Pitfalls of German Contract Law and German Company Regulations (Part 1)

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 regulations which can essentially void any agreement or deed drafted by a naive (in the nicest sense) British or US lawyer who is unfamiliar with the specifics of codified German Civil and Commercial Law. Therefore, this article is to make you aware of some of the dangerous pitfalls that you can face when entering into a German agreement. 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.

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 termination (written notice) is handed to the employee, tenant, business partner etc? Providing 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 provides his or her consent? Or have you heard about the German legal principle that a unilateral confirmation of contract letter (kaufmännisches Bestätigungsschreiben) sent from one merchant to the other becomes a binding contract if the confirmation letter is not immediately rejected by the recipient of the letter? 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)!

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:

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 individual or company, 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 thus, if not, the recipient can and in most circumstances 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 is rendered to be too late because the notice period has been missed due to an invalid letter of termination. In our firm, we have have had numerous cases where an agreement, which could only be terminated every 5 years, prolonged for such a period, because a lawyer or another representative of one contractual party tried to terminate the 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 in the letter. If this is not practical 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!

This brief statute appears quite harmless, but can have disastrous effects for one or even both contractual parties if overlooked during negotiations. Simply put, 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 sound 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.

Believe it or not: Regardless of which marital property regime you live 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 again? 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 deed of sale is not valid unless the other spouse co-signs the notarial deed providing their consent to the same. 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 jurisdictions, German Civil Law does not apply the last shot doctrine when it comes to general terms and conditions. Instead, if parties reject each other’s general terms, then neither terms 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 law applies 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 you 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 into existence without you ever signing a piece of paper or expressly re-confirming the terms.

  • 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 could 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 debt is only EUR 5,000 and the lawyer has to 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 subsidize 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.

Bernhard Schmeilzl_crop1Managing 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.

English Desk at German Law Firm Graf Partners LLP

Solicitor_SchmeilzlThe Munich and Regensburg based German law firm Graf & Partners LLP, established in 2003, specialises in providing professional legal services to English speaking clients, both business and private. Our British-German specialist teams of lawyers and linguists advise on all legal and tax issues connected to Germany and European Union law, from business, corporate and labour to international probate, family law and property.

Solicitor_EJ_MunichThe English Desk in our Munich office is headed by dual qualified English solicitor and registered European lawyer Elissa Jelowicki. The English Desk at the Regensburg office is headed by the firm’s managing partner Bernhard Schmeilzl, LL.M.

Our English partner firm Lyndales Solicitors LLP, located in central London, operates a German Desk with expertise in German-British legal matters from an English law perspective. Together, the British-German lawyers do assist UK, US and other international clients in both the United Kingdom and in Germany.

And should you need to go to court in Germany, the litigation department GP Chambers provides forensic services in German civil and business lawsuits or arbitration proceedings throughout the country. Our senior lawyers are also frequently called upon to act as arbitrators due to their expertise in both English and German law as well as their language skills.

If you need assistance with German law or tax issues, why not contact German lawyer Bernhard Schmeilzl, LL.M. (Leicester) or Munich based English solicitor Elissa Jelowicki on +49 941 463 7070.

More information on litigation and legal fees in Germany is available in these posts:

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The law firm Graf & Partners was established in 2003 and has many years of experience with British-German and US-German legal matters.The Anglo-German litigation lawyer team of GP Chambers is well equipped to advise and represent clients from the UK and other English speaking countries. 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 in order to contact German lawyer Bernhard Schmeilzl, LL.M. (Leicester), managing partner and head of the litigation department. Bernhard is also frequently asked by British and US Courts and Tribunals or by legal counsels to provide expert reports and legal opinions on German law.

Expert Reports on German Law

As a full service German and English law firm, established in 2003, we are often asked to provide English Law Firms with an expert report based on issues of German Law.

Solicitor_SchmeilzlBernhard Schmeilzl, a bilingual Lawyer who qualified in 2001 (admitted to the Munich Bar) and is able to provide expert reports to be used in English litigation and arbitration cases based on various issues of German law, whether it be Civil, Commercial or Criminal law, including procedural aspects . Not only does he have a very good grasp of the English Civil Procedure Rules on expert reports, but he also has a vast experience of working closely with Solicitors and Barristers within England. Bernhard has prepared reports for all types of law firms in England, from Magic Circle firms to regional firms, including the following areas:

  • Corporate and commercial law disputes between British and German businesses;
  • Contentious probate matters around the validity of German wills;
  • Accidents involving British citizens in Germany (personal injury, tort); and
  • Medical malpractice cases involving German GP’s and hospitals

In case you need an expert report from a German Solicitor please do not hesitate to call us on +49 (0) 463 7070. More information on litigation and legal fees in Germany is available in these posts:

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The law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German business and corporate matters, including the representation of clients in M&A transactions. If you wish us to advise or represent you please call German business and litigation lawyer Bernhard Schmeilzl, LL.M. (Leicester) or Munich based English solicitor Elissa Jelowicki on +49 941 463 7070.

Notices of Termination under German Law

Under German Law, the requirements, both in relation to the form as well as length of the notice period needed in order to terminate a contract for the performance of a continuing obligation (Dauerschuldvertrag), can vary significantly, depending on the type of contract that is in question. Employment contracts (Arbeitsverträge), Service Contracts (Dienstverträge) and Contracts for the production of a piece of work (Werkverträge) can be terminated without regard for any agreed notice period as long as it is for “a compelling reason” (wichtiger Grund, see Section 314 para. 1 German Civil Code). Compelling reason in these types of cases means that it is either impossible or unreasonably damaging for a party to continue the contractual relationship. Anything beyond that, one would have to consider what is stated in the contract. Continue reading

When starting a Business in Germany: Don’t Forget the Trade Register Notification (Gewerbeanmeldung)

Under German law (see section 14 Gewerbeordnung, i.e. German Trade Regulation), the commencement of a business activity must be notified in writing (Gewerbeanmeldung) to the local Ordnungsamt (Trades Office), which is a department of the municipal government, for example the city of Munich. This notification obligation also applies to any change in the business (e.g. move, modification to the nature of the business or staff recruitment) and to the termination of the trade activity, which requires a termination notification (Gewerbeabmeldung). More information on the various options in terms of how to start a business in Germany is available here. For an overview of German company forms see here. Continue reading

Statutory Minimum Vacation Days for Employees in Germany

Becoming an employer in Germany can be a bit of a culture shock for foreign entrepreneurs, especially those coming from a more hire and fire oriented US jurisdiction. German labour law is highly regulated. We explained the rules regarding employee protection against dismissal here and described the risky issue of “Fictitious Self-Employment” here. Another fact, that many American or Asian employers can’t get their head around is the amount of holidays German employees are entitled to. Here are the basics of statutory vacation entitlement in Germany: Continue reading

Beware of the horrid Monster of German Labour Law: Ficticious Self-Employment

German labour law is strictly regulated and employees are well protected against dismissal if the employer’s workforce exceeeds 10 full time employees (details here). Furthermore, German wage tax (Lohnsteuer), health insurance, social security and state pension contributions are rather hefty (for more see here: Statutory Pension Insurance in Germany). Therefore, to try to avoid these labour costs, some employers but also employees are tempted to make it look as if the employee was a freelancer. They enter into a “consulting” or “freelance” agreement. But in reality the employer still expects the so called “freelancer” to be there at certain hours and the “freelancer” does not have any other clients. This is extremely risky:  Continue reading

London Chamber of Commerce: 10 practical tips for doing business in Germany

In this issue of „London Business Matters“, the London Chamber of Commerce’s monthly magazine, German corporate and business lawyer Bernhard Schmeilzl has compiled 10 Top Tips when starting a Business in Germany”. The magazine also contains helpful information about the trading relations between the UK and Germany. Just browse the online issue. For more details on how to establish a business in Germany please see the articles below

– 3 Ways to expand your Business to Germany
– What is a German “Mini-GmbH” or “Unternehmergesellschaft”?
– 10 Things to do when starting a German Business
– Guide for doing Business in Germany

 

The law firm Graf & Partners (Germany) assists entrepreneurs and businesses with their international expansion to Germany since 2003. Also, we have a network of professionals in the areas tax, IT, marketing and business consulting. Do not hesitate to contact us by calling solicitor Bernhard Schmeilzl at +49 941 785 3053 or send an email to: mail [at] grafpartner.com

Germany introduces minimum wage in January 2015

After 10 years of heated discussion Germany will implement a nationwide universal minimum gross wage (flächendeckender Mindestlohn) of EUR 8.50 per hour starting 1 Januar 2015. The act still needs to be formally passed but is expected to go through without relevant changes. Thus the details of the future „Tarifautonomiestaerkungsgesetz“ can already be found in the government draft of the bill here. There will be transitional provisions and some exceptions for certain business sectors.

Fore more information contact Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 785 30 53 Continue reading

10 Things to do when starting a German Business

If you have read our previous postings “Guide for doing Business in Germany“, “Establish a German Limited Company (GmbH): FAQ and Checklist“, “Taxation for UK Expats or Freelancers in Germany” and “Open a Business Bank Account in Germany?” you already have a pretty good idea how to go about starting your own German business. With this posting we provide ten – personal and probably subjectively biased – practical tips how to get a head start: Continue reading