YouTube Terms of Service for Businesses: A Practical Look at Monetization and Embedding

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In this series, I examine the terms of service of major platforms from a business perspective: Who is our contractual partner, which law applies—and which clauses pose practical risks? My third episode focuses on YouTube. I’ll focus on two points that frequently raise questions in practice: YouTube’s general right to monetize uploads and the rules for embedding —each with a clear explanation and a brief legal assessment based on the terms of service.

Contracting Parties & Governing Law

(Note: The choice of law and venue provisions do not take effect until the Terms of Use have become an effective part of the contract—more on this below.)

For users in the EU/EEA and Switzerland, the contracting party is Google Ireland Limited (Dublin). For users based in Germany—which, in practice, regularly includes companies headquartered in Germany—the German-language YouTube Terms of Service stipulate that German law applies and that legal proceedings may be brought before the German courts with jurisdiction under the law. This is noteworthy because YouTube thereby deliberately accepts a local legal and judicial framework. While this appears user-friendly, it is also strategic: it avoids conflicts of law within the single market and reflects legal requirements for digital content and services in the EU.

Applicability of the Terms of Use—Are They Even Part of the Contract?

Whether the platform terms are even part of the contract in the event of a dispute depends on whether they were validly incorporated. The following factors are typically decisive: a clear notice, access to the full text prior to the conclusion of the contract, and verifiable consent to the specific version. These basic requirements play a role—with minor differences—in most legal systems.
For German companies, incorporation is assessed under German law. In practice, therefore, clear records (timestamps, version of the terms, account details) and verifiable access to the full text prior to consent are crucial. If this evidence is missing, it’s worth taking a closer look—even on YouTube.

In-Depth Look: Incorporating Terms and Conditions in B2B Transactions – Guide & Checklist: https://www.legal-plus.eu/agb-einbeziehung/

“Right to Monetization” (General Prohibition on Monetization for Uploaders)

The YouTube Terms of Service, under the section titled “Your Content and Conduct,” state:

“You grant YouTube the right to monetize your content on the service. This monetization may include displaying ads within or in connection with the content or charging users access fees. This agreement does not entitle you to any payments. Payments you receive from YouTube under another agreement between you and YouTube (e.g., through the YouTube Partner Program, Channel Memberships, or Super Chat) will be treated as royalties effective June 1, 2021. Where required by law, Google will withhold taxes on these payments.

What does that mean in practice?

YouTube may display its own ads on any video you upload or monetize it in other ways— even if you don’t participate in a partner program yourself. Without a separate compensation agreement (e.g., the YouTube Partner Program), you will not receive a share of these revenues. For corporate communications, this means that simply “uploading and embedding” a video can result in third-party ads appearing alongside your corporate video—ads over which you have no control.

Analysis (under German law)

The clause is clearly worded and, in the “ad-supported in exchange for free distribution” ecosystem, is generally to be expected. Nevertheless, it comes as a surprise to companies that intuitively assume they have free disposal of their own content—including the advertising environment. In substance, it stands up to scrutiny because it transparently discloses the business model and offers alternative compensation methods (YPP, etc.). Vulnerabilities arise primarily when YouTube uses advertising formats that convey a misleading impression of the advertiser’s identity or infringe upon communication or labeling requirements (e.g., issues related to surreptitious advertising or labeling under the Unfair Competition Act (UWG) and the State Media Treaty).

It seems that points of contention tend to arise over factual issues: unwanted third-party advertising appearing alongside corporate content.

Practical Tip:

If you want to communicate without ads (e.g., for product, HR, or investor videos), you shouldn’t rely on YouTube to show your content without ads. Here are three practical approaches:

  1. Your own media library or a professional video hosting service that guarantees ad-free playback.
  2. Two-pronged strategy: An ad-free primary host for your website; additionally, use YouTube to expand your reach, but not as the sole source in key contexts (e.g., careers, products, investor relations).
  3. Internal Communication: Do not use YouTube for confidential or internal content; a closed, ad-free channel outside of public platforms is recommended for this purpose.

Embedding (“Embeds”) and Advertising Context on Your Own Website

The YouTube Terms of Service, under the section titled “Your Use of the Service,” state:

“You can view or listen to content for your personal, noncommercial use. You can also display YouTube videos using the embeddable YouTube player.”

The relevant prohibition (excerpt) reads as follows:

“The following is not permitted:
10. Using the Service to (a) sell advertising or sponsorships placed in, on, or around the Service or its content, unless it complies with YouTube’s advertising policies (such as product placements that comply with the policies); or (b) to sell advertising or sponsorships on any page of a website or application that contains content derived exclusively from the Service, or where content derived from the Service forms the primary basis for such sales (for example, selling ads on a webpage where YouTube videos are the only content providing added value).”

What does that mean in practice?

YouTube only allows videos to be embedded using the official player. You may then display the video on your website. You are not permitted to “frame” the embedded player in such a way that your ads accompany or overlay this content—unless this is expressly permitted by YouTube’s advertising policies.

Typical “no-gos” include:

  • Embedding and custom display ads directly on or above the player (“pre-roll” from your own ad server, overlays, interstitials).
  • Technical changes to the player (e.g., removing YouTube branding/links, disabling features).

Analysis (under German law)

In any case, the policy is sufficiently transparent: embedding is allowed, but only within the YouTube ecosystem and without any additional advertising “frills.” This protects YouTube’s business model and the interests of content creators. From a terms-of-service perspective, this is generally unobjectionable.

Friction points arise when websites rely on their own marketing efforts. Anyone who wants to manage video monetization on their own should avoid using YouTube embeds.

Practical Tip:

  • Use only the official embed code. Do not modify the player.
  • No custom ad overlay.
  • If advertising is necessary on the page: Place ads outside the immediate player area (clearly separated), and follow YouTube’s advertising policies.
  • Alternative if you need control over your own marketing: a host that allows completely ad-free content or the inclusion of your own ads

My Review of YouTube

YouTube’s legal framework is relatively clear for companies in Germany: the contracting party is Google Ireland, German law applies, and German courts have jurisdiction. In terms of content, the two clauses discussed here are legally “sound,” but they are relevant to your business:

  • The monetization policy means that you are not entitled to ad-free playback of your uploads. If you want to communicate “clean” or control your own marketing, you need an alternative hosting strategy.

  • The embedding rules require the use of the official player and prohibit the use of custom ad formats directly “around the video.” Anyone who markets the site on their own will quickly run into limitations here.

When it comes to reach and public communication, YouTube is virtually irreplaceable. For controlled brand management, ad-free content distribution, and self-promotion, complementary or alternative approaches make sense.

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.

Vertragsrecht Stuttgart 21 – Sprechklausel Urteil

Contract law: Stuttgart 21 and the speech clause – a lesson in clear contract drafting

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In contract law, sometimes a single sentence can decide billions. This is exactly what happened with the Stuttgart 21 project. At the center of the legal dispute was a short contractual provision – the so-called “speech clause”. It was intended to ensure a willingness to talk in the event of additional costs, but was understood by Deutsche Bahn as a basis for additional payments. This argument did not stand up in court. The decisions of the Administrative Court of Stuttgart and the Administrative Court of Baden-Württemberg are a prime example of how contracts should be interpreted – and what happens if they remain too vague.

Part 1: The judgment on Stuttgart 21 as a textbook case in contract law

In a ruling dated May 7, 2024 (case no. 13 K 9542/16), the Stuttgart Administrative Court dismissed Deutsche Bahn’s claim for cost sharing by the project partners in the Stuttgart 21 project. The Administrative Court of Baden-Württemberg rejected the application for leave to appeal in its ruling dated August 1, 2025 (case no. 14 S 1737/24). The ruling is therefore legally binding. The dispute concerns a public law financing agreement with a volume in the double-digit billion range. At the center of the legal dispute is a single clause: the so-called “speech clause”.

This reads:

“In the event of further cost increases, the EIU and the state will enter into talks.”

Deutsche Bahn had argued that an obligation to subsequently increase the financing contributions could be derived from this regulation. The courts have clearly denied this.

The decision of the VG Stuttgart and its explicit confirmation by the VGH Baden-Württemberg can be considered an exemplary case for the systematic interpretation of contracts. They show how wording, systematics, drafting history and purpose interact – and what consequences unclear or strategically open regulations can have.

1. wording of the speech clause

In the event of further cost overruns, the clause merely regulates the obligation to enter into discussions. No material claim to cost sharing can be derived from the mere requirement to hold discussions. The term “discussions” is too unspecific in legal terms to justify legal obligations in the form of additional payments.

2. systematics of the contract

The speech clause follows a graduated and quantified financing regulation. This structure suggests that a substantive obligation ends with the last quantified contribution and is replaced by a procedural clause that has no legal consequences beyond the communication obligation. The lack of a distribution key shows that no further obligation to pay was deliberately intended.

3. historical interpretation

The clause was created after several draft versions in which – partly on the initiative of the railroads – an explicit rejection of automatic additional payments was envisaged. The development shows: The parties did not want a binding regulation of further contributions.

4. teleological interpretation

The purpose of the speech clause was not to establish an obligation to continue the project or to co-finance it, but at most to create a basis for discussion for amicable solutions. An obligation to reach an agreement or to pay cannot be derived from this.

5. no supplementary interpretation of the contract

There is no gap in the contract that could be closed by an amendment. The clearly staggered financing up to a maximum amount and the waiver of automatic updating were an expression of deliberate risk limitation.

6. no interference with the basis of the transaction

The principle of frustration of contract did not help Deutsche Bahn either. The parties had expressly agreed that in the event of additional costs, payment would only be made in writing, not automatically.

Part 2: What a good clause in contract law must achieve – lessons from the language clause

For me, the ruling is a lesson in contract law: contracts do not live from euphonious formulations, but from clear, robust provisions.

I see this as a prime example of a central problem in many contract negotiations: When economic compromises are translated into non-binding language. The result is seemingly elegant formulations that have no substance in the event of a dispute – just like here.

Anyone who uses regulations only as a diplomatic formula, but does not back them up with legal obligation, is building on sand. This can be fatal for large projects. Contracts need to be thought of like processes: resistant to dispute, resistant to interpretation, strategically sound. And vice versa: a judgment is always the result of the contract on which the process is based.

In contract law, good clauses are not created through harmony, but through the struggle for clear solutions. Those who evade in negotiations will lose in a dispute. The speech clause shows what happens when, instead of clarity, only a willingness to talk is agreed – and thus the actual conflict is postponed.

About RA Daniel Meier-Greve

Daniel Meier-Greve is a lawyer based in Hamburg. He advises and represents clients in complex commercial law disputes – out of court and in court. His work focuses on contract drafting and litigation.

He does not view the two separately: anyone who drafts contracts must also think about the dispute – and anyone who conducts litigation should understand how contracts are created. This change of perspective characterizes his legal work – and is the basis of his advice.

About Legal+

Legal+ stands for legal advice with a strategic view: Drafting and disputes belong together. A contract is not an end, but a means – to manage risk, to balance interests, to prepare for a dispute. Legal+ thinks contracts in terms of conflict – and conducts proceedings with the knowledge of how they came about.

Unclear clauses cost time and money – I draft contracts that HOLD.

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?

Vertragsgestaltung im Vertragsrecht – klare Regelungen

Possibilities of contesting a settlement concluded in court

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Overview of the types of court settlements

The Code of Civil Procedure provides for two ways of reaching a settlement with the help of the court:

  • On the one hand, a court settlement can be reached during the oral hearing. In this case, the settlement negotiated during the hearing is recorded by the court in the minutes of the hearing and must then be approved by the parties or their representatives. The approval must also be recorded in the minutes.
  • On the other hand, a court settlement can also be concluded by the parties submitting a written settlement proposal to the court or accepting a written settlement proposal from the court in writing to the court. The court then determines the conclusion and content of the settlement by means of an order.

Effect of the settlement agreement

The settlement effectively concluded in one of the aforementioned ways generally leads to the termination of the legal dispute.

In its ruling of 14.7.2015 (case no. VI ZR 326/14; NJW 2015, 2965), the BGH summarized the legal nature and effect of a court settlement:

“(…)

A court settlement has a dual legal nature. On the one hand, it is a procedural act that ends the legal dispute and whose effectiveness is determined according to procedural law principles. On the other hand, it is a private legal transaction to which the provisions of substantive law apply and with which the parties settle claims and liabilities (BGHZ 164, 190 [193 f.] = NJW 2005, 3576 mwN; cf. also BGHZ 142, 84 [88] = NJW 1999, 2806; BGHZ 79, 71 [74] = NJW 1981, 823; BGHZ 41, 310 [311] = NJW 1964, 1524; BGHZ 28, 171 [172] = NJW 1958, 1970; BGHZ 16, 388 [390] = NJW 1955, 705; OLG Hamm, NJW-RR 2012, 882). Procedural acts and private legal transactions are not separate. Rather, the procedural effects and the substantive legal agreements are interdependent (BGHZ 164, 190 [194] = NJW 2005, 3576; BGHZ 79, 71 = NJW 1981, 823). The court settlement is only effective if both the substantive legal requirements for a settlement and the procedural requirements for an effective court action are met. If one of these requirements is not met, there is no effective court settlement; the effect of ending the proceedings does not occur (BGHZ 164, 190 = NJW 2005, 3576; see also BGHZ 16, 388 = NJW 1955, 705). This also applies to the court settlement within the meaning of Section 278 VI ZPO (see BT-Drs. 14/4722, 82; BAGE 120, 251 = NJW 2007, 1831 para. 15; OLG Hamm, NJW-RR 2012, 882; Assmann in Wieczorek/Schütze, ZPO, 4th ed., Section 278 para. 79; Thomas/Putzo/Seiler, ZPO, 36th ed., Section 794 para. 2 f.).

(…)”

Dispute over the effectiveness of the settlement

In practice, it happens time and again that one party attempts to challenge the validity of the settlement reached.

The starting point here (see the BGH ruling cited above) is that the court settlement is of a dual nature, with the result that grounds for invalidity can arise on two levels. A distinction must therefore be made between two types of conceivable defects:

Level 1: Process-related defects

On the one hand, the court settlement is a litigation contract and could suffer from procedural defects.

The most frequent deficiency at this level is the incorrect logging of the contents of the comparison.

Level 2: Material defects

The court settlement is also a “normal” substantive legal contract between the parties with which they wish to end or settle their dispute.

This contract may also suffer from defects, e.g. in such a way that one of the parties was in error when making the declarations enabling the settlement. Under certain circumstances, this would enable it to contest the settlement on the grounds of error in accordance with Section 119 BGB. The case of Section 779 BGB (error regarding the basis of the settlement), which is expressly regulated by law, also comes into consideration. A right of adjustment may also arise from the point of view of interference with the basis of the transaction (Section 313 BGB)

Procedural consequences of a settlement challenge

If a party asserts defects in the settlement to the court, this leads to the continuation of the proceedings and the examination of the asserted defects by the court.

A distinction must then be made:

  • If the court finds procedural defects, this means that the court settlement is invalid. The legal dispute is still pending. A special situation arises in cases in which the parties had initially reached a substantively effective agreement and this agreement was subsequently incorrectly recorded in the minutes. This is because the merely erroneous recording does not eliminate the previously valid agreement.

    And even in other cases of a court settlement that is ineffective for procedural reasons, it may be contrary to good faith (Section 242 BGB) if a party invokes the procedural defect due to contradictory behavior. The BGH assumed this as follows in the judgment cited above:

    (…)
    However, in accordance with the principle of good faith (§ 242 BGB), the plaintiff cannot invoke the fact that the settlement determined by the appellate court pursuant to § 278 VI 2 ZPO was not valid in procedural terms.

    The principle of good faith also applies in procedural law (…).
    Contradictory behavior of a party (venire contra factum proprium) in the process can be an abuse of rights and therefore inadmissible (…).

    Contradictory conduct is an abuse of rights if a situation of trust has arisen for the other party or if special circumstances make the exercise of rights appear to be contrary to good faith (…). According to the established case law of the BGH, the exercise of rights may be inadmissible if, for example, the overall picture of contradictory conduct arises objectively because the earlier conduct is objectively incompatible with the later conduct and the interests of the other party appear to be primarily worthy of protection in view of this (…).

  • If the court finds material defects that result in the settlement being null and void (i.e. initially ineffective), the situation is as if the settlement had never existed.

    The proceedings continue as normal because the legal dispute was never actually concluded.

  • In cases in which the settlement was initially effective and is only called into question or has become ineffective ex nunc due to circumstances occurring later, e.g. due to a disruption of the basis of the transaction, the situation is more complex because the settlement initially had the effect of terminating the settlement.

    It is then correct to conduct a new trial, as there is no legal basis for reviving the old trial, which has been effectively terminated in the meantime. If the court comes to the conclusion that there are no defects, it will determine the effect of the settlement in terminating the proceedings by means of an appealable judgment.

CONCLUSION

Anyone who believes that the involvement of the court ensures a “clean” settlement is mistaken!

Do you have any questions?

Person filling the car with diesel at the gas station, close-up.

Guide to procedural law: Easier way to claim damages for exhaust gas manipulation – On the BGH ruling of June 26, 2023 (Ref. Via ZR 335/21)

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The article first briefly examines the background of the diesel scandal dating back to 2015 as well as the first landmark ruling of the BGH from 2020 in order to then deal with the effects of the current ECJ ruling of March 21, 2023 (Ref. C-100/21), which laid the foundations for the amended BGH case law analyzed below.

A look back at 2015

The scandal surrounding emissions manipulation by car manufacturers dates back to 2015.

At the time, it turned out that VW had installed special software in the engine control unit to generate lower nitrogen oxide values on the test bench during emissions tests. In normal driving, however, the exhaust gas purification systems were deactivated in order to improve engine performance and fuel consumption. As a result, the vehicles did not comply with the statutory emission limits in real road traffic.

It later emerged that VW was not the only manufacturer to have “cheated” its way into supposed compliance with the statutory emission limits in the manner described above (or similar).

This resulted in waves of lawsuits from affected car buyers. The lawsuits were aimed at compensation for damages, reduction of the purchase price and rescission of contracts.

On the first landmark ruling of the BGH from 2020

In its first diesel ruling of 25.5.2020 (case no. VI ZR 252/19), the BGH ruled and confirmed the lower court in this respect that the fraudulent procurement of type approvals through emissions manipulation may also constitute a direct deception of the car buyer and, if necessary, a right of the buyer to compensation, and possibly also rescission, may be considered.

The guiding principles of the judgment were as follows:

a) It is equivalent to a direct fraudulent misrepresentation of vehicle purchasers if a vehicle manufacturer, in the context of a strategic decision taken by it during engine development, deliberately exploits the guilelessness and trust of vehicle purchasers by fraudulently deceiving the Federal Motor Transport Authority and then placing the vehicles thus falsified on the market.

b) If there are sufficient indications that at least one former member of the Management Board was aware of the strategic decision taken, the defendant manufacturer bears the secondary burden of proof for the assertion that such knowledge did not exist. It is irrelevant whether the former members of the Executive Board could be named as witnesses by the plaintiff.

c) If someone is induced by conduct giving rise to liability to conclude a contract that he would not otherwise have concluded, he may suffer pecuniary loss even if the performance and consideration are objectively valuable, because the performance is not fully usable for his purposes. However, the affirmation of financial loss under this aspect presupposes that the performance obtained through the unwanted contract is not only regarded as damage from a purely subjectively arbitrary point of view, but that the public opinion, taking into account the prevailing circumstances, also regards the conclusion of the contract as unreasonable, not appropriate to the specific financial interests and thus as disadvantageous.

d) The principles of equalization of benefits also apply to a claim for intentional immoral damage pursuant to Section 826 BGB.

This initially positive-sounding ruling meant that affected car buyers faced significant hurdles on the way to possible compensation, in particular:

  • According to the ruling at the time, a claim should require intent. Even though the BGH made it easier to provide evidence, the affected parties had to prove that the company managers had knowledge – possibly also “mediated” by employees.
  • Last but not least, the buyers concerned had difficulties with the necessary proof of loss. Thus, the BGH (see guiding principle 3 above) required that “the performance obtained through the unwanted contract is not only regarded as damage from a purely subjective arbitrary point of view, but that the public opinion (…) also regards the conclusion of the contract as (…) disadvantageous”.

The “prehistory” of the new BGH case law: The ECJ ruling of 21.3.2023 (Ref. C-100/21)

The overriding European law and thus the case law of the European Court of Justice (ECJ) is of essential importance for understanding the BGH’s changed case law in favor of consumers.

In an equally recent ruling of 21 March 2023 (case C-100/21), the ECJ laid the foundations for the current BGH case law by – contrary to previous BGH case law – granting individual protection to consumers under European type approval law. Paragraph 85 of the ECJ ruling states accordingly,

“(…) that Article 18 I, Article 26 I and Article 46 of the Framework Directive in conjunction with Article 5 II of Regulation (EC) No 715/2007 must be interpreted as meaning that, in addition to general legal interests, they protect the individual interests of the individual purchaser of a motor vehicle against its manufacturer if this vehicle is equipped with an unlawful defeat device within the meaning of Article 5 II of this Regulation.”

As if that were not enough, the ECJ even derives a claim for damages in favor of the car buyer from European law if the buyer has suffered damage as a result of the defeat device. Paragraph 91 of the ECJ ruling states,

“(…) that it follows from Article 18 I, Article 26 I and Article 46 of the Framework Directive in conjunction with Article 5 II of Regulation No 715/2007 that the Member States must provide that the purchaser of a vehicle equipped with an unlawful defeat device within the meaning of Article 5 II of that regulation has a right to compensation from the manufacturer of that vehicle if the purchaser has suffered damage as a result of that defeat device (…)”

The ECJ goes even further and admonishes the Member States to ensure that consumers actually benefit from this “European right to compensation”. According to the ECJ, this includes ensuring that the hurdles for consumers to obtain such compensation are not set too high. The ECJ ruling states this in paragraphs 92 and 93:

“92In the absence of provisions of Union law on the arrangements for obtaining such compensation by the purchasers concerned on account of the acquisition of such a vehicle, it is for each Member State to determine those arrangements.

93 However, national legislation which makes it practically impossible or excessively difficult for the purchaser of a motor vehicle to obtain adequate compensation for the damage caused to him by the manufacturer of that vehicle’s infringement of the prohibition laid down in Article 5(II) of Regulation No 715/2007 is not consistent with the principle of effectiveness.”

In short, the above-mentioned ECJ ruling is an obligatory instruction to the Member States that they must ensure that claims for damages by consumers due to exhaust gas manipulations that violate European type approval law do not remain mere theory.

On the new diesel ruling of the BGH of June 26, 2023 (Ref. Via ZR 335/21)

The ruling now issued by the BGH on June 26, 2023 (Ref. Via ZR 335/21) aims to implement the aforementioned requirements of the ECJ.

As a result, the BGH has significantly lowered the hurdles for claims for damages by diesel buyers in Germany, although (see my outlook at the end of this article) it seems questionable whether the BGH has gone far enough in accommodating consumers.

According to the amended BGH case law, vehicle manufacturers may in future be liable to pay compensation even if they have “only” acted negligently.

In addition, the BGH has implemented the further requirement of the ECJ, according to which car buyers must also have an effective way of obtaining compensation, by awarding affected consumers compensation in a range of 5 to 15 % of the purchase price without the need for an expert opinion.

In detail:

EC type approval cannot exclude claims for damages

In its ruling, the BGH first of all clarifies once again that neither an EC type approval granted nor an additional certificate of conformity can be suitable to exclude a tortious claim by the car buyer from the outset.

The decisive factor is that EC type approvals and any additional certificates of conformity only have effect with regard to a specific vehicle type, but the decisive factor for a claim under tort law is whether the specific vehicle purchased is affected.

Reversal (“major” compensation) still only in the case of intentional, immoral damage

The BGH continues to hold that “major” damages can only be claimed in the event of intentional immoral damage. In the event that a buyer’s trust in the correctness of the certificate of conformity is disappointed, he cannot demand that the vehicle manufacturer takes back the vehicle and refunds the purchase price less any benefits obtained.

Although European emissions law also protects the individual car buyer against the manufacturer if the vehicle purchased is equipped with an unlawful defeat device, the BGH stated verbatim (see para. 22 of the judgment):

“Union law, as clarified by the judgment of the Court of Justice of March 21, 2023, nevertheless does not require the purchaser of a motor vehicle equipped with an unlawful defeat device to be placed in the same position as if he had not concluded the purchase contract, i.e. to include the interest in rescinding the purchase contract in the material scope of protection of Section 6 (1), Section 27 (1) EG-FGV.”

The BGH further justifies this with, among other things, the limited wrongfulness of a “merely” culpable violation of a protective law in relation to an immoral, intentional damage.

The BGH sees no requirement in EU law and the case law of the ECJ to the effect that national law must provide for a right to rescission. It refers to the fact that the ECJ only requires sanctions that must be effective, proportionate and dissuasive. It also refers to a ruling by the Supreme Court of the Republic of Austria on April 25, 2023, which – for Austria – had affirmed a claim for major damages. The BGH considers this case law to be based on modalities of national Austrian law. It then also takes from the judgment of the Supreme Court that the Supreme Court itself assumes that EU law does not require the award of large damages.

Claim for compensation for so-called differential damages due to negligent violation of EU emissions legislation

The BGH then concedes that a negligent violation of EU emissions legislation – in the form of an impermissible defeat device – can justify a claim by the car buyer for compensation for the so-called differential damage.

In this respect, the ECJ stated that the so-called declaration of conformity pursuant to Article 26(1) of Directive 2007/46/EC provides individual protection for the vehicle purchaser, which is also aimed at ensuring that the purchased vehicle complies with all relevant legal acts. According to the ECJ, the right to register the vehicle in any Member State without further technical documentation is derived in particular from the declaration of conformity.

According to the case law of the ECJ, this reasoning in turn leads to a link between the declaration of conformity and the consumer’s individual purchase decision. This in turn corresponds to the principle established by the BGH that

“a buyer purchasing a vehicle for his own use would have refrained from purchasing the vehicle if he had been aware of the risk of an operating restriction or prohibition“

(see para. 30 of the judgment).

As a result, the BGH stated (see para. 32 of the judgment):

“The interest, which is therefore protected under EU law, not to suffer a loss of assets in the sense of the difference hypothesis by concluding a purchase contract for a motor vehicle due to a violation of European emissions law by the vehicle manufacturer, is protected by Section 823 (2) BGB in conjunction with Section 6 (1), Section 27 (1) EG-FGV according to the required interpretation of EU law. (…)”

Necessity of fault on the part of the car manufacturer

The BGH continues to demand fault on the part of the car manufacturer.

The BGH concedes that the ECJ did not deal with a fault requirement. However, the ECJ – which seems questionable to me (!) – did not directly derive a claim for damages due to an unlawful defeat device from Union law, but merely demanded such a claim to be defined in more detail by the Member States. With reference to the national law of the Federal Republic of Germany, the BGH upholds the culpability requirement and has explained this (see para. 37 of the judgment):

“According to its wording, § 823 para. 2 sentence 2 BGB does not permit an obligation to pay compensation independent of fault on the part of the injuring party. Rather, according to § 823 para. 2 sentence 2 BGB, if a violation of the protective law is also possible without fault according to the content of the protective law, the obligation to pay compensation only arises in the event of fault. Even if the limits of permissible interpretation of the law are exhausted, there is therefore no question of deriving strict liability from Section 823 (2) BGB. Nothing else applies with regard to the possibility of an interpretation in conformity with EU law. According to the case law of the Court of Justice, such an interpretation of national law finds its limit in the will of the national legislator expressed in the law (ECJ, judgment of January 22, 2019 – C-193/17, NZA 2019, 297 para. 74 mwN).”

If the affected car buyer has proven the existence of an unlawful defeat device, the vehicle manufacturer still has the option of demonstrating and proving that it neither acted intentionally nor negligently failed to recognize that the vehicle did not comply with EU regulations. If the vehicle manufacturer succeeds in doing so, it will not be liable in future either! This is because German tort law always presupposes fault on the part of the tortfeasor for tortious liability. According to the BGH, the German courts cannot impose tortious liability regardless of fault, which must also be decided in accordance with the requirements of the ECJ within the framework of the applicable national law.

Necessity of a reduction in assets – differential damages always to be assumed

For negligence cases, the BGH continues to adhere to the general principle that a claim for damages requires a reduction in assets due to the disappointed investment of trust when concluding the purchase contract for the motor vehicle.

Based on the ECJ’s requirement to grant consumers an “effective claim for damages”, the BGH links the required reduction in assets to the availability of a motor vehicle at all times, which in itself has a monetary value.

With “regard to the monetary advantage of the availability of a motor vehicle at any time”, “the legal possibility of a restriction of use, which is given with the use of an inadmissible defeat device” (see para. 42 of the judgment), is sufficient to assume damage to the detriment of the car buyer.

Accordingly, the buyer of a vehicle equipped with an impermissible defeat device within the meaning of Union law always suffers damage because the availability of the vehicle is in question due to the threat of an operating restriction or operating ban.

According to the BGH, the aforementioned principle of experience applies in favor of the buyer, namely that if the vehicle had been equipped with an unlawful defeat device, the buyer would not have purchased the vehicle at the agreed price. Accordingly, the necessary comparison of assets must be based on the time at which the contract was concluded.

Amount of damage in the range of 5% to 15% of the purchase price paid

Based on the requirements of the ECJ, according to which national law must provide an effective sanction for the violation of Union law, the BGH further ruled that the individual buyer must always be granted compensation in the amount of at least 5% and a maximum of 15% of the purchase price paid, without the need for a damage assessment.

The BGH justified the estimation of damages within this range by stating that, on the one hand, a minimum amount of damages is required to ensure sufficiently effective sanctions, but on the other hand, it must be taken into account that reasons of proportionality and the cumulative effect affecting the manufacturer as a result of multiple sales require an upper limit.

The BGH explained the reasons for the estimation range in detail (see para. 72 et seq. of the judgment):

“Pursuant to Section 287 (1) sentence 1 ZPO, the trial judge must estimate the amount of the damage in his free judgment, taking into account all the circumstances. By granting the power to estimate damages, the law accepts that the result of the estimate does not fully reflect reality as long as it comes as close as possible to it. (…)

In cases where a buyer relies on the accuracy of the certificate of conformity when purchasing a motor vehicle equipped with an unlawful defeat device, the estimation of the differential damage is subject to EU law requirements. (…)

For reasons of effectiveness under EU law, the estimated damage cannot be less than 5% of the purchase price paid. Otherwise, the sanctioning of an even merely negligent infringement of Art. 5 (2) sentence 1 of Regulation (EC) No. 715/2007 would not be sufficiently effective with regard to the promotion of the objectives of Union law due to its insignificance. (…)

Conversely, damages owed solely under Section 823 (2) BGB in conjunction with Section 6 (1), Section 27 (1) EG-FGV and not also under Sections 826, 31 BGB cannot be higher than 15% of the purchase price paid for reasons of proportionality. Liability pursuant to Section 823 (2) BGB in conjunction with Section 6 (1), Section 27 (1) EG-FGV covers cases of objectively comparatively minor infringements of the law, which the legislator has merely classified as an administrative offense. In addition, liability pursuant to Section 823 (2) BGB in conjunction with Section 6 (1), Section 27 (1) EG-FGV applies to the vehicle manufacturer several times in relation to a single motor vehicle in the event of multiple sales, so that a cumulative effect can occur. (…)

According to the BGH, the exact determination within this range is the responsibility of the trial judge, who can exercise his discretionary power of estimation without having to obtain expert advice beforehand.

Outlook

This BGH ruling will not be the last on the diesel scandal.

The judgment shows the comprehensible and welcome efforts of the BGH to limit the ECJ’s interference in the regulation of tort law claims, which is in principle the sole responsibility of the Member States, to a minimum. This is particularly evident in the culpability requirement, to which the BGH adheres with seemingly “spasmodic” reasoning, although the ECJ requires every Member State to provide a claim for damages based solely on an unlawful defeat device.

Do you have any questions?

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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