Pitfalls of German Contract Law and German Company Regulations (Part 1)

Foreign Contract Lawyers beware of surprising German Laws and Directives!

The German Civil Code (Bürgerliches Gesetzbuch, BGB, available in English), the German Commercial Code (Handelsgesetzbuch, HGB, partly available in English), the German Act on Corporations (Aktiengesetz, AktG) and the Act on Limited Liability Companies (GmbHG, available in English) are all full of surprising regulations which can essentially void any agreement or deed drafted by a naive (in the nicest sense) British or US lawyer who is unfamiliar with the specifics of codified German Civil and Commercial Law. Therefore, this article is to make you aware of some of the dangerous pitfalls that you can face when entering into a German agreement. In this post we explain some peculiarities of German contract law which, if not known, can cost non-German in-house lawyers their job and can create liability risks for any foreign contract lawyer.

Some examples? Sure: Did you know, for instance, that giving notice under German law is usually only legally effective, if an original wet ink copy of the letter of termination (written notice) is handed to the employee, tenant, business partner etc? Providing notice by email, fax or orally, has not effect. Or, did you know that under German family law rules, contracts entered into by one spouse are not valid unless and until the other spouse provides his or her consent? Or have you heard about the German legal principle that a unilateral confirmation of contract letter (kaufmännisches Bestätigungsschreiben) sent from one merchant to the other becomes a binding contract if the confirmation letter is not immediately rejected by the recipient of the letter? You may agree, that this is probably rather helpful information if you are dealing with a German contractual partner or if you are the legal counsel of the non-German contractual party.

Don’t be tricked by German Law(yers)!

The following clarifies some statutes and German legal principles any British Solicitor, American Attorney-at-Law and non-German businessman should know before engaging in business in good old Germany:

 

• Section 174 German Civil Code: Requirement to present an original wet ink copy of a power of attorney

This statute baffles not only many foreign lawyers (especially from Common Law jurisdictions), but is also often unknown to young German contract lawyers. Section 174 BGB is contained in the “general section” (allgemeiner Teil) of the German Civil Code, which means it applies to all areas of German civil law. In practice, the statute’s somewhat cryptic wording means that if someone acts as attorney, proxy agent or delegate for somebody else, the attorney must present the original, i.e. the wet ink copy of the power of attorney document signed by the constituent (principal). A simple copy, a fax or a scan are not sufficient. The consequences of breaching this law are particularly severe in the area of “unilateral legal acts” (einseitiges Rechtsgeschäft), i.e. if the attorney gives written notice to someone on behalf of the individual or company, or if the attorney sends out a demand note, a dunning letter or a cease and desist letter. All these legal actions have no effect if the attorney does not enclose an original (wet ink) power of representation document (and thus, if not, the recipient can and in most circumstances rejects the letter). Naturally, such notices and legal actions are often made by lawyers for their clients. Thus, the client will not be amused if it turns out that the lawyer’s written notice to the unwanted employee is ineffective for lack of an original power of attorney document. Or if the termination of an agreement is rendered to be too late because the notice period has been missed due to an invalid letter of termination. In our firm, we have have had numerous cases where an agreement, which could only be terminated every 5 years, prolonged for such a period, because a lawyer or another representative of one contractual party tried to terminate the said German agreement without presenting an original POA.

So, what to do as a lawyer? Well, best is to obtain an original POA from the client and enclose it in the letter. If this is not practical or would take too long, then an easy trick to circumvent section 174 German Civil Code is to ask the client to inform the opponent in Germany directly about the fact that the lawyer has been instructed to act on the client’s behalf (see the last sentence of the statute: “Rejection is excluded if the principal notified the other of the authorisation”). For this, strangely, German law does not require written form, so an email or fax from principal to opponent is sufficient. The law is not always entirely logical!

 

• Section 181 German Civil Code – A very dangerous statute for foreign lawyers

This brief statute appears quite harmless, but can have disastrous effects for one or even both contractual parties if overlooked during negotiations. Simply put, this statute means that an agent (anyone authorised by someone else to act on his behalf, in German a Vertreter) can and may not – at the same time – act (i) in his or her own name or (ii) as agent for another party. May sound cryptic, but does often happen in practice, as you can see from these examples: (1) A managing director of a German company wishes to invest in the company or wishes to buy an asset of said company for himself. (2) A managing director of a company is asked by an investor to represent the investor at a meeting.

 

• Section 1365 German Civil Code: Consent of spouse is required for certain transactions

Believe it or not: Regardless of which marital property regime you live in, under German law one spouse cannot enter into contracts without the express consent of the other spouse if the contract covers the vast majority of one’s fortune. Sounds cryptic again? Well, here is an everyday example: A husband owns property which is worth more than 80 or 90% of his entire fortune. If he wishes to sell this property, the deed of sale is not valid unless the other spouse co-signs the notarial deed providing their consent to the same. The same is true if one spouse tries to sell a business or another asset which constitutes the majority of that spouse’s fortune.

As a purchaser of German property or of the shares of a German company owned by that spouse you would probably like to know if that asset makes up the vast majority of that person’s wealth and you would want to make sure that the spouse does agree to the transaction. Otherwise, the deal could explode years later.

 

• Contradicting General Terms (AGB), no “last shot doctrine”

In contrast to most Common Law jurisdictions, German Civil Law does not apply the last shot doctrine when it comes to general terms and conditions. Instead, if parties reject each other’s general terms, then neither terms apply to the extent they contradict each other. Instead, the default statutory provisions apply. This can lead to significantly different results depending on whether German or British or US law applies to a business transaction.

 

• Confirmation letter between merchants (“kaufmännisches Bestätigungsschreiben”)

Another speciality of German commercial law is the so called “kaufmännisches Bestätigungsschreiben”, i.e. the confirmation letter between merchants. This legal principle of German law means that if merchants orally discuss a deal or transaction, and one party does confirm what that party believes the oral agreement was, then the content of the confirmation letter becomes legally binding unless the other party rejects the content of the confirmation letter without undue delay (ohne schuldhaftes Zögern), which in practice means 2-5 business days. Thus, if you are doing business with Germans, do not ignore letters you receive from the German business partner, even if you think that what they “confirm” in that letter is nonsense. A binding contract can come into existence without you ever signing a piece of paper or expressly re-confirming the terms.

 

• How expensive are German lawyers? What is the Rechtsanwaltsvergütungsgesetz (RVG)? Fee agreement clauses of German lawyers with their clients

Clients and lawyers from outside Germany usually assume that legal fees need to be agreed on when they hire a German legal counsel and – until they sign a fee agreement – they do not enter into any financial obligations. You could not be more wrong. Because, to the surprise of many non-German clients, lawyer fees are regulated by statutory provisions. These fees can be significantly higher or lower compared to hourly rates in Common Law jurisdictions, because the German lawyer fees do depend on the value of the legal dispute, not so much on the amount of time spent on the case. So, if you hire a German lawyer because a debtor does not pay a debt worth EUR 500,000, the German lawyer writes one short letter and the debtor immediately pays, then the German lawyer has earned legal fees of approximately EUR 5,000 in spite of having only spent 30 minutes on the case. If the debt is only EUR 5,000 and the lawyer has to write numerous letters, make dozens of phone calls until the debtor pays, then the German lawyer earns only EUR 350, in spite of having spent 3-5 hours on the case. The thinking behind this German lawyer fee table is that the wealthier German clients shall pay higher fees and shall thus subsidize the legal costs of clients who claim only small amounts. In theory, on average it will level out for German lawyers. In practice, however, qualified German lawyers, especially experts in international law, will not accept a case unless the client is willing to pay hourly fees comparable to those in Britain and larger cities in the USA. More on the issue of German legal fees and lawyer remuneration here.

To be continued ……

– – –