Terms and Conditions and Standard Contracts for Mittelstand

Review of General Terms and Conditions: which clauses are invalid

Under Section 305 of the German Civil Code (BGB), standard terms and conditions are pre-formulated terms which one party to a contract imposes on the other at the time of conclusion of the contract and intends to use for a large number of contracts. The specific term used is irrelevant. Terms such as ‘framework agreement’, ‘terms and conditions of purchase’, ‘supplier terms’ or a repeatedly used standard form contract may also constitute General Terms and Conditions. Simply signing the document does not automatically render the clauses individually negotiated terms.

A genuine individual agreement requires that the user seriously offers the core of the provision – which deviates from statutory provisions – for negotiation, and that the contracting party is actually able to exert influence. The mere possibility of amending peripheral points, ticking a box or having the contract approved by the legal department is generally not sufficient for this. Anyone using standard clauses should therefore assume that they will be subject to the general terms and conditions review, rather than relying on the heading ‘individually negotiated’.

In business dealings between companies, the prohibitions on clauses set out in Sections 308 and 309 of the German Civil Code (BGB) do not apply directly under Section 310 BGB. However, they remain an important benchmark when assessing clauses under Section 307 BGB. In particular, provisions that unreasonably disadvantage the contracting party contrary to the principles of good faith, or that are not clear and comprehensible, are invalid. Industry practice, the type of contract and bargaining power may influence the assessment, but they are no substitute for a balanced clause.

Under Section 305c of the German Civil Code (BGB), surprising provisions do not even form part of the contract in the first place. This applies to unusual content as well as to clauses appearing in a place where the contracting party would not expect to find them. A far-reaching limitation of liability in a technical annex or an automatic contract renewal under an inconspicuous heading may therefore be rendered invalid simply because of its placement. Ambiguous wording is generally interpreted to the detriment of the party using it.

If a clause is invalid, the contract generally remains valid in all other respects under Section 306 of the German Civil Code (BGB). The invalid provision is replaced by the relevant statutory provision. There is no such thing as a general ‘reducibility to preserve validity’, whereby the court would scale back the clause to the minimum extent still permissible. Whilst severable clauses may remain valid in their remaining parts, a contract should not be structured on this basis.

Liability, Payment Guarantees and Place of Jurisdiction

Liability clauses often fail because they attempt to cover too many risks in a single sentence. A blanket exclusion of all consequential damages or a limitation of liability to the contract value may make economic sense in certain cases, but it does not accurately reflect either the statutory grounds for liability or the various types of damage. A more robust approach is a tiered framework that takes into account breach of duty, degree of fault, type of damage and maximum liability.

A liability clause requires mandatory exceptions. Liability for wilful misconduct cannot be waived in advance under Section 276(3) of the German Civil Code (BGB). Personal injury, claims under the Product Liability Act, guarantees given and fraudulent conduct also require separate treatment. In cases of gross negligence and breaches of essential contractual obligations, blanket exclusions in general terms and conditions are particularly vulnerable to challenge. For breaches of essential obligations due to slight negligence, liability is often limited to foreseeable damage typical of the contract. Whether this is appropriate depends on the contract and the calculable risk.

The definition of damage also warrants attention. Production downtime, loss of profit, data loss, recall costs and third-party claims vary greatly in economic terms. If they are excluded as ‘consequential damage’ without a clear distinction, it remains unclear what the clause actually covers. Insurability, typical loss amounts and the scope of control provide a better basis for apportionment than standard clauses taken from another contract.

Payment security does not begin only once a payment is in arrears. Due dates, instalment payments, acceptance, invoicing requirements and time limits for raising objections must align with the actual course of events. Retention of title, set-off, rights of retention and advance payment can strengthen the supplier’s position, but must be tailored to the business model and supply chain. An extended or expanded retention of title is not a universally applicable standard clause. Processing, resale, group structures and cross-border transactions give rise to specific issues regarding validity and enforcement.

The choice of place of jurisdiction and choice of law must be kept separate. A German court may apply foreign law, and the choice of German law does not automatically establish the jurisdiction of German courts. Within the EU, an agreement on place of jurisdiction is governed in particular by Article 25 of the Brussels Ia Regulation. Purely domestic agreements are governed, amongst other things, by Section 38 of the German Code of Civil Procedure (ZPO). The clause should be worded in such a way that it is appropriate to the parties to the contract, the type of contract and any mandatory rules on jurisdiction.

International Contracts: Language, Law and Enforceability

A translation of German terms and conditions does not in itself constitute a legally valid international contract. The first step is to determine which law applies under the Rome I Regulation and which mandatory provisions may apply regardless of the choice of law. It must then be assessed whether the clauses are valid under that law. Even a linguistically flawless translation may still fail to meet the legal requirements of the target market.

In the international sale of goods, there is a further consideration: the choice of German law does not automatically exclude the UN Convention on Contracts for the International Sale of Goods (CISG). If the conditions for its application are met, the CISG may form part of the chosen German law. The contract should therefore explicitly state whether the UN Convention on Contracts for the International Sale of Goods is to apply or be excluded. Otherwise, a casual formulation may result in a different system of warranties and remedies than expected.

Multilingual versions of a contract require a priority clause. This should not encourage parties to treat any language version as merely a superficial formality. If the descriptions of performance, liability or termination provisions differ from one another, even a priority clause cannot completely eliminate operational uncertainty. It makes sense to have a translation that is consistent in content, with uniformly defined terms and a clear process for subsequent amendments.

Dispute resolution must be geared towards enforcement. Within the EU, court judgments are, in principle, recognised under the Brussels Ia Regulation without any special recognition procedure and enforced without the need for a declaration of enforceability. Outside the EU, enforcement depends on conventions and the law of the state of enforcement. In the case of arbitration clauses, the New York Convention may offer advantages, but the seat, institution or rules, language and number of arbitrators must be clearly specified. A theoretically favourable place of jurisdiction is of little use if the contracting party has no realisable assets there.

Review prior to the next contract being concluded

The legal review should begin at the start of the business process. It is necessary to clarify when the quotation, order and order confirmation are exchanged, which documents refer to the general terms and conditions in each case, and whether the customer and supplier are using conflicting terms. In the so-called ‘battle of forms’, the document sent last does not automatically take precedence in its entirety. An invoice is usually too late for the initial incorporation of general terms and conditions, as the contract has already been concluded by that point.

The contract is then analysed as a coherent system. The scope of work, acceptance, warranty, liability, prices, term, termination and payment security must all be consistent with one another. A short liability period, for example, may be worthless if it is not aligned with acceptance and the notification of defects. A right to adjust prices requires clear parameters and a provision for significant changes. Automatic renewals should clearly set out deadlines, the term and the procedure for termination.

Standard contracts also become outdated more quickly than their version number might suggest. Changes in legislation, new products, digital ordering channels and changes to insurance policies can alter the original distribution of risk. A documented version, a designated point of responsibility and regular reviews prevent multiple conflicting versions from being used in parallel. It is only through controlled operational use that good clauses can be turned into a robust contractual framework.