Major customers’ purchasing terms

Which terms and conditions of purchase actually apply under the contract?

Firstly, the most important question from a practical point of view: the customer’s terms and conditions of purchase do not automatically apply simply because they are printed on or linked to the order. In commercial dealings, general terms and conditions only form part of the contract if the other party does not object to their validity and has had a reasonable opportunity to take note of them.

If both parties use their own terms and conditions – that is, the customer uses their terms and conditions of purchase and the supplier uses their terms and conditions of sale or delivery – these will conflict. However, according to the ‘residual validity’ theory that prevails today, it is not the set of terms and conditions issued most recently that prevails in this case. Rather, the contract is governed by the provisions where they coincide. Where the terms and conditions contradict one another, they are set aside and replaced by the relevant statutory provisions.

For suppliers, this has two implications. Firstly, it is rarely the case that the customer’s terms and conditions apply in full. In disputed matters, the more balanced statutory law often prevails. Secondly, it is risky to rely on this, as determining which clauses are consistent and which are superseded requires interpretation in the event of a dispute. Anyone seeking clarity should actively object to the other party’s terms and conditions and submit their own, rather than relying on the conflict-of-law rules.

Which clauses in customers’ terms and conditions of purchase pose the greatest risk to suppliers?

Long payment terms have a particularly significant impact. Deadlines of 60, 90 or more days put a strain on the supplier’s cash flow and, from an economic perspective, are effectively equivalent to a forced loan to the customer. Section 271a of the German Civil Code (BGB) and the interpretation of Section 308(1a) BGB – which is also directly relevant in the B2B sector – set limits on such provisions. The longer the payment term and the more one-sidedly it is imposed, the greater the legal and economic risk.

A second area of focus is on contractual penalties, indemnities and extended liability for defects. Flat-rate contractual penalties for late delivery may be open to challenge if there is no requirement for fault, the daily rate is too high or the upper limit is insufficient. Unlimited indemnities for product liability, infringements of intellectual property rights or recall costs often exceed the supplier’s scope of responsibility. Clauses that effectively remove the customer’s obligation to give notice of defects or transfer the entire responsibility for incoming goods inspection to the supplier via a quality assurance agreement should also be viewed critically.

The ownership of tools and materials supplied by the supplier also warrants attention. Ownership often remains with the customer, whilst the supplier bears the costs of storage, maintenance, insurance and the risk of loss. Prohibitions on assignment can further complicate the financing of receivables via factoring, even though Section 354a of the German Commercial Code (HGB) limits their effect in the case of monetary claims.

Finally, compliance and supply chain obligations are increasingly being shifted further up the supply chain. However, audit, documentation and indemnity obligations only make sense if they are tailored to the respective supplier’s sphere of influence. Unilateral rights of the customer to make changes regarding quantities, deadlines, specifications or prices are particularly problematic, as they deprive the supplier of the basis for its cost calculations.

Which of these clauses are invalid under Section 307 of the German Civil Code (BGB)?

Terms and conditions of purchase between businesses are also subject to content review under Section 307 of the German Civil Code (BGB). Although Sections 308 and 309 of the BGB do not apply directly, their principles are taken into account in the assessment. An important exception is provided by the rules on unreasonably long payment, inspection and acceptance periods. The decisive factor is always whether the clause unilaterally shifts the fundamental principles of the law to the detriment of the supplier.

In particular, strict liability for damages, contractual penalties without a reasonable upper limit and very long payment terms set out in standard form contracts are open to challenge. Furthermore, the complete elimination or excessive tightening of the obligation to inspect and give notice of defects pursuant to Section 377 of the German Commercial Code (HGB) may unduly prejudice the supplier’s interests. Section 354a of the German Commercial Code (HGB) protects receivables financing in the event of prohibitions on assignment, as the assignment of a monetary claim in a bilateral commercial transaction remains valid in principle despite any prohibition.

In the case of compliance clauses, the scope and area of responsibility are key. If, for example, the supplier is required to vouch for all upstream suppliers or to bear all audit and training costs, the provision may be excessive. If a clause is invalid, it is set aside and replaced by the statutory provision. The remainder of the contract remains in force. In practice, however, it is better to use the invalidity as a negotiating point rather than having to rely on it only once a dispute has arisen.

How do third-party terms and conditions end up in the contract, and where is the pitfall?

Many suppliers underestimate how quickly third-party terms and conditions can take effect. Two scenarios are particularly tricky.

The first is a conflict between sets of terms and conditions, also known as the ‘battle of forms’. If the customer places an order by referring to their terms and conditions of purchase and the supplier confirms the order by referring to their terms and conditions of sale, no contract is formed on the basis of the latter terms; instead, the conflict described above arises: Provisions that are consistent apply; conflicting provisions are set aside; and gaps are filled by statute. However, anyone who takes no action and delivers the goods without objection risks individual customer clauses being deemed to have been agreed after all.

The second option is the commercial letter of confirmation. If, following a verbal or provisional agreement, the customer sends a letter summarising the content of the contract, including their terms and conditions of purchase, and the supplier does not respond, this silence may be deemed consent in commercial dealings. In this case, the contract is concluded with the terms set out in the letter, even if these differ from what was discussed. For suppliers, this means that a letter of confirmation from the customer which does not correspond to what was agreed must not be left unanswered. Anyone who fails to object immediately to any discrepancies risks being bound by them.

How do suppliers counter unsuitable purchasing terms?

There are three levels of defence against unwelcome customer terms, which are graded according to bargaining power and the importance of the business relationship.

The first level is the defence clause in the supplier’s own terms and conditions of sale or delivery. In this clause, the supplier makes it clear that they enter into contracts exclusively on their own terms and reject the validity of any conflicting purchasing terms. Such a clause prevents the customer’s terms and conditions from taking precedence by virtue of the ‘final say’ and ensures recourse to statutory law in the event of a conflict. It is a standard feature for every supplier, costs nothing and applies to every order. Its limitation, however, is that it only neutralises the conflicting clauses. It does not achieve a positive outcome in negotiations.

In the second stage, the critical points are agreed upon individually. What has been negotiated individually takes precedence over the General Terms and Conditions and is not subject to strict scrutiny of its content. This therefore opens up scope for manoeuvre in both directions. It is worthwhile for the supplier to specifically identify the few truly problematic clauses – such as those relating to payment terms, liability limits, contractual penalties and indemnification – and to regulate them individually, rather than challenging the entire set of clauses. A negotiated liability cap or an indemnity limited to one’s own fault is more valuable than an abstract reference to the invalidity of a clause in the general terms and conditions.

The third stage is the framework agreement. In the case of long-term supply relationships, it makes sense to set out the terms and conditions once and for all in a negotiated framework agreement. This takes precedence over individual orders and the parties’ respective terms and conditions. It creates legal certainty for both sides, puts an end to recurring disputes over the validity of the terms and conditions, and allows quality assurance, liability, tools, compliance and price adjustments to be regulated within a coherent framework. It is the standard approach as soon as the volume and duration of the relationship justify the effort involved.

Which level is appropriate depends on the respective bargaining power. When dealing with a major customer whose turnover is many times greater than one’s own, a complete rejection of their terms and conditions is rarely enforceable. It is more realistic to identify the clauses that are most significant economically and most vulnerable to legal challenge, and to reach an individual solution for these, whilst the defence clause in the background absorbs the remaining conflicts. It is precisely this prioritisation – that is, the distinction between what can be accepted and what must be negotiated – that lies at the heart of a lawyer’s contract review on the supplier’s side.

What do the current compliance and LkSG pass-through requirements mean for suppliers?

The passing on of supply chain obligations deserves special attention, as the legal situation is currently changing. The German Supply Chain Due Diligence Act (LkSG) is in a transitional phase: reporting obligations have been suspended and enforcement has been scaled back. Furthermore, the legislature plans to replace the LkSG with a law on international corporate responsibility, which will implement the European Supply Chain Due Diligence Directive (CSDDD). The obligations under this directive will not come into effect for the large companies directly covered by it until the coming years anyway.

Despite the easing of regulatory pressure, the contractual pass-through clauses in the terms and conditions of purchase remain in place. They apply regardless of whether the customer is still directly subject to a legal obligation. For suppliers, this means that the obligation arises today through the contract, not through the law. This makes the legal limit set by the General Terms and Conditions all the more important.

A clause that imposes full responsibility on the supplier for all upstream suppliers, obliges them to provide unlimited indemnity, or transfers all audit and training costs to them, may place them at an unreasonable disadvantage. It is, however, reasonable to limit one’s own duties of care to one’s own sphere of influence, to share costs fairly and to restrict indemnities to cases of one’s own fault. This can be negotiated, precisely because the legal basis for passing on liability is currently in flux.