Insolvency Challenge: Recovery of Payments

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INTRODUCTION

The insolvency administrator is demanding the return of payments already received. The basis for this is the right to challenge transactions under §§ 129–146 of the German Insolvency Code (InsO). For companies, this is not a matter of morality, but of hard cash: Can the claim be defended against, reduced, or resolved in a financially sound manner? This article categorizes the relevant grounds for avoidance, explains their requirements in an accessible manner, and shows how a company affected by an avoidance action can effectively defend itself.

LEGAL BASIS

The challenge is based on Sections 129 through 146 of the Insolvency Code (InsO). A legal act that disadvantages other creditors is subject to challenge. A legal act is any intentional arrangement with legal effects, such as a payment or the creation of security. Disadvantage occurs when the estate is reduced or creditors’ access to it is impeded. The insolvency administrator must substantiate and prove the facts of the case and the existence of the disadvantage. The affected company bears the burden of presenting and proving exculpatory facts.

CRIMINAL OFFENSES — EXPLAINED IN SIMPLE TERMS

§ 130 InsO (Congruent Coverage)

  • What this is about: Settling a claim that is due and owed in the agreed-upon manner.
  • Why the trustee is bringing the action: alleged knowledge of insolvency.
  • What matters: standard payment terms, unchanged bank account information, no escalation. Routine reduces the likelihood of disputes.

Section 131 of the Insolvency Code (Inconsistent Coverage)

  • What this is about: Performance for which there was no legal entitlement (e.g., premature payment without legal basis, unusual security, performance under pressure from enforcement proceedings).
  • Why the Administrator Gets Through More Easily: Atypical Behavior as a Warning Sign.
  • Defense: Argue that the atypical nature of the arrangement is standard practice in the industry or contractually agreed upon; demonstrate equivalence and causation.

Section 132 of the Insolvency Code (legal act that directly disadvantages creditors)

  • What this is about: Actions that reduce the balance sheet total without any intermediate steps (e.g., collateral not owed for existing liabilities).
  • Defense: Prove that there is no net disadvantage, that value has been compensated, and that consideration has been provided.

Section 134 of the Insolvency Code (service rendered without compensation)

  • What this is about: Services provided without adequate compensation.
  • Defense: Document that payment was made and that value was provided; demonstrate genuine consideration.

Section 135 of the Insolvency Code (Legal Transactions with Shareholders)

  • What this is about: Repayments on shareholder loans and collateral provided to shareholders.
  • Relevance for suppliers: only if the supplier is also a shareholder or a related party.

Section 133 of the Insolvency Code (Voiding for Intentional Fraud)

  • What this is about: Legal acts committed by the debtor with the intent to disadvantage the creditor; the creditor was aware of this intent.
  • Indicators: persistent payment delays, imminent enforcement, and installment-like agreements related to a financial crisis.
  • Defense: Normal business relationship, equivalence of performance and consideration, no knowledge of insolvency.

Section 142 of the Insolvency Code (cash transaction)

  • What it’s all about: an equitable, timely exchange of services and consideration.
  • Meaning: central counterweight; debate over whether they occurred close together in time and whether they are of equal significance—both of which require extensive documentation.

REVIEW PERIODS – OVERVIEW

  • § 130 InsO (corresponding): generally, the last three months prior to the filing of the insolvency petition.
  • § 131 InsO (incongruent): particularly strict in the last month; in the second and third months, only under additional conditions (including insolvency/knowledge).
  • § 133 InsO (Intent): up to ten years; in some cases, limited to four years for security interests and satisfaction of claims.
  • § 134 InsO (pro bono): four years.
  • § 135 InsO (Shareholders): Repayment of shareholder loans within one year; collateral may be subject to longer periods in some cases.
    The exact classification depends on the specific facts of the case and the timing of the action.

BURDEN OF PROOF AND PRESENTATION OF EVIDENCE – WHO MUST PROVE WHAT

The insolvency trustee (as representative of the estate) must fully set forth and prove the grounds for avoidance asserted—including prejudice to creditors, the nature and timing of the legal act, (in)congruence, insolvency during the relevant period, and—to the extent required by the facts of the case—knowledge or constructive knowledge on the part of the party against whom the avoidance action is brought.
The company affected by the avoidance action (the party against whom the action is brought) bears the burden of presentation and proof only for defenses that preclude legal action, in particular cash transactions (Section 142 InsO), specific compensation for value, or the statute of limitations.

Based on the facts of the case—summarized concisely:

  • § 130 InsO (congruent): The administrator must provide evidence of coverage, the time period, insolvency, and knowledge or constructive knowledge; the party against whom the challenge is brought must submit evidence of normal business practices and—if applicable—the cash transaction.
  • § 131 InsO (incongruent): The administrator establishes the atypical nature of the transaction and the time period (strictly in Month 1; Months 2–3 subject to additional requirements); the party against whom the avoidance action is brought demonstrates a contractual or industry-standard basis and equivalence.
  • § 132 InsO (directly prejudicial): The trustee must prove the direct prejudice; the party against whom the challenge is brought must demonstrate economic compensation.
  • § 134 InsO (without consideration): The administrator claims that the transaction was without consideration; the party against whom the challenge is brought provides evidence of consideration and consideration in return.
  • § 135 InsO (Shareholder): The administrator establishes the facts constituting shareholder conduct; the party against whom the action is brought delineates the roles and any third-party funds.
  • § 133 InsO (Intent): The trustee bears the burden of proving the debtor’s intent to disadvantage creditors and the opposing party’s knowledge (usually based on circumstantial evidence); the opposing party challenges the chain of circumstantial evidence with routine documentation and evidence of consideration.
  • § 142 InsO (Cash Transaction—Defense): The burden of proof rests entirely with the party against whom the challenge is brought; equivalence and close economic proximity in time must be demonstrated.

Assumptions and circumstantial evidence—effect without a reversal of the burden of proof

Circumstantial evidence such as suspension of payments, persistent payment delays, imminent enforcement proceedings, or installment-like agreements makes it easier for the administrator to take action. Such evidence serves as an indication but does not shift the burden of proof on the merits. It is the responsibility of the party against whom the challenge is brought to substantially refute such circumstantial evidence—through documented routine practices, project- or acceptance-based payment terms, clear consideration, stable credit and credit limit data, and traceable sources of third-party funding.

Secondary Burden of Proof

Facts pertaining to the opposing party in the challenge (e.g., equivalence in cash transactions, internal acceptance processes, payment methods via factoring, escrow, or group clearing) trigger a secondary burden of proof on the part of the company: a structured presentation of the facts, supported by documentation, is required. Nevertheless, the substantive burden of proof for the grounds for avoidance remains with the insolvency administrator.

Typical document layouts

  • Factors pointing in favor of the administrator include: failed direct debits, changes in bank accounts, imminent enforcement proceedings, collateral provided retroactively for existing liabilities, and emails indicating liquidity problems.
  • Arguments in favor of the defense include: a closed timeline (order – service/acceptance – invoice – payment), unchanged payment terms/accounts, documented consideration, contractually fixed – performance-based – installments, and traceable third-party cash flows.

DEFENSIVE STRATEGIES

§ 130 InsO (congruent)

  • Approach: Demonstrate that this is a standard contractual practice; refute allegations of lack of knowledge.
  • Required documents: Purchase order/framework agreement with payment terms; acceptance certificates/proof of performance; invoice; payment notice and value date; unchanged bank account information; open-item lists; credit insurance/credit limit information, if applicable.
  • Key arguments: due and payable claim; agreed-upon payment method; no imminent enforcement; no extraordinary payment extensions; no knowledge of—or reason to have known about—insolvency.

Section 131 of the Insolvency Code (incongruent)

  • Approach: Explain the atypical nature of the contract in terms of standard industry practice; emphasize economic neutrality.
  • Required documents: contractual provisions regarding advance/staggered payments and security; process descriptions; performance/acceptance reports; proof of value.
  • Key arguments: performance- or acceptance-related deviation; equivalence; no disadvantage in the process.

Section 132 of the Insolvency Code (directly prejudicial)

  • Approach: Demonstrate that the exchange of value and consideration occurred within the same economic context.
  • Required documents: Valuation documents; credit notes/settlements; service receipts; settlement agreements.
  • Key arguments: no net outflow from the estate; economic neutrality.

Section 134 of the Insolvency Code (pro bono)

  • Approach: Break down the concept of remuneration into its constituent parts.
  • Required documents: Performance/acceptance reports; service reports; proof of use; offsetting invoices
  • Key arguments: concrete, measurable consideration; not a favor.

Section 135 of the Insolvency Code (Shareholders)

  • Approach: Clarify roles and disclose third-party funding.
  • Required documents: List of shareholders/capital structure; loan and security agreements; cash flows; third-party creditor positions.
  • Key arguments: no shareholder loans or external third-party funding; otherwise, a financially viable solution through a sound settlement agreement.

Section 133 of the Insolvency Code (Intent)

  • Approach: Break down the chain of evidence; document the business process in a systematic manner.
  • Required documents: Chronological record of order–service–acceptance–invoice–payment; schedule/project emails; credit limit/creditworthiness documents; evidence of consideration; third-party funding sources, if applicable.
  • Key arguments: no knowledge of the crisis; payment terms based on project/acceptance rather than a liquidity crunch; equivalence.

Section 142 of the Insolvency Code (Cash Transaction – Objection)

  • Approach: Provide complete evidence of equivalence and close economic proximity in time.
  • Required documents: Order; delivery slip/proof of service; acceptance; invoice; payment notice; value date; price/valuation report, if applicable.
  • Key arguments: direct exchange; economic equivalence; barrier to challenges.

DOCUMENTED CHRONOLOGY OF THE TRANSACTION—PURPOSE AND IMPLEMENTATION

The chronology of the transaction serves as the evidentiary framework for the company in question. It is intended to provide verifiable proof that each payment was based on a specific, equivalent service and that the transaction proceeded in accordance with the contract. As such, it supports the company’s defense (routine, cash transaction, value exchange, lack of knowledge).

What the chronology shows:

  • Contractual Basis: Purchase Order/Framework Agreement, Payment Terms, and, if applicable, Acceptance Procedures and Security Interests.
  • Consideration: Delivery/service and acceptance, including the date and reference to the order.
  • Payment Allocation: Invoice and value date are uniquely assigned to the same service.
  • Payment method: Payment via the agreed-upon method/account; no alternative methods.
  • Temporality/Equivalence (if asserted): a close economic connection and equivalence in value.
  • Value Adjustment/Third-Party Funding (if applicable): Credits/offsets or factoring/escrow/group clearing are presented in a transparent manner.

Here’s how the chronology is structured:

  • Order of documents: Purchase order/framework agreement → Proof of service/acceptance → Invoice → Bank statement/value date (payment advice, if applicable) → Credit memo/offset, if applicable → Third-party funding documents, if applicable.
  • A brief note for each document: “Refers to order X/item Y; pertains to invoice Z; value date on ….”
  • Briefly explain and document any discrepancies (e.g., partial acceptances or payments due to acceptance windows).

SAMPLE LETTERS FOR INITIAL CONTACT WITH THE INSOLVENCY ADMINISTRATOR

Example 1: First Factual Response

Subject: Your letter dated [date] – Challenge under the Insolvency Code (InsO) – Case [Case Number]

Dear Sir or Madam,

We dispute both the merits and the amount of the claimed demand for restitution. The disputed payment is part of an ongoing exchange of services. Due claims were settled in accordance with the contract. We had no indication that the other party was insolvent.

Please submit the payment summary you have provided, including the value dates, as well as any documents you consider relevant. Once we receive them, we will provide additional comments.

Sincerely,
[Company, Contact Person, Contact Information]

Template 2: Request for Documentation and Deadline Management

Subject: Your letter dated [date] – Challenge under the Insolvency Code (InsO) – Case [file number] – Request for Documents / Deadline

Dear Sir or Madam,

To conduct a proper review, we require the following documents and information:
– a payment schedule with posting and value dates, as well as a breakdown by invoices/services,
– the evidence you have cited regarding the alleged insolvency during the relevant period,
– Information regarding any enforcement measures, installment agreements, or security arrangements on which you are relying.

Please send the documents as soon as possible. We ask that you extend the deadline you have set until further notice. A final decision will be made after the documents have been reviewed.

Sincerely,
[Company, Contact Person, Contact Information]

THREE EXAMPLE CASE STUDIES

Timely Payments Throughout the Project

A company delivers specialty parts according to milestones. The invoice is due upon acceptance and is paid within the agreed-upon timeframe. There was no cycle of payment reminders, no enforcement proceedings, and no change of bank accounts. The administrator argues that there was alleged knowledge of insolvency. The chronology shows a routine process: order, acceptance, invoice, payment.

Result:

The attack fails or results in a very low success rate.

Installment Agreement for Performance-Related Reasons

This is a major project; a large single payment is settled in several installments because acceptance inspections take place only during defined production windows. This is documented in the contract. There are no emails complaining about cash flow issues, only agreements regarding deadlines and acceptance inspections. The administrator is trying to fabricate a crisis situation. The documents show the opposite.

Result:

Reasonable agreement or defense, depending on the evidence.

Cash Payment for Spare Parts Delivery

Express delivery of critical replacement parts. Payment shortly after delivery. Complete acceptance and service records; payment notices and value dates are documented. Equivalence and tight time constraints are clear.

Result:

Challenge Fails Due to the Cash Transaction.

Judge's gavel. Symbol for jurisdiction. Law concept a wooden judges gavel on table in a courtroom

Breach of an international jurisdiction agreement can result in liability for damages! – On the ruling of the BGH from 17.10.2019 (Ref. III ZR 42/19)

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Problem description

International agreements on jurisdiction, especially if they are to have exclusive validity, generally have the purpose of protecting the party benefiting from the agreement from the often very considerable costs of a legal dispute in a foreign country.

Unfortunately, however, it is not uncommon for the other contracting party to suddenly no longer want to know about the jurisdiction agreement in the event of a dispute. The background to such a dishonest approach is – obviously – not least the potential for blackmail associated with such an approach. This is because the party that finds itself – in breach of the jurisdiction agreement – exposed to a foreign lawsuit is regularly forced to take action abroad through lawyers in order to avoid legal disadvantages. This in turn is often very expensive, with the USA being the most prominent example.

The BGH has “jumped to the side” of German victims in a very significant judgment, still unknown to many, and has ruled in their favor that the breach of an exclusive jurisdiction agreement generally obliges them to pay damages. The judgment concerns a German-American case, but in the author’s opinion appears to be transferable to other third country constellations.

BGH ruling from 17.10.2019; Ref. III ZR 42/19; BGHZ 223, 269

In its judgment of October 17, 2019, the BGH ruled that a US plaintiff who brings an action in the USA in breach of a jurisdiction agreement is obliged to pay damages to the other party with regard to the costs incurred by this action (see BGH judgment of October 17, 2019; case no. III ZR 42/19; BGHZ 223, 269). The memorable guiding principles of the judgment are as follows:

  1. The agreement of a domestic place of jurisdiction may establish an obligation to bring actions only at this place of jurisdiction.

  2. If a contracting party culpably breaches this obligation by bringing an action before a US court, which dismisses the action due to lack of jurisdiction and does not order reimbursement of costs in accordance with US procedural law (“American rule of costs”), it is obliged to reimburse the other party for the costs of the appropriate legal defense in accordance with Section 280 (1) BGB.

A reading of the reasons for the decision suggests that, according to the BGH, almost every international jurisdiction agreement – over and above the purely procedural agreement of a place of jurisdiction – must also include the substantive obligation to comply with this agreement:

Initial situation

Until now, jurisdiction agreements have only been ascribed a procedural effect by lawyers. Accordingly, their significance was limited to the establishment and/or exclusion of a specific court’s jurisdiction.

However, a further binding effect was rejected, so that actions that violated such an agreement could not trigger a claim for damages in accordance with Section 280 BGB. This was particularly problematic in cases in which actions were brought in countries without a procedural claim for reimbursement of costs in breach of the jurisdiction agreement. For example, according to the “American Rule of Costs” in the USA, the reimbursement of legal fees of the winning party is excluded. In view of the notoriously horrendous legal fees in the USA, this is particularly bitter for the party concerned.

The BGH has now – very welcome – moved away from this view.

No fundamental objections to material legal component

According to the earlier case law of the Federal Court of Justice, a jurisdiction agreement is a substantive contract on procedural relationships.

As the BGH rightly states, the parties are free to agree material obligations in a contract in addition to purely procedural obligations.

In this regard, the BGH first states that such an assumption would not raise any concerns with regard to national and European civil procedural law, as the substantive part of the agreement lies outside the scope of application of the Code of Civil Procedure and the Brussels I Regulation.

In third-country cases, this also applies without further ado with regard to the case law of the European Court of Justice on so-called “anti-suit injunctions”, as the principle of mutual trust applicable within the EU is not affected. In addition, no contradictions in value are discernible either way if the derogated court, i.e. the court seized in breach of the jurisdiction agreement, has denied its jurisdiction in full knowledge of all relevant circumstances.

Agreements on the place of jurisdiction can be interpreted as binding under the law of obligations

According to the very convincing explanations of the BGH, a content under the law of obligations can be read into a jurisdiction agreement by way of interpretation.

In this regard, the BGH first states that a jurisdiction agreement “according to its objective content and typical meaning, taking into account the interests of the parties involved, must be understood by an honest and reasonable contractual partner” to mean that the obligation under the law of obligations sanctioned in accordance with Section 280 (1) BGB has been entered into not to sue at a place of jurisdiction other than that agreed.

The following passage of the judgment is worth quoting, in which the BGH deals with the typical interests of the parties (para. 37 of the judgment):

“The agreement of the law applicable to the contract and a place of jurisdiction expresses the interest of both parties in making legal disputes predictable in terms of both substantive and procedural law. The contracting parties involved in international legal transactions in particular want to create legal certainty and make – also economic – litigation risks predictable (Eichel loc. cit. p. 224). By stipulating a specific place of jurisdiction, they aim to select a specific place of jurisdiction and, in particular, to prevent subsequent forum shopping by a contracting party.”

Vulnerability of the party concerned

This typical interest, which is worthy of protection, also includes avoiding unnecessary costs for appealing to a court without jurisdiction. The protective purpose of such an agreement can only be achieved if it is thwarted by recourse to a court in breach of the agreement by granting the party thereby burdened a claim for reimbursement of costs.

According to the purposes of the above-mentioned principles, there is no reason to protect a party who brings an action before a foreign court in breach of the agreement on domestic jurisdiction from the substantive legal cost consequences that it would have to bear under procedural law in the event of a purely domestic case – irrespective of the illegality of its action.

The described need for protection of exclusive jurisdiction agreements is also confirmed by Art. 31 (2) and (3) of the Brussels I Regulation, whereby the scope of application of this provision is only limited and its protection is also insufficient with regard to the cost consequences of invoking a court without jurisdiction.

Conclusion of the BGH

After all, the BGH considers an action that deviates from the agreed international place of jurisdiction to be a breach of duty obliging the claimant to pay damages, at least if it is a third country case (non-EU) and the third country does not provide for a sufficient claim for reimbursement.

Rating

The BGH ruling is not only important for lawsuits in US cases.

At least in the case of contracts with partners from non-EU countries, in the event of a breach of the exclusive jurisdiction agreement, it is advisable to examine the claim for damages affirmed by the BGH with regard to the costs that a legal defense in the third country has triggered and the reimbursement of which is not covered by local procedural law.

However, in the author’s opinion, a claim for damages under substantive law also appears possible in purely EU-related cases on the basis of the BGH ruling discussed above.

An action brought in breach of an exclusive jurisdiction agreement forces the party benefiting from the jurisdiction agreement, in breach of contract, to deal with the contractual partner in a foreign jurisdiction at – at least from a German perspective – often significantly higher costs. In such cases, the claim for reimbursement of costs awarded by the court seized in breach of contract will often not be sufficient to cover the costs incurred for the legal defense “in a foreign jurisdiction”. As the BGH itself rightly noted, the EU legislator also sees a special need for protection of the party benefiting from an exclusive jurisdiction agreement. However, the provision of Art. 31 (2) of the EU Regulation based on this is not sufficient on its own, as it helps to “stop” an inadmissible action, but does not guarantee that the party concerned will actually be reimbursed for all costs.

You can read more about the options for defending yourself against actions brought in breach of an exclusive jurisdiction agreement here!

Do you have any questions?

Timber frame house, real estate

Estimation of fictitious defect rectification costs

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Problem definition

It has been clarified for some time by a landmark decision of the BGH that the contractual claim for damages instead of performance in accordance with Sections 437 No. 3, 280, 281 BGB can be assessed on the basis of the “fictitious” costs of remedying defects that are likely to be necessary but have not yet been incurred, see BGH ruling of 12.03.2021, Ref. V ZR 33/19.

In practice, it is of particular relevance how the court called upon to decide in an individual case is to determine the amount of such fictitious damage costs. The starting point for this is Section 287 (1) ZPO, which reads as follows:

“If there is a dispute between the parties as to whether damage has occurred and how much the damage or an interest to be compensated amounts to, the court shall decide on this in its own discretion, taking into account all the circumstances. Whether and to what extent a requested taking of evidence or ex officio expert appraisal is to be ordered is left to the discretion of the court. (…)”

It has not yet been clarified according to which principles the court must apply the aforementioned Section 287 (1) ZPO in the specific case.

In a more recent decision from March 11, 2022 (case no. V ZR 35/21), the BGH provided the courts of lower instances with valuable criteria.

The judgment

Its decision of March 11, 2022 (case no. V ZR 35/2) was based on the following abridged facts:

The subject of the dispute was the purchase contract for a property. The sellers had concealed from the buyers that the external waterproofing of the cellar was incomplete and accordingly demanded compensation in the form of fictitious defect rectification costs.

The court of first instance had sentenced the defendants in the amount of fictitious defect rectification costs of EUR 144,800. The Court of Appeal reduced this amount to EUR 97,556 and allowed the appeal with regard to the amount of the claim.

The estimate made by the court of first instance and the court of appeal was based on an expert opinion, according to which two options for remedying the defects could be considered. According to the less expensive option A, the incompleteness of the waterproofing could not be completely eliminated, according to the more expensive option B with costs of EUR 138,920, waterproofing would be completely possible. The Court of Appeal assumed that the plaintiffs did not have to be satisfied with variant A, however, the estimation inaccuracy of +/- 30% mentioned by the expert was to be taken into account to their detriment, as the plaintiffs could only be awarded whatwould“certainly be incurred” in terms of defect rectification costs. Uncertainties in determining the costs of remedying defects should not be borne by the tortfeasor.

In its decision, the BGH initially confirmed the Court of Appeal’s assumption that the claimants did not have to settle for the cheapest option. The same applies to the rejected “new for old” deduction.

Otherwise, however, it rejected the Court of Appeal’s assumptions for determining the specific amount of damages as legally untenable. The BGH stated:

“As a starting point, the Court of Appeal correctly assumes that the contractual claim for damages instead of performance (minor damages) pursuant to Sections 437 No. 3, 280, 281 BGB can be assessed on the basis of the “fictitious” costs of remedying defects that are likely to be necessary but have not yet been incurred.

However, according to the reasoning of the Court of Appeal, the costs for the necessary renovation work determined by the expert cannot be reduced by 30% when assessing the amount of the claim for damages.

The court must determine the amount required to rectify the defect in accordance with Section 287 (1) ZPO, taking into account all the circumstances in its own discretion.

(…)

The Court of Appeal overstretches the measure of necessary conviction within the framework of Section 287 (1) ZPO and thus disregards legal principles of damage assessment.

If the asserted claim for damages is established on the merits and only the amount needs to be filled in, the injured party benefits from the facilitation of evidence under Section 287 ZPO. In contrast to the strict requirements of Section 286 (1) ZPO, when deciding on the amount of damages, a considerable probability based on a sound foundation is sufficient for the court to form its opinion; the estimate should be as close as possible to reality.

The court of appeal misjudged this. It believes that only the amount that is certain to be incurred within the scope of the estimate to be made for the rectification of defects may be awarded, so that in the case of a range of estimates, only the lower amount can regularly be awarded as damages. It thus wrongly demands absolute certainty for the assessment of damages to be carried out by it, which is not even required within the framework of § 286 ZPO. It is true that even in the case of an estimate pursuant to Section 287 ZPO, doubts about the amount of the costs required to remedy the defect may not, in principle, be borne by the tortfeasor (see BGH, Urt. v. 10.04.2003 – VII ZR 251/02 – NJW-RR 2003, 878, 879; OLG Celle, Urt. v. 17.01.2013 – 16 U 94/11 – BauR 2014, 134, 139). However, it is in the nature of things that when calculating the fictitious restoration costs required to remedy the damage, a (certain) uncertainty remains as to whether the amount objectively required for the repair (to be assessed ex ante) corresponds to the amount that would have been or would be incurred if the repair had actually been carried out. If the contractual claim for damages in lieu of performance (small damages) pursuant to Sections 437 No. 3, 280, 281 BGB is assessed on the basis of the presumably necessary but not (yet) incurred (“fictitious”) costs of remedying the defect, the court must therefore determine the damage in accordance with the principles of Section 287 (1) ZPO and in this respect to examine the extent to which damage is predominantly probable. This also and especially applies if a range of estimates is stated in an expert report. (…)”

As a consequence of the aforementioned deficiencies, the BGH referred the case back to the Court of Appeal for reconsideration and decision

Conclusion

With this decision, the BGH first confirmed that Section 287 ZPO is decisive for determining the fictitious amount of damages. For the formation of a judicial conviction, a

“considerable probability based on a sound foundation.”

Any remaining uncertainty lies in the nature of the simplified assessment of damages pursuant to Section 287 ZPO. It follows for the courts of lower instances that it is not permissible to assume the minimum amount specified by the expert as the damage. The court must correctly approach the most probable amount required to remedy the defect. For claimants, this means that it may be advisable to consult their own expert to help determine the “probable costs”.

Do you have any questions?

Europe

EUGH ruling “LKW Walter”

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Problem definition

The possibility of being able to enforce one’s own rights as easily and quickly as possible in cross-border EU business transactions, which is very welcome in principle, has some pitfalls. The author’s experience shows that traders are often overwhelmed when they receive legally relevant mail from abroad. This is not least due to the fact that court documents received from abroad often do not meet the requirements of European law. Art. 8 of the European Service Regulation 2007 (Regulation No. 1393/2007 of the European Parliament and of the Council of 13 November 2007 on the service in the Member States of judicial and extrajudicial documents in civil or commercial matters; in short: EUZVO 2007) stipulates that every document that courts within the EU wish to serve must be accompanied by a form set out in the annex to the regulation, which sets out the important rights of the recipient. Without this form, service is ineffective and time limits do not begin to run. Furthermore, Art. 8 of the EUTMR stipulates that the addressee has the right to refuse acceptance or to return the document within one week if they are unable to understand it. This case is very relevant in practice because it is more the rule than the exception that documents are sent without being translated into the recipient’s language.

In its judgment of 7 July 2022 (C-7/21; “LKW Walter”), the CJEU recently dealt with the latter protective right of the recipient – the one-week reflection period – with regard to the important question of how national appeal periods and the period for refusing acceptance (reflection period) interact.

This ruling of the European Court of Justice is of great importance, as it once again makes it clear that the European regulations for the protection of the recipient in cross-border deliveries must be interpreted strictly and that national regulations that reduce this protection are unlawful and therefore irrelevant.

The “LKW-Walter” ruling by the ECJ

In brief, the judgment of the CJEU of 7 July 2022 (C-7/21) was based on the fact that, in an Austrian-Slovenian constellation, the Slovenian courts had deemed an objection lodged from Austria against a Slovenian payment order to be untimely. In this case, the Slovenian courts had based the start of the objection period on the day of service in Austria and thus disregarded the one-week period under Art. 8 EUZVO 2007 when calculating the very short eight-day objection period. Calculated from the date of service, the objection lodged by Austrian lawyers was then also time-barred. The Slovenian courts adhered to their calculation method throughout all instances. The case was only referred to the European Court of Justice in the context of lawyers’ liability proceedings.

With regard to the ultimately only relevant question referred for a preliminary ruling, namely whether the one-week time limit under Art. 8 EUTMR 2007 suspends national time limits for appeals, the ECJ made the following findings in particular:

’35 That possibility of refusing to accept the document to be served constitutes a right of the addressee of that document (judgment of September 6, 2018, Catlin Europe, C 21/17, EU:C:2018:675, paragraph 32 and the case-law cited). The addressee may exercise that right when the document is served or within one week, provided that he returns the document within that period.”

“36 It is also apparent from the case-law of the Court that that right to refuse to accept a document to be served makes it possible to protect the rights of the defense of the addressee of that document, in compliance with the requirements of a fair trial laid down in Article 47(2) of the Charter. Even if Regulation No 1393/2007 is primarily intended to improve the effectiveness and speed of judicial proceedings and to ensure the proper administration of justice, those objectives cannot be achieved by compromising in any way the effective protection of the rights of the defense of the addressees of the documents concerned (see, to that effect, judgment of 6 September 2018, Catlin Europe, C 21/17, EU:C:2018:675, paragraph 33 and the case-law cited).”

“41 The practical effectiveness of the right to refuse to accept a document to be served presupposes, first, that the addressee has been informed of the existence of that right and, second, that he has the full period of one week to assess whether he should accept or refuse to accept the document and, in the event of refusal, to return it.”

’45 However, the objective pursued by Article 8(1) of Regulation No 1393/2007, which is to avoid any discrimination between those two categories of addressees, requires that addressees who receive the document in a language other than that referred to in that provision be able to exercise their right to refuse to accept that document without suffering any procedural disadvantage in view of their cross-border situation.

“46 Consequently, if the document to be served is not drawn up in or translated into one of the languages referred to in this provisionthe period of one week provided for in Article 8(1) of Regulation No 1393/2007 shall not begin to run at the same time as the period prescribed for lodging an appeal under the legislation of the Member State to which the authority which issued the document belongs belongs as otherwise the practical effectiveness of this provision in conjunction with Article 47 of the Charter would be impaired. On the contrary, the period for lodging an appeal must, in principle, begin to run after the expiry of the period of one week provided for in Article 8(1) of Regulation No 1393/2007.”

Conclusion

Recipients of court documents from other EU countries should ensure that the foreign court strictly observes the rights of the recipient in accordance with the EU Regulation. In case of doubt, violations will result in the service being invalid. Time limits under the national law of the country of origin cannot begin to run until effective service has been effected on the addressee. This includes the recipient having the full one-week period for consideration under Art. 8 EUTMR 2007 [Note: The new EUTMR 2020 now provides for a two-week period in Art. 12].

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Construction worker in protective uniform shaking hands with businessman in hardhat at construction

Bid low and look high – How to deal with unfair offers in construction law

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Problem description

Many fellow sufferers will be familiar with the following constellation: As the client or building owner, you have opted for the most favorable of the offers obtained, which are comparable in quality. It is not uncommon for the rude awakening to come with the final invoice at the latest. The final costs often exceed the offer many times over.

What went wrong? First of all, when it comes to the question of whether the “additional payment” can be demanded from the contractor commissioned, it is of course of central importance what was agreed in the contract ultimately concluded on the basis of the offer (see the following article).

But what happens if the contractor has submitted a so-called bait offer? This refers to an offer that the contractor has deliberately, i.e. intentionally, submitted at a particularly low price in order to “land” the contract.

It is surprising that this practice receives little attention in case law, although this approach is by no means rare.

Solution approaches

The starting point is the question of whether a bidding contractor is permitted to underestimate the quantities and expenses required to perform the work for which it is bidding in order to then take into account the additional quantities and expenses that will almost certainly be required later in the form of supplements. Such unfairly acting contractors regularly rely on gaps in the specifications to justify their subsequent additional charges.

In principle, this procedure is not permitted!

The strategy of“bid low and add high” is unlawful. The bidding company may not simply retreat to a particularly favorable calculation approach in order to improve its prospects of being awarded the contract with the disadvantageous consequence for the client that the risk of a subsequent supplement increases accordingly.”

This can be clearly inferred from the case law of the BGH.

By way of example, the notable judgment of the BGH of February 25, 1988 (case no. VII ZR 310/869), which has become known under the keyword “frivolity”, should be mentioned. In this judgment, the BGH stated (note: “plaintiff” refers to the “frivolous” bidder):

“The clients must have been aware that the soil and water conditions were only incompletely specified in the tender documents. Since the soil report did not contain any water permeability values and pumping tests had obviously not been carried out, only rough estimates could be considered from the outset. If the plaintiffs did not want to accept this in their calculation, they should have asked the defendant to supplement the tender documents accordingly. Therefore, there is much to suggest that the principles which the Senate has long developed for the case that a specification is recognizably incomplete for the contractor should be applied here (e.g. MDR 1966, 317 = NJW 1966, 498; most recently Senate judgment, MDR 1988, 43 = BauR 1987, 683).

Ultimately, however, this can be left to one side because a claim for damages is already ruled out here for another reason. The basis for a claim for damages based on culpa in contrahendo is always “disappointed trust” (Senate judgment, MDR 1966, 317 = NJW 1966, 498; cf. also Ingenstau/Korbion, VOB 10th ed. A § 9, para. 5). This cannot be said to be the case here because, according to the findings of the Higher Regional Court, the plaintiffs calculated “frivolously” in their offer and accepted the present dispute about the additional costs incurred. How correct this statement is is shown above all by the fact that the plaintiffs in their offer for the water maintenance costs for lot 2 only estimated DM 2.00 per running meter, while the plaintiff to 1 had shortly before demanded DM 75.00 per running meter for lot 1. The fact that in the case of the lot in question here it was not plaintiff 1 alone, but rather together with plaintiff 2, who submitted the offer, is irrelevant, since both bidders clearly had the calculation documents from the earlier offer for lot 1 at their disposal. The reason given for the difference in approach, firstly that the costs for the dewatering work for lot 2 had been partially allocated to the construction site equipment, and secondly that it had been possible to calculate “lower” because a lot of groundwater had already been extracted from the construction area by the dewatering for lot 1, does not explain such a wide divergence in the cost estimates for the two lots.

Rather, this disproportionately large, objectively unjustifiable difference shows that the plaintiffs ultimately calculated more or less “in the blue” – if not even “speculatively” – without any reasonable reference to the invitation to tender (cf. Senate judgment, MDR 1988, 43 = BauR 1987, 683, 685 = ZfBR 1987, 237, 238). In doing so, they not only significantly increased the risk that unforeseeable “additional claims” would later be made (in this case around one hundred times the bid price stated for the dewatering) (cf. Senate loc. cit.), but virtually conjured up the risk in order to be able to take advantage of it without jeopardizing their prospects of being awarded the contract. Anyone who acts in this way cannot invoke “disappointed trust”.

The following principles can be inferred from the above extract, which stand in the way of any subsequent proposals:

  • Gaps in supply must not be accepted in silence.
  • Calculating “frivolously” is prohibited.
  • Supplements cannot be based on tenders submitted “in the blue”.

Conclusion:

Anyone who finds themselves in the situation described above should, in addition to general contractual agreements, also carefully examine the original offer to determine whether it was a “frivolous” offer.

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Businessmen Deal Handshake Agreement Concept

Corona as a disturbance of the business basis?

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In two recent landmark rulings, the Federal Court of Justice clarified that the principle of “pacta sunt servanda” (“contracts must be honored”) must be observed even in unusual circumstances that no one had anticipated, such as the coronavirus crisis. That’s right!

Problem description: Corona as interference with the basis of the transaction?

Countless contractual relationships have not been implemented as planned since the start of the coronavirus crisis (see also this article). The government corona measures, for which none of the contracting parties are naturally responsible, were mostly to blame. This has raised the exciting question of how to deal with cases in which the main contractual service – e.g. the provision of the premises in tenancy law constellations – could still be provided despite the corona measures, but the use of the premises was not possible for the tenant in whole or in part as a result of the corona measures.

In the past two years or so, the courts of lower instances have all too easily awarded the burdened party – in the aforementioned example, the tenant – the right to reduce or even cancel their own obligation to perform (e.g. rent payment) with reference to Corona as a disturbance of the basis of the transaction. Often a blanket approach was taken and, for example, a division was ruled.

This approach is not legally tenable according to recent BGH rulings. This case law must be endorsed!

The BGH’s clarifications on corona as a disruption of the basis of the transaction in detail

Starting point: pacta sunt servanda

As already mentioned at the beginning, the Federal Court of Justice has clarified in two recent decisions, which point the way for the right to contract adjustment in accordance with Section 313 BGB (disturbance of the basis of the contract), in a welcome and clear manner that contracts must also be adhered to in the event of a subsequent serious change to the contractual basis.

Assessment of the agreed and/or contractual risk distribution – who bears the risk of use?

This applies in particular and of course if the risk realized as a result of the changed circumstances is legally and/or contractually assigned to a contracting party.

Using the example of commercial tenancy law, the BGH in its Judgment of January 12, 2022, Ref. XII ZR 8/21 , explains how strictly the obligation to comply with a concluded commercial lease agreement is to be understood.

The following applies:

The subject of this new ruling by the BGH on January 12, 2022 was the complete closure of a store that had become necessary due to official measures imposed by the coronavirus authorities.

For the tenant, this meant a complete loss of use of the commercial space he had rented for the period of closure.

On this issue, the BGH found that

  • the complete loss of the possibility of use does not constitute a defect in the leased property or a case of impossibility of surrendering the leased property, and
  • In the case of contractual relationships under tenancy law, the so-called usage risk lies with the tenant by law.

According to the BGH, the object of the usage risk is in particular the tenant’s expectation of being able to generate profits.

Even more significant is the further finding of the BGH that the assumption of the prescribed risk of use also includes circumstances occurring subsequently, e.g. in the form of official measures. The BGH stated:

“In the case of commercial leases, however, the risk of use of the leased property is generally borne by the tenant. This includes, above all, the risk of being able to make a profit from the rented property. If the tenant’s expectation of profit is not fulfilled due to a circumstance that subsequently arises, a typical risk of the commercial tenant is realized. This also applies in cases in which subsequent legislative or official measures result in an impairment of the tenant’s business operations (Senate ruling of July 13, 2011 – XII ZR 189/09 – NJW 2011, 3151 para. 8 f. mwN).”

Right to contract adjustment as a major exception

As a consequence of the fact that the risk of use also includes circumstances that occur subsequently and may have a serious impact, the BGH further clarified that a claim by the affected party for an adjustment of the contract cannot be considered under the aspect of interference with the basis of the transaction pursuant to Section 313 BGB if and to the extent that the circumstances in question, on which such a right of adjustment is based, are covered by the contractual risk assumed by this party.

The BGH has once again explained this with welcome clarity:

“In principle, however, there is no scope for taking into account the provisions on the frustration of contract (Section 313 BGB) insofar as it concerns expectations and circumstances which , according to the contractual agreements, should fall within the scope of risk of one of the parties. Such a contractual distribution of risk or assumption of risk regularly excludes the possibility for the contracting party to invoke a disturbance of the basis of the transaction if the risk materializes (Senate ruling BGHZ 223, 290 = NJW 2020, 331 marginal no. 37 with further references).”

Interim conclusion on the significance of corona as a disruption of the basis of the transaction

“Pacta sunt servanda” means that assumed contractual obligations generally continue to apply unchanged even in the event of a subsequent serious change in the circumstances underlying the contract.

In particular, if a certain contractual risk, e.g. the risk of use, has been assumed by one party in accordance with the agreements made, circumstances relating to this assumed risk cannot form the basis of a claim for contract adjustment.

NOTE:

Even if an interpretation of the circumstances of the individual case shows that the circumstances that occurred in the case in question “exceed” the risk assumed, this does not mean that the agreed distribution of risk becomes irrelevant.

Rather, in such cases, as the BGH has also made clear, the party bearing the risk according to the agreements made does not bear the realized risk alone. Based on the circumstances of the individual case, it must be determined how the parties are to participate in the consequences of the realized risk. The BGH stated:

“Contrary to the plaintiff’s view, the defendant in the present case did not contractually have the sole risk of use in the event of a pandemic-related closure of its retail store.”

What is important about the above statement is that the BGH only assumes that in this case the risk of use does not lie solely with the tenant, even in the case of complete closure.

Content and loss of the right to amend the contract

In the event that the affected party is exceptionally granted a right to adjust the contract in accordance with the prescribed criteria, the BGH has again attached great importance to the principle of pacta sunt servanda on the legal consequences side, i.e. with regard to the content of any contract adjustment.

In a further ruling dated March 2, 2022, ref. no. XII. ZR 36/21, the BGH initially pointed out that it is not sufficient for a right to adjust the contract that the changed circumstances in question exceed the contractually assumed risk. In its ruling of January 12, 2022 (case no. XII ZR 8/21), the BGH stated that

“Even if the business closure associated with the pandemic

If the impairment of use of the rented property cannot be attributed solely to the tenant’s risk of use, this does not mean, however, that the tenant can always demand an adjustment of the rent for the period of closure.”

Rather, it must be added that, again taking into account all the circumstances of the individual case, adhering to the contract unchanged appears to be completely unreasonable.

The agreed distribution of risk is particularly important for the question of reasonableness. The BGH explicitly highlighted this in this further coronavirus rulingfrom March 2, 2022 (case no. XII ZR 36/21):

“Whether it is unreasonable for the tenant to adhere to the unchanged contract also requires comprehensive consideration in this case, in which all circumstances of the individual case must be taken into account (Section 313 (1) BGB). An adjustment can only be demanded to the extent that one party cannot reasonably be expected to adhere to the unchanged contract, taking into account all circumstances of the individual case, in particular the contractual or statutory distribution of risk. According to Section 313 (1) BGB, the court must therefore choose those legal consequences that are reasonable for the parties , taking into account the distribution of risk (MünchKommBGB/Finkenauer 8th ed. § 313 para. 89) and by which a distribution of the realized risk in line with the interests of the parties is achieved with the least possible interference with the original provision. the least possible interference with the original regulation is established (BGH judgment of September 21, 1995 – VII ZR 80/94 – ZIP 1995, 1935, 1939 mwN).”

The aforementioned statements of the BGH contain another important and very welcome finding. This is that, in the event that a claim for contractual adjustment is upheld, an adjustment must be chosen that represents the least possible interference with what was originally agreed. The BGH has thus once again emphasized the great importance of the pacta-sunt-servanda principle.

According to the BGH, contract adjustments are “millimeters of work”.

Any adjustment to the content of what has been agreed requires special justification, which must be justified taking into account the criteria described above and weighing up all the circumstances of the individual case.

NOTE:

It follows logically from the above that the party entitled to claim under certain circumstances can also lose its right to adjust the contract again – and for good!

This applies if the party definitively rejects the right of adjustment offered to it. The latter was the case in the ruling by the BGH on March 2, 2022 .

In this case, the wedding celebration in dispute had to be canceled for the planned date due to coronavirus. The landlord of the wedding venue had offered alternative dates, but the bride and groom were no longer interested in these and only wanted a refund of the rent already paid.

The BGH has ruled that the claim for repayment of the rent does not exist. The couple should at least have agreed to postpone the party. As they had refused to do so, the obligation to pay the rent remained.

The BGH stated (from para. 41 of the judgment):

(…) However, it is an error of law that the Court of Appeal did not sufficiently consider whether the plaintiffs’ claim under Section 313 (1) BGB for an adjustment of the contract is limited to the postponement of the wedding celebration offered by the defendant, because this alone can establish a distribution of the pandemic risk in line with the interests of the parties with the least possible interference with the original arrangement. (…) However, it did not adequately take into account the fact that the defendant had already offered the plaintiffs a large number of alternative dates on March 26, 2020, including for 2021, which would have enabled the plaintiffs to make long-term plans, also taking into account the further development of the pandemic. The defendant repeated this offer to rebook the date free of charge on April 25, 2020. However, the plaintiffs were not prepared to enter into further negotiations with the defendant regarding an appropriate contract adjustment and rejected the offer to reschedule the date across the board. This shows that the plaintiffs were not interested in a solution that was in line with their interests, but only wanted to achieve a termination of the rental agreement and thus unilaterally shift the risk of canceling the celebration to the defendant.

(…)

The adjustment of the contract sought by the plaintiffs to the effect that they are released from their obligation to pay rent in whole or in part is therefore out of the question because they can reasonably be expected to accept the defendant’s offer to postpone the date of the planned wedding celebration, taking into account all the circumstances, including the contractual distribution of risk (Section 313 (1) BGB). (…)”

NOTE:

The aforementioned ruling from March 2, 2022 is also significant from another perspective. In this ruling, which was issued following the first Corona ruling of January 12, 2022 (BGH ruling of February 12, 2022, file no. XII ZR 8/21), which, as is well known, concerned commercial tenancy law, the BGH has now also ruled for the consumer sector that the principle of “pacta sunt servanda” must be applied very strictly and that an adjustment to the contract can therefore only be justified in absolutely exceptional cases.

Corona as a disturbance of the business basis? – Overall conclusion

Pacta sunt servanda! Even in Corona times.

Do you have any questions?

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Evidential value of private expert opinions

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The evidentiary value of private expert opinions is very close to that of court expert opinions. In practice, this is often not the case: many courts tend to regard private expert opinions, i.e. expert opinions commissioned outside the proceedings, as a nuisance. These expert opinions, which are usually “labeled” as biased, are therefore in most cases considered to be of lesser value than court-commissioned expert opinions and are downgraded in the judgment with clichéd justifications. However, this approach, which is widespread in practice, is not covered by supreme court case law! In fact, expert opinions provided by the parties are important for the constitutionally guaranteed legal protection of the parties. This is the only way to fully uncover – not infrequent – errors in court reports.

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EURO clauses – prevention of euro crisis scenarios

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The term “euro clause” is still predominantly associated with the introduction of the euro. The following article deals with the unpleasant eventuality of the euro entering a crisis, e.g. associated with the exit of individual countries from the eurozone. To prevent this eventuality, it is worth thinking about “post-euro” clauses.

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Agreement of obligations to keep free

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The contractual agreement of hold harmless obligations is still a rarely used contractual instrument. However, such indemnity agreements can be very helpful, especially in multi-party constellations. One particularly relevant example is in the area of highly complex and therefore contentious plant construction.

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Recognition and enforceability of foreign judgments

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The question of the recognition and enforceability of foreign judgments in Germany is of great practical relevance: If a foreign (non-European) business partner threatens to sue in his home country in the event of a conflict, a decision must be made as to whether or not a defense against a possible lawsuit abroad makes sense.

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