Significant Revisions to the German Civil Code Affect Contracts of U.S. and Other Companies

Download IconDownload Print IconPrint

Significant Revisions to the German Civil Code Affect Contracts of U.S. and Other Companies

Publication

Related Solutions

We help companies protect data, comply with evolving regulations, and respond to investigations and litigation.
Insightful guidance for clients navigating the ever-complex global economy.
We leverage technical knowledge, business acumen and legal experience to structure, prepare and negotiate innovative and effective technology-related agreements.
For companies in the life sciences sphere, licensing intellectual property and establishing strategic alliances are critical. WilmerHale’s experienced licensing lawyers shepherd biotech, pharmaceutical, healthcare and medical device clients of all sizes through the complex transactions that make their businesses possible, including a broad range of licensing, collaboration, strategic alliance and joint venture agreements. Our attorneys also excel at brokering manufacturing and supply agreements, contract research and development agreements, distribution and commercialization services agreements, and material transfer and confidentiality agreements. They also frequently represent life sciences clients as they license patents—often the foundations of their companies—from, and sponsor research at, leading academic institutions across the United States and Europe. Backed not only by their own experience but also the deep well of knowledge possessed by the firm’s patent, tax, antitrust and EU competition lawyers, our transactional attorneys are ready to handle even the most multifaceted matters. Our team helps clients protect their innovations, forge strategic alliances, and successfully navigate a complex, dynamic industry.
Our clients in the ever-changing and fiercely competitive hardware, software, IT and services industries depend on us to strategize and negotiate transactions that take advantage of opportunities now while protecting their innovations and preserving flexibility for the future. We structure, negotiate and draft all types of licensing, distribution, product development, joint venture and strategic alliance agreements for these clients, often drawing on the deep experience of WilmerHale’s unique capabilities in regulatory, intellectual property, corporate and tax law. We represent both mature and emerging companies with business models centered around offering software and/or professional services relating to analyzing and extracting insights from large data sets. We frequently draft and negotiate data license agreements, software-as-a-service (SaaS) agreements, website terms and other services agreements in which data is the core subject of the license. We also advise technology clients on big data issues that arise in outsourcing, joint venture and other transactional matters. Our attorneys keep a close watch on internet-related legislative and regulatory developments in the United States, the European Union and elsewhere, and leverage our up-to-the-minute knowledge to advise clients in areas such as data privacy and security, copyright infringement, and export restrictions.

Amendments to the German Civil Code which came into effect on January 1, 2002 implemented the most significant changes in German business law in 100 years. These changes will affect the ways in which U.S. and other companies buy and sell goods and services to German companies, both online and through more traditional channels. These changes also affect employment contracts between U.S. and other companies with their German employees.

As a result of those changes:

  • Standard types of agreements (e.g., license or distribution agreements, general terms and conditions of purchase or sale) used by companies may have to be updated in order to conform to the revised statutory provisions.
  • Existing contracts requiring continuing performance (e.g., employment, credit or lease agreements, as well as master service or supply agreements) must be amended to conform to the new legislation by no later than December 31, 2002.
  • The statutory interest rate that may be charged with respect to a defaulting party has been increased considerably.
  • Companies engaged in e-commerce must make certain changes in the way they offer their goods and services online.

The Amendments, Sections 194 through 218 and Sections 241 through 853, (the “Amendments”) are currently available only in German. The German Federal Ministry of Justice will make an English version available later this year. If you are interested in the English text, please contact Dr. Christian Breuer or Peter Kremer, who will forward that text to you when it becomes available.

We have briefly outlined below several of the significant changes effected by the Amendments:

1. Contractual Warranty

Right to “cure” breaches of warranty adopted

Previously, German law provided no right to “cure” a breach of warranty. Statutory provisions discussed only a buyer's right to rescind or receive a reduction in the purchase price. As a result, most parties included provisions in their standard terms and conditions creating a contractual right of cure.

The right of cure has now been expressly recognized in the Civil Code. The defaulting party must now be given an adequate period of time to cure a warranty default. Only if the default is not cured in a timely manner is the injured party entitled to exercise other warranty rights (e.g., seeking damages, a reduction of the price or rescission of the agreement).

Extension of warranty periods

The statutory warranty period, which applies when the contract itself does not specify a different warranty period, was extended to two years, compared to six months under the former law. There are certain legal restrictions with regard to shortening this period by mutual agreement and by means of General Terms and Conditions.

Reminder Notices

As was the case before the Amendments, an invoice that is unpaid 30 days after receipt is automatically in default, without the necessity of a reminder notice. However, an invoice addressed to individual consumers must now notify the consumer that the invoice will be in automatic default if not paid within 30 days.

Increase of statutory interest rate for default

The statutory interest rate payable by defaulting individual consumers has been raised to 5% above the so-called “basic interest rate,” which is set from time to time by the German Central Bank. (currently 2.57%), or 7.57%. In all other cases (i.e., commercial contracts), the statutory interest rate has been raised to 8% above the basic interest rate, or 10.57%. This interest rate may be varied by the express agreement of the parties in any specific contract, but may not be varied in a general manner, for example by a company’s General Terms and Conditions.

Reversal of burden of proof

The Amendments did not alter the liability of a defaulting party who has intentionally or negligently breached an obligation. However, the Amendments now require that the defaulting party prove that the breach was not due to an intentional or negligent action of its side, whereas previously the burden of proof was on the non-defaulting party.

2. Statute of Limitations

The Amendments have altered many of the applicable limitations periods. In most cases, a 3-year statute of limitations will apply, commencing at the end of the calendar year in which the non-defaulting party becomes aware of the circumstances giving rise to a claim.

3. E-commerce

The Amendments have introduced detailed new statutory obligations concerning electronic commerce that will affect the way e-commerce companies do business with consumers. For example, an individual consumer has a right to rescind an electronic agreement within the first 2 weeks. If the consumer is not specifically informed of this rescission right, then the right of rescission is extended to 6 months. On this point, the Amendments are implementing the European Union's Distance Sales Directive. For a discussion of the EU's Distance Sales Directive and its other Internet directives on e-commerce, see our March 14, 2000 and August 10, 2000 Internet Alerts.

4. Employment law

As a result of the Amendments, employment agreements are now subject to the stringent provisions of Sec. 305 et seq. of the German Civil Code (formerly the law on General Terms and Conditions). These general terms and conditions may now override provisions contained in existing employment agreements.

Conclusion

This is only a brief summary of several of the numerous important changes effected by the Amendments. For companies doing business in Germany, it is likely that these changes in the Civil Code will require changes in their existing contracts and business practices. While contracts requiring continuing performance must be amended by December 31, 2002 in order to comply with the Amendments, a company's other contracts and practices should be amended even earlier if that company wants to minimize any adverse effects of the Amendments on its business.

Notice

Unless you are an existing client, before communicating with WilmerHale by e-mail (or otherwise), please read the Disclaimer referenced by this link.(The Disclaimer is also accessible from the opening of this website). As noted therein, until you have received from us a written statement that we represent you in a particular manner (an "engagement letter") you should not send to us any confidential information about any such matter. After we have undertaken representation of you concerning a matter, you will be our client, and we may thereafter exchange confidential information freely.

Thank you for your interest in WilmerHale.

I Accept Cancel