No Escape? – Navigating the Rocky Terrain of German General Terms and Conditions Law

I. Introduction and Facts

The background to the decision of the Higher Regional Court of Düsseldorf was an action for payment of a contractual penalty of EUR 380,000 from cease-and-desist declaration issued by the defendant. The Higher Regional Court of Düsseldorf overturned the judgement to pay the contractual penalty, as the contractual penalty promise in the form of the cease-and-desist declaration was invalid under German general terms and conditions law.

The cease-and-desist declaration drawn up by the plaintiff's lawyer with regard to patent claims concerning door closing hinges contained a contractual penalty of EUR 10,000 for each case of infringement and excluding the continuation of the offence, i.e. the waiver of a summary of suitable individual infringements without regard to a connecting overall intent, even in cases of negligent infringements by the party liable to pay the penalty. In the original it said:

"Upon pain of a contractual penalty of € 10.000.00 (ten thousand EUR) for each case of non-compliance - excluding the application of the continuation-of-offence clause - to refrain from [...]"

In addition, the original version of the cease-and-desist declaration contained further clauses on invoicing, compensation, destruction, legal fees and the place of jurisdiction. The defendant deleted these clauses, leaving essentially the duty to refrain, together with the penalty clause.

After the defendant had introduced a new door closing hinge in its portfolio, the plaintiff, relying on the cease-and-desist declaration with the penalty clause, successfully brought an action against the sale of the door closing hinges before the Regional Court of Düsseldorf. The defendant appealed to the Higher Regional Court of Düsseldorf.

II. The Higher Regional Court of Düsseldorf stated the following reasons for invalidity

• Classification as General Terms and Conditions: The Higher Regional Court of Düsseldorf dismissed a claim by the plaintiff as it categorised the contractual penalty clause as a standard form provision and rejected it as invalid due to unreasonable disadvantage (Sec. 307 para. 1 of the German Civil Code – BGB). The cease-and-desist declaration as a whole was considered to be a pre-formulated declaration for a large number of cases and therefore as general terms and conditions ("GTC" – AGB) (Sec. 305 para. 1 sentence 1 of the German Civil Code – BGB). This resulted from the fact that rights holders often have cease-and-desist declarations formulated for several cases and use legal templates, which speaks in favour of multiple use. According to the Higher Regional Court, this is already apparent from the external circumstances. In particular, in the case of templates pre-formulated by lawyers, the prima facie impression is already in favour of an intention of multiple use and thus in favour of classification as a standard form provision.
• Lack of individual agreement: The Higher Regional Court also denied that the contractual penalty clause had been negotiated in detail as an individual agreement (Individualvereinbarung) (Sec. 305 para. 3 of the German Civil Code – BGB). A clause remains a standard form provision even after significant deletions if the user of such standard form provisions does not leave the core content up for negotiation or does not leave the negotiating party any real flexibility to protect its own interests.

This was not the case here, as the individual clauses had to be analysed. Even in a contract that is predominantly structured as an individual agreement, certain provisions can be regarded as GTC. Particularly as the amendments and deletions made in the present case did not affect the core area of the cease-and-desist declaration and the penalty clause. On the contrary, its content remained unchanged without any discussion between the parties (e.g. by exchanging drafts).

As a result, the more likely it is that an unamended provision is the core of the contract, the more difficult it is to prove that the contract is designed as a single negotiated package that reflects the economic power play and expectations of the parties and covers all contractual terms.

• Unreasonable disadvantage: The contractual penalty agreement unreasonably disadvantaged the defendant, as it excluded the aggregation of individual breaches without allowing the possibility of aggregation in the case of natural unity of action. This contradicted fundamental principles of dispositive law and was considered unreasonable (Sec. 307 para. 1 of the German Civil Code – BGB). The exclusion of the continuation of the offence contradicted the requirements for the agreement of contractual penalties and constituted an abusive enforcement of own interests, which did not sufficiently take into account the interests of the defendant. In the opinion of the Higher Regional Court, the impossibility of aggregating individual breaches does not comply with the requirements of good faith and unreasonably disadvantages the contractual partner, as the aggregation of the individual penalties could result in an unreasonable total penalty amount.
• No splitting of the clause: The attempt to reduce the clause to a permissible level by deleting the exclusion of the continuation of the offence was deemed to be an inadmissible reduction to preserve the validity of the A splitting of the clause in the sense of a "blue-pencil test" was also ruled out, as the exclusion of the continuation of the offence is not an independent provision, but determines the scope of the contractual penalty.

III. Assessment

The decision of the Higher Regional Court of Düsseldorf provides valuable information for the practice of contract drafting and emphasises the strict requirements placed on the judicial distinction between individual agreements and GTC. The question arises individually for each contractual clause as to when it is deemed to be a GTC and is therefore subject to content review in accordance with Section 307 of the German Civil Code (BGB). Depending on the case, even the use of pre-formulated draft contracts by lawyers can give the impression that they are GTCs. Care must therefore be taken when drafting such clauses in order to avoid them being categorised by the courts as reviewable and possibly invalid clauses.

A key consequence of the decision is the need for serious and documented negotiations on each individual contractual provision in order to ensure an effective individual agreement. It should be noted that even seemingly individualised provisions can be assessed as GTC if they have not been demonstrably negotiated.

Furthermore, the decision shows that the Higher Regional Court of Düsseldorf considers the blue pencil test to be a strict exception to the prohibition of reduction in order to preserve validity. This means that parts of a clause cannot simply be deleted in order to save its effectiveness if these parts do not represent provisions that can be separated in terms of content. Clauses must therefore – as far as possible – be drafted in such a way that insertions, subordinate clauses or additions can be deleted without being an integral part of the specific structure of the clause. This strict approach is shared in part by other higher courts (Higher Regional Court of Frankfurt a.M., judgement of 23 July 2022, – 6 U 91/19; Higher Regional Court of Cologne, decision of 15 June 2010 – 19 U 53/10), which underlines the importance of precise contract drafting.

Irrespective of the distinction between GTC and individual agreements in a particular case, the decision of the Higher Regional Court of Düsseldorf was not surprising in the matter. It The Federal Court of Justice has consistently held that an unrestricted waiver of the defence of continuation of the contract in GTCs is invalid unless the waiver is justified by special interests of the beneficiary (Federal Court of Justice, judgement of 10 December 1992 – I ZR 186/90; judgement of 28 January 1993 – I ZR 294/90; judgement of 20 January 2016 – VIII ZR 26/15).

IV. Outlook

In practice, the decision of the Higher Regional Court of Düsseldorf means that precise documentation of the negotiation processes and a clear distinction between individually negotiated agreements and pre-formulated clauses are crucial in order to ensure legal effectiveness and minimise the risk of a legal challenge.

Even the recent introduction of (English-speaking) Commercial Courts into the German civil jurisdiction will not remedy this situation. In this respect, the international attractiveness of German courts remains a problem due to the strict controls on GTC in B2B contracts. A reform in this area could increase the competitiveness of Germany as a jurisdiction. Although the ability to conduct proceedings in English is an advantage, the substantive application of the law remains a key factor in the choice of jurisdiction.