Ensuring the legal validity of terms and conditions of purchase and enforcing them

What are terms and conditions of purchase?

Terms and conditions of purchase, often abbreviated to AEB (Allgemeine Einkaufsbedingungen), are pre-formulated terms for a wide range of contracts which the buyer imposes on the other party upon conclusion of the contract. They thus fulfil the definition of standard terms and conditions under Section 305(1) of the German Civil Code (BGB). The key factor is that the clauses are pre-formulated and are intended to be used for more than just a single instance. The specific name is irrelevant. Even a set of terms and conditions that a company draws up internally just once and then uses as the basis for its orders on an ongoing basis constitutes General Terms and Conditions.

The aim of the terms and conditions of purchase is to shift the balance of the contract in favour of the purchaser. Statutory sales law and commercial law are generally balanced, but in some respects allocate risks differently from how the purchaser would wish. Terms and conditions of purchase intervene in these areas: they extend warranty periods, ensure adherence to delivery deadlines through contractual penalties, establish claims for indemnity in the event of product or intellectual property infringements, and counter the supplier’s retention of title.

It is important to note that this shift is only valid to the extent permitted by the law governing general terms and conditions. Terms and conditions of purchase are a tool for structuring contracts within the legal limits; they are not a carte blanche.

Are terms and conditions of purchase the same as general terms and conditions, and which take precedence – general terms and conditions or terms and conditions of purchase?

Yes, terms and conditions of purchase are general terms and conditions and are subject to Sections 305 et seq. of the German Civil Code (BGB). The frequently asked question as to whether, in case of doubt, the general terms and conditions or the terms and conditions of purchase apply is based on a misunderstanding: terms and conditions of purchase are general terms and conditions, just those of the buyer. The real distinction is not between standard terms and conditions and terms and conditions of purchase, but between the purchaser’s terms and conditions of purchase and the supplier’s terms and conditions of sale or delivery. Both are standard terms and conditions, and both claim to apply to the same contract.

In commercial transactions, a more relaxed regime applies. Under Section 310(1) of the German Civil Code (BGB), the strict conditions for incorporation set out in Section 305(2) BGB do not apply to businesses, nor do the prohibitions on certain clauses in Sections 308 and 309 BGB apply directly. This does not mean that anything goes in B2B transactions. The substantive review under Section 307 of the BGB remains in force, and the assessments set out in Sections 308 and 309 of the BGB serve as an indication of disproportionate disadvantage in this review. Terms and conditions of purchase are therefore easier to incorporate in dealings with suppliers than with consumers, but their scope is by no means unlimited.

When do terms and conditions of purchase apply in B2B transactions?

Terms and conditions of purchase apply if they are validly incorporated into the contract. In dealings with a business, any form of mutual agreement is sufficient for this purpose, including an implied agreement. Unlike in consumer transactions, no explicit notice or formal opportunity to take note of them is required. It is generally sufficient for the purchaser to refer to their terms and conditions of purchase with sufficient clarity at the time the contract is concluded and for the supplier not to object to their validity. A reference on the purchase order or in the framework agreement, combined with the option to access the text if required, constitutes incorporation.

During the course of the ongoing business relationship, their validity is further cemented. If the terms and conditions of purchase are used without objection across a series of orders, they also apply to subsequent orders without having to be re-attached each time.

The commercial letter of confirmation plays a special role: if a trader confirms the conclusion of the contract in writing by attaching or referring to their terms and conditions, and the other party remains silent, these terms and conditions become part of the contract, provided that the recipient could reasonably have expected such a provision. This effect applies to both parties and can equally serve to give effect to the supplier’s terms and conditions of sale. The safest course of action therefore remains to expressly agree on their inclusion in a framework agreement.

What happens when terms and conditions of purchase and sale conflict?

Conflicts are the norm in B2B business. The purchaser places an order by referring to their terms and conditions of purchase, the supplier confirms the order by referring to their terms and conditions of sale, and neither party accepts the other’s terms. This situation is known as a ‘battle of forms’. In German case law, the ‘residual validity’ theory – also known as the ‘congruence principle’ or the ‘knock-out rule’ – has become the established approach.

It operates in three stages. Firstly, the contract is concluded despite the conflicting terms, because both parties clearly intend to exchange performance and the conflict of clauses does not alter this. Secondly, the conflicting clauses in both sets of terms do not form part of the contract. They cancel each other out. Thirdly, in accordance with the legal principle set out in Section 306(2) of the German Civil Code (BGB), the omitted clauses are replaced by the dispositive statutory law, namely the law of sale and commercial law as set out in the BGB and the German Commercial Code (HGB). Only where the terms coincide, or where one party makes a provision whilst the other remains silent, do the respective clauses take effect.

For the purchaser, this has a sobering consequence. A mere defence clause along the lines of ‘Our terms and conditions of purchase apply exclusively; any conflicting terms and conditions shall not be recognised’ does not prevent the purchaser’s own favourable clauses from failing due to the conflict. It merely ensures that the supplier’s terms and conditions do not take precedence either, and leaves both parties to rely on the law.

Anyone who really wants to enforce their own terms in the ‘battle of forms’ must remove the crucial points from the dispute over general terms and conditions and agree them individually, for example in a framework agreement, a quality assurance agreement or an explicit confirmation from the other party.

In cross-border trade, the picture changes further. Under the UN Convention on Contracts for the International Sale of Goods, the treatment of conflicting general terms and conditions is controversial: The Federal Court of Justice also applies the ‘knock-out’ rule here (judgement of 9 January 2002, VIII ZR 304/00), whilst a minority opinion derives the ‘last word’ theory from Article 19 of the CISG. Other legal systems, particularly Anglo-American ones, tend, by contrast, to allow the terms and conditions sent most recently to prevail. Anyone making international purchases should therefore make separate provision for the choice of law and the incorporation of terms and conditions.

What should be included in terms and conditions of purchase?

Good terms and conditions of purchase set out the procurement process as a coherent system. They begin with a precise description of quantity, quality and specifications, as well as binding delivery dates, rules on partial deliveries, packaging and the transfer of risk. Where adherence to delivery deadlines is business-critical, a reasonably capped contractual penalty can provide protection against late delivery. It should be linked to culpable conduct and clearly regulate the handling of any further damage.

With regard to quality and warranty, the inspection of goods on receipt, the obligation to examine and give notice of defects under Section 377 of the German Commercial Code (HGB), subsequent performance, rectification by the purchaser and the bearing of costs must all be consistent with one another. A quality assurance agreement may expand upon these obligations, but should not create any contradictions with the framework contract or the terms and conditions of purchase. Limitation periods may be extended, but must remain within the legal limits set out in the law governing general terms and conditions.

Liability and indemnification primarily concern product liability, recall costs and the infringement of industrial property rights. Robust clauses are linked to the supplier’s area of responsibility and are supplemented by appropriate insurance cover. The transfer of ownership and the handling of the supplier’s simple, extended or expanded retention of title should be expressly regulated, as should payment terms, discounts and invoicing requirements.

Finally, confidentiality, data protection, export controls and supply chain compliance form part of the contractual framework. These obligations must be tailored to the product, the supply chain and the purchaser’s actual level of influence. A standard group template adopted without review is therefore rarely the best solution: terms and conditions of purchase are only effective if they are tailored to the purchaser’s own procurement processes and typical suppliers.

Which clauses are enforceable against suppliers?

The line is drawn by Section 307 of the German Civil Code (BGB). A clause is invalid if it unreasonably disadvantages the supplier contrary to the principles of good faith, in particular if it is no longer compatible with the fundamental purpose of the statutory provision or restricts essential rights to such an extent that the purpose of the contract is jeopardised. In commercial transactions, this is the decisive standard of review, and the prohibitions on clauses set out in Sections 308 and 309 of the German Civil Code (BGB) serve as an indication. Four areas deserve particular attention.

Obligation to give notice of defects under Section 377 of the German Commercial Code (HGB). The purchaser wishes to extend the short period for inspection and notice of defects under commercial law so as not to lose their right to claim for defects even in the event of a slight delay. A moderate extension is permissible, such as specifying that ‘immediate’ notice of defects means within a few working days. However, a clause that effectively removes the obligation to give notice of defects or renders it impossible for the supplier to predict is contrary to the fundamental principle of Section 377 of the German Commercial Code (HGB) and is invalid. Conversely, the situation where suppliers impose stricter inspection obligations on the buyer in their terms and conditions of sale is also only effective to a limited extent.

Retention of title. In principle, it is possible to override a simple retention of title through purchasing terms; however, this conflicts with the supplier’s interest in security and is usually overruled by statutory law in the ‘battle of forms’. Conversely, clauses in the supplier’s terms which extend a retention of title to cover all future claims until they have been settled are, according to established case law of the Federal Court of Justice (BGHZ 137, 212), if they result in over-securitisation. The purchaser has strong arguments here, but should expressly regulate this point and avoid a conflict between clauses.

Payment terms. This is an often-overlooked pitfall for the purchaser. Whilst long payment terms in purchasing conditions favour the purchaser, they disadvantage the supplier as the creditor of the payment claim. Under Section 308(1a) of the German Civil Code (BGB), a payment period of more than 30 days (calculated from receipt of the consideration or receipt of the invoice) provided for in general terms and conditions is, in cases of doubt, presumed to be unreasonably long.

This review of terms and conditions also applies directly in commercial transactions, because, unlike the other prohibitions on terms and conditions, Section 308(1a) of the German Civil Code (BGB) is not covered by the scope exception set out in Section 310(1), first sentence, of the BGB. Section 271a of the German Civil Code (BGB) sets the limit at 60 days: a longer payment period is only valid if it has been expressly agreed and is not grossly unfair in view of the creditor’s interests.

A standard 90-day period set out in standard terms and conditions of purchase is therefore open to challenge. Anyone wishing to enforce long payment terms must agree them on a case-by-case basis and justify them objectively.

Contractual penalties and indemnity. Contractual penalties for late delivery are an effective means of enforcement, but are subject to a proportionality test. Their amount must be limited; they must not be disproportionate to the value of the order; and they should be linked to culpable conduct. If there is no upper limit or if daily rates accumulate without limit, the clause is invalid.

Indemnity clauses which require the supplier to indemnify the buyer for any conceivable third-party claim, regardless of fault and without any limit on the amount, also fail to withstand scrutiny as to their content. An indemnity clause remains valid if it is linked to the supplier’s sphere of responsibility, such as product defects or infringements of intellectual property rights for which the supplier is liable.

Terms and conditions of purchase are therefore enforceable wherever they modify the statutory framework in a moderate and balanced manner. Where they reverse this framework and unilaterally shift the risk onto the supplier, they are void, and in the event of a dispute, the law applies once again.

How do the LkSG and CSDDD affect purchasing terms and conditions?

Supply chain legislation has turned purchasing terms and conditions into a compliance tool. Companies that are themselves subject to the Supply Chain Due Diligence Act must pass on their human rights and environmental expectations to suppliers, and the practical means of doing so are the purchasing terms and conditions and supplier contracts. Typical provisions include a commitment to a code of conduct, assurances of compliance with labour and environmental standards, audit rights and information obligations, as well as sanction and termination mechanisms in the event of breaches.

This pass-through also applies to suppliers who are not themselves covered by the Act, as larger customers pass on the requirements contractually. For Mittelstand purchasers, as for their suppliers, this presents a twofold challenge: as recipients of third-party clauses and as users of their own.

The legal framework is also evolving. The European Supply Chain Due Diligence Directive (CSDDD) is set to replace national law; its implementation deadline has been postponed, and the annual reporting obligation under the LkSG has been abolished. However, the substantive due diligence obligations remain in force. In terms of drafting purchasing conditions, this means formulating supply chain clauses in such a way that they satisfy current obligations whilst remaining adaptable to the forthcoming European regulation. The details of supply chain law are covered in a separate article.