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Responsibility of RSS feed operators for legal violatons by their subscribers

Responsibility of RSS feed operators for legal violatons by their subscribers

At the end of last year the Federal Court of Justice had to deal with the question of the scope of a contractually agreed restraining order (VI ZR 18/14). It decided that there is no obligation to act against RSS feed subscribers who continue to publish picture material obtained before the conclusion of the relevant restraining contract. On the other hand, the Federal Court of Justice decided that the operator of an RSS feed may possibly be liable to pay compensation for the use by feed subscribers of a photograph which violates personal rights.

The ruling was based on the following situation:

The respondent operates a journalistic website where the image at the centre of the dispute, a photograph taken secretly without the knowledge of the person portrayed, was published together with a relevant headline. The image and text could be obtained by the respondent's RSS feed subscribers. The person shown on the image took action against the publication, and on the same day she obtained a negative undertaking from the respondent, on pain of punishment, in which the respondent undertook to refrain from disseminating the image again in future. The respondent deleted the image from its website, added a blocking note and disseminated this blocking note to the recipients of a large distribution list which had been created in its company.

The operator of a separate and independent information portal which was a subscriber to the RSS feed had obtained the material containing the image from the respondent before it was blocked, so the image and headline were still visible on this portal's website even after the respondent had signed the negative undertaking. The lawyers acting for the person shown in the image then also took action against the information portal to demand that the portal refrains from using the image. The portal removed the image, but refused to pay the legal costs which had arisen.

In the case before the Federal Court of Justice, the claimants (the lawyers for the person shown in the image), acting on the basis of an assignment of the rights of their client, demand compensation from the respondent for the costs of their legal representation in the case against the information portal, the costs of the demand letter to the respondent in relation to this demand for compensation and payment of a contractual penalty for violation of the negative undertaking which had been issued on pain of punishment.

The Federal Court of Justice rejected the claim for payment of a contractual penalty. It argued that the respondent had not culpably violated the negative undertaking because it had not been reasonably possible for the respondent to take the precaution of informing each one of its subscribers about the negative undertaking which it had given in relation to the RSS feed. The court pointed out that the respondent had only undertaken to refrain in future from “disseminating the image again”, and that this could only refer to publication on its website and repeated provision to subscribers. It stated that the wording of the negative undertaking did not contain any indication that the respondent had undertaken to act against the RSS feed subscribers who had downloaded the image before the deletion and blocking date and prevent them from any further publication or dissemination.

On the other hand, the Federal Court of Justice agreed with the payment of compensation in the form of the lawyer costs for the complaint letter to the information portal and the demand letter to the respondent. The court considered that this compensation was justified under Section 823 I, II of the German Civil Code in conjunction with Sections 22 and 23 of the German Art Copyright Act (KUG). It stated that any violation of the personal rights of the person shown in the image must be ascribed to the respondent because it had been the equivalent and adequate causal source of the alleged legal violation. It ruled that the further dissemination of the original material by a third party, the information portal, had merely been an implementation of the “typical Internet-related risk” which was created by the first publication. It stated that reports on the Internet are typically copied and linked by third parties. The court added that involving a lawyer to represent the interests of the person shown in the image was absolutely necessary, so the claim for reimbursement of the legal representation costs was justified.

To summarise, an RSS feed operator can only avoid liability for violations of personal rights by its subscribers if it ensures that content which is originally disseminated unlawfully is no longer used by its subscribers.

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Award of contract in spite of a serious error in the calculation

Award of contract in spite of a serious error in the calculation

If a bidder makes an error in the calculation of its bid and the bid is accepted, the bidder is normally obliged to render the performance at the incorrectly calculated price. In such cases, the bidder is not even entitled to contest the legal transaction if the client recognised the error before awarding the contract (Federal Court of Justice, ruling of 7 July 1998, X ZR 17/97).

According to a recent ruling of the Federal Court of Justice of 11 November 2014, however, the award of a contract on the basis of a bid containing a calculation error in a public procurement procedure may constitute a violation of the pre-contractual obligation of consideration and therefore entitle the contractor to refuse performance (Federal Court of Justice, ruling of 11 November 2014, X ZR 32/14).

In the case decided by the Federal Court of Justice, the public sector client had initiated a tender process for construction work to renew a road surface. The contractor's bid was approx. 27% below the second lowest bid. After the date for opening the bids, the contractor informed the client that it had selected a wrong quantity measurement for the asphalt binder in one item of the bid. Instead of the required accounting unit “tonnes” it had based the calculation on the accounting unit “square metres” and calculated the mass as 150 kg/m². The unit price had been given as 9.60 EUR, but just to cover the manufacturer's costs the correct price should have been 59.59 EUR per tonne. This would have corresponded with the price level of the other bidders in the tender process. But although the contractor asked the client to exclude the bid from the evaluation, the client refused, and awarded the contract to the contractor on the basis of the bid calculated in error. However, the bidder refused the performance on the terms offered, so the client declared a revocation of the contract, awarded the contract to another bidder and claimed the associated extra costs from the contractor as compensation.

But this claim was unsuccessful. According to the Federal Court of Justice, the implementation of a public tender process involves pre-contractual obligations of the public sector client to the bidder, so that under Section 241 (2) of the German Civil Code the public sector client is obliged to take account of the rights, legal assets and interests of the bidder.

But the court added that the obligation of consideration under Section 241 (2) of the Civil Code does not mean that the public sector client must exclude a bid for every small mistake in the calculation. It stated that the provision is not a corrective which saves companies from the responsibility for their own business activities in the course of their commercial operations. Instead, the court saw this provision as an expression of the principle of good faith and the protection of honest business dealings. It pointed out that such honest business dealings assume the principle of adherence to one's own business actions, especially where there is an exchange of performance and the other party is likely to have its own interests in mind. And this fundamentally also applied in tender processes.

But the court ruled that the public sector client's obligation to consider the contractor's interests under Section 241 (2) of the Civil Code is violated if the bidder has made a calculation error and cannot be reasonably expected by a reasonably sympathetic public sector client to accept the miscalculated price as remotely sufficient consideration for the performance which is to be rendered. If this situation arises and the client nevertheless enforces a conclusion of contract, the court decided that the bidder can claim a permanent right to refuse performance under Section 242 of the Civil Code in response to any contractual claims to fulfilment or compensation. According to the Federal Court of Justice, this right to refuse performance is not dependent on whether the affected bidder would be threatened by insolvency or comparable precarious economic difficulties in the foreseeable future if it implemented the order at the offered price. It ruled that the obligation to refrain from awarding the contract out of consideration for the interests of the bidder arises not only if the bidder's economic survival is at stake.

The ruling by the Federal Court of Justice underlines the obligation of the public sector client to check the economic viability of a bid before awarding the contract (Section 16 (6) of the Standard German Building Contract Terms Part A (VOB/A)). The Federal Court of Justice did not stipulate a binding threshold from which the contractor has a permanent right to refuse performance. It stated that all significant circumstances of each individual case must be taken into account in the evaluation. But it must be hoped that the lower courts, when they apply the deliberations of the Federal Court of Justice, will only grant the best bidder a right to refuse performance in absolutely exceptional cases. Otherwise it could become a popular trick for best bidders to get rid of bids that were deliberately calculated low by claiming a calculation error – for example if the order situation is better at the time when the contract is awarded.

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Change in the Schedule of Services and Fees for Architects and Engineers (HOAI)

Change in the Schedule of Services and Fees for Architects and Engineers (HOAI)

Over recent years, the legislative body has twice reformed the Schedule of Services and Fees for Architects and Engineers (HOAI, in 2009 and 2013), and this often brings up the question of the which version of the HOAI was in force at a certain time and should be applied, and the resulting differences in the minimum rates. This especially results from the fact that each reform led to an increase in the rates, so it is attractive for the architect or engineer to base the invoice on the new minimum rates.

A particularly controversial scenario has arisen in cases in which the contractual document was signed when the old version of the Schedule of Services and Fees for Architects and Engineers was in force and then the option of later incremental commissions for additional work stages was reserved (e.g. work stages 5 to 8 or work stage 9 of the Schedule of Services and Fees for Architects and Engineers). This brings up the question of which minimum fee should be applied if the later additional work was commissioned on or after 18 August 2009 (when the 2009 version of the Schedule of Services and Fees for Architects and Engineers came into force) or 17 July 2013 (when the 2013 version came into force). Is this additional work then subject to the version of the Schedule of Services and Fees for Architects and Engineers which applied when the contract was signed, or to the version which was in force when the additional work was commissioned?

The transitional provisions (Section 55 of the 2009 Schedule of Services and Fees for Architects and Engineers and Section 57 of the 2013 version) base this decision on whether the performance/basic performance (the terminology here differs between the 2009 and 2013 versions) was “contractually agreed” before or after the next version of the Schedule of Services and Fees for Architects and Engineers came into force. There had not yet been a supreme court ruling to clarify what was meant when additional performance was commissioned later. This issue has now been decided by the Federal Court of Justice (BGH).

The question of when the work and services were “contractually agreed” had recently been controversially discussed in the literature, and the only higher court ruling was just one judgment by the Higher Regional Court (OLG) of Koblenz (ruling of 6 December 2013, 10 U 344/13).

The Federal Court of Justice has now decided on this issue by supporting the opinion of the Higher Regional Court of Koblenz and the dominant view expressed in the literature: if the work stages are awarded incrementally, the time of each commission/call for services is the definitive time!

In the case decided by the Federal Court of Justice, the claimant demanded among other things the payment of the outstanding architectural fee from a part payment invoice. The respondent had commissioned the claimant with architectural services for the redesign of the administrative building and paved outdoor areas of the water and shipping authority. The original general planning contract was concluded on 26 May 2009 (note: before the 2009 Schedule of Services and Fees for Architects and Engineers came into force). The contract contained a provision for the incremental commissioning of work which did not specify the whole of the architecture (i.e. a commission for all work stages), but initially only involved a firm order and call for some of work stages under the Schedule of Services and Fees for Architects and Engineers. Only work stages 1 to 4 were commissioned in the original contract. The contract explicitly stipulated that the commission for the other work stages 5 to 8 would be issued “optionaly after the approval of the construction project has been received from the supervising department (…)”. In other contractual provisions of the general planning contract it was stated that the client intended to commission the additional work and services, but no binding commitment was included in the contract.

The claimant had already rendered the work stages 1 to 4 as defined in Section 15 of the Schedule of Services and Fees for Architects and Engineers 2002. On a date after 17 August 2009 (note: after the 2009 Schedule of Services and Fees for Architects and Engineers came into force), the respondent had commissioned services from additional work stages. In the invoice on account of 28 October 2011, the claimant demanded a fee based on the Schedule of Services and Fees for Architects and Engineers 2009. The respondent reduced the invoice amount on the grounds that the scale of fees in the 2002 version of the Schedule of Services and Fees for Architects and Engineers was applicable. The claimant then filed litigation for the differential amount.

The District Court of Koblenz fully accepted this claim in its ruling of 28 February 2013 (4 O 103/12). In the appeal proceedings, the Higher Regional Court of Koblenz confirmed this decision in its ruling of 6 December 2013 (10 U 344/13).

The further appeal on points of law was deemed to be unjustified in relation to the use of the 2009 version of the Schedule of Services and Fees for Architects and Engineers, but the case was nevertheless referred back to the previous court because the invoice for fees did not comply with the version of the Schedule of Services and Fees for Architects and Engineers which had been in force from 18 August 2009 and which the claimant had used in the invoice on account.

In justification of this ruling, the Federal Court of Justice follows the arguments of the Higher Regional Court of Koblenz, which it finds no fault with in this respect. The Higher Regional Court of Koblenz had interpreted the contract to mean that with regard to the work and services under work stages 5 to 8 there was a time-limited offer from the claimant, and the respondent had reserved the right to decide whether to accept this offer at a later date at its own discretion.

The legal review was based on the question of whether the 2009 version of the Schedule of Services and Fees for Architects and Engineers was applicable to this situation under its Section 55. In this respect, the Federal Court of Justice described the conflicting opinions in the literature. According to one opinion, the date when the original contract was concluded for the work which was to be commissioned later should be the definitive date (in this case: conclusion of the contract before 18 August 2009). The opposite opinion looks at whether the additional performance is commissioned at a later date (“called for”), and when this order is issued. The Federal Court of Justice starts from the wording of Section 55 of the 2009 Schedule of Services and Fees for Architects and Engineers (identical with Section 57 of the 2013 version) and agrees with the second of the above opinions (i.e. that the date of the later commissions is applicable), thus agreeing with the decisions of the lower courts. It concludes that the decisive date is “solely the time when the work and services are commissioned, and not the date of a preliminary agreement on fees for work and services which are to be commissioned later”. This means that the time of the original contract is not the definitive date “even if the parties agreed specific provisions for the intended work and services and the applicable fees in the event of a later commission”, and that the only definitive date is the date when the contract for the additional work and services is finally concluded.

The respondent's petition had argued that there was an unintended gap in the legal provisions because the legislator had not provided for such cases. In response to this argument, the court ruled that the legislator had been very aware of the problems, and that the wording and the systematic structure of the Schedule of Services and Fees for Architects and Engineers did not give any indication of an unintended omission of incrementally commissioned work and services. In addition, the court justified its ruling by referring to the meaning and purpose of the Schedule of Services and Fees for Architects and Engineers, i.e. to ensure a remuneration which the legislator considered adequate. The court suggested that this meant that all contracts which were concluded after the new version came into force had to be based on the new price provisions. And finally, the Federal Court of Justice also clarified that this ruling does not violate public procurement law, because the provisions of procurement law recognise that the mandatory character of price law takes priority.

The ruling was in fact referred back to the appeal court, but only because of an incorrectly calculated minimum rate which did not comply with the underlying 2009 version of the  Schedule of Services and Fees for Architects and Engineers.

In conclusion, it must be noted that the much-discussed question of whether the old or new version of the law on fees should be applied to an incremental award of commissions if there are fee changes in the course of the project has now been settled. On the basis of the ruling by the Federal Court of Justice it must therefore now be assumed that the time of the commission and call for services is always the applicable time. For existing cases, this means that the amount of the payable fee is always dependent on whether the binding call for services, which created a binding commitment for both parties, was before or after the time when a new version of the Schedule of Services and Fees for Architects and Engineers came into force. The question of what constitutes the relevant call for services must be considered and checked in individual cases.

For contract drafting, this means that the parties must be clear about whether they want to commit to a binding scope of performance and binding fee law for all planned work stages – and therefore to agree a full contract –  or whether they only want to issue a binding commission for individual parts of the performance from the outset and take the risk of possible fee increasees – and therefore issue the commissions incrementally.

It remains to be seen whether this topic will continue to have the same dispute potential, because at least at present there are no known plans for further reforms in the Schedule of Services and Fees for Architects and Engineers, so it is unlikely that new fee scales will come into force in the coming years.

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Not entitled to be granted a claim-securing mortgage against the new landowner

Not entitled to be granted a claim-securing mortgage against the new landowner

1. Problem

At the start of the construction phase the building contractor often does not want to “spoil things” with the client and therefore does not demand any security for its entitlements to remuneration. The contractor begins the work before any payment is received. If the client then becomes less willing to make payments in the course of the construction phase, the building contractor sometimes wants to secure its entitlements to remuneration for the work which it has rendered by creating a claim-securing mortgage on the built land. But this demand is too late if the client has already sold the built land at this time. In a ruling of 18 December 2014 (VII ZR 139/13), the Federal Court of Justice (BGH) decided that the building contractor is not entitled to demand that the new owner grant a claim-securing mortgage without any special reasons.

2. Factual background

The ruling was based on the following situation:

In December 2008 the developer, Hausbau-GmbH, commissioned the building contractor, which is now the claimant, to carry out work on two apartments which were at that time owned by Hausbau-GmbH. The respondent is the sole manager of Hausbau-GmbH and the sole director of the association which is the sole shareholder of Hausbau-GmbH. The building contractor rendered part of the commissioned work in the two apartments and then invoiced its work to Hausbau-GmbH. Hausbau-GmbH only paid part of the amount, but then it sold the owner-occupied apartments to the respondent in return for a relatively low purchase price, and in fulfilment of the purchase price the respondent took over the loan liabilities of Hausbau-GmbH in the same amount, which had been borrowed to finance the construction project. After the respondent was registered as the new owner of the apartments in the land register, the building contractor then demanded that the respondent approve a claim-securing mortgage in favour of the contractor to cover the outstanding amounts receivable for work and services.

3. Decision

So far the claimant has been unsuccessful. In the lower courts the respondent had been ordered to comply on the grounds that the sale had mainly served the respondent's own economic interests, the respondent had legal and economic dominion over Hausbau-GmbH and the purchase price was reduced, but in response to the appeal by the respondent the Federal Court of Justice referred the case back to the appeal court for a new judgement. This was done because the court considered that the granting of a claim-securing mortgage in favour of the contractor was not justified for the reasons given by the appeal court. The Federal Court of Justice justified this ruling as follows:

The entitlement to be provided with a claim-securing mortgage is fundamentally directed against the party which orders the performance, and it assumes that this party is also the owner of the land on which the work and services are to be rendered (this is the principle that the ordering party and the owner are identical). The respondent was not the party which ordered the performance carried out by the building contractor, and at the time when the work and services were commissioned he was not the owner of the land on which the building work was to be rendered.

In one earlier case, a departure from the principle of the personal identity of the ordering party and the owner was enforced by the Federal Court of Justice where the ordering party was not also the owner of the land affected by the award of contract at the time of the order, but the owner of the land actually gained benefits from the work and services rendered by the contractor (VII ZR 12/87). In such a case, it ruled that the purpose of the claim-securing mortgage in favour of the contractor was to grant the building contractor a right to the building land because the performance rendered by the contractor was intended from the outset to benefit the landowner directly, because they were necessary to enable him to make greater use of his land. But it considered that the present case was different, The personal identity between the ordering party and the owner had originally existed. Hausbau-GmbH, which concluded the contract with the building contractor and claimant, was originally the owner of the apartments for which the work and services were to be carried out. The building contractor was originally entitled to demand that Hausbau-GmbH grant a claim-securing mortgage for its amounts receivable under the building contract.

But the court stated that a departure from the principle of personal identity is not possible if the owner of the land had a justified interest in selling the land. It considered that the sale of the land is justified if it serves to repay the investments made by the vendor in relation to the land property. It stated that such a justified interest in the sale cannot be ruled out from the beginning even if the ordering party – as in this case - sells the property in a self-dealing transaction to its sole shareholder who is also, at the same time, the sole director of the only shareholder of the ordering company.

However, it considered that a departure from the principle of the personal identity of the ordering party and the owner could exceptionally be considered if Hausbau-GmbH deliberately cooperated with the manager, or at least acted with the knowledge of the manager, to place the building contractor at a disadvantage by removing the apartments out of the contractor's reach, or if the manager violated his obligations to the building contractor under the principle of agent's liability.

4. Conclusion

The claim-securing mortgage can only be demanded when work and services have already been rendered. This is often too late because the property may already have been sold at this time. The demand is then always in vain unless it is exceptionally possible to enforce the claim against the new owner. In theory the building contractor can secure its claim to the award of the claim-securing mortgage by a provisional entry in the land register. But here, the problem is that the building contractor can only obtain a provisional entry after it has carried out work, and that the property may then already have been sold.

However, the building contractor can avoid this dilemma if it secures its payment claims not by a claim-securing mortgage, but by demanding builder's security from the client under Section 648 of the German Civil Code. By contrast with a claim-securing mortgage, builder's security can already be demanded when the building contract is concluded. And builder's security is not dependent on whether the ordering party is the owner of the building land at the time of the order or at the time when the payment is claimed. In addition, builder's security also makes economic sense if the building land is already so heavily encumbered with other land charges that a claim-securing mortgage would no longer be sustainable in its value.

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Partitionining of land from the perspective of public law

Partitionining of land from the perspective of public law

As early as 2004, the European Law Adaptation Act for the Construction Sector (EAG Bau) abolished the need for approval of land partitioning in order to simplify legal and administrative practice. In most federal states, including Bavaria, approval for land partitioning is only necessary if the plot of land is subject to special procedures under the German Building Code (BauGB), such as reallocation or redevelopment processes. Responsibility for the material and legal permissibility of the partitioning now lies in the hands of the parties involved in the partitioning process. In spite of the long period since the need for approval was abolished, the consequences of a failure to comply with the material and legal requirements of partitioning had not yet been fully clarified in case law. In its ruling of 28 November 2013 (2 BV 12.761), the Bavarian Higher Administrative Court (BayVGH) stated that the building control authority can demand the revocation of the partitioning and can also revoke the building permit.

1. Material and legal requirements

The material and legal requirements for land partitioning are only explicitly defined in Section 19 of the Building Code. It stipulates that the partitioning of a plot of land must not create any circumstances which contradict the planning requirements in the zoning plan. But even if the land to be partitioned is not situated in an area covered by a zoning plan, the partition must not create any circumstances which violate building law.

A partition violates the zoning plan if it either contradicts the planning requirements or if the implementation of the zoning plan is made impossible or considerably more difficult. In view of the number of possible planning requirements in the zoning plan, there are a variety of possible contradictions. It is particularly important to consider planning requirements which explicitly mention the size or location of the plots of land, i.e. minimum plot sizes, plot ratios and floor area ratios.

From the perspective of building law, special attention must be paid to the regulations for the distance between buildings and plot boundaries, the reliable supply of services and fire safety.

2. Consequences of circumstances which violate building law

With regard to the consequences of the partition, it is important to distinguish between undeveloped land and land which has already been built on. If a plot of land which is not built on is partitioned in violation of the building regulations, this does not create any circumstances which violate building law, but because of the violation of building law there is no entitlement to obtain a building permit.

For plots which are already built on, the Bavarian Higher Administrative Court in its ruling of 28 November 2013 (2 BV 12.761) clarified - at least for Bavaria - that the building control authority can demand a revocation of the partitioning if a plot of land is partitioned in violation of building law. In addition, there is also the fundamental option to revoke the building permit and order the removal of any buildings. To keep things in proportion, however, the first method is usually used.

The decision appears logical at first glance because it underlines that the parties involved in partitioning the land are responsible for compliance with the requirements under public law. But it seems questionable whether it is practically feasible in all constellations.

There is no problem in cases in which the circumstances on all newly created plots of land violate the building regulations, as in the case decided by the Bavarian Higher Administrative Court. The order to reverse the partition can then be issued to each owner, so that all owners are then obliged to revoke the partitioning. The same applies if the order is issued before a change of ownership has taken place, so the partitioned plots of land are still owned by the owner of the original plot.

But difficulties arise if the plots are owned by different persons and the partitioning has created a situation which violates building law on only one of the newly created plots. The order can then only be issued to the owner on whose plot the requirements of building law are violated. But this owner is unable to revoke the partitioning alone. He is dependent on the cooperation of the owner of the other part of the original plot. But this owner's property does not pose any risk, because there is no violation of the building regulations on this plot. According to the general principles for averting risks, this owner can only be placed under an obligation to reverse the partitioning of the land if he was involved in the unlawful partitioning. But if he only acquired ownership of this plot after the partitioning, there are then no constituent facts associated with his person which would justify any intervention by the building supervision authorities. In this case, the building control authority will have to take action against the owner of the plot on which the building regulations are violated, and if necessary to order the demolition of building structures. It remains to be seen how this type of case will be handled by the supervision authorities in practice.

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Does a legionella infestation constitute a defect in rented premises?

Does a legionella infestation constitute a defect in rented premises?

According to Section 14 (3) of the Drinking Water Supply Act, the owners of a water supply installation which contains large facilities for the heating of drinking water, i.e. including the owners of residential complexes with hot water systems, are obliged to take regular samples of the drinking water to check for legionella. Legionella are rod-shaped bacteria which are found in fresh water and which occur in the natural environment in quantities which are harmless to health. But in heated water at temperatures between 30 and 45°C they have ideal breeding conditions, so they can become a health hazard. An infection of humans arises when water spray containing legionella is breathed in (aerosol) or when drinking water containing the bacteria enters the trachea or the lung (aspiration).

A health hazard can fundamentally constitute a defect in the rented premises, and under Section 569 (1) of the German Civil Code tenants of residential premises even have an extraordinary right of termination without notice if the use of the rented premises poses a serious health hazard. The landlord has a contractual obligation to maintain the rented premises in a condition which is safe to use and to exclude the possibility of health hazards for its tenants.

In a recently published ruling, the Local Court (Amtsgericht) of Munich had to deal with the question of whether a detected case of legionella can lead to a reduction in rent (ruling of 25 June 2014, 452 C 2212/14). In the case in question, a legionella infestation of 1,700 CFU/100 ml was detected in an inner city apartment in Munich, where CFU denotes the number of colony-forming units per 100 ml of water. The Local Court of Munich ruled that this value is not sufficient for a reduction in the rent. It agreed that the measured value is above the parameters of 100 CFU/100 ml stipulated in Appendix 3 Part II of the Drinking Water Ordinance, but it ruled that this does not constitute a health hazard for the residents. It pointed out that a legionella infestation which is above the parameters merely makes it necessary to conduct further tests. But it stated that merely exceeding the threshold value does not mean that there is a health hazard for the tenant. It only recognises a health hazard if a threshold value of 10,000 CFU/100 ml is exceeded. The tenant is therefore only entitled to reduce the rent because of the health hazard if this threshold is reached. Up to this threshold, the court considers that no defect can be deemed to exist. It says that a purely subjective perception of a hazard by the tenant without a specific health risk does not render the apartment defective.

With this ruling, the Local Court of Munich made an important decision for landlords because it means that not every measurement above the legionella parameters in the Drinking Water Ordinance constitutes a defect which entitles the tenant to reduce the rent. However, if the technical action threshold of 10,000 CFU/100 ml is exceeded, the tenant will be entitled to an appropriate rent reduction. The Local Court of Dresden stipulated a reduction of 25% for a measured legionella concentration of 14,000 CFU/100 ml (ruling of 11 November 2013, 148 C 5353/13). The Local Court of Dresden justified the high reduction rate by pointing to a significant impairment of the usability of the apartment with such a high legionella infestation and the major impairment of the residential quality due to the acute health hazard. If a legionella infestation actually leads to specific damage to the health of the tenant through legionella infection, the landlord/owner must even pay compensation to the tenant (District Court of Saarbrücken, ruling of 11 December 2009, 10 S 26/08 – 6,000.00 euros for serious legionella pneumonia in both lungs).

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Care required for non-compete provisions (or their absence) in commercial rental contracts

Care required for non-compete provisions (or their absence) in commercial rental contracts

The Higher Regional Court (OLG) of Brandenburg, in a ruling of 25 November 2014 (6 U 117/13), decided that a provision in a commercial rental agreement which excludes any non-compete provision or product range exclusivity agreement in favour of the tenant is null and void if the tenant is at the same time placed under an obligation to operate the business which involves a limitation of its product range and pricing requirements.

The ruling was based on the following situation:

The claimant is a tenant and the respondent is the landlord of rented premises in a hypermarket operated by the respondent. In the area in front of the checkouts, the tenant operates a restaurant with take-away sales. The rental agreement between the tenant and the landlord contains a the heading “Purpose, range of products, limitation of product range” with the designation: “Restaurant serving mainly German cuisine”. The rental agreement also included an obligation for the tenant to operate the business during the opening hours of the hypermarket. Any opening outside the opening hours of the hypermarket, on the other hand, required the prior written approval of the landlord. Any violation of this obligation to operate the business was declared to be subject to a contractual penalty payable by the tenant. The rental agreement also placed the tenant under an obligation to adjust its sale prices to the price level of the hypermarket. The sale prices were to be lower than the prices of comparable competitors with a comparable range of products and comparable quality. In addition, any changes in the product range or the type of product required the prior written approval of the landlord. Elsewhere in the contract, product range exclusivity and/or non-compete agreements were excluded.

During the term of the rental agreement, the landlord itself opened a stand-up snack bar in the area in front of the hypermarket checkouts opposite the premises rented by the tenant. The tenant saw this as competition for its own business operations and demanded that the landlord cease this business. The court of first instance decided in favour of the landlord, but the Higher Regional Court of Brandenburg followed the opinion of the tenant.

The Higher Regional Court of Brandenburg considered that the exclusion of a non-compete provision in the rental agreement had not been valid because the relevant provision was null and void. Even without a contractual provision, the court felt that the landlord of commercially used premises was fundamentally obliged to protect tenants against competition within the same building. The court did not suggest that the tenant must be protected from any competition whatsoever, but that the tenant is entitled to protection against competition if a balance of interests in the individual case shows that the tenant's claim to protection against competition should prevail over the landlord's entitlement to decide freely how to use its property. In the court's opinion, this was the case here.

On the one hand, the court considered that the sale of take-away food by the tenant's business had at least implicitly become part of the rental agreement, which the court saw as one of the requirements for contractual protection against competition. The tenant had carried out these take-away sales for several years. On the other hand, the court pointed out that the building was a hypermarket and not a shopping mall. In such premises, it considered that traders must be better protected from competition than in shopping malls. In addition, in the necessary balance of interests the court considered it necessary to take into account that the services offered by the landlord were aimed at the same customers as the food offered by the tenant. And finally, the court saw it as significant that in this case it was the landlord itself which opened the competing outlet.

In view of this, the court believed that the landlord had not been effectively able to exclude the non-compete requirement which was immanent to the contract. It stated that there was no objection in principle to the exclusion of a non-compete provision on the basis of a standard form as such – even in conjunction with the obligation of operation based on a standard form. But it considered that the cumulation of one-sided obligations which are imposed in favour of the landlord in this case could no longer be reconciled with the underlying principle of the statutory provisions on mutual loyalty and consideration in a contractual relationship. It concluded that the large number of restrictions placed on the tenant had the effect of placing the tenant at an unreasonable disadvantage, and that the provision as a whole was therefore null and void.

For property transactions this means that in future, when drafting and checking commercial rental contracts, greater attention must be given to non-compete provisions to ensure that landlords do not expose themselves to claims by the tenants, and also that tenants do not refrain from enforcing their claims because they wrongly assume that a non-compete provision has been effectively excluded.

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Care required! Federal Court of Justice relaxes minority protection in partnerships

Care required! Federal Court of Justice relaxes minority protection in partnerships

The Federal Court of Justice recently decided that the principle of clarity and definiteness which applied in partnership law will not apply in future. This means that changes in the articles of association should become easier to implement.

1. Federal Court of Justice finally abolishes the principle of clarity and definiteness!

The German law for partnership companies (GbR, OHG, KG, GmbH & Co. KG) states that resolutions of the shareholders must always be passed unanimously. However, it is permissible to stipulate in the articles of association that the shareholders' meeting is also entitled to pass resolutions with a simple or qualified majority (the “majority provision”).

The principle of clarity and definiteness was introduced in case law in 1953 to prevent disadvantages for minorities in the shareholders' meeting. This principle states that majority decisions by the shareholders' meeting involving unusual circumstances, i.e. circumstances which affect the membership of the partners (e.g. changes in the profit distribution ratio, changes in the distribution of votes, increases in contributions etc.) are null and void if the articles of association do not contain any explicit reservation which permits such a majority decision. Up to now this has meant that changes in the articles of association or fundamental questions about the membership rights of the partners could only be effectively decided by a majority resolution if the articles of association contained an explicit reservation for the exact type of resolution involved. In practice, this created a situation in which many articles of association contained an extensive catalogue of all conceivable changes in the contract which could be resolved by a simple or qualified majority. If the articles of association did not contain a reservation for a specific change in the articles, a majority resolution of the shareholders was automatically null and void.

In its ruling of 21 October 2014 (II ZR 84/13), the Federal Court of Justice has now again clearly stated that this limitation for partnership companies will no longer apply, with immediate effect. Instead, the articles of association of partnerships are  subject to the general provisions of contract law. On principle, in future all changes to the articles of association and all questions of fundamental importance can now be decided by a majority resolution if the articles of association contain a contractual provision which authorises the shareholders to pass majority resolutions.

2. Effects in practice

The above ruling is significant in practice – as long as the articles of association contain a majority provision – because it means that majority shareholder resolutions in a partnership (e.g. in limited partnerships constituted as a “GmbH & Co. KG”) which make any changes in the articles or any other fundamental circumstances are no longer automatically null and void if the articles of association do not contain a contractual reservation for the specific subject of the resolution. Alterations to the articles of association can therefore fundamentally be decided by a simple majority resolution of the shareholders' meeting as long as the articles of association do not contain any contrary provision.

The only exception (as before) applies if the resolution of the shareholders does not stand up to a material check of its effectiveness. But this is only relevant if the resolution of the shareholders violates the principle of loyalty or if it interferes with the core membership rights of a partner (the core interests theory).

3. Conclusion

If the articles of association stipulate that resolutions of the shareholders can also be passed by a majority vote, the relevant articles should be checked to find out whether the text of the articles stipulates clearly enough what topics are not to be decided by a majority resolution of the shareholders. In particular, it should be clearly stated whether changes to the articles of association may also be resolved by a majority vote. Otherwise, there is a danger that if there are any changes to the articles of association or decisions about fundamental questions related to the membership rights of the partners, there could then be disputes about whether such resolutions of the shareholders are covered by the majority provision. Over and above that, if a shareholder objects to an shareholder resolution which he dislikes and which infringes his membership rights, his last remedy against the resolution should not be a mere material check of efficiency, which often has an uncertain outcome and cn entail years of litigation.

When new articles of association are drafted for partnerships, on the other hand, the decision by the Federal Court of Justice means that the articles of association should become simpler and clearer because there is no longer any need for a list of all possible resolutions which can be decided by a majority vote, which can go on for several pages. In drafting future articles of association, greater care must be taken to list exactly which topics should not be open to a majority resolution of the shareholders. It is advisable to stipulate in the text of the articles of association that changes in the articles can be made either unanimously or by a resolution passed with a high quorum.

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The certificate of incorporation of a US American company is not suitable proof of its existence

The certificate of incorporation of a US American company is not suitable proof of its existence


If a foreign company is involved in transactions which must be registered in the register of companies, especially the founding of a German branch or subsidiary or the appointment or dismissal of the manager of a German subsidiary, proof must be provided of the existence of the foreign company and the authorisation of representation of the managers who act for the company. German registration court judges regularly demand certified public documents or certificates from a trustworthy public register, although the requirements of individual registration courts vary. If the certification is carried out abroad, generally the documents also need to be legalised or an Apostille needs to
be added.

If the relevant country has a directory with similar legal force to the German register of companies, it is relatively easy to prove the existence of the company. For example, if a Belgian, French or Danish company wishes to form a German subsidiary, it is sufficient for an authorised representative to present a notarised power of attorney and a certified extract from the register of companies because international treaties apply which eliminate the need for legalisation or an Apostille for these countries. The existence of an English company can be established by presenting a certificate of incorporation, an extract from the English register of companies or a corresponding certificate from an English notary. Sometimes, the registration courts also recognise the presentation of a certificate from the registrar of companies which shows that the company has been founded and that the representative has a right of representation.


In the USA there is no register which is comparable with the German register of companies, and under US law an American notary public is not suitable or responsible for issuing certificates. Moreover, in a ruling of 1 February 2013,
the Higher Regional Court of Cologne decided that the necessary proof of the existence of the foreign company could not be provided by presenting the certificate of incorporation alone. The court stated that it is necessary to prove the continued existence of the company, and that for US companies this cannot be proved with the certificate of incorporation because there may have been changes in the meantime, and the company may even have been dissolved.

For this reason – as was also ruled by the Higher Regional Court of Cologne – it is generally demanded that US American companies prove their existence by presenting a certified certificate of good standing issued by the responsible secretary of state, and this certificate must then be confirmed by an Apostille. The proof of the right of representation must take the form of a secretary’s certificate which bears an Apostille and in which the company secretary certifies that the person acting for the company has been elected to the Board of the company and is authorised to represent the company. The company secretary is not just a secretary in the general sense of the word, rather this person is a clerk or certifying officer of the company who keeps the company’s legal documents – often the lawyer who advises the company.

When transactions take place which require registration and involve a foreign company, it is therefore important to consider at an early stage what additional documents are needed and, if necessary, to contact the responsible
registration court to clarify what documents are suitable.

Contact: Dr. Christina Riedl, LL.M

 

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Land transfer tax

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.

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New developments at the European Court of Justice

New developments at the European Court of Justice

On the in-house award of contracts and on cooperation between public authorities

I. Background

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.

V. Summary

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.

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Are contract supplements subject to compulsory tender under public procurement law?

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.

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Estate agents and distance selling law

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.

Conclusion:

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.

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Implied acceptance of an architectural service

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.

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Expiry by limitation of warranty claims for defects when purchasing photovoltaic installations

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.

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General terms of business (AGB): check boxes must be filled in correctly

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

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Due date for payment of an amount which is dependent on an arbitration report

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

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Entitlement to estate agency commission if a property is purchased for a significantly lower price

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

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Obligation of the architect to determine the client's budget and comply with the cost framework

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.

3.    Conclusion

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

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Submission of the list of shareholders after a foreign notarisation

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

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Reimbursement of due diligence costs arising from the letter of intent

06/19/13

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.

Contact:
Dr. Dagobert Nitzsche

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