The six clauses with the greatest potential for conflict
1. Liability and force majeure
Liability is usually the first consideration. In business-to-business transactions, there is greater scope for drafting terms than in dealings with consumers; however, the provisions of Section 309(7) of the German Civil Code (BGB) have an impact on B2B transactions via Sections 310(1) and 307 BGB: A comprehensive exclusion of liability for wilful misconduct and gross negligence is also invalid between businesses. The exclusion of liability for wilful misconduct is invalidated by Section 276(3) of the German Civil Code (BGB) alone. Similarly, a disclaimer regarding the breach of essential contractual obligations (cardinal obligations) is generally invalid, even in cases of simple negligence, insofar as foreseeable damages typical of the contract are concerned. A robust provision therefore differentiates according to the degree of fault, between personal injury, property damage and financial loss, and according to specific risk categories. Flat-rate limits based on the contract value fall short if they do not reflect typical, foreseeable damage; conversely, unlimited liability for loss of production, recall costs and all consequential damages creates an uninsurable risk.
Liability has its flip side: exemption from liability in cases of force majeure. The contract should not merely list examples, but should set out the legal consequences – notification, proof, mitigation of loss, temporary exemption from performance, allocation of costs and a right of termination in the event of a prolonged disruption. Supply bottlenecks at upstream suppliers, price increases or staff shortages do not automatically constitute force majeure. The contract must make it clear which risks each party bears itself, even under difficult market conditions. Anyone who defines the grounds for exemption too broadly undermines the obligation to perform and runs into the problem of fundamental obligations once again.
2. Retention of title
Retention of title protects the supplier until payment is made, but is only effective if it has been validly agreed and can be implemented within the supply chain. Extended retention of title (retention of title in respect of current account balances) is, in principle, unobjectionable in commercial dealings provided that it lapses upon settlement of the balance. A ‘revival’ of the retention for future claims is invalid. A group-wide retention of title is void under Section 449(3) of the German Civil Code (BGB), but only in so far as it secures third-party claims – the agreement is reduced to its valid core. In the case of an extended retention of title, the decisive factors are the specificity of the advance assignment and protection against over-securing; an unrestricted assignment of the entire claim arising from resale or work performed does not stand up to a substantive review.
In practice, the issue of incorporation arises more frequently than the substantive review: if the terms and conditions of purchase contain a defence clause or if the sets of terms conflict, the simple retention of title may prevail, because the buyer implicitly accepts the merely conditional transfer of ownership upon acceptance of the goods. Extended and prolonged forms are then ruled out. Furthermore, rights in rem are generally assessed in accordance with the law of the country where the goods are located – a German clause does not have the same effect in every destination country.
3. Warranty
Warranty clauses are the second major point of contention. A complete exclusion of the rights under Sections 437, 634 of the German Civil Code (BGB) is generally ineffective even in commercial transactions, as is the condition that rights in respect of defects are contingent upon fault on the part of the supplier, or a reference to claims against third parties where the unsuccessful pursuit of such claims does not revive liability. Subsequent performance and rescission are practically indispensable even between traders; a restriction to subsequent performance is only tenable if the right to a reduction in price and rescission are retained in the event of failure. Anyone supplying goods that go to consumers at the final stage of the market must also observe the semi-mandatory supplier’s right of recourse (Sections 445a, 445b and 478 of the BGB): any deviations from this require equivalent compensation.
A distinction must be made regarding time limits. The limitation period under Section 438 of the German Civil Code (BGB) serves as a guiding principle. Moderate reductions in time limits are conceivable in B2B transactions if the purchaser retains a fair opportunity to identify defects and assert claims, whilst in the case of buildings, the five-year time limit must not be altered, even in commercial transactions. Time limits for giving notice of defects must be assessed against Section 377 of the German Commercial Code (HGB) and Section 307 of the German Civil Code (BGB): clauses which fail to distinguish between obvious and hidden defects, which restrict the right to give notice of defects to the time of delivery, or which set extremely short time limits for doing so, are invalid. Conversely, the purchaser cannot completely exclude the obligation to inspect and give notice of defects in its terms and conditions of purchase.
4. Default
Clauses relating to default rely on the penalty – and that is precisely where the risk lies. Contractual penalties are generally permissible in commercial transactions because Section 309(6) of the BGB does not apply and, in this respect, has no indicative effect; however, they are subject without restriction to a review of their content under Section 307 of the German Civil Code (BGB), and Section 348 of the German Commercial Code (HGB) does not protect the clause from this. In particular, penalties that are disproportionately high, penalties that do not differentiate according to the nature, severity and duration of the breach, and – in the absence of particularly compelling reasons – the waiver of the requirement of fault are invalid. In the event of a delay in meeting a deadline, a dual limit has become established: both the daily rate and the total amount must be capped. No reduction is made to preserve the validity of the clause; the penalty that is too high is entirely set aside, and even Section 343 of the German Civil Code (BGB) is of no help in such cases.
A separate standard applies to lump-sum damages: the assessment under Section 309(5)(a) of the BGB is extended to commercial transactions via Section 307 of the BGB; the lump sum must not exceed the damage to be expected in the ordinary course of events. In B2B transactions, there is no requirement to expressly include a reference to the possibility of proving lesser damages; however, the party must not be prevented from providing evidence to the contrary. A combination of a contractual penalty and a lump-sum compensation for damages is also unenforceable in commercial transactions, and the set-off under Sections 340(2) and 341(2) of the German Civil Code (BGB) cannot be excluded in general terms and conditions.
5. Price adjustment
Price adjustment clauses are ancillary price agreements subject to review and are governed by section 307 of the German Civil Code (BGB), as a unilateral right to determine performance deviates from the principle that performance and consideration must be specified in the contract. The decisive factor is that the contracting party must be able to ascertain the reason for and extent of any potential price increases from the clause itself at the time the contract is concluded, and must be able to assess any increase made against the terms of the clause. Cost-element clauses are generally recognised in ongoing supply relationships, but require the disclosure of the relevant cost components and their weighting; a clause is invalid if it permits the drafter not only to offset increased costs but also to increase the profit margin retrospectively, or if it refers to internal company data that is not accessible to the other party.
Clauses that are linked to publicly available indices over which the parties have no influence are more robust: this establishes the basis, scope and procedure for the adjustment, and the user cannot expand their margin unchecked. It is essential that cost increases and cost reductions are aligned according to the same standard and without any time lag at the other party’s expense. A high level of detail is not an end in itself – clauses that are too complex can themselves become opaque. In addition to the law governing standard terms and conditions, the provisions of the Price Clauses Act must be complied with; whether indexation is permissible depends on the type of contract, its term and its specific terms.
6. Choice of law
The choice of law determines the standard against which all the above clauses are assessed – and is precisely for this reason often underestimated. Under Article 3(1) of the Rome I Regulation, the contract is governed by the law chosen by the parties; the choice must be made expressly or be clearly evident from the contract or the circumstances. A choice of law in general terms and conditions is not invalid per se. If there is no genuine international element because all other elements of the facts are situated in another country, that country’s mandatory provisions remain applicable under Article 3(3) of the Rome I Regulation – thus, it is not possible to circumvent German scrutiny of general terms and conditions.
The relationship with the UN Convention on Contracts for the International Sale of Goods (CISG) must always be clarified: according to case law, the choice of German law generally encompasses the CISG, meaning that any exclusion must be expressly stated. Conversely, the choice of the CISG has effect only in terms of substantive law; the applicable national law must be determined in any event, and it is not possible to exclude any national law whatsoever. Choice of law, place of jurisdiction and arbitration clauses should be coordinated with one another – and be identical across all documents.
