When you negotiate agreements between German companies and companies with a – broadly speaking – common law background, especially the U.S., one issue that keeps appearing is the parties’ liability for damages. Groundhog day, if you will.
“Liability” is certainly a difficult legal term to being with, especially as you have to first decide what you are actually talking about when using the word. For the purpose of making it easy (easier than it is, of course), let’s look at the word not in its “responsibility” sense, but in terms of the German word “Haftung” (which is as close as it gets to “liability”), and as far as “Haftung” is concerned in terms of suffering monetary damages and resolving the liability/Haftung by paying damages.
Let me explain – in extremely summarized fashion – how liability for damages and the corresponding claims work in German statutory law:
First, there needs to a breach of an obligation or duty that exists for the benefit of another party (“obligation” and “duty” used in the broadest possible sense). It may be the breach of a contractual obligation, or a violation of someone else’s (usually you contracting partner’s) statutory rights (such as, for instance, copyright and the right not be physically injured).
Second, that breach must have to led to a financial loss. You need to establish causality (in line with the concept of “proximate cause”, more or less) and an actual financial loss. Those two points lead to various important consequences:
- “Causality” means that the liability for damages not only extends to direct damages but to every financial loss caused by the respective act or omission and reasonably foreseeable for a person of average understanding, including, for example, loss of profit.
- “Actual financial loss” means that you can recover everything that you have actually lost/had to pay or did not gain (hence lost profits) as a result of the respective act or omission – but no more. There are very few areas of law that allow for a monetary compensation of other aspects (such as particularly grave libel and/or breach of privacy cases and cases of severe personal injury/pain, the courts being very careful with the amounts they award, if at all). As a result, there are no such things as punitive damages or statutory damages in Germany. In other words: Damage awards may never have the purpose of punishing the defendant. Damages may not even be awarded to provide an incentive (except where the parties have specifically agreed on contractual penalties for certain failures to perform). On the other hand, aside from product liability law there is no form of “cap” for the amount of damages that may be awarded.
Third, there are only few cases in which a claim for damages does not at least require negligence on the part of the defendant. Exceptions that matter are very few and far between (e.g. in product liability cases (even though, product liability in way always requires a certain “organizational negligence”) as well as in cases of a “guarantees proper” (the legal meaning of the German word “Garantie” is a different and rather difficult story of its own).
Forth, as claimant you will have to prove the actual amount that you have lost or did not gain as result of the respective act or omission, which can be very, very difficult (think of, say, “image loss” or potential customers that you had courted but are now gone).
That is the statutory legal background for drafting liability clauses in German law – or part of it, that is. Whereas you can agree to almost anything with regard to liability in individually negotiated agreements, that is not the case for standard contract terms that companies use in their dealings with consumers and other companies. Such contracts, or rather the clauses in such contracts, are subject to the so called “content control” (for lack of a better translation) of sections 305 et seqq. (in particular section 307) of the German Civil Code. As already explained in an earlier post on this blog, “standard terms and conditions” will only be valid if they are not “unreasonable disadvantageous” for the other contracting party.
That makes drafting liability clauses for standard contracts a very tricky business.
First, there is the law and what the courts have made of it, starting with the specific provision of section 309 No. 7 which reads:
“Even to the extent that a deviation from the statutory provisions is permissible, the following are ineffective [“invalid”would have been the better translation], in standard business terms:
7. (Exclusion of liability for injury to life, body or health and in case of gross fault [read “negligence” instead of “fault”]
a) (Injury to life, body or health) any exclusion or limitation of liability for damage from injury to life, body or health due to negligent breach of duty by the user or intentional or negligent breach of duty by a legal representative or a person used to perform an obligation of the user;
b) (Gross fault) any exclusion or limitation of liability for other damage arising from a grossly negligent breach of duty by the user or from an intentional or grossly negligent breach of duty by a legal representative of the user or a person used to perform an obligation of the user;
letters (a) and (b) do not apply to limitations of liability in terms of transport and tariff rules, authorized in accordance with the Passenger Transport Act [Personenbeförderungsgesetz], of trams, trolley buses and motor vehicles in regular public transport services, to the extent that they do not deviate to the disadvantage of the passenger from the Order on Standard Transport Terms for Tram and Trolley Bus Transport and Regular Public Transport Services with Motor Vehicles [Verordnung über die Allgemeinen Beförderungsbedingungen für den Straßenbahn- und Obusverkehr sowie den Linienverkehr mit Kraftfahrzeugen] of 27 February 1970; letter (b) does not apply to limitations on liability for state-approved lotteries and gaming contracts;”
So that clause alone greatly limits your wiggling room in drafting a clause. Add to this sections 309 No. 5 and No. 6 on liquidated damages and contractual penalty clauses and your hands are already significantly tied before you even get to the general “unreasonably disadvantageous” test of section 307.
That test takes away any of the remaining fun of drafting a valid liability clause. There is relatively ample jurisdiction on standard liability clauses that in the end – in my words, mind – effectively leave one with no room to draft a standard liability clause that effectively limits one’s client’s liability were it really matters. You can work around the fringes, as it were, but no more.
Second, as a contract lawyer’s job is to deal with it and come up with a solution for the client that is better than saying “sorry, can’t do anything about that, it’s the law” you have to ask yourself: Can yo do something about it?
Well, sometimes, and to an extent, you can try to anticipate typical situations from which damage claims may arise, depending on the individual client’s business and products. If, for example, your client’s business involves directly dealing with customer IT (e.g. when installing/implementing/maintaining software in situ or via remote access) you may try to insert a clause to the effect that the customer is/remains solely responsible for making proper, industry standard backups of his data. If that clause is not itself “unreasonably disadvantageous” (and not “surprising within the meaning of section 305 c of the German Civil Code) then the client will, if at all, have only a limited liability for a large-scale data loss, as the customer will bear at least a significant part of the blame.
More important, though, I thinking about whether it makes sense for the client to actually work with an invalid liability clause in his standard contract form. That is because a standard term in a standard contract looses its quality as a “standard term” within the meaning of section 305 of the German Civil Code, and thus falls outside the scope of sections 305 et seqq., if the parties in the end actually negotiate on the liability clause. If, in the experience of the client, the customers never just sign the contract but want to discuss and negotiate at least the “major” clauses (of which the liability clause is generally one) then the client is obviously much better off when starting negotiations with a rather restrictive (if invalid) liability clause. Or, put the other way around: If you start with a valid clause that does nothing to effectively limit liability, you do not have anything to negotiate with. That approach does not work with consumer contracts, of course, but is certainly worth considering with B-to-B products.
All those considerations just go to show, though, that the German law approach to liability and liability clauses leads to an almost completely different set of contract drafting problems than you generally experience with U.S. Style contracts. However, when you localize U.S. or UK style contracts into German law, or you just negotiate contracts with German clients, you cannot avoid them.