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 statutes which can render void any agreement or deed drafted by a naive British or US lawyer being unfamiliar with the specifics of codified German Civil and Commercial Law.
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 cancellation (written notice) is handed to the employee, tenant, business partner etc? Giving 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 gives his or her consent? Or have you heard about the German legal principle that a confirmation of contract (kaufmännisches Bestätigungsschreiben) sent from one merchant to the other becomes a binding contract if the confirmation letter is not immediately contradicted by the other party? 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)!
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. 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 constituent 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 if the recipient thus 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 now comes too late because the notice period has been missed due to an invalid letter of termination. In our firm, we have hade numerous cases where an agreement, which could only be terminated every 5 years, prolonged for such perid, because a lawyer or another representative of one contractual party tried to terminate 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 to the letter. If this is unpracticable 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 desastrous effects for one or even both contractual parties if overlooked during negotiations. In simple language, 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 sounds 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 life 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? 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 sale deed is not valid unless the other spouse co-signs the notarial deed. 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 jursidictions, German Civil Law does not apply the last shot doctrine when it comes to general terms and conditions. Instead, if parties reject each others general terms, then neither terms do 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 laws do apply 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 your 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 intgo existence without you ever signing a piece of paper.
- 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 coudl 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 debts is only EUR 5,000 and the lawyer ha sto 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 subsidise 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 ……
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Experts on German-British and German-American Legal Matters
Since 2003, the German law firm Graf Partners LLP with its headquarters in Munich specialises in British-German and US-German legal cases. Our German lawyers are fluent in English, have many years of practical experience with clients from Britiain and the USA and are part of a well established network of law, tax and accounting firms.
Managing partner Bernhard Schmeilzl was admitted as German Rechtsanwalt (attorney at law) to the Munich Bar in 2001 and specialises in international cases ever since, especially German-American and German-English commercial and probate cases. In addition to obtaining his German legal exams with distinction, he also graduated from the English University of Leicester where he obtained his Master of Laws degree in EU Commercial Law in 2003. But do not mistake Bernhard for a German lawyer who focuses merely on German-British legal matters.
In 2014, Graf Partners LLP has set up the international litigation department GP Chambers which focuses on providing professional litigation services to British and US-American clients, both on a commercial and a private client level. The Graf Partners litigation lawyers regularly appear before German law Courts throughout the country and provide specialist legal advice, support and advocacy services in all commercial and civil law matters, ranging from contract disputes, corporate litigation and employment, to damage claims, divorces and contentious probate. If you wish us to advise or represent you in a German or cross border case, or if you need an expert report on German law, please call +49 941 463 7070.