Legal Challenges for US Companies Entering the German Market

International IT-Providers interested in starting a business or investing in Germany are generally attracted by the prospect of expanding into the stable or even prospering market. Insurances and banks, the automotive and semiconductor industry, telecommunications and the various public authorities are preferred targets for IT-Providers offering software solutions and IT-related services.

Different legal systems

However, international IT-Providers also have serious concerns about the different legal systems. German law has a strong reputation of providing substantial obstacles for the use of contractual terms which are not compliant with the provisions of the German civil law code.

Nevertheless, economic needs and opportunities will force more and more international IT-Providers to think about expanding their business to Germany. After a successful start in Germany the doors can be opened to other European markets which offer further business opportunities. Therefore, US and other international companies will also have to face the differences within the legal system.

Freedom of Contract

One of the main issues of German contract law are the very restrictive provisions with respect to standard terms and conditions, incorporated in section 305 et. seq. Bürgerliches Gesetzbuch (BGB). They deviate from the principle of freedom of contract. In general, the BGB states that contracts are only unenforceable if they conflict with mandatory laws or if their provisions are unethical due to their nature. Whether or not a contract is fair or reasonable is not a question of statutory laws. The parties are free to enter contracts which are not in favor of their position. In contrast, standard terms and conditions have to be fair and reasonable. Despite the principle of freedom of contract, the “reasonableness requirement” with respect to standard terms and conditions is broadly adopted by German courts.

Although even under US Law not all standard terms and conditions are enforceable in all circumstances, the German approach is much more restrictive. Provisions that unfairly disadvantage the customer cannot be enforced. Such a disadvantage can already be lack of clarity or an incomprehensible meaning of a provision. One of the major consequences of sections 307 et. seq. is that the exclusions and limitations of liability are most likely to be invalid. Moreover, most German courts apply them very strictly. Neither the liability for personal damages nor the liability for damage caused by intentional or grossly negligent conduct can be excluded or limited. The liability for infringement of essential (material) contractual obligations corresponding to the core performance can only be limited to the contractually foreseeable (and usually not calculable) damage. Therefore, inherent risks of specific transactions cannot be substantially limited in standard terms and conditions.

Escape Route: Individual Negotiation

The only way to contractually limit the risks is through an individually negotiated, agreed contract. Any individually negotiated provision will be held enforceable. To make things even more difficult German courts have developed very restrictive requirements. They must be fulfilled for a contractual provision to be considered individually negotiated. It is not sufficient to customize standard terms and conditions with the customer’s name and wording regarding the customer’s background.

A contract or a contractual provision is only considered to be properly negotiated if a customer had the opportunity to influence the content. The supplier must grant the option to change and amend provisions to make them individual. Courts show a tendency to assess only very little provisions as individually negotiated. For example, a clause providing a limitation of liability is not individually negotiated and thus enforceable merely because the supplier adds concrete limitations and the customer does not give any feedback with respect on such a proposal. If contractual clauses are not modified by the customer at least once and discussed to reach a compromise it is very likely that clauses are not enforceable.

Negotiation Procedures Take Time

Any software provider entering the German market must be aware that its negotiation procedures will have to be enhanced and will take more time. The approach that provisions are deemed as standard and cannot be changed at the clients’s request does not work in Germany and (even worse) constitutes a disadvantage. Only extensive negotiations and the exchange of markup versions of contractual provisions provide the necessary protection.

This legal assessment has implications on negotiations: If a client does not want to negotiate or if the parties do not find the time to negotiate and the supplier still wants to use its standard terms and conditions, the supplier must expect clauses to be unenforceable.

We advise IT-Providers based abroad on the specifics of standard contractual clauses and German contract law. In addition, we support them in negotiating individual contracts and help them identify and contractually regulate the relevant issues.

Michaela Witzel, LL.M. (Fordham University School of Law), Certified Expert for IT Law