Contract law in focus: a look at current judgements and legal reforms

This overview includes case law since mid-2022 and provides an overview of legal amendments that have a practical impact on national and international contracts.

Insolvency-based rescission clauses

The German Federal Court of Justice (Bundesgerichtshof) (FCJ) (judgment dated 27 October 2022 – IX ZR 213/21) has clarified its case law on insolvency-based rescission clauses. An insolvency-based rescission clause is a clause that entitles a contracting party to rescind the contract based solely on the other party’s inability to pay or insolvency. The dispute regarding the validity of such clauses arises from the delicate balance between contractual freedom on the one hand and the protection of insolvency assets under section 103 and following of the German Insolvency Code (Insolvenzordnung), especially insolvency administrators’ right to choose to continue contracts, on the other.

The FCJ’s decision was in regard to a case in which a transportation contract was terminated with immediate effect for cause based on an insolvency-based termination clause after a preliminary insolvency administrator had been appointed. The lower court had assumed that the insolvency- based termination clause was invalid because the clause was not covered by any rescission option found in the applicable law. The FCJ did not concur with this reasoning but instead clarified that such rescission clauses may be valid if they pursue a legitimate goal under insolvency law.

This decision has established a guideline that a rescission clause is invalid if it entitles a party to rescind a contract based solely on the insolvency of the other party and differs from the options to rescind provided by law although no justified grounds for these differences existed when the contract was signed. As a result, the FCJ has consistently ruled that insolvency-based rescission clauses in favour of the party to which payment is owed are invalid because the payment recipient has sufficient possibilities to protect itself in the form of rights of retention provided by law.

Thus, conversely, this opens up options for recipients of goods and services to draft valid rescission clauses in their favour. Because the FCJ has not made any sweeping statements in this regard, this will depend on the circumstances of the specific case, particularly whether the purpose of the termination right agreed is to pursue a legitimate goal under insolvency law or whether the risks associated with insolvency constitute cause in any case within the meaning of the termination right provided by law (e.g. section 314 of the German Civil Code (Bürgerliches Gesetzbuch) or section 89a of the German Commercial Code (Handelsgesetzbuch)). For this reason, it may be advisable to state in the contract itself the reasons for including an insolvency- based rescission clause and to draft the clause to cover all circumstances.

Including a place of jurisdiction clause using a hyperlink

The European Court of Justice (ECJ) (judgment dated 24 November 2022 – C-358/21) considered the issue of whether a jurisdiction clause included in standard terms and conditions of business (T&C) is valid if it is only included in the written contract by reference to an embedded hyperlink. The main issue in the proceedings was whether such a clause that can be accessed online can be deemed to be a durable record equivalent to “writing”. According to the Brussels I Regulation (recast) 1215/2012 (and the parallel provision in the Lugano Convention), compliance with this formal requirement is necessary in order for a valid agreement on the international standing of a court to hear a case to come about.

This decision is consistent with the ECJ’s history of technology-friendly case law. In 2015, when ruling on entering into contracts online, it decided that it is sufficient if the T&C are accessible via a hyperlink and their validity has been accepted by clicking on a button displayed for that purpose. In this current decision, the ECJ has expanded the option of using a hyperlink to include contracts signed in writing.

Using a hyperlink to include T&C opens up opportunities but also new challenges. For example, the company that issues the T&C must document the availability and the version provided. For the other contracting party, this means increased due diligence because they will need to review and comply with linked documents.

Subsequent exclusion of the UN Convention on the International Sale of Goods (CISG)

Munich Higher Regional Court (OLG München) has held (guidance order dated 12 December 2022 – 7 U 4810/21) that the applicability of the CISG can be excluded either expressly or implicitly not only when a contract is entered into but also subsequently if it is sufficiently clear that both parties intended this. The background to the order was a dispute between a dealer in the Netherlands and a dealer domiciled in Germany regarding the effectiveness of the rescission of a purchase contract for electric vehicles. Without a contractual clause to the contrary, the rules of the CISG would have been automatically applicable to this cross-border case. Munich Higher Regional Court discerned a tacit exclusion of the CISG from the fact that the parties based their arguments during the court proceedings solely on the German Civil Code.

This case shows that, in the absence of a contractual clause, the courts were able to assume throughout the entire oral hearing that the CISG had been excluded. Consequently, parties to such contracts are well advised to consider the opportunities and risks of the CISG either when entering into the contract or, at the latest, in the context of a court case.

No-fault B2B vendor liability

The FCJ (judgment dated 21 June 2023 – VIII ZR 105/22) reached a decision on a purchaser’s right to claim no-fault reimbursement of its expenses in the context of supplementary performance. The dispute regarded reimbursement of the expenses incurred for prefabricating and connecting defective stainless steel pipes. This means that the subject in dispute was not the installation of the defective item per se. The FCJ awarded the purchaser the reimbursement claimed, noting that reimbursement of expenses was to be interpreted in a purchaser-friendly manner and that the right to claim it already existed when a defect in the purchased item became apparent during the prefabrication process and thus prevented the installation process from being completed. As long as the purchased item was not inseparably connected to another item, the claim was not defeated by the fact that a new item was created during the installation process, the court stated. In accordance with the express legislative intent, the FCJ made no distinction between B2B and B2C transactions.

The broad interpretation of the term “installation” of an item leads to a high risk of a seller of materials from which new products are manufactured at great expense being exposed to no-fault liability. This makes it necessary when drafting contracts to carefully consider the extent to which contractual rights to claim reimbursement of expenses can be restricted and how recourse and indemnity options can be secured within (international) supply chains.

Outlook

At the European and national levels, there are several legislative initiatives that will influence contract drafting and dispute resolution.

The German federal government plans to make Germany more attractive as a place of jurisdiction by establishing commercial courts (Bill to strengthen Germany as a place of jurisdiction, Parliamentary Publication 20/8649 (Entwurf über ein Justizstandort-Stärkungsgesetz - only in German). The commercial courts are to be able to rule on first-instance civil commercial cases with claim values starting at €1 million if the parties have agreed to this. It will be permissible to conduct the proceedings in English or German. This bill aims to create quick, efficient and attractive court proceedings to strengthen Germany as a place of jurisdiction and commerce and further develop its civil law. Additional advantages are intended to be specialised judges, comprehensive protection of business secrets and litigation costs that are lower than those for conventional civil proceedings due to the option of bypassing the first instance.

The German Federal Ministry of Justice has also drafted a bill that would make video proceedings in civil cases more flexible and easily accessible. In the future, a court is to be able to not only allow digital proceedings but also to order them on its own initiative (for example to expedite the proceedings). In addition, the requirements for rejecting an application for video proceedings are to be increased. After the Bundestag (lower house) passed the draft, the Bundesrat (upper house) referred the bill to the mediation committee, making it unclear whether and, if it is passed, when the law will enter into force (Bill to promote the use of video conference technology in the civil and specialised court systems (Entwurf über ein Gesetz zur Förderung des Einsatzes von Videokonferenztechnik in der Zivilgerichtsbarkeit und den Fachgerichtsbarkeiten), Parliamentary Publication 20/8095).

At the European level, the European Commission is planning to combat late payment in commercial transactions. It has published a proposal for a new late payment regulation to protect companies from the negative effects of late payments (European Commission, Proposal for a regulation of the European Parliament and of the Council on combating late payment in commercial transactions). The key aims of the current proposal are to limit periods for payment and acceptance and inspection periods to a maximum of 30 days and to make default interest fall due automatically.

 

This article is part of the "Update Commercial 2024". All insights and the entire report as a PDF can be found here.