General terms of business (AGB): check boxes must be filled in correctly
Contractual penalty is null and void if the box has not been correctly crossed
In its ruling of 20 June 2013, the Federal Court of Justice (BGH) again had to consider questions arising from a contractual penalty agreement in general terms of business. In this judgment (VII ZR 82/12), the Federal Court of Justice ruled that a contractual penalty is not deemed to have been effectively agreed, even if one of the available options in the form has been completed in text form (whereas the other option has not been completed), if the box which should be crossed in front of the option has not been filled in by entering a cross, but has been left empty.
The claimant, a metal construction company, filed action against the respondent, a hospital, for the outstanding remainder of the remuneration from a building contract. The respondent claimed a set-off against the remaining remuneration. The hospital based its set-off claim on an allegedly justified demand for payment under a contractual penalty agreement which was included in the terms of contract provided by the respondent. The contract defined specific contractual deadlines and stipulated the following provision for the contractual penalties:
“2. Contractual penalties
The contractor shall be obliged to pay a contractual penalty for each working day of the delay as follows:
2.1 If the building deadline is exceeded
|_| EUR …
|_| 0.1 per cent of the final order total […]
2.3 The contractual penalty shall be limited to a maximum of 5% of the order total […].”
In the above contractual penalty provisions, the respondent had only entered the values “0.1” and “5” by hand. The boxes were left empty.
The District Court ordered the respondent to pay the remaining remuneration as demanded by the claimant. In support of this ruling, it stated that the contractual penalty had not been agreed because the
check box under No. 2.1 had not been filled in. In other respects, the court suggested that it is not clear whether this point in the special terms of contract was intended to apply (Section 305 c (2) of the German Civil Code). The Appeal Court overturned this ruling and rejected the claimant's demand because it assumed that the addition of the percentage figures had shown with sufficient clarity that a contractual penalty was to be agreed. It suggested that there was therefore no lack of clarity in relation to Section 305 c (2) of the Civil Code.
The Federal Court of Justice rejected the ruling of the Appeal Court and restored the ruling of the District Court. To support this position, the court suggested that although the appeal court had correctly observed that the box had not been crossed but on the other hand the percentage values “0.1” and “5” had been entered, merely filling in the percentages did not show clearly enough which of the two options had been selected and was intended to be agreed. The Federal Court of Justice pointed out that the form envisaged a declaration about the agreement of a contractual penalty which consisted of two significant elements. It suggested that not only the amount of the contractual penalty needs to be specified, but that a separate check box needs to be filled in to clarify whether the contractual penalty is really intended by the parties in this specific case. Here, the Federal Court of Justice convincingly argued that it can only be interpreted as a preparation for a possible contractual penalty agreement if the relevant percentages are inserted, but the check box is not crossed. The court considered that entering the percentages, which could be seen as a sign of agreement, combined with the empty check box, which could be seen as a sign of the lack of an agreement, are contradictory. In evaluating the factual situation, the Federal Court of Justice then concluded that there was no intention to use the option of a contractual penalty and that this provision had therefore not been integrated into the contract (Section 305 (1) sentence 1 of the Civil Code). The Federal Court of Justice thus solved the issue on the basis of an interpretation of the content of the contract alone, without considering the other provisions of the law on general terms of business in Sections 305 ff. of the Civil Code.
So this is yet another failed contractual penalty provision in general terms of business!
Once again, this shows that an effective agreement of a contractual penalty provision in general terms of business needs to overcome several obstacles. This not only applies to the wording of the content of the contractual penalty provision and the maximum limits for the appropriateness or otherwise of the amount of the contractual penalty (both in the daily rate and in the cap on the total amount). It is also reflected in the more generalised concept that if alternative check boxes are included in the form, these options must really be filled in. For the client, this means that even more care must be taken when completing the contractual forms. This not only applies to entering the figures, it is also important to insert the necessary crosses and ticks to ensure that
the provision is complete. On the side of the contractor, this shows another line of argument which can be used to contest an alleged obligation to pay a contractual penalty, i.e. that the penalty has not effectively been agreed. In general terms of business, the first step should therefore always be to check if the provision has been correctly filled in and is therefore effectively agreed. In a second step, it is then still possible to check whether the provision could be deemed inappropriate under Section 307 of the Civil Code because the maximum limits have been exceeded. It remains to be seen whether case law rulings will follow the same principles in other cases in which printed forms have been incompletely filled in.
Contact: Florian Pfitzer
Due date for payment of an amount which is dependent on an arbitration report
In our last newsletter we presented a recent ruling of the Federal Court of Justice on the subject of arbitration reports (in the narrower sense). In the case in question, the Federal Court of Justice ruled that if an arbitrator is only commissioned by one party to the arbitration agreement, and the arbitration
report that is compiled is obviously incorrect, the party which did not commission the arbitrator also has direct contractual claims for compensation against the arbitrator. In the area of arbitration agreements and the extent to which they are binding for the parties to the arbitration agreement in the
absence of obvious mistakes which would cause the necessary factual findings to be transferred to the court by analogy with Section 319 of the German Civil Code, we would like to refer to our article in the last newsletter.
In another ruling on the subject of arbitration reports in the narrower sense (Federal Court of Justice, 4 July 2013 - III ZR 52/12), which had to decide a dispute about the remuneration that is payable under an investment management contract, the Federal Court of Justice ruled that an arbitration agreement in the narrower sense generally includes an implicit agreement
that the payment of the relevant amount cannot be enforced in court or demanded out of court during the time needed to prepare the report, which means that the amount is not yet due for payment in this period.
This effect continues to apply if the ruling on the factual findings which are necessary to determine the amount of the due payment is transferred to a court, by analogy with Section 319 (1) sentence 2 of the Civil Code, so that the
payment demand only becomes due for payment when the court ruling becomes legally enforceable. This means that maturity interest, default interest and court interest are only awarded from this time onwards.
For the creditor of a payment demand which is dependent on an arbitration report, this means that first of all the preparation of an arbitration report must be initiated so that the amount becomes due for payment as soon as possible.
If the debtor does not cooperate in this process, the creditor can – and should – unilaterally commission an arbitration report which will be binding for all parties to the arbitration agreement, taking the requirements of case law into account.
Contact: Dr. Florian Hänle
Entitlement to estate agency commission if a property is purchased for a significantly lower price
A commonly disputed issue in relation to the question of whether an estate agent has really “earned” the commission which he claims is whether the main contract that is concluded is economically identical with or equivalent to the intended contract. This question always arises if the client wants to sell his property for a certain price or to purchase a property for a certain price, but this intended price cannot then be attained in the main contract.
According to the consistent case law pronouncements of the Federal Court of Justice, a claim for commission is fundamentally not effective if there is no economic equivalence. But no fixed and absolute boundary has yet been defined to show when this equivalence is lacking. So if a vendor, for example, wishes to sell his property for € 2,000,000.00 and tells the estate agent this price when commissioning the agent, and if the estate agent then only manages to sell it for € 1,000,000.00, a demand for commission by the estate agent, at least in relationship to the vendor as the client, is generally not applicable. The estate agent has then not achieved the intended result (sale for 2,000,000.00 Euros) or an economically equivalent result.
But the Federal Court of Justice has not yet decided whether a vendor who has succeeded in purchasing the property for a significantly lower price – perhaps even because of his own negotiating skill – can (successfully) contest the estate agency commission on the grounds of a lack of economic identity.
The Higher Regional Court of Hamm had to deal with this very question in its ruling of 21 March 2013 (18 U 133/12).
Whereas the court of first instance, the District Court (LG) of Bielefeld, had denied the economic equivalence and thus the estate agent's claim to the commission because the purchase price was 43% below the quoted price, the Higher Regional Court of Hamm cancelled the ruling of the District Court of Bielefeld in its ruling of 21 March 2013.
The Higher Regional Court of Hamm rightly pointed out that although there was not an economic identity, the estate agent's client had nevertheless achieved the economic result which he had aimed for in the purchase contract which was concluded, i.e. the purchase of the project. It argued that the significant price difference does not affect this, especially because it benefits the purchaser. Without any additional reasons, which do not apply in this case, the court considered that it would violate the principle of good faith if the client avoided the payment of the commission by appealing to a lack of economic equivalence.
The ruling of the Higher Regional Court of Hamm can be fully accepted. It goes against good faith if a purchaser who has undisputedly learned of the property from the estate agent, and undisputedly concluded the main contract because of the information from the estate agent, refuses to pay a commission because the price which he has paid is significantly below the price originally quoted. As a consequence, this would mean that the vendor would be willing to pay an estate agent fee if the purchase price had been significantly higher and had thus corresponded to the intended price.
Commendably, the Higher Regional Court of Hamm allowed an appeal. It can only be hoped that the parties to this case take the trouble to appeal to the court of third instance in this case, so that this hotly disputed question, which is very relevant in practice, can be decided at last by the Federal Court of Justice.
Contact: Eva Mäschle
Obligation of the architect to determine the client's budget and comply with the cost framework
1. Ruling of the Federal Court of Justice of 21 March 2013
In its ruling of 21 March 2013 (VII ZR 203/11) the Federal Court of Justice dealt with the frequent question of the extent to which the architect is responsible for compliance with the budget – and thus also for the previous calculation of the budget. The Federal Court of Justice confirmed the previous case law and stated clearly that the architect must determine the budget, especially for private clients, and must take the client's ideas on the costs into account even if they do not explicitly constitute a maximum construction cost limit.
The claimant had inherited the assets of her husband, an architect, and sued the respondent for payment of the remaining fee. The claimant's husband had provided planning services for the respondent for the construction of a new residential house, but the project was not built. The claimant now claimed an architect fee of about 27,000.00 Euros. In his defence, the respondent claimed a set-off against a compensation claim against the deceased architect because the planning had exceeded a maximum building cost limit. He alleged that a maximum building cost limit of 800,000.00 DM had been defined. According to the building application of the deceased architect, he claimed that the building costs would have amounted to 1,500,000.00 DM.
In this connection it remained unclear in the court case whether an explicit maximum cost limit had been agreed. In the course of the evidence, the District Court found that the respondent's wife had mentioned a budget of about 800,000.00 DM and the respondent himself had not contradicted his wife's statement in his discussions with the architect.
The District Court awarded the claimant the asserted claim under the architectural contract in full. The appeal court confirmed the ruling in essence.
But the Federal Court of Justice departed from the previous courts in this case and assumed that there had been a breach of obligations by the deceased architect. The Federal Court of Justice justified this breach of obligations by stating that the architect was not only obliged to comply with exactly agreed maximum cost limits, but he was also obliged to take his knowledge of the respondent's ideas on the costs into account in his planning. The Federal Court of Justice derived this from the architect's obligation to ascertain such ideas on the costs in the course of his appraisal because the architect is obliged at this early stage in the planning to determine the economic framework for the construction project. The court considered this especially important for a private client. The Federal Court of Justice logically concluded that an architect violates his contractual obligations if he carries out the planning for a residential property without reliable knowledge of the economic resources of the private client. In relation to the determination of the economic resources, the Federal Court of Justice then stated that depending on the circumstances of the individual case it may be sufficient for the ideas on cost to be expressed by family members taking part in an information discussion with the architect if the client does not contradict them, even if the client does not separately state that these ideas are also his ideas. The court argued that these ideas on costs which are expressed are then binding in the sense that in the absence of any change they determine the planning framework and generally become part of the contract if the architect does not express an objection to them. According to the ruling of the Federal Court of Justice, this also applies even if only approximate figures are quoted for the construction costs.
In this case it had been established before the court that costs of approximately 800,000.00 DM had been mentioned by the respondent's wife and not contradicted, so the court considered that there was a breach of obligations by the architect. Consequently, plans for construction costs of over 1,500,000.00 DM were deemed to be useless. But further factual findings were necessary to calculate a possible claim for compensation, so the Federal Court of Justice did not rule on the compensation claim, instead it referred the matter back to the appeal court for factual findings to be obtained.
The ruling described here does not create any fundamentally new requirements for the architect. But it is relevant because it clearly summarises the case law situation up to now, and also because it clarifies that the client's budget is decisive even if it is not agreed as a maximum cost limit.
But the ruling of the Federal Court of Justice does not state to what extent these requirements also apply to other clients. And it is left unclear what exactly the Federal Court of Justice means by “private clients”. Probably this applies especially to natural persons acting in a private capacity.
2. Ruling of the Higher Regional Court (OLG) of Hamm of 15 March 2013
In relation to the compensation claim for exceeding the budget which is mentioned in the ruling, a recent ruling of the Higher Regional Court of Hamm of 15 March 2013 is significant in this context (12 U 152/12; not yet enforceable).
In this ruling in a rather similar case, the Higher Regional Court of Hamm clarifies that such a compensation claim of the client for a defective cost calculation or other wrong consulting by the architect assumes that the client proves that the damage or loss was caused by the violation of the contract. There is no reversal of the burden of proof. This represents the first major obstacle to the enforcement of the compensation claim by the client.
The Higher Regional Court of Hamm then clarifies that even if this proof of causality is successful, the advantages obtained must be offset against any damage or loss which is assessed. In this connection, any increase in the value of the building (not the land itself) as determined, for example, by a market value appraisal must be offset. This factor represents another obstacle for the client.
The Higher Regional Court of Hamm considered that even the proof of causality had not been provided, so it rejected the claim.
These two rulings show how important a careful documentation of the ideas on costs and the cost limits is. Architects – and clients - are therefore urgently advised to carry out and document a prior calculation of the costs (not only for private clients). If there are any later planning changes which increase or change the costs, it is important for these changes to be documented in order to refute any allegation of a breach of obligations.
But the two rulings also show that enforcing a compensation claim for a breach of obligations by the architect in relation to the cost calculation and compliance with the costs is difficult, because the client has the full burden of proof in this respect and any increases in the value of the property have the effect of reducing the damage or loss.
Contact: Florian Pfitzerinfo
Submission of the list of shareholders after a foreign notarisation
In a ruling of 6 February 2013 on the permanent company law topic of a foreign notarisation, the Higher Regional Court (OLG) of Munich departed from the case law ruling of 2 March 2011 on the submission of the shareholder list by a foreign notary (see also the SIBETH Newsletter of June 2011) and at the same time permitted a legal appeal to the Federal Court of Justice in the interest of consistent case law (Higher Regional Court of Munich, ruling of 6 February 2013, 31 Wx 8/13).
The requirement of a notarisation of the sale and transfer of shares in a German private limited company (GmbH) and the associated often considerable notary fees based on the value of the property have made it attractive to carry out notarisations before Swiss notaries, especially for higher transaction values, because their fees increase more slowly or are negotiable. German law recognises foreign notarisation as effective if it fulfils certain requirements. This especially includes the requirement that the foreign person notarising the document has qualifications and a status in the local legal system which corresponds to the activities of a German notary and that the foreign notarisation procedure is equivalent to the German procedure. In the past this has been deemed to apply to the Swiss notarisation procedure and to notaries in certain cantons, especially the canton of Basle.
Misgivings about the effectiveness of this practice had arisen after the revision of the German Companies Act (GmbHG) came into effect on 1 November 2008 in the Act to Modernise the Law on Private Limited Companies and Combat Abuses (MoMiG), which especially increased the importance of the list of shareholders. Even before the reform, the list of shareholders had to be updated by the managers after every change and submitted to the commercial register. But if a notary is involved in the changes, this notary is then obliged to sign and submit the list. Specifically, under Section 40 (1) of the Companies Act the managers of the company are fundamentally obliged to submit the updated list of shareholders if there is a change in the shareholders. But if a notary was involved in the change in the shareholders, under Section 40 (2) of the Companies Act the officiating notary is obliged to submit the list instead of the managers.
In this respect, the District Court (LG) of Frankfurt ruled that this obligation of the notary to submit the list is an official duty under public law and can therefore only be fulfilled by a notary in Germany. The District Court of Frankfurt concluded that a foreign notary could not guarantee the correctness of the list and that the legislative body therefore intended to exclude foreign notarisations in future.
However, the Higher Regional Court of Düsseldorf was not content with this conclusion about the effectiveness of the notarisation before a foreign notary. It admitted that the notification obligation stipulated in the German Companies Act could not be imposed on foreign notaries by German laws, but it suggested that this did not affect the effectiveness of the notarisation by foreign notaries. The Higher Regional Court of Düsseldorf also ruled that the changed provisions of the Companies Act for the obligation to submit the list of shareholders in the event of foreign notarisations meant that although the officiating foreign notaries were not obliged to submit them, they were nevertheless entitled to do so – through a German notary acting as an agent if necessary because of the requirement of electronic submission.
The Higher Regional Court of Munich came to a different conclusion. In the case which it had to decide, the officiating foreign notary had compiled the list of shareholders, signed it and submitted it with an Apostille. The Higher Regional Court of Munich ruled that the court of registration rightly rejected the list of shareholders because it did not fulfil the formal requirements. It pointed out that the managers are fundamentally responsible for submitting the list of shareholders according to Section 40 (1)of the German Companies Act and suggests that this responsibility is only waived if a notary is involved in the change in the shareholders. The Higher Regional Court of Munich concludes that these provisions imply an alternative responsibility, and that the existence of two parallel responsibilities was not intended. However, the court argues that a German law cannot place a legal obligation on a foreign notary and that the responsibility of the managers for the submission of the list does not lapse if the list is notarised by a foreign notary. In the event of a foreign notarisation, the court therefore argues that the list of shareholders must be signed and submitted by the managers.
The Higher Regional Courts of Düsseldorf and Munich therefore agreed about the recognition of foreign notarisations where the defined requirements for equivalence are fulfilled, but they advocated completely different solutions for the responsibility for signing and submitting the list of shareholders, which brings new uncertainty to “notarisation tourism” with Switzerland. But the Higher Regional Court of Munich considered that a decision of the Federal Court of Justice (BGH) is necessary to ensure consistent case law, so it permitted an appeal.
However, until a decision has been made by the Federal Court of Justice, the responsibility for the submission of the list of shareholders in the event of foreign notarisations is open, and this leads to considerable risks, especially but not only because in certain circumstances a purchaser could purchase shares in good faith from an unauthorised person who is still listed in the list of shareholders.
Contact: Dr. Christina Prinzhorn, LL.M.info
Reimbursement of due diligence costs arising from the letter of intent
The letter of intent which is drawn up in the course of a company purchase is often regarded as irrelevant, but if it is drafted appropriately it can lead to the reimbursement of considerable costs incurred in advance of the transaction if the negotiating party cancels the negotiations. In its ruling of 19 September 2012, the Higher Regional Court (OLG) of Munich confirmed that a provision is legally valid which states that one of the parties to a negotiation agrees to reimburse all the due diligence and legal costs incurred by the other party in connection with the transaction if it then decides to withdraw from the negotiation. This applies up to an amount of 400,000 Euro (Higher Regional Court of Munich, ruling of 19 September 2012, 7 U 736/12).
In particular, the Higher Regional Court of Munich saw no reason to accept the respondent's claim that the letter of intent was null and void for formal reasons. According to the statutory requirements, the necessary formal elements include founding a German private limited company (GmbH) and entering into an obligation to assign shares in a German private limited company. It is undisputed that the underlying letter of intent does not contain any obligation which is directly related to any of the legal transactions which are subject to mandatory notarisation.
However, the foundation of a German private limited company and the assignment of shares were part of the transaction described in the letter of intent. In this connection, the court rejected the assertion that the mere obligation to pay compensation up to a maximum of EUR 400,000 for the costs incurred by the other party for the due diligence up to the time when the negotiations fail constituted such a severe disadvantage that the respondent was effectively forced to conclude the contracts which required notarisation. The court rejected this assertion on the grounds that the provision in the letter of intent was for a limited time and amount, and that it was limited to an enforcement of the documented and reasonable costs which had actually arisen.
It also pointed out that the parties to the negotiation would have been at liberty to apply this cost provision to any cancellation of the contract negotiations. If the parties exercise their freedom of contract by agreeing in the letter of intent that a justification for the cancellation of the contract negotiations is not necessary, the court concluded that the parties are then free in their decision-making until the contract is finally concluded – so the objection of an unconscionable withdrawal from contract negotiations cannot be made in the event of a cancellation of negotiations, not even in relation to the obligation to bear costs.
With regard to the reasonable amount of the consulting costs incurred in the framework of the due diligence, the Higher Regional Court of Munich also confirmed that invoicing at hourly rates is customary and widespread. In the absence of any proof of a higher hourly rate, the court assumed an hourly rate at the lower end of the scale, i.e. between 250 Euro and 300 Euro per lawyer. The Higher Regional Court of Munich considered the total number of hours, 463.60, to be realistic in this case in view of the volume of data that needed to be evaluated, the questions which required clarification and the other issues which arose in the legal due diligence. In addition, the court considered it normal and reasonable that the pure costs of the copies made in the course of the due diligence were not covered by the hourly rates, so it deemed them also to be eligible for reimbursement. But the Higher Regional Court of Munich stated that the consulting costs for the letter of intent itself were covered by the other reimbursable legal costs.
Therefore, the agreement of a letter of intent should not be regarded as a mere formality or an unnecessary interim step in the course of a transaction. Rather, if it includes an appropriate provision it can be a way to obtain reasonable compensation for costs incurred in advance of the transaction, which can be claimed from the other party if negotiations are cancelled – which can be regarded as either an opportunity or a risk, depending on the perspective. The careful wording of a balanced obligation to bear the costs incurred in advance of the transaction, for example if the negotiation process is cancelled without any justifying reasons as defined by the parties in the letter of intent, should therefore feature in the wording of a letter of intent and be explicitly made part of the binding content of the letter of intent.
Dr. Dagobert Nitzsche