The Law of Obligations Modernisation Act of 2002

I. The Problem

The German Civil Code, the Bürgerliches Gesetzbuch, ("BGB") was enacted at the end of the Nineteenth Century. Impressively, it managed to be outdated on the very day it was passed. The main problem with the BGB was that it was designed with an agrarian society in mind, but would apply to a society that was already industrialising and switching to the modern modes of mass production and consumption.

Because the BGB was so out of touch, both the Bundestag and the judiciary constantly felt the need to fill in the gaps. Thus, the Bundestag enacted a cornucopia of "auxiliary statutes" to deal with such modern issues as adhesion contracts, long-distance purchases, rent control, condominium rights, consumer credit, products liability, and a number of others. Before the reform, Palandt, one of the leading commentaries on German private law, included not only the BGB but also seven additional statutes:
(1)AGB-Gesetz (Adhesion Contracts Act) of 1976
(Consumer Credit Act) of 1990
(3)Haustürgeschäfte-Widerrufsgesetz (Casual Transactions Revocation Act) of 1986
(4)Teilzeit-Wohnrechtegesetz (Part-Time Residential Rights Act)
(5)Miethöhegesetz (Rent Control Act) of 1974
(6)Produkthaftungsgesetz (Products Liability Act) of 1989
(7)Wohnungseigentumsgesetz (Condominium Act) of 1951
Meanwhile, the courts were developing doctrines to supplement the provisions of the BGB such as culpa in contrahendo ("c.i.c."), positive Vertragsverletzung ("pVV" - affirmative breach"), and Wegfall der Geschäftsgrundlage ("WGG" - disappearance of the basis of the transaction).

This put Germany's ius civile system in the unaccustomed position of having to rely almost exclusively on judicially created law in many areas. And to complicate things even further, the European Union provided a steady stream of new Directives that had to be incorporated into existing law.

II. The Solution

Since the 1970s, academic and legislative circles have seen the need for greater coherence in German obligations law. However, little was done until the past few years.

In 2001, a discussion draft of an act to modernise the law of obligations was presented to the Bundestag. The bill was highly ambitious, seeking to do away with every identified problem of the current system, codifying a century of jurisprudence, and integrating both the auxiliary statutes and various EU directives into the BGB.

III. The Act

The Act reformed several areas of German obligations law:
(1) Statutes of limitations
(2) judicially created causes of action
(3)integration of auxiliary legislation and EU directives
(4) the doctrine of impossibility of performance
(5) the law of damages
(6) default and deficient performance
A. Statutes of Limitations

1. Consolidation and uniformisation of limitations periods

Under previous law, there was a vast hodgepodge of statutes of limitation, ranging from periods of months to decades. The general statute of limitations was thirty years. See old § 195 BGB. A two-year statute of limitations applied to a wide variety of forms of compensation for services rendered. Old § 196 BGB. A four-year statute of limitations applied to past-due interest, pension, and other similar claims. Old § 197 BGB. On the other hand, a lessor's claim to compensation for depreciation or waste of the leased object were time barred either in six months, old § 558 I, or at the time the statute of limitations had run for an action to recover the leased property. This breathtakingly wide variation in statutes of limitation led to constant litigation and required courts to dedicate substantial time to delineating exactly what type of claim was at issue in order to determine the applicable statute of limitations.

The reforms of 2002 have sought to bring a greater degree of uniformity to the statutes of limitation. Under the new version of § 195, the general limitation period is three years. Rights to tracts of land are time-barred after 10 years. § 196. The 30-year statute of limitations is maintained for
(1) claims for the return of property and rights to property;
(2) claims arising under family or estate law;
(3)claims arising out of enforceable settlements or other documents;
(4) claims based on determinations made in insolvency proceedings,
§ 197 I, except in the case of rights to continual performance or maintenance, or claims for monies not yet due, to which the three-year general statute of limitations is applicable. § 197 II.

2. When the countdown begins

Previously, the statute of limitations clock began ticking at the time the claim arose (or the duty not to do a certain thing was breached). Old § 198. For claims that only became actionable once the claimant took a certain action (termination of a contract, voiding a transaction), the statute of limitations only began to run when that action had been taken. Old § 199. For claims to remuneration, subject to the abbreviated two-year limitations period, the limitations period only began at the end of the year in which the claim arose or the contract/transaction was terminated or voided. Old § 200.

Under the new law, the beginning of the limitations period is determined by §§ 199 - 201. § 199 sets forth the general provisions for determining when the limitations period begins:
(1) The general limitations period shall begin at the end of the year in which
1. the claim has arisen and
2. the creditor becomes aware, or in the absence of gross negligence should have become aware, of the circumstances giving rise to the claim.

Previous law did not explicitly require the creditor to be aware of the claim, leading the courts to read a notice requirement into the statute to prevent claims from becoming time-barred before the creditor could even have known that they existed. The new version both increases the level of fairness of the statute of limitation and gives the courts better legislative guidance.

§ 199 also sets forth the maximum limitations periods that apply regardless of notice or lack thereof. "Claims for compensation arising out of violations of life, bodily integrity, health, or liberty" become time-barred 30 years after "commission of the act, the breach of duty, or any other event causing the damage." § 199 II. All other claims for damages become time-barred
1. ten years after they arise, without regard to the creditor's awareness or grossly negligent lack of awareness thereof, and
2. 30 years after the commission of the act, breach of duty, or event that causes the damage , without regard to the time they have arisen, or the creditor's awareness or grossly negligent lack of awareness thereof,

whichever is earlier. § 199 III. Claims other than claims for damages are time-barred within ten years of their having arisen, regardless of whether the creditor was aware (or unaware do to gross negligence) that he had a claim.

The limitations period for all other claims not subject to the three-year general limitations period begins once the claim arises. § 201. For claims that have been judicially determined, the limitations period begins at the later of (1) the date of the judicial determination or (2) the date on which the claim arises.

A new § 202 prohibits agreements shortening the limitations period for intentional torts or lengthening the limitations period beyond 30 years.

3. Tolling - Stopping the Clock

There are two types of tolling in German law - Hemmung (suspension) and Unterbrechung (interruption). When the limitations period is suspended, the duration of the suspension is not counted toward the limitations period. Thus, if the limitations period began in 2002, but was suspended from 2003-2004, by 2004 only one year could be counted toward the limitations period. Old § 205 / present § 209. If the limitations period is interrupted, the limitations period begins anew once the interruption is over. While the concept of suspension has remained unchanged, its section being simply renumbered, interruption has been renamed and its scope substantially narrowed.

Prior law recognised five basic cases in which the limitations period could be suspended:
(1) cases in which the debtor was entitled to refuse performance (Old § 202);
(2) cases in which the creditor was temporarily unable to take legal action because the courts have been at a standstill during the last six months of the limitations period or is prevented from asserting his claim due to force majeure (Old § 203);
(3) cases in which one spouse had a claim against another for the duration of the marriage, claims arising between a minor child and a parent or guardian for the duration of the child's minority (Old § 204);
(4) cases in which the creditor is incompetent or partially incompetent and has no legal representative, until no more than six months after the creditor has attained full competency or obtained a legal representative (Old § 206);
(5) cases in which the claim arises out of an estate, until no more than six months after there is an administrator for the estate (Old § 207)
Interruption was provided for in cases in which the creditor took legal action to assert his claim.

The new provisions add new cases in which the limitations period is suspended, and have eliminated the term Unterbrechung, preferring Neubeginn (starting anew). Now, in addition to the above, the limitations period can be suspended
(1) until no less than three months following the end of negotiations between the creditor and debtor (§ 203);
(2) in cases of claims arising out of violations of the right to sexual self-determination, (a) until the creditor reaches the age of 21 and (b) until the debtor and creditor no longer live together (§ 208);
In addition, legal action on the part of the creditor is now grounds for suspension rather than interruption of the limitations period. § 204. Former § 203 is now § 206, and now is limited to force majeure during the last six months of the limitation period; the "standstill of the courts" language has been deleted.

Interruption (restarting) of the limitations period is now provided for in §§ 212-13. The limitation period starts anew if the debtor admits liability or makes payment arrangements, or the creditor takes measures to enforce a judgment obtained against the debtor. § 212 I 1, 2. § 213 makes § 212 applicable to related claims that are asserted in addition or as an alternative to the primary claim.

The reform of the tolling provisions, as finally enacted, was a substantial improvement upon the limitations system envisioned by the Consolidated Draft ("KF") of the reform bill, which included a special provision for the limitation of (unintentional) "claims of any kind arising out of a defect (1) in a purchased product or (2) workmanship consisting of the manufacture or modification of an object." See KF § 202 II. This provision was rightly criticised as leading to perverse results. See e.g. Dauner-Lieb, et al., Anmerkungen und Fragen zur konsolidierten Fassung des Diskussionsentwurfs eines Schuldrechtsmodernisierungsgesetzes. For example, under the system of the KF, a pedestrian injured in an auto accident would have to deal with a different limitations period depending on whether the injury was caused by the driver's negligence or defective brakes. Since KF § 202 II exempted products liability claims from the requirement that the plaintiff be aware of his claim, the pedestrian accident victim might be completely without recourse if the driver's car had defective brakes, because the statute of limitations for injuries arising from the defective brakes (products liability) could have run out long before the accident even occured!

B. Codification of Judge-Made Law

1. Positive Vertragsverletzung ("pVV")

The original drafters of the BGB concentrated on two issues in their provisions for failure to perform - impossibility and belated performance. Not long after the BGB was enacted, it became clear that it did not come close to covering all conceivable cases of deficient performance and nonperformance. In particular, the original text of the BGB was not much help in cases of negligently inadequate performance. For example, if a solicitor negligently fails to file a document until after the deadline, it falls under neither rubric. For cases such as this, in which the debtor performed too late, inadequately, or breached ancillary duties, prior law did nothing more than provide that a person was liable for intentional and negligent acts, Old § 276; no cause of action for damages was provided.

In response to this obvious gap, Hermann Staub developed the concept of "positive Vertragsverletzung" (pVV - affirmative breach) in 1902. While the textual basis for the doctrine was long a source of controversy, the Federal Court of Justice ("BGH") eventually held that the source of pVV was the duty of good faith and fair dealing of § 242. Under the doctrine of pVV, a plaintiff could recover if
(1) there was a relationship of obligation (not necessarily a contract) between the parties;
(2) the defendant breached a duty arising out of that relationship by an act or omission.
While this doctrine had long since reached the status of customary law, it had only limited support in the text of the BGB. The 2002 reforms codified the pVV doctrine in the broad new § 280 I:
If the debtor breaches a duty arising out of the relationship of obligation, the creditor shall be entitled to compensation for the damages arising from such breach. The foregoing shall not apply if the debtor is not at fault for the breach of duty.
. 2. Wegfall der Geschäftsgrundlage

Similarly, the BGB did not contain any provision for the case in which the basis of a transaction, without which neither party would have concluded the transaction (or concluded it as they did), ceases to exist. However, since approximately the Fifteenth Century, it has been recognised that a party should not be held to a contract when its purpose has been frustrated. This doctrine has now been granted admission to the text of the BGB at § 313.

§ 313 Disturbance of the basis of the transaction

(1) If circumstances upon which the contract is predicated have substantially changed since the conclusion of the contract, and the parties thereto would not have concluded the contract, or would have concluded the contract with different content, if they had predicted such change in circumstances, the contract may be adapted to the circumstances to the extent that binding one party to the unmodified contract would constitute an intolerable hardship, taking into account all circumstances of the individual case, including without limitation the contractual and statutory allocation of risk.

(2) A change in circumstances shall also be deemed to exist if essential expectations, which have become the basis of the contract, are later discovered to be false.

(3) If it is not possible to adapt the contract, or if an adaptation of the contract would consitute an intolerable hardship for one of the parties, the disadvantaged party may rescind the contract. For long-term relationships of obligation, the parties shall have a right of termination in lieu of right of rescission.
3. Culpa in contrahendo

As originally enacted, the BGB also did not allow for recovery for breaches of duty during contract negotiations. Gradually, the courts began to recognise a duty of care between parties in the process of initiating negotiations, which gave rise to a contract law cause of action. This doctrine, known as culpa in contrahendo, has now been codified:

§ 311 Transactional and quasi-transactional obligations

(1) Unless otherwise provided by law, there must be a contract between the parties to a transaction in order for a transaction to create a relationship of obligation, and in order to modify the terms of a relationship of obligation.

(2) A relationship of obligation with the duties enumerated in § 241 II may also be created by
1. the initiation of contract negotiations,
2. the invitation to form a contract, if one party entrusts to the other party his rights, legal goods, and interests or allows the other party to influence such rights, legal goods, and interests in contemplation of a future transactional relationship , or
3. similar business contacts.

(3) A relationship with the obligations enumerated in § 241 Abs. 2 can also arise for persons who are not themselves intended to become parties to the contemplated contract. Such a relationship shall arise, inter alia, in cases in which such third party accepts a special trust or substantially influences the conclusion of the contract.

C. Integration of Auxiliary Legislation and EU Directives

As noted above, prior to the reform, there were a number of auxiliary statutes regulating matters not contained in the BGB itself. The reform has now integrated those statutes into the BGB itself:
(i) Integration of Auxiliary Statutes
1. The Adhesion Contracts Act (AGBG)

The AGBG has now been split between the BGB, the BGB Implementation Act (EGBGB), and the Permanent Injunction Actions Act (UKlaG).

§§ 1 - 11 of the AGBG are now codified at §§ 305 - 307 BGB. § 305 I now defines the term "adhesion contract" (allgemeine Geschäftsbedingungen) as
all contractual conditions drafted in advance to apply to multiple contracts, which are given to one party ("the drafter") to the other party at the time of conclusion of a contract. It shall not be of importance whether the provisions constitute a separate component of the contract or are included in the contract document itself; nor shall the font in which they are written or the form of the contract be of importance. Contract terms shall not constitute an adhesion contract to the extent that such terms have been individually negotiated by the parties thereto.
§ 305 II, III set forth the conditions under which an adhesion contract will considered part of the agreement between the parties. Specifically, the other party (the "adhering party") must consent to the incorporation of the adhesion contract into the agreement after being made aware of the adhesion contract either by express notice by the drafter or prominent display of the terms. The drafter must also give the adhering party a reasonable opportunity to see the content of the terms. One innovation of the reform is the specific requirement that the "reasonable opportunity" take into account any disability on the part of the adhering party. In addition, parties may agree in advance that certain adhesion contracts will apply to certain types of transactions if the other requirements of § 305 are met. § 305a exempts certain adhesion contracts, most notably those of mass transit services, government agencies, and telecommunications services, from the requirements of § 305 I and II. Under § 305b, individually negotiated agreements supersede adhesion contracts. No substantial change has been made to the central provisions of the AGBG, which are now located at § 307 (general provisions), §§ 308, 309 (specifically prohibited terms).

2. The Casual Transactions Revocation Act (HtWiG)

The HtWiG, which sets forth special provisions for the revocation of transactions concluded by consumers
1. by oral negotiations at [the consumer's] place of business or private residence,
2. on the occasion of a leisure activity organised and carried out by, or in the interest of, the merchant,
3. following a surprising approach in mass transit or publicly accessible mass transit facilities,
has now found its new home at § 312 BGB. As it is now formulated, consumers have a right to be informed of the rights to revocation under § 312 II BGB.

The new version of § 312 also implements Art. 10, 11, and 18 of Directive 2000/31/EC, which require that merchants provide certain information to consumers regarding the online contracts they are required to sign, means for correcting errors in orders placed, confirmation of receipt of orders, and provide judicial remedies for consumers injured by violations of the Directive.

3. The Long-Distance Distribution Contracts Act (Fernabsatzverträgegesetz, FernAG)

Contracts for goods or services concluded via telecommunications facilities, including the Internet, were previously subject to the Long-Distance Distribution Contracts Act. The provisions of that Act can now be found at § 312b ff. Merchants using telecommunications facilities to conclude consumer contracts are required to provide full disclosure of the nature and purpose of the agreement and of their own identities. § 312c. § 312d provides a right of revocation similar to that provided by the new §§ 312, 355.

§ 312e imposes special duties on e-commerce merchants
1. to provide the customer with appropriate, effective, and accessible technological means of recognising correcting incorrect entries prior to placing his order,
2. to provide the information enumerated in Article 241 of the Civil Code Implementation Act in a clear and understandable manner within a reasonable time prior to placing the order,
3. to electronically confirm receipt of the order in a timely manner, and
4. to enable the customer to view, and store in a manner allowing repeated viewing, the contract terms, including the terms of an adhesion contract.

4. The Part-Time Residential Rights Act (TzWrG)

The Part-Time Residential Rights Act has been relocated to § 481 ff. These provisions regulate the business of time-shares (or "interval ownership), or, as the BGB puts it,
contracts, by which a merchant, for the payment of a total price, obtains, or promises to obtain for a consumer, the right to use a residential building for residential or vacation purposes, for an agreed period of time of the year, or a period of time of the year to be agreed upon later, during a period of at least three years.

(ii) Integration of EU Directives
The Obligations Law Reform also integrates three EU Directives into the BGB: Directive 1999/44/EC on consumer purchases of goods, Directive 2000/31/EC on e-commerce (see above), and Directive 2000/35/EC on combating late payment.

1. Directive 1999/44/EC

Directive 1999/44/EC serves to improve consumer protection within the European internal market. To this end, Art. 2 establishes the concept of "conformity with the contract." Under Art. 2(2), goods are presumed to conform with the contract if they:
(a) comply with the description given by the seller and possess the qualities of the goods which the seller has held out to the consumer as a sample or model;
(b) are fit for any particular purpose for which the consumer requires them and which he made known to the seller at the time of conclusion of the contract and which the seller has accepted;
(c) are fit for the purposes for which goods of the same type are normally used;
(d) show the quality and performance which are normal in goods of the same type and which the consumer can reasonably expect, given the nature of the goods and taking into account any public statements on the specific characteristics of the goods made about them by the seller, the producer or his representative, particularly in advertising or on labelling.

Essentially, this article protects whatever expectations the average consumer might have gained from product advertising, viewing a sample of the product, or based on the purpose for which a given product is normally used. For example, if a consumer buys a car that is advertised as going from zero to 100 km/h in under 30 seconds, and it turns out to be a used Vega with some Trabant parts that fall off whenever the ignition is turned, the consumer is protected.

If a product does not conform with the contract, Art. 3 of Directive 1999/44/EC makes the seller liable to the consumer. The seller may be required to repair or replace the product free of charge (including postage, labour, and materials). Art. 3(3). If the seller fails to repair or replace the product within a reasonable time, does so at "significant inconvenience" to the consumer, or if the consumer has no entitlement to repair or replacement, the consumer can require a proportionate reduction in price or rescind the contract altogether. Art. 3(5).

Art. 4 protects merchants who sell products manufactured by others by creating a "right of redress," which allows the final seller who is required to compensate a consumer for a product that is nonconforming due to the act or omission of another link in the chain of distribution to obtain compensation from the person/company from whom he bought the product, who can in turn assert the same claim against the next link in the chain, continuing all the way until the guilty party is reached.

Art. 6 makes guarantees binding " under the conditions laid down in the guarantee statement and the associated advertising," thus putting sellers on the hook for puffing their guarantees. Guarantees must inform consumers of their legal rights under national legislation, and make it clear that they retain those rights notwithstanding the guarantee. Guarantees must be written in "plain intelligible language," and give consumers the information they need in order to make a claim under the guarantee.

Art. 6(5) ensures that consumers who have obtained a noncompliant guarantee will not lose its protection by virtue of the noncompliance. This protection is augmented by the provision of Art. 7, which provides that consumers will not be subject to obligations arising out of terms of a guarantee that do not comply with the Directive. Art. 7 also protects against abusive choice of law clauses that would make the guarantee subject to the law of a state that is not a member of the European Union.

Germany's Obligations Law Reform has implemented the provisions of Directive 1999/44/EC in §§ 275, 323, 346 ff., and 651.

§ 275 provides that there is no duty to perform if performance is impossible, would be disproportionately expensive for the debtor, or would otherwise be so difficult for the debtor that it would be unfair to require the debtor to perform.

§ 323 implements the provisions of Art. 3 of the Directive, by allowing creditors (including consumers within the meaning of the Directive) to rescind a contract if the debtor (seller) fails to perform or performs in a way that does not conform to the contract, and still does not perform on the contract after a grace period has been set by the creditor/consumer. §§ 346 ff., which implement the rescission provision of Art. 3 of the Directive, deal with the right of rescission in consumer contracts. § 346 discusses the effects of rescission, providing that rescission ("Rücktritt") returns the parties to the status quo ante, with each party returning to the other anything received as part of the contract, or providing compensation if it is somehow impossible to return the object itself. The remainder of the sections in the title on rescission deal with the formalities of rescission.

§ 651 merely ensures that consumer contracts for the sale of movable, tangible objects - the matter with which the Directive was concerned - are subject to the provisions for sale of goods.

2. Directive 2000/35/EC

Directive 2000/35/EC contains various measures to combat late payment in commercial transactions. The Directive entitles creditors to interest at a specified rate for past-due payments, Art. 3, encourages statutory schemes that allow sellers of goods to retain title to them until full payment has been made, Art. 4, and requires member states to adopt procedures for obtaining an enforceable title to the amount owed "normally within 90 calendar days of the lodging of the creditor's action or application at the court or other competent authority" unless the debt is disputed, Art. 5.

These provisions are implemented under the Obligations Law Reform by §§ 247, 286, 288. § 286 provides standards for determining whether a payment is late. Under § 286, a payment is late once the creditor has given notice ("Mahnung"), unless a specific deadline has already been set, the debtor refuses payment, or specific reasons require that the payment be deemed late immediately. Except in the case of a consumer debtor who has not been specifically informed, a payment will generally be deemed to be late 30 days after the payment is due and either an invoice has been sent or the goods for which payment is required have been received.

Art. 3 is implemented by § 288, which provides for a rate of interest for late payments of 5% over the base interest rate for consumer transactions and 8% over the base interest rate for non-consumer transactions. The base interest rate, another innovation of the Obligations Law Reform, is set by § 247 based on the interest rate for the most recent "main refinancing operation" of the European Central Bank, determined biannually.

D. The Doctrine of Impossibility

The Obligations Law Reform also brought substantial changes to the doctrine of impossibility. Under prior law, § 275 provided that:

§ 275
Impossibility for which debtor is not at fault

(1) The debtor shall be free from the obligation of performance to the extent that performance becomes impossible due to an event, for which the debtor is not at fault, occurring after the initiation of the relationship of obligation.

(2) The debtor's later inability to perform shall have the same effect as impossibility arising after the initiation of the relationship of obligation.
This language has been replaced by the new § 275 I:

§ 275
Exemption from Duty of Performance

(1) There shall be no claim to performance to the extent that performance is impossible either for the debtor or for any person.

Under the new § 275 I, many of the requirements present in former § 275 have been omitted. There is no longer a requirement that the debtor not be at fault. Impossibility may now be present ab initio, instead of having to arise after the obligation. Moreover, the new statute makes it clear that both subjective and objective impossibility are covered. Now, impossibility creates a clear-cut exemption from the "primary duty of performance" (Primärleistungspflicht). This does not, however, render a contract void, as it did under previous law pursuant to former § 306. Instead, the primary duty of performance may be substituted by a "secondary duty of performance" (Sekundärleistungspflicht), which entitles the creditor to compensation.

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