a contractual penalty provision which stipulates an upper limit of 5% of total order sum for a failure to meet intermediate deadlines is null and void!

In its ruling of 6 December 2012 (Ref. VII ZR 133/11), the Federal Court of Justice (BGH) ruled that a contractual penalty provision in the client's general terms of business in a building contract which fixes a contractual penalty which is payable for culpably exceeding an interim deadline at no more than 5% of the total order sum is null and void.

The claimant, as a subcontractor, demanded from the respondent (the general contractor) the payment of the outstanding contractual remuneration for the supply and assembly of a dike gate. The respondent set off a claim for compensation for the same amount against this demand due to a delay. The parties were in dispute about whether the claimant's entitlement to the contractual remuneration was cancelled by this set-off. In its review of the loss asserted by the respondent, the Federal Court of Justice had to check whether the respondent itself was obliged to pay a contractual penalty of up to 5% of the total order sum. The alleged claim for compensation could only exist if the contractual penalty itself was valid.

In April 2008 a dike association (hereinafter referred to as the intervening party) commissioned the respondent with the refurbishment of a dike. The necessary components for flood control had to be provided at the latest by 31 October 2008 because according to the Dike Protection Ordinance, all construction work within the dike zone is fundamentally only permitted in the flood-free period from 1 April to 31 October. The general terms of business of the intervening party, which were integrated in the contract, included an interim deadline for the completion of all components which are necessary for flood control. In addition, the general terms of business of the intervening party included a contractual provision that the respondent must pay a contractual penalty of 5,000 € per working day for every working day of any delay if individual deadlines are exceeded, this contractual penalty being limited to a maximum of 5.0% of the total order sum.

The respondent commissioned the claimant, as a subcontractor, with the manufacture and assembly of the dike gate. The agreed date for its completion was 18 October 2008. According to the contract agreed between the claimant and the respondent, the work commencement and completion dates were contractual deadlines. In the event of a culpable failure to meet these deadlines, it was stipulated that the respondent would be liable for all damage, losses and disadvantages. The claimant (culpably) delivered the dike gate late on 25 November 2008 and completed the assembly work on 5 December 2008.

According to the wording of its general terms of business, the intervening party was entitled to demand a contractual penalty from the respondent, so the intervening party retained the relevant portion of the respondent's remuneration and set it off against the respondent's claim. The respondent therefore assumed that it was entitled to a compensation claim due to the delay. It declared to the claimant that it would set off an amount equivalent to the remaining remuneration for work rendered which was the subject of the claim.

The District Court (LG) awarded the remaining remuneration for work rendered to the claimant. The respondent's appeal against this ruling was rejected (Higher Regional Court (OLG) of Düsseldorf, 13 May 2011 - 22 U 186/10).

The Federal Court of Justice ruled that a contractual penalty provision in the client's general terms of business in a building contract which fixes a contractual penalty for culpably exceeding an interim deadline at no more than 5% of the total order sum is null and void.

In the opinion of the Federal Court of Justice, this provision is null and void because it places the contractor at an unreasonable disadvantage. The Federal Court of Justice justified this by pointing out that if the contractor was liable in relation to the whole order sum at the interim deadline, this liability would be based on a part of the remuneration which it had not yet earned. Where a contractual penalty is agreed to secure an interim deadline, the Federal Court of Justice argued that the client must not profit from the fact that the contractor is obliged to render other services at a later date which do not serve to secure adherence to the interim deadline.

The Federal Court of Justice then added that this applies even where the interim deadline was set to comply with flood control. According to the position outlined by the Federal Court of Justice, the client is sufficiently protected by the possibility of pursuing its claims for compensation separately against the contractor.

Therefore the court stated that the respondent could not appeal to the set-off because it was not obliged to make any payments under the contractual penalty provision and had therefore suffered no loss and thus had no claim for compensation.

This decision is highly significant when drafting contractual penalty provisions in contracts, and it is also important for the application of existing contractual penalty provisions. This importance results from the fact that many standard contract terms define the maximum contractual penalty with reference to the total order sum (e.g. in uniform sanction provisions for a failure to meet final and interim deadlines). Here, it must be pointed out that the "5 per cent limit" for contractual penalties had only recently been established.

The fact that general terms of business which define the total order sum as the reference point for interim deadlines are now null and void may invalidate the contractual penalty as a whole, depending on the details of the contract.  This ruling should therefore be taken into account in any future discussions about contractual penalties which are due.

A consequence of this ruling for contract drafting is that in any contractual penalty provision for interim deadlines, the upper limit must be based only on the amount that has been earned up to that point. In future, the upper limit (e.g. 5%) must be based on the part of the remuneration which corresponds to the work which is due by the interim deadline.

The limit must no longer be based on the total remuneration. If the principles of the ruling are applied systematically, this should also apply to the daily rate defined in the contractual penalty (e.g. 0.1%/day). Here, too, it would probably be consistent if this rate is not based on the total remuneration, but only on the part of the remuneration for the work which is due at the time of the interim deadline. A contractual penalty provision which meets the legal validity criteria for general terms of business must be carefully drafted because of the level of certainty which is required at the same time, e.g. by a prior definition of how to calculate the value of what has been earned up to each deadline.

But it remains to be seen how the courts will implement the principles of this ruling in detail.

print

For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com.

print

For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com.

print

For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com.

print

For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com.

print

Section 84 (1) sentences 2 and 3 of the Stock Corporation Act envisage that the reappointment of members of the Board of Directors for a period of office of a maximum of five further years can be decided by the Supervisory Board at the earliest one year before the expiry of the existing period of office. The need of joint-stock companies to bind members of the Board of Directors to the company for a further period of office at an earlier time than stipulated in the law has now been catered for by the Federal Court of Justice, thus ending a protracted controversy about the widespread practice of prematurely reappointing members of the Board of Directors (Federal Court of Justice, ruling of 17 July 2012, Ref.: II ZR 55/11). In future, the Supervisory Board which is responsible for appointing the Board of Directors can therefore fundamentally extend the period of office of the directors for a maximum of five years at any time.

The procedure:

The current appointment of the member of the Board of Directors is cancelled by mutual agreement and at the same time a reappointment for a new period of office of a maximum of five years is decided by the Supervisory Board. According to the decision of the Federal Court of Justice, this is neither a violation of Section 84 (1) sentence 3 of the Stock Corporation Act nor a prohibited circumvention of the law.

In the case which the court had to decide, the affected members of the Board of Directors of a joint-stock company in which two family clans had fallen out were appointed in 2005 and 2006, each for the period up to 21 January 2010. In 2007 the Supervisory Board resolved to cancel the appointment of the two members of the Board of Directors by mutual agreement, then immediately reappointed them as members of the Board of Directors for a further five years. On the following day an Annual General Meeting of the company was held at which a new Supervisory Board was elected, but it was then not able to dismiss the two directors because of a voting stalemate. One member of the new Supervisory Board then appealed to the court to rule that the resolutions of the Supervisory Board were null and void.

The Federal Court of Justice considers that the intention of the legislative body in connection with the requirements of Section 84 (1) sentences 2 and 3 of the Stock Corporation Act is explicitly not to ensure that the Supervisory Board and the Board of Directors will work together in a relationship of trust. In this respect, the Federal Court of Justice also  rejects the objection based on this interpretation which suggests that by making a reappointment more than one year before the expiry of the original period of office, the Supervisory Board used the impermissible opportunity to bind a future Supervisory Board to a Board of Directors which it has not itself appointed for a period of five years. Rather, the court ruled that a new Supervisory Board must accept the Board of Directors as it was appointed by the old Supervisory Board.

The court suggested that the law aimed instead to ensure that the company did not commit itself to a director for more than five years at a time, because this could lead to economically unsustainable burdens. The Supervisory Board should therefore have the opportunity to end the cooperation with a member of the Board of Directors at the latest after five years without a serious reason and without a severance payment. The court considered that another purpose of the Act was that the Supervisory Board should be forced to hold responsible consultations at the latest every five years and to reach a coherent agreement on the continued appointment of the member of the Board of Directors.

To put it another way: according to the intention of the Act, it should not be possible to resolve an extension of the period of office beyond its existing duration at any time earlier than one year before its expiry, because this would enable the company to commit to the director for too long without the Supervisory Board being obliged to review the suitability of the member of the Board of Directors at least every five years. But the Federal Court of Justice considered that the Act was not designed to prevent the possibly of a new five year period of office being started at any time by the Supervisory Board by mutual agreement with the member of the Board of Directors. In other words, after the Supervisory Board has dealt with the appointment of the member of the Board of Directors, the company should not be committed to the individual director for more than five years at a time.

In this connection the Federal Court of Justice explicitly states that the premature reappointment after the termination of the post by mutual agreement does not represent a prohibited circumvention of the law even if there are no special reasons for this procedure. Here, the court explicitly contradicts the recommendation in section 5.1.2 sub-section 2 sentence 2 of the German Corporate Governance Code (GCGC) which stipulates that a premature reappointment should only take place “in special circumstances”. It remains to be seen whether the government commission will make a desirable correction in this recommendation of the Code as a result of this supreme court ruling.

According to the reasons for the judgment given by the Federal Court of Justice, such a resolution is only null and void if the procedure described proves to be an abuse of the law in individual cases. The court ruled that the decisive factor in this connection is whether the Supervisory Board, by mutual agreement with the member of the Board of Directors, acted out of motives which can be regarded as an abuse of the law in relation to its duty of loyalty to the company. In this specific case, the Federal Court of Justice disagreed with the previous court and rejected the idea of an abuse of the law based on the assumption that the resolutions to extend the appointment had obviously not been based on objective considerations, but rather had been passed in the light of the disputes between the family clans in order to create a “fait accompli” for the new Supervisory Board which would be elected on the next day.

It remains to be seen what circumstances the Federal Court of Justice will deem to constitute an abuse of the law. One conceivable example would be if there is an impending hostile takeover and the hostile bidder publicly declares its intention to dismiss the Board of Directors, and if the Board of Supervisors then arranges the resignation and premature reappointment of the Board of Directors by mutual agreement with the directors in order to frustrate the takeover plans or ensure the member of the Board of Directors a higher severance payment.

Conclusion:

The Federal Court of Justice confirmed the fundamental entitlement of the Supervisory Board to make decisions about the persons on the Board of Directors for the coming five years at any time, even without any special reason – subject to the obligation to act by mutual agreement with the affected member of the Board of Directors if this member's period of office has more than one year to run. In practice this extends the necessary scope for flexibility of action at any time, for example if the Board of Directors needs to be restructured or if competitors try to attract directors away from the company. The premature reappointment of members of the Board of Directors and the simultaneous termination of their current period of office is only prohibited according to the Federal Court of Justice if it proves to be an abuse of the law in individual cases. However, until the recommendation in section 5.1.2 sub-section 2 sentence 2 of the GCGC is adjusted to take the supreme court ruling into account, the Board of Directors and the Supervisory Board must openly declare any premature reappointment of members of the Board of Directors without any special circumstances as a departure from the recommendation of the Code in the framework of their declaration of compliance under Section 161 of the Stock Corporation Act.

print

from Corporation to Partnership

For further information please visit the German version of this site or contact tax @ sibeth.com

print

The Federal Court of Justice) decided in a ruling of 17 February 2012 (V ZR 102/11) that easements created in favour of a leaseholder with heritable building rights which provide rights of way and supply line rights become part of the leasehold land when the heritable building right expires. Until a relevant legislative provision is created, this case law ruling must be taken into account in contract drafting, especially in cases involving equal or similar rights which are mutually granted as encumbrances to heritable building rights.

In the case which was decided here, the respondents purchased the leasehold land and the heritable building right which had been created for the land. An easement had been created in favour of the respective leaseholder with heritable building rights which provided rights of way over the neighbouring plot owned by the claimants. The respondents arranged for the heritable building right to be cancelled and deleted. Subsequently, the claimants applied for the deletion of the right of way, which had been executed in the land register on the basis of a court ruling in land register proceedings. Then the claimants demanded that the respondents cease to enter their land or permit their children to do so. The Local Court (Amtsgericht) granted the petition, the District Court (Landgericht) rejected it.

The Federal Court of Justice confirmed the rejection of the petition on the grounds that a right secured by a property charge in the land register does not expire by a deletion in the land register alone, as long as the material and legal requirements for its expiry are not fulfilled, and that in the case before the court, the right of way created as an easement had not materially and legally expired by the cancellation and deletion of the heritable building right. Instead, when the heritable building right was cancelled the easement which was created for the right of way became an integral part of the leasehold land according to Section 12 (3) of the Heritable Building Rights Act (ErbbauRG).

The starting point of the deliberations of the Federal Court of Justice was the recognition that easements are subjective rights in rem according to Section 1018 of the German Civil Code, which are deemed to be major inseparable parts of the dominant plot of land under Sections 96 and 93 of the Civil Code and share the fate of the land. This also applies to any easement created in favour of the owner of any heritable building right. When a heritable building right is cancelled, an easement can therefore no longer continue to be a part of the heritable building right.

The decisive question was whether the easement also includes the rights specified in Section 96 of the Civil Code under Section 12 (3) of the Heritable Building Rights Act, which states that elements of the heritable building right become part of the leasehold land when the heritable building right expires. This is a matter of controversy in case law and in the literature. The dominant opinion in the literature (up to now) assumes that only parts of the land which are physically connected to the land as specified in Sections 94 and 95 of the Civil Code become integral parts of the land under Section 12 (3) of the Heritable Building Rights Act. The contrary opinion argues that when the heritable building right expires, all parts of the heritable building right under Section 12 (3) of the Heritable Building Rights Act, i.e. including the subjective rights in rem under Section 96 of the Civil Code, become parts of the leasehold land. The Federal Supreme Court has now taken the latter opinion as far as it applies to easements for rights of way and supply line rights.

The Federal Court of Justice based its approach on the wording of Section 12 (3) of the Heritable Building Rights Act, which does not exclude any parts specified in Section 96 of the Civil Code, and especially on the economic purpose which is to be achieved by the transfer of ownership of the building to the landowner at the expiry of the heritable building right. The transfer of ownership of the building to the landowner at the expiry of the heritable building right, and the simultaneous obligation to compensate the former leaseholder with heritable building rights without any additional activity of the parties, were economically aimed at ensuring that the leaseholder with heritable building rights was able to maintain the building properly even in the last few years of the lease and that the landowner would receive the building in the condition which it was in when owned by the leaseholder with heritable building rights. This goal would not be achieved if the rights of way and supply line rights which are necessary for the use of the building were not transferred after the expiry of the heritable building right. In this case, the landowner would receive a properly maintained building, but would possibly be unable to use it.

The Federal Court of Justice doubts, but without passing judgment, whether Section 12 (3) of the Heritable Building Rights Act also applies to subjective rights in rem under Section 96 of the Civil Code in addition to rights of way and supply line rights, i.e. whether it covers other encumbrances, ground rents and preemptive rights in rem which do not serve for the further use of the building. Therefore, in future it must be assumed in practice that a preemptive right of purchase in rem, for example, expires together with the heritable building right because it is not related to the use of the building. Things are probably different for overbuilding rights, for example, because they could be a requirement for the use of the building in its existing context.

And finally, the Federal Court of Justice points out the need for legislative clarification in cases in which the same or similar encumbrances are mutually created in relation to heritable building rights. For example, if mutual easements are created as rights of way between two neighbouring plots of land, and if one of these properties is subject to a heritable building right and the easements are registered for and against this heritable building right, if the heritable building right then ceases to exist, the right of way in favour of the leaseholder with heritable building rights would pass to the owner of the leasehold property according to the ruling of the Federal Supreme Court outlined above, but the right of way registered against the heritable building right would expire when the heritable building right expires. The owner of the land with the heritable building right would then have a secured right of way in rem against the neighbouring land, but the owner of the neighbouring land would have no such right against the land with the heritable building right.

The same could happen if, in return for the right of way created in favour of a leaseholder with heritable building rights, a ground rent were established so that an amount would be paid for the right of way. In this case, the ground rent would cease with the expiry of the heritable building right, the right of way would pass to the owner of the leasehold land, but the owner of the land would no longer be obliged to pay the amount stipulated in the ground rent.

As long as there is no statutory provision to settle cases in which equal or similar rights are mutually created as encumbrances against the heritable building right, care must be taken to ensure that the appropriate private contractual provisions are made.

print

If the Standard Building Contract Terms part B (VOB/B) are not agreed as a whole in a construction contract issued by the client, Section 16 (3) No. 1 of the Standard German Building Contract Terms part B will not stand up to an isolated judicial examination of the terms. This means that the remuneration becomes due with acceptance and receipt of the final invoice. The client then falls into default at the latest 30 days after the final invoice.

In 2009 the Federal Court of Justice had already decided (in a ruling of 20 August 2009, VII. ZR 212/07) that the provision in Section 16 (5) Nr. 3 of the Standard Building Contract Terms part B, which stipulates that the contractor must first set the client a reasonable extension period before the client falls into default, is null and void under Section 307 of the German Civil Code (BGB) if the client is a user of the Standard Building Contract Terms part B, these terms are not agreed as a whole and the client therefore falls into default at the latest 30 days after acceptance and the receipt of the final invoice even without a warning. Now, case law rulings in the Higher Regional Courts also increasingly state that Section 16 (3) No. 1 of the Standard Building Contract Terms part B does not stand up to an isolated judicial examination of the terms.

Section 16 (3) No. 1 sentence 1 of the Standard Building Contract Terms part B deviates from the statutory principle of Sections 641 (1) and 286 of the Civil Code by stipulating that in spite of acceptance and the receipt of the final invoice, the remuneration of the contractor for work rendered only becomes due two months after the receipt of the final invoice. Taking into account the case law ruling of the Federal Court of Justice mentioned above, the client then falls into default at the earliest 90 days after the final invoice. In 1994 (ruling of 26 July 1994, 13 U 1804/94) the Higher Regional Court of Munich already took the view that Section 16 (3) Nr. 1 sentence 1 of the Standard Building Contract Terms part B does not stand up to an isolated judicial examination of the terms under Section 307 ff. of the Civil Code, and now two other Higher Regional Courts have confirmed this opinion (Higher Regional Court of Celle, ruling of 18 December 2008 – Ref. 6 U 65/08; Higher Regional Court of Naumburg, ruling of 12 January 2012 – Ref. of 9 U 165/11). The provision of Section 16 (3) No. 1 sentence 1 of the Standard Building Contract Terms part B is invalid in an isolated examination under Section 307 (2) of the Civil Code because the due date for the remuneration for work performed is tightened to the detriment of the contractor, in deviation from the statutory principle in Section 641 (1) and Section 286 of the Civil Code. According to Section 306 (2) of the Civil Code, the invalid provision is then replaced by the statutory provision so that the remuneration becomes due upon acceptance and receipt of the final invoice.

The case law policy of the Federal Court of Justice and the Higher Regional Courts means that the client can fall into default with the payment of the final invoice 60 days earlier than under the provisions of the Standard Building Contract Terms part B. If it is not possible to check invoices within 30 days, as is often the case in large construction projects, the due date for the remuneration for work rendered and the resulting date of default can only be postponed by individual contractual provisions in the building contract.

print

For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com.

print

For further information please visit the German version of this site or contact the Practice Group Tax tax @ sibeth.com.

print

Placing press articles or other publications in digital archives can lead to copyright violations even if the original article was legally permissible. The Federal Court of Justice recently had to decide whether a report about an art exhibition which contained photographs of copyright-protected works of art and originally appeared in a magazine could be stored in the on-line archive of the magazine publisher for a longer period. The reproduction of copyright-protected works – in the context of “Reporting on daily events” – is permissible under Section 50 of the German Copyright Act (UrhG) even if the publisher has not obtained the relevant usage rights from the copyright holder. However, the Federal Court of Justice decided that the report cannot be permanently regarded as a report on daily news, even if it met this requirement at the time when it was added to the archive. The archive operator must constantly check whether the event still constitutes daily news, and if appropriate it must remove the illustration of the copyright-protected work (Federal Court of Justice, ruling of 5 October 2010, I ZR 127/09).

The situation is different for a dedicated picture archive which is exclusively drawn on by other media companies to illustrate their publications. The archive operator is not responsible as a perpetrator or an accessory for any violations of copyright or personal rights by the users of the picture archive (Federal Court of Justice, ruling of 7 December 2010, VI ZR 30/09).

print

The purchaser of a defective consumer product which has been installed into another object before the defect was detected can demand, in the course of subsequent fulfilment by delivery of a replacement, that the vendor must also uninstall the defective product and install the new product or bear the costs for removal and installation. This also applies even if the vendor did not install the defective product and if the costs of removal and installation exceed the value of the defect-free purchased product. In the national (German) court proceedings which led to the legal question being forwarded to the European Court of Justice, the case involved defective floor tiles which had already been laid and a dishwasher. In particular, the Federal Court of Justice asked the European Court of Justice whether the vendor of the tiles was entitled to refuse to bear the costs of removal and installation on the grounds that they were disproportionate. The European Court of Justice decided that there was no such entitlement. But it added that Article 3 (3) of the Consumer Sales Directive does not preclude a settlement in which “the consumer's entitlement to a reimbursement of costs for the removal of the non-conforming consumer goods and the installation of the consumer goods delivered as a replacement could be limited, if necessary, to an amount which corresponds to the value that the consumer goods would have if they conformed with the contract and which is reasonable in view of the significance of the violation of the contract”. (European Court of Justice, ruling of 16 June 2011, C 65/09 and C 87/09).

print

All deliveries and other services rendered by a business entrepreneur for payment are fundamentally subject to VAT. However, turnover in the context of a transfer of a business or a separately managed enterprise as a whole is not taxable in accordance with Section 1 (1a) of the German VAT Act (sale of a business as a whole).

Under certain circumstances, the sale of a fully or partly let property may constitute such a sale of a business as a whole, even if the vendor also lets other properties. The purchaser then continues the letting business of the vendor. But a letting business which is eligible for such continuation does not apply if a land property which is not let is transferred.

In a ruling of 28 October 2010, the Federal Court of Finance (BFH) again had to deal with the concept of the sale of a business as a whole, and it decided that such a sale did not apply if the business activities of the vendor largely consisted of constructing a building and finding tenants for the rental units in order to sell it more lucratively after completion because of the units which have already been let. Such project development activities therefore fundamentally do not lead to the creation of a letting company which could be continued by the purchaser. Instead, the sale is classed as the provision of an individual economic asset.

print

Tenants do not normally want to pay too much in prepayments of operating costs which would give their landlords an interest-free loan, and landlords do not want to finance the operating costs in advance by making the prepayments too low. According to Section 560 (4) of the German Civil Code (BGB), both parties to a rental agreement can therefore unilaterally demand a reasonable level for the prepayments of operating costs after an account settlement, so that the prepayments by the tenant are as close as possible to the actual costs. Many landlords also add a “flat rate security surcharge” of about 10% as a “buffer” for future cost increases. Up to now this was usually accepted, and this was the advice which was given.

In future, however, such a “flat rate security surcharge” will no longer be so easy to enforce. In a ruling of 28 September 2011 (VIII ZR 294/10), the Federal Court of Justice decided that an adjustment of the prepayments for operating costs is only “reasonable” according to Section 560 (4) of the Civil Code if it is based on the probably costs which actually arise in the current accounting year. The court states that the basis for the adjustment of the prepayments is always the last operating cost statement. The landlord is not entitled to impose an abstract “security surcharge” which is not justified by specifically anticipated cost increases for individual operating costs. But an anticipated development of the future operating costs may be taken into account in the forecast of the amount of the operating costs in the current year. Cost increases in the operating costs are an important factor - if not the decisive factor - for any change in the operating costs, so if there are specific reasons to expect such increases, they can certainly be taken into account. However, if the landlord wants to increase the account results from the previous year by a general “security surcharge” of 10% to allow for possible cost increases and to adjust the prepayments accordingly, this is not possible. This would go further than the justified interest of the landlord not to have to finance the tenant's share of the operating costs in advance. Only if price increases are specifically expected for certain parts of the operating costs - such as energy prices - can this be included in the calculation of the prepayments, but only after taking into account the ratio of the affected operating costs to the total operating costs.

In future, landlords will therefore only be entitled to increase the prepayments by a twelfth of the amount which had to be charged in arrears for the previous year, and any additional increase should at least be justified briefly and verifiably, because it will only be possible to demand a “security surcharge” in justified exceptional cases, e.g. if price increases are certain and the amount can also be reliably estimated.

print

The VII. Division of the Federal Court of Justice (BGH) in its ruling of 28 July 2011 (VII. ZR 207/09) again had to consider the (in)validity of security clauses in contracts under the Standard German Building Contract Terms (VOB).

A contract under the Standard Building Contract Terms contained the general terms of business of the client which stated that “to secure the contractual settlement of the services after acceptance, especially but not limited to warranty”, a surety of 5% of the invoice total was agreed. The contract for work also stipulated that guarantees must be issued according to the client's template, although this provision on security in the contract for work did not demand any waiver of the defence according to Section 768 of the German Civil Code (BGB) by which the guarantor can assert the objections to which the primary debtor is entitled. However, the provision about the waiver of defences was included in the surety form which was enclosed with the contract for work. The respondent as the guarantor issued a guarantee according to the contract form, and waived the defences under Section 768 of the Civil Code in this guarantee. Subsequently defects arose and the contractor filed for insolvency. The client then demanded a payment under the guarantee from the respondent because of the costs incurred to remedy the defects.

The Federal Court of Justice, like the lower courts, rejected the claim and stated that the security agreement is null and void under Section 307 (1) of the Civil Code. With reference to the ruling of the XI. Division of 16 June 2009 (XI. ZR 145/08), the Federal Court of Justice stated in its ruling that the standard form agreement of the waiver of defences under Section 768 (1) of the Civil Code was null and void because it placed the contractor at an unreasonable disadvantage (Section 307 (1) of the Civil Code. The Federal Court of Justice regarded the provisions about the retention and the guarantee requirements as a “conceptual unity” which belonged together and was based on a “coherent concept”. It deemed that the waiver of defences in the guarantee form had become part of the security agreement by reference. It considered that this provision could therefore not be sustained when separated into parts which differed in their wording and were far apart. And the Federal Court of Justice also excludes the possibility of preserving the security agreement by a supplementary interpretation of the contract, because this would require a gap in the provisions whereas the contract explicitly claimed to be a full and final version.

Two points are of special interest here. Firstly, in the opinion of the Federal Court of Justice, the invalidity of the security agreement is not remedied by the fact that instead of the guarantee, security for the warranty claims can be provided by a security retention of 5% of the final invoice total. That means that the unreasonableness of the security provision results from the unreasonable redemption possibility.

Secondly, a notable feature of the ruling is the fact that the security agreement is found to be null and void as a whole, although the provisions about the security retention and the waiver of defences for the guarantee differ in their wording and are widely separated. With this decision on the invalidity of the security agreement as a whole, the VII. Division of the Federal Court of Justice is close to a case law ruling of the XI. Division of 16 June 2009. In a ruling of 12 February 2009 (VII. ZR 39/08) with a similar constellation, the VII. Division had decided that the waiver of defences used in the guarantee template was a provision which could be separated in content from the security agreement in the contract for work, with the consequence that the security agreement remained effective and the contractor was obliged to provide an absolute contract performance guarantee without any time limit. According to the opinion of the VII. Division at that time, they did not form a conceptual unity. It now remains to be seen whether this view of the invalidity of the security agreement as a whole is confirmed in the case law rulings of the Federal Court of Justice.

This has the following practical consequences: a standard form exclusion of the defence of the guarantor under Section 768 of the Civil Code renders the security agreement null and void. According to the latest ruling of the VII. Division this applies consistently, even if the exclusion is contained in a provision which differs in its wording and is far removed – for example in an attached waiver of defences – because this provision in combination with the security agreement in a contract for work forms a “conceptual” unity. The ruling therefore shows yet again that the design of the security agreement requires extreme care, because otherwise it may not be possible to use the guarantee when it is needed. The ruling underlines that these requirements must especially be taken into account in the drafting of enclosed guarantee forms. From the point of view of the contractor, this ruling indicates that it is worth studying the security agreements close if there is a risk of the security being called on.

print