Land transfer tax
Change in the shareholder situation if a retired shareholder rejoins the company
Land property transactions are fundamentally subject to land transfer tax. Under certain circumstances, even a change in the shareholder situation in a private company which owns land property may create a liability for land transfer tax. According to Section 1 (2a) of the Land Transfer Tax Act, this applies if 95% of the shares in the assets of the private company are transferred to new shareholders within a period of five years.
In its ruling of 16 May 2013 (II R 3/11), the Federal Court of Finance (BFH) had to decide whether a transfer of shares to a new shareholder also applies if the purchaser was already a shareholder of the private company which owns the land in the past, but then retired – for a temporary period.
In the underlying case before the Federal Court of Finance, all shares in a landowning partnership under civil law (GbR) were transferred within five years. Initially, shareholder A held 1/3 of the shares of the company and shareholder B held 2/3. In a first step, shareholder A sold his 1/3 to a third party, so he retired as a shareholder of the company. In a second step, and within five years after the first transfer, B then sold half of his 2/3 holding to A and the other half to the third party. As a result of this second transfer of shares, A therefore entered the company again according to company law.
The court ruled against the taxpayer and concluded that a change in the shareholder situation which leads to a liability for land transfer tax is not excluded simply because a shareholder who initially retired from the company acquires a new holding in the company within a period of five years. With this decision, the Federal Court of Finance makes the land transfer tax subject to the criteria of company law. In other words, the person's status as a shareholder is lost when his membership rights and the associated entitlement to a share of the company's assets are transferred to a new member of the private company under civil law. If the retired shareholder then again acquires a share in this private company, the court considers that he must be treated as a new shareholder under company law and land transfer tax law.
In its ruling, however, the Federal Court of Finance also points out that the liability for land transfer tax could have been avoided. To achieve this, the first transfer of shares which led to the retirement of the shareholder should have been reversed. This ruling is yet another example which shows that land transfer tax should always be considered in any reorganisation of the shareholder structure.
New developments at the European Court of Justice
On the in-house award of contracts and on cooperation between public authorities
The question of relevance to public procurement law especially arises in constellations in which several legally independent public bodies interact to carry out tasks. In the past, the European Court of Justice has developed criteria which must be fulfilled so that the cooperation between public bodies does not need to be preceded by a (European) tender process. In the course of the current modernisation of the European legal framework for the award of public contracts, these previously unwritten exceptions have been incorporated into law for the first time, although it is generally criticised that the implementation is only partly successful and that many questions of detail which are relevant in practice have been left unanswered.
As a result, in recent rulings the European Court of Justice has had to define individual criteria for practical situations in which the constellations for the in-house award of contracts and cooperation between public authorities are not covered by the provisions of European public procurement law. In a ruling of 29 November 2012 (linked cases C-182/11 and C-183/11 – “Econord”), the European Court of Justice tightened the requirements for the “control criterion”, which will especially affect public sector participation. For the first time since the ruling on the “Hamburg refuse collection authority” of 9 June 2009, the European Court of Justice in its ruling of 19 December 2012 (case C-159/11 – “Lecce”) had to deal with the question of which task areas can have a special status under public procurement law in the framework of contractual cooperation between public authorities. And finally, in its ruling of 13 June 2013 (case C-386/11 – “Düren administrative district”), the European Court of Justice had to deal with a constellation which combined two elements: firstly a cooperation between two public bodies, and secondly the question of the existence of an in-house award of contract not covered by public procurement law.
II. Decision of the European Court of Justice on the in-house award of contracts
In its ruling of 29 November 2012 (linked cases C-182/11 and C-183/11 – “Econord”), the European Court of Justice defined practical details of the “control criterion” for the in-house award of contract in the event of a minority participation of a public body in an organisational unit which is legally independent of it.
1. Factual background
The case was based on a constellation in which 36 Italian local authorities held a total of 0.2% of the capital of a public company limited by shares. The majority of the capital, 99.8%, was held by another local authority.
Each of the local authorities with a minority holding was entitled to send one representative to the Supervisory Board and the Board of Directors. The local authorities commissioned this company to render health services without carrying out a prior tender process. The local authorities considered that the award of the contract in this form was justified by the criteria for the in-house award of contracts.
2. Content of the decision
According to the consistent case law pronouncements of the European Court of Justice, an order need not be put out to tender if a public client exercises the same control over the commissioned organisation as it does over its own department, and if this organisation mainly works for the public sector client which holds its shares. This “control criterion” is fulfilled if the public sector client can influence the decisions of the organisation, in other words the public sector client must have a decisive influence both on the strategic goals and on the important decisions. Fundamentally, the European Court of Justice accepts that such control can also be exercised by several shareholders jointly. This also means that it was already accepted that under certain circumstances, such control can also be exercised by minority shareholders.
But now, the European Court of Justice has ruled that minority shareholders can have no control over the organisation if there is not even the slightest opportunity to participate in this control. Merely holding a share of the capital is not enough according to the European Court of Justice, instead there must be a participation in the managerial committees.
III. Decision of the European Court of Justice on cooperation between public authorities
In its ruling of 19 December 2012 (case C-159/11 – “Lecce”), the European Court of Justice had to deal with the criteria which must be fulfilled to exempt cooperation between public authorities from a compulsory tender process for the first time since its decision on the “Hamburg refuse collection authority” of 9 June 2009, which is much discussed in relation to the practical work of local authorities.
1. Factual background
In the case before the court, the Italian province of Lecce had commissioned the University of del Salento with the analysis and evaluation of the vulnerability of hospital installations to earthquakes. A large proportion of the commissioned tasks involved engineering work which could not be classified as scientific research and was therefore not part of the work of the university. In view of the order situation, the university had to include third parties in the implementation of the assignment, in other words to pass on work to private parties.
2. Content of the decision
In its decision, the European Court of Justice systematically continues the policy which it initiated with the “Hamburg refuse collection authority” ruling on the exceptional circumstances under which a cooperation between public authorities does not fall under public procurement law. According to this policy, the important element is that the cooperation of the public bodies is justified to fulfil a public task for which they are all responsible. According to the European Court of Justice, this excludes any participation of private parties. Nevertheless, the cooperating parties may call on private service providers. In this connection, however, the European Court of Justice has now clarified that none of these private service providers may be placed at an advantage over its competitors. But such an unjustified advantage is deemed to exist if it is agreed between the public authorities that external staff should be called in as support, but the relevant transaction is then not put out to tender.
IV. Decision of the European Court of Justice on a combination of cooperation between public authorities and in-house award of contracts
In its ruling of 13 June 2013 (case C-386/11 – “Düren administrative district”) the European Court of Justice was faced with a constellation which combined both cooperation between local authorities and an in-house award of contracts.
1. Factual background
In the underlying case, the administrative district of Düren commissioned the municipality of Düren with the cleaning of its publicly owned administration buildings on a contractual basis, without a previous tender process. The municipality of Düren was to receive financial compensation for the cleaning work from the administrative district of Düren. To fulfil this task, it was then intended to sub-contract the work to a service company which was owned solely by the municipality of Düren. If the service provided by this municipal service company was unsatisfactory, the administrative district of Düren had a contractually agreed special right of termination.
2. Content of the decision
The European Court of Justice decided that such an award of contracts without a prior tender process was unlawful. It stated that a contractual assignment of the task without a tender process by way of cooperation between public authorities is only permissible if statutory tasks are to be carried out jointly, for example waste disposal. It ruled that auxiliary tasks – such as cleaning the building in this case – must be the subject of a public tender. Apart from this, the European Court of Justice stated that even if the cooperation between public authorities were deemed permissible in the present case, the award of the contract to the municipal service company without a prior tender process would not be permissible in any case. It pointed out that the administrative district of Düren did not have the same level of control over the service company as it had over its own departments. The court considered that a special right of termination was no substitute for the necessary shareholding which could have justified an exception from the obligation to carry out a tender process.
The “Econord” ruling of the European Court of Justice tightens the requirements for the configuration of state participation structures. In this respect, it is advisable for existing participations to be analysed in order to avoid any violations of public procurement law. A mere “silent participation” of the public sector without the possibility of influencing business decisions will probably not be possible in future if exemptions under public procurement law are to be exercised. The “Lecce” ruling of the European Court of Justice on cooperation between public authorities largely serves as clarification. Nevertheless, it clearly indicates that any cooperation between public bodies in auxiliary tasks which involve third parties could be more difficult in the future. This assessment is also confirmed by the last ruling of the European Court of Justice on “Düren administrative district”, which stipulated that an exception under procurement law is only justified for the joint fulfilment of statutory tasks, but not for cleaning services. However, it must be noted that public authorities will continue to have enough public procurement scope to carry out non-statutory tasks jointly even without a prior tender process. But on the whole this will only be possible by cooperation in jointly owned organisational units.
Are contract supplements subject to compulsory tender under public procurement law?
During the term of the relevant contract, almost every construction project and service contract requires an adjustment of the performance content, an award of supplements to the contract or an extension of the term of the contract. If a client is bound by the regulations for public procurement, this invariably leads to the question of whether a new tender process must be carried out in the event of alterations to the contract. In the past, various decisions have been made in this connection by procurement tribunals which have greatly restricted the ability of clients to conclude supplementary agreements without a separate tender process.
For example, one such decision was recently made by the national procurement tribunal (VK Bund) in relation to supply contracts in the health care system (decision of 2 September 2013, procurement tribunal 2 – 74/13). In the case which was brought before the tribunal, a statutory health insurance company had included a provision in the text of the contract in the tender which stated that the parties reserved the right to add further performance areas to the contract at a later date and thus to extend the scope of performance of the contractor retrospectively. After several months the option was exercised and a supplementary agreement was concluded with a reference to the opening clause in the original contract, so that the contractor was commissioned to render additional services. A competitor objected to this and appealed to the procurement tribunal. The tribunal confirmed the legal opinion of the competitor that a separate and independent tender process should have been carried out here. It ruled that the supplementary agreement was therefore a de-facto award which was null and void under Section 101b of the Restrictive Practices Act (GWB). The tribunal argued that under public procurement law, changes or supplements must be regarded as a new award of contract if they involve significantly different characteristics than the originally awarded contract (cf. also the ruling of the Higher Regional Court (OLG) of Düsseldorf of 28 July 2011, Verg 20/11, on a supplementary agreement for waste disposal). The procurement tribunal evaluated both the volume and the content of the supplement. In relation to the content, the tribunal considered the goal of the supplement to be particularly relevant, especially the fact that it comprises an extension of the range of performance to make it more attractive and to procure advantages for the client. It considered that the supplement fulfilled the significance criterion for the scope of the changes because the supplement increased the volume of the contract by about 20% compared with the original content of the contract. If the value of a supplement is at least 20% of the value of the original performance, the tribunal argued that this invariably constitutes a significant change in the contract and thus leads to a compulsory separate award of contract.
The national procurement tribunal (VK Bund) had previously reached the same conclusion (decision of 12 November 2012, procurement tribunal 1 – 109/12). This decision arose from a situation in which delivery difficulties had arisen in the course of the procurement of medicines and the parties had therefore decided to substitute other medicines for the original performance in order to cover the difficulties in delivery. Here, too, the procurement tribunal had decided that this was a new award of contract for a public procurement order because the provision of other products was permitted which were not covered in the original tender process. Therefore, it argued that additional bidders could have taken part in the original tender process if the supplementary services had been covered in the content of the contract, which documented that the change in the performance was significant.
The procurement tribunal of Saxony-Anhalt (decision of 16 January 2013, 2 VK LSA 40/12) also confirmed the significance criterion, here in relation to a contract extension in a contract for the construction and operation of an energy conversion plant and the supply of heat and electricity. In this case, the contract contained a provision by which the parties could exercise an extension option; in connection with the exercise of the contract extension option, the client also changed the quantities because of an increase in the demand for energy. The procurement tribunal ruled that a contract extension which arises from a mutual declaration of intent is always equivalent to the conclusion of a new contract, so in this case there was a separate new order which was subject to a compulsory tender process and an additional agreement which contained a prohibited de-facto award of contract.
These decisions are in harmony with the case law policy of the European Court of Justice (ruling of 13 April 2010, case C – 91/08) which had confirmed the obligation to carry out a new tender process in relation to significant changes in a concession contract as early as 2010. According to the decision of the European Court of Justice, even a change of sub-contractor can constitute an event which leads to a compulsory new tender process.
There have so far been hardly any supreme court decisions about the obligation to carry out a separate tender process for supplementary services in connection with supplementary performance in the construction sector. But especially in the area of building and planning services there is invariably a considerable need for changes. It will be interesting to observe the future case law pronouncements in this area, but it appears advisable for clients to make sure that they always hold a tender process for any supplementary services. Case law in this area has so far been inconsistent, but in future it will be placed on a statutory basis. The current drafts for EU directives envisage separate provisions by which an alteration volume of 50% of the previous order value will lead to a compulsory tender process in construction contracts, and changes amounting to 10% of the previous order volume will necessitate a new tender process in service contracts. These European targets are not yet effective because an implementation period of 2 years is envisaged from the time when the contract award directives enter into force, but it is clear that even today significant changes in performance already lead to an obligation to carry out a separate tender process. Before any supplements are awarded, it must therefore be checked whether the significance criterion that leads to an obligation to carry out a separate tender process is fulfilled.
Estate agents and distance selling law
Estate agents and distance selling law – a fundamental question of law which requires clarification (not only) in the opinion of the Federal Constitutional Court
Because of the well-known Internet platforms on which properties are offered for sale or rent, it is becoming increasingly common in practice for contracts between an estate agent and a prospective purchaser to be concluded exclusively via the Internet.
This highlights an underlying legal question:
Are the regulations for distance selling, (i.e. contracts for the provision of services which are concluded exclusively by remote communication such as phone and Internet) also applicable to estate agency contracts, even though estate agency contracts are not classical service contracts?
This question is especially relevant because an estate agent customer who has not been informed about his right of revocation, or has not been informed properly, can then revoke the estate agency contract even if he has already found and acquired the desired property via the estate agent, because in the worst case scenario the period for revocation has not yet begun. This leads to the loss of the estate agent's entitlement to be paid the commission, even if the agency services have already led to a successful result and the commission has been fully earned but not yet paid.
As a result of a recent ruling of the Federal Constitutional Court of 17 June 2013 (1 BvR 2246/11), a supreme court clarification of the issue appears to be closer.
The Federal Constitutional Court had to decide on the following factual situation:
The claimant is an estate agent and received a request by e-mail from a potential customer to send the exposé for a specific property. The estate agent complied with this request, but without informing the potential customer about the right of revocation in the event of the conclusion of an estate agency contract. The estate agent and the potential customer then agreed an appointment to view the property – again by e-mail. Six months later the potential customer purchased the property for which the estate agent had provided the details, but refused to pay the commission which was then invoiced. The estate agent then filed court action for payment at the responsible court, the District Court (Landgericht) of Aschaffenburg.
In the proceedings, the respondent justified the refusal to pay by a reference to the lack of any information about the right of revocation. The District Court of Aschaffenburg rejected the claim on the grounds that the contract had been successfully revoked. The appeal was unanimously rejected with a reference to Section 522 II 2 of the old version of the Civil Procedure Code (ZPO) because the Higher Regional Court (OLG), which was responsible for the appeal, did not consider that the appeal had any prospects of success or that it was of fundamental legal importance.
The estate agent then filed a constitutional complaint to the Federal Constitutional Court, claiming that the rejection of her appeal by a ruling violated her entitlement to a legal hearing, and she was successful in this complaint because the Federal Constitutional Court shared her legal opinion.
The Federal Constitutional Court stated that the rejection of the appeal by a ruling of the Higher Regional Court (OLG) violated the principle of effective legal protection. The Federal Constitutional Court considered the Higher Regional Court's assumption to be unjustified that the issue was not of fundamental legal importance and that a judgment with the leave to appeal was not necessary.
It argued that a case is deemed to be of fundamental legal importance as defined in Section 552 II 1 No. 2 of the old version of the Civil Procedure Code (ZPO) if it involves a legal question which is in need of clarification and capable of clarification and which could arise in an indefinite number of other cases, thus creating an abstract public interest in the consistent development and application of the law. It suggested that this very much applies to the question of the applicability of Section 312 b of the Civil Code to estate agency contracts.
It stated that the question is not only undoubtedly capable of clarification but that clarification is necessary, contrary to the opinion of the Higher Regional Court, because the issue has not yet been decided by a supreme court and is highly controversial in the literature. The fact that a District Court had no misgivings about classifying the estate agency contract as a contract under Section 312 b I of the Civil Code was not accepted as a valid argument because the Federal Constitutional Court considered that this did not constitute a supreme court clarification or settle the argument about the underlying question. Therefore, it rejected the opinion of the Higher Regional Court that the wording of Section 312 b of the Civil Code was unambiguous. In justification, it pointed out that the provision in the Civil Code is based on a contract of service and that the nature and characteristics of an estate agency contract mean that it is not a “normal” contract of service, but a special type of contract which is defined not by the agency services rendered but by the result, i.e. the conclusion of a purchase or rental contract. It underlined the fact that by law the estate agent only earns a commission in the event of a successful result.
The ruling of the Federal Constitutional Court can be fully supported. A clarification of this question, which has not yet been decided by a supreme court, is not only desirable, it is urgently necessary – as is shown in practice in daily legal consultations.
So it will be interesting to see how the Federal Court of Justice, to which the matter will be referred after leave to appeal is granted by the Higher Regional Court of Bamberg, will decide this legal question. Until then, estate agents are urged to make sure that they cover all eventualities by giving their customers proper instructions about their right of revocation and obtaining explicit confirmation from their customers, in accordance with Section 312 e (2) No. 2 of the Civil Code, that the customer wishes the estate agent to begin the search for a suitable contract opportunity even before the expiry of the revocation period. Then, the estate agent will generally be able to obtain the remuneration even in the event of a revocation.
Implied acceptance of an architectural service
Implied acceptance of an architectural service by expiry of an inspection period of six months after the building is completed and the occupants move in
In its ruling of 26 September 2013 (VII ZR 220/12), the Federal Court of Justice dealt with the question of when the limitation period for a warranty for architectural services begins by implied acceptance. The Federal Court of Justice ruled that it is sufficient evidence of an implied acceptance if the client does not complain of any defects within a reasonable inspection period after the completion of the performance and after moving into the building. According to this ruling, this inspection period is no more than six months.
The claimants are the owners of a plot of land on which a listed villa is situated. The building needed to be refurbished and modernised. To this end, the claimants commissioned the respondent to carry out planning and building supervision services. The construction work in the villa was completed in July 1999. The tenants moved into the building the same year. After an inspection of the building in September 1999, remaining defects were recorded which were later remedied. In January an inspection was carried out by the monument conservation authority and the official acceptance was given by the authority. The claimants did not explicitly accept the performance by the respondent. Later, moisture became apparent in the basement. The claimants claimed costs for the remediation of the defects and argued that the respondent was responsible for the costs due to errors in the planning and supervision. The statement of claim to suspend the expiry by limitation was served on the respondent on 28 December 2005. The respondent claimed among other things that the warranty had expired by limitation.
The District Court (Landgericht) granted the claim and ordered the respondent to pay. On appeal by both parties, the order to pay was confirmed, but the entitlement to interest was changed.
The Federal Court of Justice cancelled the ruling of the appeal court and referred it back for a renewed review of the factual basis, because the court stated that the objection on the basis of expiry by limitation had not been correctly taken into account.
As in current law, the position under the law which applied up to 31 December 2001 was also that the five year period of limitation began to run with the acceptance of the contracted services (cf. Section 634a (2) of the current version of the German Civil Code (BGB)). This means that acceptance must have taken place. Referring to earlier decisions, the Federal Court of Justice ruled that an implied acceptance of architectural services can be deemed to apply if the client does not complain of any defects in the architectural services after completion and after the expiry of a reasonable inspection period after moving into the completed building. The Federal Court of Justice stated that in individual cases the inspection period must be long enough to give the client the opportunity to check that the architect's planning and supervision services have been rendered in accordance with the contract, and that it must also be long enough so that the architect can no longer be expected to wait for acceptance to be given. In an assessment of this reasonable inspection period, the court suggests that the period may need to be extended if plans are missing and it is therefore more difficult to identify the defects – as in the case which was before the Federal Court of Justice. With regard to the appropriateness of the inspection period, the Federal Court of Justice also underlines that the justified interest in ensuring that the time of the implied acceptance is not unreasonably delayed must be taken into account. In its assessment of the inspection period, the Federal Court of Justice considered that the lack of some of the planning documents acted in favour of the client and justified an extension of the period. But even in this case, the Federal Court of Justice considered that an inspection period of six months was appropriate. After half a year, the Federal Court of Justice considers that it can invariably no longer be expected that the client of a work of architecture will reject the service as not compliant with the contract if this client has not submitted any objections in this period.
As the appeal court in its findings had assumed that the services of the respondent had largely been provided by January 2000 because of the performance and defect remediation which had been carried out (i.e. they were fundamentally ready for acceptance), the Federal Court of Justice regarded January 2000 as the start of the warranty period. The Federal Court of Justice noted the finding of the appeal court that some of the plans had not been drawn up and presented, but it did not consider this to be a sufficient reason to assume that the project was not ready for acceptance. The Federal Court of Justice therefore concluded that the warranty period fundamentally ended in July 2000, so that the claims could have expired by limitation before the court claim was filed.
The ruling discussed here deals with the frequent problem of warranty for architectural services. Often, architectural services are not explicitly accepted. In this situation, the question is whether the warranty claims against the architect have expired by limitation or whether there are still enforceable claims on the basis of the planning services or the building supervision services. This ruling of the Federal Court of Justice confirms yet again that the warranty period for architectural contracts (and other planning contracts) can be triggered by an implied acceptance in the same way as in construction contracts. In an earlier ruling (Federal Court of Justice, ruling of 25 February 2010, VII ZR 64/09), the court had concluded that an inspection period of three months should be assumed in the specific case. The latest ruling shows that defining the applicable inspection period is a question for each individual case. However, in the new ruling the Federal Court of Justice clearly indicates that even in circumstances which make it more difficult to identify defects, the inspection period cannot be more than six months from the time of occupancy and the completion of the architectural services.
For the client, this means that it must urgently determine what warranty periods apply in relation to the architect, and must comply with these periods in the event of any claims. The lack of an explicit acceptance cannot be taken to mean that the warranty cannot start to run. The circumstances which constitute an implied acceptance must therefore be exactly taken into account in order to enforce the claims successfully. For architects and engineers, on the other hand, the ruling shows that expiry by limitation is possible in the light of an implied acceptance, and that it may therefore be possible to defend warranty claims.
The controversial nature of an implied acceptance is likely to be less acute now that the new Schedule of Services and Fees for Architects and Engineers (HOAI) has come into force on 17 July 2013, because under Section 15 (1) of the 2013 Schedule of Services and Fees for Architects and Engineers acceptance is a prerequisite for the fee to be due for payment. Architects and engineers are now likely to demand acceptance more often in order to assert their right to the remuneration.
Expiry by limitation of warranty claims for defects when purchasing photovoltaic installations
In its decision of 9 October 2013, the Federal Court of Justice (BGH) rejected the inclusion of rooftop installations in the privilege of a longer period of limitation for claims arising from defects for buildings and ruled that the period of limitations of two years, which is routinely granted for claims arising from defects, is valid (VIII ZR 318/12).
In Section 438 (1) No. 2 of the German Civil Code (BGB), the legislator not only extends the expiry by limitation of claims arising from defects for buildings themselves to five years, it also applies this period of limitation to claims arising from defects for items which are normally used for a building and which have caused defects in the building.
In the case which was before the court, the claimant had purchased components of a photovoltaic installation from the respondent in April 2004, and in the same month, as instructed, the claimant supplied them directly to a farmer who had in turn purchased the installation from the claimant. The farmer mounted the components on the roof of his barn. In the winter of 2005/2006 there were faults in the installation resulting from lightning strikes and the heavy load of snow; according to an independent expert they resulted from delamination, i.e. a deficiency in the components, and the claimant informed the respondent of this fact in August 2006. In independent evidentiary proceedings initiated against the claimant by the farmer, in which the claimant declared itself in dispute with the respondent in August 2007, it was found that the front contacts were also incomplete, which constituted yet another defect. On the basis of this, the claimant was ordered to pay compensation to the farmer in a subsequent trial. The claimant then sued the respondent to demand indemnification against this obligation to pay compensation, but the respondent argued that the claim had expired by limitation.
It is not surprising that the Federal Court of Justice in its ruling did not classify the rooftop installation itself as a building structure which would be subject to a five year period of limitations. Only the barn on which the components were mounted is a building. However, the Federal Court of Justice also ruled that solar modules were not used for a building in the course of their normal use. It pointed out that they were not the subject of renovation or alteration work in the barn, nor were they important for its structural design, stability, preservation or use. Instead, the court considered that the installation was designed to serve its own purposes by producing electricity and thus giving the purchaser an additional source of income.
Therefore, the court ruled that the regular statute of limitations applied.
So according to the ruling of the Federal Court of Justice (BGH), defect warranty claims in relation to rooftop photovoltaic installations must be made within two years after the delivery of the components in order to suspend their expiry by limitation.
General terms of business (AGB): check boxes must be filled in correctly
Contractual penalty is null and void if the box has not been correctly crossed
In its ruling of 20 June 2013, the Federal Court of Justice (BGH) again had to consider questions arising from a contractual penalty agreement in general terms of business. In this judgment (VII ZR 82/12), the Federal Court of Justice ruled that a contractual penalty is not deemed to have been effectively agreed, even if one of the available options in the form has been completed in text form (whereas the other option has not been completed), if the box which should be crossed in front of the option has not been filled in by entering a cross, but has been left empty.
The claimant, a metal construction company, filed action against the respondent, a hospital, for the outstanding remainder of the remuneration from a building contract. The respondent claimed a set-off against the remaining remuneration. The hospital based its set-off claim on an allegedly justified demand for payment under a contractual penalty agreement which was included in the terms of contract provided by the respondent. The contract defined specific contractual deadlines and stipulated the following provision for the contractual penalties:
“2. Contractual penalties
The contractor shall be obliged to pay a contractual penalty for each working day of the delay as follows:
2.1 If the building deadline is exceeded
|_| EUR …
|_| 0.1 per cent of the final order total […]
2.3 The contractual penalty shall be limited to a maximum of 5% of the order total […].”
In the above contractual penalty provisions, the respondent had only entered the values “0.1” and “5” by hand. The boxes were left empty.
The District Court ordered the respondent to pay the remaining remuneration as demanded by the claimant. In support of this ruling, it stated that the contractual penalty had not been agreed because the
check box under No. 2.1 had not been filled in. In other respects, the court suggested that it is not clear whether this point in the special terms of contract was intended to apply (Section 305 c (2) of the German Civil Code). The Appeal Court overturned this ruling and rejected the claimant's demand because it assumed that the addition of the percentage figures had shown with sufficient clarity that a contractual penalty was to be agreed. It suggested that there was therefore no lack of clarity in relation to Section 305 c (2) of the Civil Code.
The Federal Court of Justice rejected the ruling of the Appeal Court and restored the ruling of the District Court. To support this position, the court suggested that although the appeal court had correctly observed that the box had not been crossed but on the other hand the percentage values “0.1” and “5” had been entered, merely filling in the percentages did not show clearly enough which of the two options had been selected and was intended to be agreed. The Federal Court of Justice pointed out that the form envisaged a declaration about the agreement of a contractual penalty which consisted of two significant elements. It suggested that not only the amount of the contractual penalty needs to be specified, but that a separate check box needs to be filled in to clarify whether the contractual penalty is really intended by the parties in this specific case. Here, the Federal Court of Justice convincingly argued that it can only be interpreted as a preparation for a possible contractual penalty agreement if the relevant percentages are inserted, but the check box is not crossed. The court considered that entering the percentages, which could be seen as a sign of agreement, combined with the empty check box, which could be seen as a sign of the lack of an agreement, are contradictory. In evaluating the factual situation, the Federal Court of Justice then concluded that there was no intention to use the option of a contractual penalty and that this provision had therefore not been integrated into the contract (Section 305 (1) sentence 1 of the Civil Code). The Federal Court of Justice thus solved the issue on the basis of an interpretation of the content of the contract alone, without considering the other provisions of the law on general terms of business in Sections 305 ff. of the Civil Code.
So this is yet another failed contractual penalty provision in general terms of business!
Once again, this shows that an effective agreement of a contractual penalty provision in general terms of business needs to overcome several obstacles. This not only applies to the wording of the content of the contractual penalty provision and the maximum limits for the appropriateness or otherwise of the amount of the contractual penalty (both in the daily rate and in the cap on the total amount). It is also reflected in the more generalised concept that if alternative check boxes are included in the form, these options must really be filled in. For the client, this means that even more care must be taken when completing the contractual forms. This not only applies to entering the figures, it is also important to insert the necessary crosses and ticks to ensure that
the provision is complete. On the side of the contractor, this shows another line of argument which can be used to contest an alleged obligation to pay a contractual penalty, i.e. that the penalty has not effectively been agreed. In general terms of business, the first step should therefore always be to check if the provision has been correctly filled in and is therefore effectively agreed. In a second step, it is then still possible to check whether the provision could be deemed inappropriate under Section 307 of the Civil Code because the maximum limits have been exceeded. It remains to be seen whether case law rulings will follow the same principles in other cases in which printed forms have been incompletely filled in.
Contact: Florian Pfitzer
Due date for payment of an amount which is dependent on an arbitration report
In our last newsletter we presented a recent ruling of the Federal Court of Justice on the subject of arbitration reports (in the narrower sense). In the case in question, the Federal Court of Justice ruled that if an arbitrator is only commissioned by one party to the arbitration agreement, and the arbitration
report that is compiled is obviously incorrect, the party which did not commission the arbitrator also has direct contractual claims for compensation against the arbitrator. In the area of arbitration agreements and the extent to which they are binding for the parties to the arbitration agreement in the
absence of obvious mistakes which would cause the necessary factual findings to be transferred to the court by analogy with Section 319 of the German Civil Code, we would like to refer to our article in the last newsletter.
In another ruling on the subject of arbitration reports in the narrower sense (Federal Court of Justice, 4 July 2013 - III ZR 52/12), which had to decide a dispute about the remuneration that is payable under an investment management contract, the Federal Court of Justice ruled that an arbitration agreement in the narrower sense generally includes an implicit agreement
that the payment of the relevant amount cannot be enforced in court or demanded out of court during the time needed to prepare the report, which means that the amount is not yet due for payment in this period.
This effect continues to apply if the ruling on the factual findings which are necessary to determine the amount of the due payment is transferred to a court, by analogy with Section 319 (1) sentence 2 of the Civil Code, so that the
payment demand only becomes due for payment when the court ruling becomes legally enforceable. This means that maturity interest, default interest and court interest are only awarded from this time onwards.
For the creditor of a payment demand which is dependent on an arbitration report, this means that first of all the preparation of an arbitration report must be initiated so that the amount becomes due for payment as soon as possible.
If the debtor does not cooperate in this process, the creditor can – and should – unilaterally commission an arbitration report which will be binding for all parties to the arbitration agreement, taking the requirements of case law into account.
Contact: Dr. Florian Hänle
Entitlement to estate agency commission if a property is purchased for a significantly lower price
A commonly disputed issue in relation to the question of whether an estate agent has really “earned” the commission which he claims is whether the main contract that is concluded is economically identical with or equivalent to the intended contract. This question always arises if the client wants to sell his property for a certain price or to purchase a property for a certain price, but this intended price cannot then be attained in the main contract.
According to the consistent case law pronouncements of the Federal Court of Justice, a claim for commission is fundamentally not effective if there is no economic equivalence. But no fixed and absolute boundary has yet been defined to show when this equivalence is lacking. So if a vendor, for example, wishes to sell his property for € 2,000,000.00 and tells the estate agent this price when commissioning the agent, and if the estate agent then only manages to sell it for € 1,000,000.00, a demand for commission by the estate agent, at least in relationship to the vendor as the client, is generally not applicable. The estate agent has then not achieved the intended result (sale for 2,000,000.00 Euros) or an economically equivalent result.
But the Federal Court of Justice has not yet decided whether a vendor who has succeeded in purchasing the property for a significantly lower price – perhaps even because of his own negotiating skill – can (successfully) contest the estate agency commission on the grounds of a lack of economic identity.
The Higher Regional Court of Hamm had to deal with this very question in its ruling of 21 March 2013 (18 U 133/12).
Whereas the court of first instance, the District Court (LG) of Bielefeld, had denied the economic equivalence and thus the estate agent's claim to the commission because the purchase price was 43% below the quoted price, the Higher Regional Court of Hamm cancelled the ruling of the District Court of Bielefeld in its ruling of 21 March 2013.
The Higher Regional Court of Hamm rightly pointed out that although there was not an economic identity, the estate agent's client had nevertheless achieved the economic result which he had aimed for in the purchase contract which was concluded, i.e. the purchase of the project. It argued that the significant price difference does not affect this, especially because it benefits the purchaser. Without any additional reasons, which do not apply in this case, the court considered that it would violate the principle of good faith if the client avoided the payment of the commission by appealing to a lack of economic equivalence.
The ruling of the Higher Regional Court of Hamm can be fully accepted. It goes against good faith if a purchaser who has undisputedly learned of the property from the estate agent, and undisputedly concluded the main contract because of the information from the estate agent, refuses to pay a commission because the price which he has paid is significantly below the price originally quoted. As a consequence, this would mean that the vendor would be willing to pay an estate agent fee if the purchase price had been significantly higher and had thus corresponded to the intended price.
Commendably, the Higher Regional Court of Hamm allowed an appeal. It can only be hoped that the parties to this case take the trouble to appeal to the court of third instance in this case, so that this hotly disputed question, which is very relevant in practice, can be decided at last by the Federal Court of Justice.
Contact: Eva Mäschle
Obligation of the architect to determine the client's budget and comply with the cost framework
1. Ruling of the Federal Court of Justice of 21 March 2013
In its ruling of 21 March 2013 (VII ZR 203/11) the Federal Court of Justice dealt with the frequent question of the extent to which the architect is responsible for compliance with the budget – and thus also for the previous calculation of the budget. The Federal Court of Justice confirmed the previous case law and stated clearly that the architect must determine the budget, especially for private clients, and must take the client's ideas on the costs into account even if they do not explicitly constitute a maximum construction cost limit.
The claimant had inherited the assets of her husband, an architect, and sued the respondent for payment of the remaining fee. The claimant's husband had provided planning services for the respondent for the construction of a new residential house, but the project was not built. The claimant now claimed an architect fee of about 27,000.00 Euros. In his defence, the respondent claimed a set-off against a compensation claim against the deceased architect because the planning had exceeded a maximum building cost limit. He alleged that a maximum building cost limit of 800,000.00 DM had been defined. According to the building application of the deceased architect, he claimed that the building costs would have amounted to 1,500,000.00 DM.
In this connection it remained unclear in the court case whether an explicit maximum cost limit had been agreed. In the course of the evidence, the District Court found that the respondent's wife had mentioned a budget of about 800,000.00 DM and the respondent himself had not contradicted his wife's statement in his discussions with the architect.
The District Court awarded the claimant the asserted claim under the architectural contract in full. The appeal court confirmed the ruling in essence.
But the Federal Court of Justice departed from the previous courts in this case and assumed that there had been a breach of obligations by the deceased architect. The Federal Court of Justice justified this breach of obligations by stating that the architect was not only obliged to comply with exactly agreed maximum cost limits, but he was also obliged to take his knowledge of the respondent's ideas on the costs into account in his planning. The Federal Court of Justice derived this from the architect's obligation to ascertain such ideas on the costs in the course of his appraisal because the architect is obliged at this early stage in the planning to determine the economic framework for the construction project. The court considered this especially important for a private client. The Federal Court of Justice logically concluded that an architect violates his contractual obligations if he carries out the planning for a residential property without reliable knowledge of the economic resources of the private client. In relation to the determination of the economic resources, the Federal Court of Justice then stated that depending on the circumstances of the individual case it may be sufficient for the ideas on cost to be expressed by family members taking part in an information discussion with the architect if the client does not contradict them, even if the client does not separately state that these ideas are also his ideas. The court argued that these ideas on costs which are expressed are then binding in the sense that in the absence of any change they determine the planning framework and generally become part of the contract if the architect does not express an objection to them. According to the ruling of the Federal Court of Justice, this also applies even if only approximate figures are quoted for the construction costs.
In this case it had been established before the court that costs of approximately 800,000.00 DM had been mentioned by the respondent's wife and not contradicted, so the court considered that there was a breach of obligations by the architect. Consequently, plans for construction costs of over 1,500,000.00 DM were deemed to be useless. But further factual findings were necessary to calculate a possible claim for compensation, so the Federal Court of Justice did not rule on the compensation claim, instead it referred the matter back to the appeal court for factual findings to be obtained.
The ruling described here does not create any fundamentally new requirements for the architect. But it is relevant because it clearly summarises the case law situation up to now, and also because it clarifies that the client's budget is decisive even if it is not agreed as a maximum cost limit.
But the ruling of the Federal Court of Justice does not state to what extent these requirements also apply to other clients. And it is left unclear what exactly the Federal Court of Justice means by “private clients”. Probably this applies especially to natural persons acting in a private capacity.
2. Ruling of the Higher Regional Court (OLG) of Hamm of 15 March 2013
In relation to the compensation claim for exceeding the budget which is mentioned in the ruling, a recent ruling of the Higher Regional Court of Hamm of 15 March 2013 is significant in this context (12 U 152/12; not yet enforceable).
In this ruling in a rather similar case, the Higher Regional Court of Hamm clarifies that such a compensation claim of the client for a defective cost calculation or other wrong consulting by the architect assumes that the client proves that the damage or loss was caused by the violation of the contract. There is no reversal of the burden of proof. This represents the first major obstacle to the enforcement of the compensation claim by the client.
The Higher Regional Court of Hamm then clarifies that even if this proof of causality is successful, the advantages obtained must be offset against any damage or loss which is assessed. In this connection, any increase in the value of the building (not the land itself) as determined, for example, by a market value appraisal must be offset. This factor represents another obstacle for the client.
The Higher Regional Court of Hamm considered that even the proof of causality had not been provided, so it rejected the claim.
These two rulings show how important a careful documentation of the ideas on costs and the cost limits is. Architects – and clients - are therefore urgently advised to carry out and document a prior calculation of the costs (not only for private clients). If there are any later planning changes which increase or change the costs, it is important for these changes to be documented in order to refute any allegation of a breach of obligations.
But the two rulings also show that enforcing a compensation claim for a breach of obligations by the architect in relation to the cost calculation and compliance with the costs is difficult, because the client has the full burden of proof in this respect and any increases in the value of the property have the effect of reducing the damage or loss.
Contact: Florian Pfitzerinfo
Submission of the list of shareholders after a foreign notarisation
In a ruling of 6 February 2013 on the permanent company law topic of a foreign notarisation, the Higher Regional Court (OLG) of Munich departed from the case law ruling of 2 March 2011 on the submission of the shareholder list by a foreign notary (see also the SIBETH Newsletter of June 2011) and at the same time permitted a legal appeal to the Federal Court of Justice in the interest of consistent case law (Higher Regional Court of Munich, ruling of 6 February 2013, 31 Wx 8/13).
The requirement of a notarisation of the sale and transfer of shares in a German private limited company (GmbH) and the associated often considerable notary fees based on the value of the property have made it attractive to carry out notarisations before Swiss notaries, especially for higher transaction values, because their fees increase more slowly or are negotiable. German law recognises foreign notarisation as effective if it fulfils certain requirements. This especially includes the requirement that the foreign person notarising the document has qualifications and a status in the local legal system which corresponds to the activities of a German notary and that the foreign notarisation procedure is equivalent to the German procedure. In the past this has been deemed to apply to the Swiss notarisation procedure and to notaries in certain cantons, especially the canton of Basle.
Misgivings about the effectiveness of this practice had arisen after the revision of the German Companies Act (GmbHG) came into effect on 1 November 2008 in the Act to Modernise the Law on Private Limited Companies and Combat Abuses (MoMiG), which especially increased the importance of the list of shareholders. Even before the reform, the list of shareholders had to be updated by the managers after every change and submitted to the commercial register. But if a notary is involved in the changes, this notary is then obliged to sign and submit the list. Specifically, under Section 40 (1) of the Companies Act the managers of the company are fundamentally obliged to submit the updated list of shareholders if there is a change in the shareholders. But if a notary was involved in the change in the shareholders, under Section 40 (2) of the Companies Act the officiating notary is obliged to submit the list instead of the managers.
In this respect, the District Court (LG) of Frankfurt ruled that this obligation of the notary to submit the list is an official duty under public law and can therefore only be fulfilled by a notary in Germany. The District Court of Frankfurt concluded that a foreign notary could not guarantee the correctness of the list and that the legislative body therefore intended to exclude foreign notarisations in future.
However, the Higher Regional Court of Düsseldorf was not content with this conclusion about the effectiveness of the notarisation before a foreign notary. It admitted that the notification obligation stipulated in the German Companies Act could not be imposed on foreign notaries by German laws, but it suggested that this did not affect the effectiveness of the notarisation by foreign notaries. The Higher Regional Court of Düsseldorf also ruled that the changed provisions of the Companies Act for the obligation to submit the list of shareholders in the event of foreign notarisations meant that although the officiating foreign notaries were not obliged to submit them, they were nevertheless entitled to do so – through a German notary acting as an agent if necessary because of the requirement of electronic submission.
The Higher Regional Court of Munich came to a different conclusion. In the case which it had to decide, the officiating foreign notary had compiled the list of shareholders, signed it and submitted it with an Apostille. The Higher Regional Court of Munich ruled that the court of registration rightly rejected the list of shareholders because it did not fulfil the formal requirements. It pointed out that the managers are fundamentally responsible for submitting the list of shareholders according to Section 40 (1)of the German Companies Act and suggests that this responsibility is only waived if a notary is involved in the change in the shareholders. The Higher Regional Court of Munich concludes that these provisions imply an alternative responsibility, and that the existence of two parallel responsibilities was not intended. However, the court argues that a German law cannot place a legal obligation on a foreign notary and that the responsibility of the managers for the submission of the list does not lapse if the list is notarised by a foreign notary. In the event of a foreign notarisation, the court therefore argues that the list of shareholders must be signed and submitted by the managers.
The Higher Regional Courts of Düsseldorf and Munich therefore agreed about the recognition of foreign notarisations where the defined requirements for equivalence are fulfilled, but they advocated completely different solutions for the responsibility for signing and submitting the list of shareholders, which brings new uncertainty to “notarisation tourism” with Switzerland. But the Higher Regional Court of Munich considered that a decision of the Federal Court of Justice (BGH) is necessary to ensure consistent case law, so it permitted an appeal.
However, until a decision has been made by the Federal Court of Justice, the responsibility for the submission of the list of shareholders in the event of foreign notarisations is open, and this leads to considerable risks, especially but not only because in certain circumstances a purchaser could purchase shares in good faith from an unauthorised person who is still listed in the list of shareholders.
Contact: Dr. Christina Prinzhorn, LL.M.info
Reimbursement of due diligence costs arising from the letter of intent
The letter of intent which is drawn up in the course of a company purchase is often regarded as irrelevant, but if it is drafted appropriately it can lead to the reimbursement of considerable costs incurred in advance of the transaction if the negotiating party cancels the negotiations. In its ruling of 19 September 2012, the Higher Regional Court (OLG) of Munich confirmed that a provision is legally valid which states that one of the parties to a negotiation agrees to reimburse all the due diligence and legal costs incurred by the other party in connection with the transaction if it then decides to withdraw from the negotiation. This applies up to an amount of 400,000 Euro (Higher Regional Court of Munich, ruling of 19 September 2012, 7 U 736/12).
In particular, the Higher Regional Court of Munich saw no reason to accept the respondent's claim that the letter of intent was null and void for formal reasons. According to the statutory requirements, the necessary formal elements include founding a German private limited company (GmbH) and entering into an obligation to assign shares in a German private limited company. It is undisputed that the underlying letter of intent does not contain any obligation which is directly related to any of the legal transactions which are subject to mandatory notarisation.
However, the foundation of a German private limited company and the assignment of shares were part of the transaction described in the letter of intent. In this connection, the court rejected the assertion that the mere obligation to pay compensation up to a maximum of EUR 400,000 for the costs incurred by the other party for the due diligence up to the time when the negotiations fail constituted such a severe disadvantage that the respondent was effectively forced to conclude the contracts which required notarisation. The court rejected this assertion on the grounds that the provision in the letter of intent was for a limited time and amount, and that it was limited to an enforcement of the documented and reasonable costs which had actually arisen.
It also pointed out that the parties to the negotiation would have been at liberty to apply this cost provision to any cancellation of the contract negotiations. If the parties exercise their freedom of contract by agreeing in the letter of intent that a justification for the cancellation of the contract negotiations is not necessary, the court concluded that the parties are then free in their decision-making until the contract is finally concluded – so the objection of an unconscionable withdrawal from contract negotiations cannot be made in the event of a cancellation of negotiations, not even in relation to the obligation to bear costs.
With regard to the reasonable amount of the consulting costs incurred in the framework of the due diligence, the Higher Regional Court of Munich also confirmed that invoicing at hourly rates is customary and widespread. In the absence of any proof of a higher hourly rate, the court assumed an hourly rate at the lower end of the scale, i.e. between 250 Euro and 300 Euro per lawyer. The Higher Regional Court of Munich considered the total number of hours, 463.60, to be realistic in this case in view of the volume of data that needed to be evaluated, the questions which required clarification and the other issues which arose in the legal due diligence. In addition, the court considered it normal and reasonable that the pure costs of the copies made in the course of the due diligence were not covered by the hourly rates, so it deemed them also to be eligible for reimbursement. But the Higher Regional Court of Munich stated that the consulting costs for the letter of intent itself were covered by the other reimbursable legal costs.
Therefore, the agreement of a letter of intent should not be regarded as a mere formality or an unnecessary interim step in the course of a transaction. Rather, if it includes an appropriate provision it can be a way to obtain reasonable compensation for costs incurred in advance of the transaction, which can be claimed from the other party if negotiations are cancelled – which can be regarded as either an opportunity or a risk, depending on the perspective. The careful wording of a balanced obligation to bear the costs incurred in advance of the transaction, for example if the negotiation process is cancelled without any justifying reasons as defined by the parties in the letter of intent, should therefore feature in the wording of a letter of intent and be explicitly made part of the binding content of the letter of intent.
Dr. Dagobert Nitzsche