between the parties, whereby the power of attorney may be granted in relation to just the representative and/or the business partner and/or the relevant public authority. The main types of powers of attorney are as follows:

  • The most restrictive common form of power of attorney is the special power of attorney to carry out one specific legal transaction.

  • There are also other powers of attorney that give the recipient power in relation not just to one specific transaction but to a series of transactions of the same type or within a definable area.

  • There is the general power of attorney which gives its holder power of representation in all legal transactions for which representation is permitted.

If an individual is empowered to operate a business or to carry out a certain type of transaction or certain individual transactions pertinent to a business without holding a general commercial power of attorney (known as a Prokura), the law provides, for reasons of legal certainty, that the power of attorney is to extend to all those transactions and legal acts that are normally associated with the operation of such a business or the carrying out of such transactions.

Prokura (general commercial power of attorney) is a common power of attorney under commercial law and entitles the holder to carry out all those legal transactions that are customary for the business represented by the party holding the Prokura. Separate authorisation is only required by Prokura holders where real estate transactions are involved. The powers under a Prokura also do not cover self-dealing, for example termination of the activities of the business, or fundamental transactions that go to the core of the business.

Companies that are commercially active are represented in particular by the members of their organs (that is, the managing or supervisory bodies in a company). The principles of the powers of representation of the following are important here:

  • The partners of a general partnership and a limited partnership.

  • The managing directors of limited liability companies.

  • The board members of stock companies are regulated by statute.

However, in addition to these representatives, other employees or third parties can act for the company provided that they are validly authorised or there is attributable apparent authority.

 
16. What are the main transactions when powers of attorney are used?

Legal entities cannot act on their own but must be represented by an authorised person. Granting power of attorney is necessary to enter into contracts. Especially in large entities the process of granting power of attorney is formalised and governed by internal guidelines to ensure that the persons acting know the limits of the power of attorney granted. Therefore, powers of attorney are very commonly used in Germany for all kinds of contract, in particular where large companies or group of companies are involved.

 
17. What are the key provisions in a power of attorney?

It is not necessary for powers of attorney to have a specific form and they can even be concluded by implication. It is nevertheless advisable for a power of attorney to explicitly include, in particular, the following points so that its legal scope is clear:

  • The name of the principal.

  • The name of the representative.

  • The scope and extent of the power.

  • Its duration.

  • If relevant, a restrictive provision that representation may only occur in conjunction with another person.

  • The date on which the power was issued.

  • The principal's signature.

 
18. What are the formalities for the execution of a power of attorney?

Under German law there are no formal requirements for issuing an individual power of attorney. Therefore, a power of attorney may be issued tacitly by conduct implying intent. However, it is advisable to issue the power of attorney in writing to make its purpose and scope clear.

Other

19. Is virtual closing used in your jurisdiction?

Virtual closing is both possible and regularly used if no statutory written form requirements must be met. However, there is no standard practice for virtual closing. In some cases separate, signed and scanned copies of a document may be exchanged by e-mail without the parties actually signing the same document. In other cases one party may sign the document and then send a scanned copy to the other party for signing.

 
20. How are legal opinions obtained and used in your jurisdiction?

A legal opinion to be given in court is only necessary if foreign law is to be applied because foreign law must be assessed through legal opinions. The court can obtain the necessary opinion itself. However, the parties are also entitled to submit their own experts' legal opinions on the application of the relevant foreign legislation.

Apart from this, legal practitioners are often involved in drawing up legal opinions for clients who want and commission legal opinions on a particular issue. Therefore, when used in Germany, the term "legal opinion" usually means a major report involving considerable potential liability.

 
21. What are the key issues in the conduct of completion meetings?

Thorough preparation is essential to a completion meeting because the necessary documents can only be signed if they are available. However, completion meetings are not of special significance in the German legal system because contracts can mostly be concluded without the need to meet any requirements as to form (see Question 6).

It is nevertheless helpful to seek legal advice during the completion process; for example, to answer questions and provide legal support on any doubts or issues that may suddenly arise, and to check signatures and powers of representation. Lawyers generally also have experience in negotiating contracts that can be of benefit to the parties.

At completion the following usually must be available:

  • Proof of powers of representation (for example, copies of powers of attorney or excerpts from the commercial register).

  • A trustee account or a trustee agreement.

  • A sufficient number of copies of the contract documentation, including annexes.

 

Content of contracts

22. What is legal status of contractual terms in your jurisdiction?

Under German law, unlike under English law, contract clauses are not differentiated based on their character (for example, as a condition or a warranty, and so on). This means that, unless otherwise agreed, the parties are generally bound by all the contractual arrangements.

Therefore, compensation can be claimed both for the violation of a major obligation and of an ancillary obligation. However, some stipulations differ slightly from other terms agreed on:

  • One distinction that can be drawn is whether or not liability exists under the clause independent of fault. As a rule, this depends on an interpretation of the respective contractual arrangement.

  • German law also generally permits conditions precedent and conditions subsequent. These allow the validity of the relevant contractual provisions to be made contingent on external circumstances.

In relation to liability under the contract, see Question 29.

 
23. Are warranties recognised in your jurisdiction?

Contracts of sale and contracts for work and services (including the subcategory contracts for work and materials), which are of particular relevance in the business environment, are covered by the German Civil Code, which sets out a statutory regime of rights in relation to defects under these types of contract.

Unless the particular features of a specific contract for work and services indicate that a different treatment is necessary, contracts for work and services are generally treated like contracts of sale. Therefore, parties to contracts of these types do not need to come to express agreement on their individual rights in the event of defects since the statutory rights relating to defects will instead take automatic effect on conclusion of the relevant contract.

Typical defect-related rights under German law are, firstly, a right of the buyer or ordering party to subsequent performance (that is, to the repair of a defective object or to substitute delivery of a new, non-defective object). If a reasonable deadline for subsequent performance is not met, in the case of substantial defects, the buyer can withdraw from the contract altogether. Apart from that, the buyer can also reduce the purchase price. If there is fault on the part of the seller or contractor, the buyer can also bring claims for damages or reimbursement of expenses.

The deadline for claims based on defect-related rights is generally two years from the time the risk passes, which is at the time of delivery for contracts of sale and on acceptance for contracts for work and services. If the end product is delivered to a consumer, the time periods for asserting recourse claims and defect-related rights is extended for the entire supply chain (two months from performance of the claim to a maximum of five years from delivery on). In the case of buildings and objects normally used for buildings, the statutory warranty period is five years, and even 30 years where the defect is in a third-party right in rem that permits the object of sale to be reclaimed or is in some other right registered in the land register.

The parties can, in principle, agree on different contractual warranty provisions. However, this is only permissible within the confines of the law. There is extensive contractual freedom in relation to individual contracts, although, for example, liability for intent cannot be excluded in advance. Contractual freedom is also limited in relation to purchases of consumer goods, where, for example, the time periods for recourse within the supply chain cannot be reduced.

 

Variation and assignment

24. What are the main ways to transfer contractual rights?

Rights and duties are normally transferred in the ordinary course of business. The consent of the other party to the contract is generally required where a contractual position as a whole, not just individual rights and duties, is transferred. Therefore, parties conclude a new trilateral agreement. This process is also called novation and means that the original contract has been changed.

Duties may be transferred by the addition of third parties (for example, it will always be possible to involve vicarious agents to perform contractual duties that actually relate to the contractual party where this involvement is not excluded by contract and the duty is not to be performed in person). However, the party involving the vicarious agent is then liable for the agent's actions and lack of action. Yet it is possible to agree to limit liability for the vicarious agent's intentional actions and lack of action.

Rights may generally be transferred without requiring a particular form. There is no necessity to adhere to the form that applies for the contract under which the rights are transferred, with the exception of mortgages and instructions (that is, an instruction to perform, for example by making a payment, in relation to a third party). Although the parties can agree that the rights under a specific contract cannot be transferred to third parties, the assignment of monetary claims as part of business operations are nonetheless valid. The debtor can then pay the current creditor with the effect of discharging the debt. Apart from contracts, prohibition of assignment may also be based on the law. For example, restrictions may exist in the area of shareholder rights and for property liens such as mortgages. Strictly personal rights are not transferable.

Therefore, in general, the debtor need not be involved where rights are transferred. The debtor's interests are protected by the receipt of objections and the protection of legitimate expectations.

 
25. What are the rules relating to waiver of contractual rights?

In German law it is generally possible to waive independent rights, to which the party waiving the rights is entitled, without adhering to a particular form.

According to the interpretation of the respective agreement or declaration of the waiving party, it must be established in each case whether or not the waiver is supposed to go beyond waiving the exercise of this right or, for example, waiving the plea of the statute of limitations, or the forgiveness of the obligations under a contractual relationship as a whole (that is, a contract of cancellation). A waiver may also be declared by implication. However, the conclusion of a contract of forgiveness (Erlass) for a receivable by which the debt expires can only be assumed in exceptional cases where the relevant conduct is clear and without ambiguity. Therefore, in the event of doubt, forgiveness is not to be assumed because, in general, the principle of pacta sunt servanda (agreements must be kept) applies in German law.

 

Enforcement

Liability and remedies

26. What are the rules relating to invalidity, misrepresentation and mistake relating to contracts?

Private autonomy has a high priority in German law. Therefore, contracts and arrangements are generally valid, and a contract will only be found to be invalid in exceptional circumstances. These include transactions that violate a statutory prohibition, and these contracts are null and void. These are exceptional cases, which affect professional law and principles (for example, it is not permissible to work in a dual capacity as an auditor and a chartered accountant).

Unethical transactions are also invalid. What counts as unethical in the individual case requires interpretation by the courts and is, therefore, subject both to changing social values and to how the details are classified in the individual case.

Where just a part of a contract is invalid (for example because performance by one side would violate a prohibition), the entire contract is invalid if the contract would not have been concluded without the void part. This generally means that the right to counter-performance is likewise invalid for lack of validity of the other party's own contractual obligation.

The existence of a contract can also be contested subsequently by challenging for the avoidance of the declaration of intent that led to conclusion of the contract. A mistake can be given as the relevant ground to the extent that the declaring party (and only the declaring party since it is otherwise likely to be a case of dissent ascertainable by interpretation) was mistaken either in the rendering or the content of their own declaration. This also includes characteristics relating to the matter as are customarily regarded as essential. It is not decisive whether the declaring party was mistaken as to the legal consequences of the intentionally delivered declaration. Even a hidden error in calculation, where the mistake is made immediately preceding the rendering of the declaration, cannot be claimed as voidable. Avoidance may also be claimed for fraudulent misrepresentation or duress, with a statutory time limit of one year applying in that case. However, avoidance is relatively rare in business situations.

Germany courts' control over standard business terms and conditions is very important. This control is frequently exercised in German law and should not be underestimated. Standard business terms can exist even in contracts that are otherwise negotiated on a case-by-case basis. All clauses that a party to the contract wishes to use more than once and the content of which is not made available to be changed or altered in serious discussion in the contractual negotiations but presented by one party to the other during contractual negotiations, are interpreted and assessed as to whether, in the individual case, they constitute an unfair disadvantage to other party. This is often the case where there is a departure from important basic statutory concepts but can also arise if, for instance, a provision is unclear or cannot immediately be understood. In addition, standard business terms cannot be reduced to the extent that they are valid under the law to preserve them in the contract. This means that a provision that violates these principles will be invalid and the relevant statutory provision will take its place.

Therefore, particular care is needed when drafting provisions that may be considered standard business terms. These standard documents are reviewed for transparency and certainty, and if these strictly interpreted concepts are not fulfilled in the individual circumstances, the clauses will be invalid. This is also an area in which the case law is constantly changing and driven by each individual case, meaning that it is extremely difficult to be certain under the law about the validity of individual standard business terms. In this context, severability clauses intended to prevent the consequence of a complete clause being invalid if it contravenes the requirements of standard business terms and conditions are invalid under German law on standard terms and conditions. This means that the statutory provision applies to the omission occurring through the deletion of the invalid clause.

 
27. What are the main performance and discharge rules relating to contracts?

In principle, the parties to an agreement are free to agree to terminate it at any time. They are also free to agree a specific form for any termination or amendment of the original contract and also to then change this (including by implication), provided that the written requirement does not prohibit this (see Question 6).

Recurring obligations can be terminated at any time for good cause without notice. Only if immediate termination is unreasonable must the contract be continued until such time as termination is reasonable. However, good cause only exists if it is unreasonable for the terminating party to be obliged to continue the contract until the next point in time at which regular termination would be reasonable. The threshold for this is high and depends on the circumstances of the individual case. Generally, prior warning must be issued specifying the grounds for the termination. It is also possible for a deadline to be set and for termination to be issued after it expires.

German law also recognises the concept of frustration of contract. This allows for a contract to be adjusted (or, as the case may be, terminated) if after its conclusion the circumstances or common understanding of the parties with regard to the contract change so that it is no longer reasonable for one of the parties to abide by the contract. However, this applies only in exceptional cases such as where there is extreme currency devaluation going beyond the limit of the risk assumed.

The German Civil Code also recognises impossibility of performance. Here the party owing performance is no longer able to render it and the party to which performance is owed is no longer able to counter-perform. Impossibility of performance is very rarely invoked but includes both cases in which no-one can perform and also cases in which the party owing performance cannot perform and cannot reasonably engage a third party for this purpose. Impossibility also includes disproportionality, although it must be noted that the specific criteria for disproportionality (or "commercial impossibility" as it is sometimes known) are not only disputed but in any case so strict that they can scarcely ever be assumed met in everyday commercial transactions. The case law in any case tends to assume frustration in this regard and not impossibility.

 
28. What are the key rules on privity of contract and third party rights?

In principle, only the parties to a contract are bound by it. Only in exceptional cases can a third party be liable based on a contract despite not being a party to it.

By contrast, a contract can always establish rights for third parties provided that these rights are exclusively for their benefit. The right of the third party, as a rule, is simply a right to make a claim. This is because most subjective rights also involve duties, which are not permitted to be imposed on third parties as this would produce a contract at the expense of third parties, which is prohibited. Prohibited contract types also include contracts that dispense with the rights of third parties. In this case, a pactum de non petendo (an agreement not to sue) is often concluded, which can provide the third party with a right of objection.

There are also contracts with protective effect for third parties. Here the contents of the contract are such that certain third parties are intended to fall under the protection offered by the contract and, in the event of an infringement of these obligations, to be able to exert rights resulting from the relationship between the contracting parties. In commercial transactions, this can be the case for drop shipment businesses, where the owner of transported goods may be intended to be included under the protection ensuing from the contract between the party sending the good and the party delivering it. Third party damage liquidation, where the harm is done to a party other than the party with the claim, can be seen in a similar light. This results in the party suffering the harm having a right to assignment of the right to damages from the holder of the right.

 
29. What are the main rules relating to contractual liability?

Depending on whether an obligation is classified a main or an ancillary obligation (for example, performance of the contract is a primary obligation, and proper clarification of a risk is an ancillary obligation), damages can be claimed either instead of or in addition to performance. This distinction under German law between the types of obligation and their associated legal consequences is complicated and contentious, with the circumstances of the individual case also playing a role.

A party can generally rescind and reverse a contract if all of the following are met:

  • The party owing performance has been set a deadline for performance that has not been met.

  • The party to whom performance is owed is not primarily responsible for such non- or poor performance.

  • The duty involved is not immaterial in nature (that is, it is not insignificant relative to the contractual duties).

It is important to note that rescission does not prevent claims to damages.

Joint and several liability exists where performance is owed by more than one party and can be claimed in full from each of them individually but only once in total. The party owed the performance can then choose which of these parties is to perform or can even sue all of them jointly, with such parties then settling the matter between themselves. One important area of application of joint and several liability is in company law where it is the case, for example, that several shareholders are jointly and severally liable for a company debt. Where legal transactions take place between the party owed the performance and one of the joint and several debtors, and there is no provision as to how far these transactions are to take effect also for and against the other joint and several debtors, the issue must be decided by interpretation on a case-by-case basis.

 
30. What are the main rules relating to excluding contractual liability?

There is no limitation of liability under the German Civil Code, meaning that liability is essentially unlimited. However, the damages that can be claimed are limited by the principles of causality and objective attribution, in particular, third-party intervention and lawful alternative conduct. The party suffering the harm must also take steps to prevent the harm, respectively to keep it to a minimum, so far as it is able to do so. In addition, a claim cannot be asserted where there is contributory negligence; in such cases a proportionate reduction is applied, which can even result in a reduction to zero.

The parties to a contract may choose to limit liability if they so wish, although subject to the exception that liability may not be excluded for damage that is caused intentionally. Clauses of this type are invalid. Statutory upper limits do apply under the Product Liability Act. For example, claims for personal injury may not exceed EUR85 million.

In the case of standard business terms and conditions, the qualifying conditions for which are very low (see Question 26), own liability can only be limited within very narrow bounds and should always be checked very carefully in each individual case.

 
31. What are the main contractual remedies?

The principle of restitution in kind prevails in German law. As a matter of principle, a party owed a duty has the right to its fulfilment; the system does not provide for damages as a means of "buying oneself out". There are only a few, rare cases in which a party will be released from its obligation to perform (impossibility of performance, frustration of contract (where relevant)) (see Question 27). German law also allows for injunctive and main proceedings as a means of enforcing the obligation to perform.

This means that the party owed performance can generally decide whether to insist on the agreed performance or to accept money as a substitute. A court can order performance (depending on the urgency of the matter and the circumstances of the case) immediately in the course of preliminary proceedings where there is a right to and grounds for an injunction but also in any possible main proceedings. For a preliminary injunction, prima facie evidence must be brought showing that the applicant has the right to the performance or discontinuation sought, and that fulfilment of the contract is imperative to prevent the permanent curtailment of a right or the non-satisfaction of a claim. An injunction is intended to secure the applicant's claim. A claim to performance can generally be enforced by imposing a fine or even imprisonment.

Where the claim brought ensues from a contract, the court will generally base its decision on the contract's wording, interpreted in accordance with the parties' intentions. In the case of omissions, the court will interpret the contract in accordance with the rules on supplementary interpretation, taking into account the intention of the parties at the time the contract was concluded. This also applies where the contract is invalid and statutory law is unable to fill the gap. If there is dissent (that is, where the parties assume they have agreed on a particular point in the contract although this is not the case), effect is given to that which the parties actually intended to agree.

 
32. What are the main differences between indemnity and damages? Are penalty clauses subject to any limitation?

German law does not make a distinction comparable to that between indemnity and damages. The principle of restitution in kind applies in this regard. Therefore, punitive damages do not exist under German law.

Contractual penalties are fundamentally permitted to be agreed to the extent considered morally conscionable. This is particularly the case with standard business terms and conditions; however, there are several restrictions on the validity of agreed contractual penalties that depend on the individual case.

 

Enforcement and cross-border issues

Choice of law

33. Is a foreign choice of law in a contract upheld by the local courts?

German courts generally respect a choice of law clause in a contract. As a basic principle under German private international law, the parties can choose which law governs their contract. However, the following exceptions apply to this free choice of law:

  • If the parties have chosen a certain law, but all facts underlying the contract point to another jurisdiction, the mandatory provisions of that jurisdiction will apply.

  • If the relevant contract qualifies as a consumer or an employment contract.

  • Certain mandatory provisions of German law, for example, regarding exchange regulations or embargoes, can apply, despite an otherwise valid choice of law.

 
34. Are any mandatory terms implied by statute?

The terms considered mandatory depend on which national law applies, which is fundamentally a matter of free choice (see Question 33).

Under German law, there is firstly mandatory international law, which cannot be excluded. This is to ensure that a level of protection that is considered important is not undermined. An example of a provision of this type is the claim to compensation had by a commercial agent when the commercial agency agreement ends.

The applicability of mandatory provisions in the international context is dealt with by Germany's conflict of law provisions. A German court with jurisdiction in a contractual matter will apply Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I). Under Rome I, the parties are fundamentally free to decide which national law is to govern the contract. However, if the facts of the case are of purely domestic relevance, the mandatory provisions of German law will also apply (for example, the strict controls over standard business terms and conditions). This is to prevent these provisions being evaded in cases that are purely domestic.

Jurisdiction

35. Is a choice of jurisdiction in a contract upheld by the local courts?

Generally, German courts respect the choice of jurisdiction under a contract. A jurisdiction clause between parties domiciled in member states and non-member states is generally respected if certain (mostly formal) prerequisites are met (Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Recast Brussels Regulation)). However, this will not apply if the clause violates certain provisions of the Recast Brussels Regulation relating to jurisdiction for insurance matters, consumer contracts and employment contracts.

In addition, local courts have exclusive jurisdiction over a dispute despite the choice of jurisdiction in the following matters:

  • Rights in rem in real property.

  • The validity of the constitution, the nullity or the dissolution of companies or decisions of their organs.

  • The validity of entries in public registers.

  • Registration or validity of patents, trade marks and designs.

As of 1 October 2015, the HCCH Convention on Choice of Court Agreements 2005 (Hague Choice of Court Convention) entered into force. The Convention, which has been ratified by Mexico and the EU, aims to ensure the effectiveness of choice of court agreements between parties to international commercial transactions.

Enforcement of foreign judgments

36. When are foreign judgments recognised in your jurisdiction?

The enforcement of foreign judgments is governed by EU law, multilateral and bilateral treaties, and domestic procedural rules.

Under the Recast Brussels Regulation, a judgment given by the court of another EU member state is usually enforceable in Germany without any declaration of enforceability required. The enforcement can only be refused under very limited conditions, for example if the enforcement is manifestly contrary to public policy.

For judgments given by courts in Switzerland, Norway or Iceland, the Lugano Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters 2007 (New Lugano Convention) applies. In the absence of an international treaty, enforcement of foreign judgments is effected through special proceedings (Exequaturverfahren). The following prerequisites for the recognition of the judgment must be met:

  • The foreign court that gave the judgment had proper jurisdiction to hear the case.

  • Proper service of process on the defendant.

  • No incompatibility of the judgment with an earlier judgment of a German court or with a judgment of a foreign court that is to be recognised in Germany.

  • No violation of German public policy.

  • Guarantee of reciprocity.

 

Online resources

W www.gesetze-im-internet.de/Teilliste_translations.html

Description. Official website of the German Ministry of Justice containing the official texts of German legislation. The website also provides non-binding English translations of German legislation:

  • Code of Civil Procedure ().

  • German Commercial Code ().

  • German Civil Code ().

  • Act on limited liability companies ().



Contributor profiles

Dr Eric Wagner, Partner

Gleiss Lutz

T +49 711 8997 248
F +49 711 855096
E eric.wagner@gleisslutz.com
W www.gleisslutz.com

Professional qualifications.

German-trained attorney-at-law; admitted at the German bar.

Lecturer and examiner in contract law and international arbitration law at the Friedrich-Alexander University of Erlangen-Nürnberg.

Areas of practice.

Product liability; commercial contracts; distribution law; dispute resolution.

Languages.

German, English.

Professional associations/memberships.

German Institution of Arbitration (DIS)

German Initiative of Young Arbitrators (DIS 40)

German Society for Distribution Law (DGRVR)

Anna Hedwig Karpf, Associate

Gleiss Lutz

T +49 711 8997 248
F +49 711 855096
E anna.karpf@gleisslutz.com
W www.gleisslutz.com

Professional qualifications.

German-trained attorney-at-law; admitted at the German bar.

Academic qualifications.

Master of laws in International Commercial Dispute Resolution at University of Westminster, London.

Areas of practice.

Commercial contracts, in particular in the automotive sector; product liability; dispute resolution.

Recent transactions

  • Advice on legal aspects of a product liability case and handling of the recall involving 54 countries.

  • Assessment and review of complex supply agreements.

  • Assessment and review of standard terms.

Languages.

German, English, French.

Professional associations/memberships.

German Inititative of Young Arbitration Lawyers (DIS 40)

German-British Lawyers' Association (DBJV)

London Very Young Arbitration Practitioners (LVYAP)


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