Spotlight: breach of contract claims in Germany

Bizar Male

All questions

Breach of contract37

Breach of contract means non-compliance with a contractual obligation.

Contractual obligations come in different types: (1) main performance obligations, which determine what kind of contract the parties have agreed (e.g., to deliver and hand over a steam turbine in a sales contract); (2) ancillary performance obligations (e.g., to provide instructions on how to operate the turbine); and (3) ancillary obligations to take account of the rights, legal interests and other interests of the other party (e.g., to inform the purchaser about possible health issues from turbine operation). Breach of any type of these obligations can give rise to claims.

When determining breach, German law does not distinguish between material and non-material breaches. Even minor breaches may give rise to damage claims (if the injured party can prove causation). Some remedies, however, require that the breach crosses a certain materiality threshold. This may be true, for example, with the right to terminate a joint venture agreement for cause.

The burden of proof for breach is largely on the claimant’s side. As a rule, the claimant must prove and establish breach, damage, and causality. If breach is established, however, it is upon the defendant to prove absence of fault. In addition, depending on the specific issue at hand, claimants may be able to rely on various types of prima facie evidence or factual presumptions from case law or statutory law. Such presumptions may, for example, apply where claimants seek to establish that specific purchases of theirs were affected by cartel infringements, a subject matter that is addressed in a growing body of case law and may be further developed in the upcoming competition law reform.

Defences to enforcement

German law provides numerous possible defences against breach of contract claims. A few are discussed below by way of example. Some of these defences will be considered by courts ex officio; others must be explicitly raised by the defending party.

i Prescription

The latter is true for the assertion that a claim is time-barred. The general limitation period is three years and begins at the end of the year in which the claim arose and the obligor became aware of the facts giving rise to the claim. Even if the obligor does not become aware of these facts, claims become time barred 10 years after arising.

As a result, limitation periods will often end on 31 December. Shorter limitation periods may follow from statutory law in some cases (e.g., buyers’ claims resulting from defective goods: two years as a rule) or from agreements to that effect. Unlike the principles of European contract law, German statutory law does not prescribe a general minimum limitation period.

Limitation periods can be suspended in particular if the parties are negotiating about the respective claim, or if one party has commenced court proceedings (whether at the state courts or in arbitration). For cartel damage claims, the limitation period is suspended as long as antitrust authorities are investigating the matter.

To avoid unnecessary disputes about what actions constitute negotiations, parties can explicitly agree on extending limitation periods to find time for amicable solutions. Otherwise, as a party cannot be forced to negotiate, taking the dispute to court will usually be the only way to guarantee suspension of the limitation period.

ii No valid contract

When claiming for breach, claimants must establish (and, if necessary, prove) that there is a contract. Defendants may then argue that the contract is invalid as a matter of law. There are several reasons why this could be the case – including lack of proper representation of one party at contract formation, breach of formal requirements, or breach of public policy.

Defendants may also try to declare their statement of intent void. They may be entitled to do so if they had erred with regard to the meaning of their declaration, with regard to essential characteristics of the product, or in cases of deceit, or in cases of duress.

iii Impossibility

For performance obligations, defendants may argue that performance is impossible – objectively or subjectively, legally or factually. In a related mnner, defendants may also argue that performance requires an effort that would be grossly disproportionate to the claimant’s interest in performance (a common example from textbooks is a jeweller’s obligation to deliver a wedding ring that fell into the ocean).

If argued successfully, impossibility will free defendants from their performance obligation. Whether they are liable for damages is a different matter, and a question of contractual risk allocation. Damage claims for monetary compensation are not affected by the impossibility defence. In other words: a party may not escape damage claims by arguing that it has no money, unless it is ready to file for insolvency.

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