Germany: 259. Reform of German Law of Obligations

Dr. Horst Schäfer and Michael Richter
KPMG Beiten Burkhardt GmbH, Cologne

The Act Modernising the Law of Obligations took effect on 1 January 2002, or 102 years to the day after the entry into force of the German Civil Code, of which the law of obligations is a part. While the primary impact of the new legislation is in the area of contract law, certain changes – notably those to the statute of limitations – apply to obligations arising in tort or for other legal reasons.

The reform transposes EU guidelines on e-commerce, late payments, and the purchase of consumer goods into German law. At the same time, it modernises major parts of the German Civil Code (Bürgerliches Gesetzbuch or BGB). The primary modernisation measures are as follows:

• Incorporation of separate protective laws into the Civil Code
• Restructuring of the statute of limitations
• Overhaul of breach of contract rules
• Changes in the law governing purchase contracts and works contracts

The new law applies to obligations arising on or after 1 January 2002. Obligations arising before this date are in general governed by prior law. However, the applicability of prior law to contracts of continuing obligation (Dauerschuldverhältnisse) terminates no later than 31 December 2002.

The following previously distinct laws have now been incorporated into the Civil Code:

• Law regulating general terms and conditions; now §§ 305 ff. BGB
• Law regulating sales in the home or in other private settings; now §§ 312 BGB
• Law regulating e-commerce and other consumer sales without face-to-face contact, now §§ 312b ff. BGB
• Law regulating consumer credit transactions; now §§ 491 ff. BGB
• Law regulating residential time sharing arrangements, now §§ 481 BGB

The standard statute of limitations period of § 195 BGB has been reduced from 30 years to 3 years. Situations previously subject to special 2-year and 4-year statutes of limitations are now covered by the standard 3 year period.

As before, there are numerous exceptions to the general statute of limitations. These are now as follows:

Under the general provision of § 199 BGB, the statute begins to run at the end of the year in which the claim has accrued and the obligee has knowledge of the circumstances giving rise thereto and the identity of obligor, or but for gross negligence would have had such knowledge.

§ 199 (4) BGB imposes an absolute limit for most claims of 10 years from the time the claim accrued without regard to any knowledge on the obligee's part. The absolute limit for damage claims by reason of harm to specially protected interests such as life, liberty, health, or bodily integrity is 30 years.

Under prior law, the statute was restarted when suit was filed on a claim or application was made for a summary payment order (Mahnbescheid). Under the new law, these actions suspend the statute, but do not restart it. Negotiations between the obligee and the obligor with respect to a claim likewise suspend the statute. The statute is restarted by:

• admission of the claim, such as by partial payment, payment of interest, or provision of security, or by
• judicial or government claim enforcement actions.

The changes in this area relate largely to the theory and terminology by which the law regulates situations in which a party to a contract breaches its obligations or is prevented from performing them.

• New § 280 BGB uses the term "breach of obligation" (Pflichtverletzung) to refer collectively to all instances of non-performance, deficient performance, and late performance of contractual obligations irrespective of fault on the part of the breaching party.
• New §§ 281, 323 BGB preserve the traditional German principle that the primary remedy of the non-breaching party in the event of breach of obligation is to compel performance by the breaching party. The obligee may thus in general only rescind the contract, claim damages, or pursue other remedies after setting a final deadline for performance by the obligor. There are exceptions to this rule, however.
• New § 323 BGB permits the obligee to rescind the contract by reason of its obligor's breach of obligation regardless of the obligor's legal responsibility for the circumstances that caused the breach (Vertretenmüssen). Rescission is thus possible where the breach is caused by circumstances beyond the obligor's control.
• New § 325 BGB permits the obligee to claim damages for non-performance in addition to rescinding the contract where the obligor is legally responsible for the breach, e.g. at fault. This is essentially the same as under prior law.
• New § 241 BGB codifies the court developed doctrine of the violation of implied duties of mutual protection between parties to a contract (positive Vertragsverletzung).
• In conjunction with new § 241 (2) BGB, new § 311 BGB codifies the court developed doctrine of liability by reason of damage culpably inflicted on the other party in the pre-contract negotiation phase (culpa in contrahendo).
• New § 313 BGB codifies the court developed doctrine of frustration of contract (Wegfall der Geschäftsgrundlage).
• New § 314 BGB codifies the court developed doctrine of termination of ongoing contracts (contracts of continuing obligation) for important cause (aus wichtigem Grund).
• New § 286 BGB regulates late performance. As before, damages may generally not be claimed for late performance per se, but only for late performance constituting default (Verzug). Default occurs when the obligee demands that the obligor perform an overdue obligation. However, the exceptions to this rule have been expanded. Notably, default on or money debts (Entgeltforderungen) occurs automatically 30 days after the due date and receipt of an invoice. Consumers must be specifically notified of this provision, however. Interest for late payment in business dealings is fixed by new § 288 BGB at 8 percentage points over the basic rate, which is adjusted twice annually under new § 247 BGB with respect to the refinancing operations of the European Central Bank. The initial basic rate is 3.62 %. For consumer transactions, the interest rate for late payment is 5 percentage points over the basic rate.

The distinction between purchase of fungible goods and purchase of a specific thing is eliminated in that the purchased item must be free of defects in both cases.

New § 434 states that the purchased product is defective if it lacks the agreed characteristics or is not suited to the contractually agreed purpose or to its customary purpose or lacks some feature that the purchaser is entitled to expect, for instance by reason of advertising statements or product markings. Differences in the definition and consequences of flaws in title (Rechtsmängel) as opposed to flaws in the product itself (Sachmängel) are generally eliminated under the new law.

Changes are made in the warranty obligations in the event of delivery of a defective product. § 437 BGB gives the purchaser the following remedies, which are similar to those under general contract law (sec. 4 above):

• As under prior law, the primary remedy is subsequent performance (Nacherfüllung). This can consist in rectification of the defect or delivery of a defect-free substitute product (§ 439 BGB).
• Rescission (§ 440 BGB).
• Reduction in price (§ 441 BGB)
• Damages (§ 442 BGB)

New § 474 ff. BGB shifts the burden of proof from the buyer to the seller with respect to consumer warranty claims against commercial sellers.

New § 443 BGB regulates the purchaser's rights in the event the manufacturer or seller guarantees characteristics or product durability over and above the basic warranty.

As noted above, the warranty period is extended from 6 months to 2 years.

Each seller is given a right of recourse against its respective supplier in the event the buyer asserts warranty claims against the seller. This right of recourse is available to every distributor in the chain of delivery and is subject to a special statute of limitations.

German law distinguishes between purchase contracts, where the seller is required to deliver the purchased item, and works contracts, where the contractor is required to achieve a specific contractually defined result, e.g. by constructing a building, modifying a machine, or designing a computer programme for a specific purpose. The changes in the law governing works contracts include the following:

• The concept of a defective work under works contract law has been aligned with that of a defective product under purchase contract law.
• The customer's rights in the event of defects in the commissioned work have been aligned with the buyer's rights in the event of a defective product under purchase contract law (subsequent performance, self-rectification, rescission or reduction in contract price, damages or reimbursement for useless expenditures).
• See sec. 3 above regarding the statute of limitations.

New § 312e BGB implements the EU E-Commerce Directive (2000/31/EC) in conjunction with the revised version of the German electronic signature law. Businesses that offer to enter into contracts by electronic means must configure their systems to meet certain requirements so that the counterparty is aware at what stage a contract is concluded and can cancel the transaction or make corrections in the agreed terms prior to crossing this threshold. Certain information must be provided to the counterparty and receipt of the counterparty's order must be immediately confirmed by e-mail. Breach of these obligations can render the business liable in damages and/or permit the customer to void the contract.

All businesses should review their contracting procedures in light of the new legislation. General terms and conditions should be a particular area of focus. This article sketches the broad contours of the voluminous new legislation and is not intended as a substitute for legal counsel.

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. KPMG Germany in particular insists that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note that the article is current only through its editorial cut-off date shown immediately above (not to be confused with the later date as of which the article was placed online – the date appearing at the article's outset). Related developments subsequent to the editorial cut-off are not necessarily reported on in later articles. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While KPMG Germany's articles are carefully reviewed, it can accept no responsibility in the event of any inaccuracy or omission. Any claims nevertheless raised against KPMG Germany on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Germany (KPMG Deutsche Treuhand-Gesellschaft AG). No use of or quotation from the article is permitted without full attribution to KPMG Germany and the article's stated author(s), if any. Distribution to third persons is prohibited without the express written consent of KPMG Germany in advance.