Business Law for final exam (chapter 1-7 + 11)

Contract Law

Definition of a Contract

  • A contract is a multi-party legal transaction where the intended legal consequence is a key element.
  • Legal transactions can:
    • Establish legal relationships.
    • Terminate legal relationships.
    • Transfer legal relationships.
    • Modify legal relationships.
  • Contracts require at least two correlated declarations of intent:
    • Offer
    • Acceptance
  • These declarations must define the essential content of the contract, known as "essentialia negotii".
  • Offer:
    • The first declaration of intent.
    • Becomes effective upon receipt by the recipient.
    • Contains the essential components of the contract.
  • Acceptance:
    • A declaration of intent indicating unconditional consent to the offer.
    • Must become effective unless §§ 151, 152 BGB conditions are met.
  • Distinction between factual elements and effectiveness:
    • A contract can be void due to legal nullity or contestation by a party.

Declaration of Intent

  • A necessary component of every legal transaction.
  • Private expressions of will recognized by the legal system that bring about a legal effect
  • Must be distinguished from the "invitatio ad offerendum", which invites others to make an offer.
  • Examples of "invitatio ad offerendum":
    • Newspaper advertisements
    • Catalogs
    • Price lists
    • Announcement posters
    • Menus
    • Product presentations on TV and the internet.
  • These are generally not intended to be legally binding; they encourage customers to make an offer.

Receipt of Declarations of Intent

  • Governed by § 130 para. 1 sentence 1 BGB for absent parties: declarations become effective upon receipt.
  • Receipt:
    • The declaration enters the recipient's sphere of control or actual power of disposition.
    • The recipient can take notice, and it is expected under normal circumstances.
  • Based on the receipt theory:
    • The declarant must transmit the declaration into the recipient's sphere of control.
    • The declarant bears the risk of loss, misdirection, or delayed transmission until receipt.
  • The recipient bears the risk of timely notice of the declaration once it has entered their sphere of influence.
  • Decisive factor: When the recipient could have taken notice under ordinary circumstances.
  • Examples: Emptying the mailbox, post office box, or email inbox at the expected time.

Offer Binding and Right of Revocation

  • The receipt alone triggers the binding effect of the offer according to § 145 BGB.
  • The offeror cannot revoke their offer while the binding effect lasts.
  • Reason: Protection of commercial transactions.
  • Revocation after receipt is excluded if the offeror has not excluded their commitment.
  • An exclusion example: "subject to prior sale".
  • Phrases like 'without obligation' or 'without commitment' do not signal an offer; they're an 'invitatio ad offerendum’.
  • Revocation requirements according to § 130 para. 1 sentence 2 BGB:
    • Reach the other party before or simultaneously with the offer.
    • Must be available at the latest when the recipient can take notice under normal circumstances.
    • The actual chronological order of awareness is not relevant.

Content Specificity of the Offer

  • The offer must be specific or at least determinable.
  • The offer can be accepted with a simple 'Yes’ from the recipient's perspective.
  • For contracts typified in the BGB, the offer must contain at least the essential components of the contract ("essentialia negotii").
  • For atypical contracts, the offer must include a clear and comprehensible regulation.
  • In a contract for work, performance obligations must be precisely defined, at least through a functional performance description.
  • If no price is set:
    • The price can be determined by law (remuneration claim per § 612 para. 2 BGB or § 633 para. 2 BGB).
    • Or by contractually agreed performance determination (§ 315 et seq. BGB).
    • If neither is possible, no contract conclusion per § 154 para. 1 BGB.

Acceptance Periods and Contract Conclusion

  • Requires the timely acceptance of the offer.
  • Acceptance is not timely if received after the expiry of the:
    • Acceptance period specified by the offeror (§ 148 BGB).
    • Statutory period (§ 147 BGB).
  • Legislator differentiates between direct communication and indirect communication:
    • § 147 para. 1 BGB: An offer to a person present can only be accepted immediately.
    • § 147 para. 2 BGB: An offer to an absent person can be accepted until the offeror may expect the receipt of the answer under regular circumstances.
  • The period of § 147 para. 2 BGB is determined by objective standards:
    • Time for transmitting the offer to the recipient.
    • Transition and processing time of the recipient.
    • Time for transmitting the answer to the offeror.
  • Offeror can set an acceptance period as per § 148 BGB to clarify how long they wish to be bound.

Responsibility for Receipt and Good Faith

  • If the recipient doesn't take appropriate precautions to ensure acceptance declarations reach them, they may be treated as if the declaration arrived in time, according to:
    • The principle of good faith (§ 242 BGB).
    • Analogy with § 162 para. 1 BGB.
  • This applies in cases of deliberate delay or prevention of receipt.
  • Silence generally has no declarative value and does not lead to contract conclusion.
  • Behavior of the declarant is crucial:
    • Upon becoming aware of failed receipt, they immediately make a new attempt appropriate to the circumstances.
    • The aim is to bring their declaration into the recipient's sphere of control for easy notice.

Late Acceptance and Contract Conclusion

  • Regulated by §§ 149, 150 para. 1 BGB.
  • § 150 para. 1 BGB: Late acceptance is considered a new offer.
  • § 149 BGB: Deviation from this principle to protect the recipient of the offer.
  • If a declaration of acceptance would have reached the offeror in time under normal circumstances, it can lead to a contract even if late.
  • The offeror can decide whether to recognize the acceptance as timely.
  • If the offeror does not want to recognize the acceptance as timely, they must immediately notify the recipient of the delay.
  • Only through this notification can they avert the fiction of the timeliness of the acceptance.

Declarative Value of Silence

  • Acceptance is declaration of intent.
  • Silence generally has no declarative value.
  • It doesn't bring about a contract after receipt of an offer.
  • Exceptions:
    • Law (cf. § 516 para. 2 sentence 2 BGB).
    • Obligation to contract.
    • Party agreement.
    • Commercial letters of confirmation.
    • Principle of good faith (§ 242 BGB).
  • Silence is legally relevant in commercial law (e.g., § 362 HGB).
  • § 362 para. 1 HGB regulates silence to a business management offer.
  • The commercial letter of confirmation is a letter that one contracting party sends to the other to communicate their understanding of the conclusion and content of the contract.
  • If the recipient is a merchant, negotiations preceded the letter, the letter immediately follows the negotiation temporally, and the confirmation does not deliberately incorrectly reproduce the content of the negotiations, the letter is authoritative between the parties unless the recipient objects.

Late Acceptance and Legal Consequences

  • The declaration of acceptance must become effective.
  • Exceptions to the requirement of becoming effective are allowed by §§ 151, 152 BGB.
  • e.g., When acceptance is not expected (mail order purchases) or the offeror has waived it.

Unconditional Acceptance and Defects in Agreement

  • Acceptance must express unconditional consent.
  • If the acceptance contains changes compared to the original offer, it is treated per § 150 para. 2 BGB as a new offer and a rejection of the original offer.
  • § 150 para. 2 BGB is related to open and hidden defects in agreement (§§ 154, 155 BGB).
  • § 155: a contract conclusion is not excluded despite a hidden dissent if it can be assumed the contract would have been concluded even without a provision on the deviating points.

Validity of the Contract

  • Contracts can be void due to legal provisions or challenge.
  • Legal grounds for nullity protect those not fully capable or set limits to contract design (mandatory laws, good morals, formal requirements).
  • Challenges must be made within deadlines based on error, deception, or threat.
  • Nullity grounds are observed without further ado, while challenge grounds require a declaration of challenge.
  • Legal capacity is the ability to make legally binding declarations, with incapacitated persons enjoying special protection.
  • Contracts must not violate mandatory legal requirements or good morals.
  • Immoral or usurious contracts are void.
  • Formal requirements:
    • Warn against hasty decisions.
    • Ensure advice.
    • Clarify content.
    • Secure evidence.

Grounds for Nullity in Contract Law

  • The content of the contract must not contradict mandatory law (§ 134 German Civil Code) or public policy (§ 138 German Civil Code).
  • A legal transaction is null and void if it doesn't comply with a prescribed form (§ 125 Sentence 1).
  • Legal transactions can be void if a declarant lacked the intent to enter into a legal transaction, (e.g., mental reservation (§ 116), sham transactions (§ 117), or lack of seriousness (§ 118).

Contestation Periods and Requirements

  • Nullity depends on whether the person entitled to contest has challenged their declaration within a contestation period (§ 143 German Civil Code).
  • Grounds for contestation include error (§ 119), incorrect transmission (§ 120), deception or threat (§ 123 Paragraph 1).
  • In cases of error and incorrect transmission, the person entitled to contest must do so without culpable delay (§ 121 Paragraph 1 German Civil Code).
  • In cases of deception or threat, the contestation period is one year from discovery of the deception or cessation of the coercive situation (§ 124 Paragraphs 1, 2).

Objections Preventing Legal Effect and Possibilities for Contestation

  • Mandatory grounds for nullity prevent legal effect, regardless of whether parties invoke it.
  • Nullity must be observed ex officio.
  • Grounds for contestation:
    • Provisional effectiveness can be justified by the person entitled to contest having an interest in the transaction despite the defect of will.
    • Choice between annulment and maintenance is sensible.

Basics of Legal Capacity (1)

  • Legal capacity is the ability to make and receive declarations of intent in legal transactions.
  • Persons lacking legal capacity cannot make effective declarations; their declarations are void (§ 105 Paragraph 1).
  • Lack of legal capacity can be due to young age (§ 104 No. 1) or mental illness (§ 104 No. 2).
  • Limited legal capacity begins with the completion of the 7th year of life and ends upon expiry of the last day of the 18th year of life.

Basics of Legal Capacity (2)

  • Legal consequences of limited legal capacity are regulated according to §§ 106 to 113.
  • Only legally advantageous declarations of intent are effective without legal representative involvement (§ 107).
  • Legally disadvantageous contracts are effective from the beginning if they have been concluded with legal representative consent (§ 107) or if a case of § 110 exists.
  • Otherwise, they are pending ineffective and can become effective retroactively through legal representative approval or ineffective through the refusal of approval (§ 108).
  • Unilateral legal transactions are generally effective with consent and ineffective without consent.

Limits of Contract Design

  • The content of the contract must not contradict mandatory law (§ 134) or public policy (§ 138).
  • A violation of a prohibitory law is necessary for § 134.
  • The law is a prohibitory law if it prohibits the performance of a legal transaction (e.g., violations of the law against undeclared work, employment bans for foreign workers, or violations of medical confidentiality).
  • Void legal transactions:
    • Tax evasion as the main contractual purpose (§ 370 Fiscal Code).
    • Agreements restricting competition (§ 1 Act against Restraints of Competition).
    • Special remuneration for supervisory board members without a resolution of the general meeting (§ 113 Stock Corporation Act).

Immorality and Usury in Contract Law

  • § 138 aims to prevent the validity of legal transactions that deviate from the ethical foundations.
  • A legal transaction is immoral if it is incompatible with the fundamental values of the legal and moral order.
  • Usury: a person exploiting another's predicament, allows himself or a third party to be promised or granted pecuniary advantages which are clearly disproportionate to the performance (§ 138 Paragraph 2).

Form Requirements and Their Functions

  • Legal transactions are generally free of form.
  • Exceptions are intended to protect those affected from the risks of hastily concluded transactions of particular significance or to ensure expert advice.
  • Some form requirements clarification and evidentiary functions.
  • Statutory forms:
    • Written form (§ 126).
    • Electronic form (§ 126 Paragraph 3, § 126a).
    • Text form (§ 126b).
    • Public certification (§ 129).
    • Notarial authentication (§ 128).

Lack of Intent to Contract and Nullity

  • The intent to contract is directed towards bringing about a specific legal consequence.
  • In the cases of §§ 116-118, the declarant lacks the intent to contract.
  • Nullity is ordered if:
    • The recipient knows about a secret reservation (§ 116 Sentence 2).
    • A declaration is made for appearance's sake (§ 117 Paragraph 1).
    • A declaration not meant seriously is made in expectation that the lack of seriousness will not be misunderstood (§ 118).

Form and Effectiveness of the Declaration of Contestation

  • The declaration of contestation is a declaration of intent that does not require a specific form but must be received.
  • Must indicate that the person entitled to contest does not want their previous declaration to be valid.
  • Whether the word "contest" is used is irrelevant.
  • Decisive: the expression of will unambiguously indicates that a legal transaction is to be eliminated due to an error.
  • The opposing party in a contract is generally the other party (§ 143 Paragraph 2).

Grounds for Contestation and Their Effects

  • In addition to the declaration of contestation, there must be a ground for contestation
  • Error in content: The declarant has a false idea of the legal significance of their declaration (§ 119 Paragraph 1 Sentence 1).
  • Error in declaration: The declarant did not want to make a declaration of this content at all (§ 119 Paragraph 1 Sentence 1).
  • Error in characteristic: The declarant is mistaken about a certain characteristic of a person or thing, which is a motive decisive for their formation of will (§ 119 Paragraph 2 ).
  • § 120: The erroneously incorrectly transmitted declaration and protects the recipient.

Deception and Threat as Grounds for Contestation

  • A declaration of intent can be contested if the declarant was induced to make it by fraudulent deception (Section 123 Paragraph 1).
  • Deception: the conscious simulation, distortion, or concealment of facts for the purpose of arousing or maintaining an error.
  • Fraudulent intent only requires (conditional) intent.
  • Anyone induced to make their declaration of intent by unlawful threat can contest it (Section 123 Paragraph 1).
  • Threat: the prospect of a future evil, over the occurrence of which the actor claims to have influence.

Contestation Periods and Legal Certainty

  • For a declaration based on an error, the contestation must occur without culpable delay (§ 121 Paragraph 1).
  • For deception, the declarant has one year from the discovery of the deception (§ 124).
  • Retroactive nullity usually occurs if the contestable legal transaction was effectively contested within the relevant contestation period (§ 142 Paragraph 1).

Agency

  • According to § 164 para. 1 of the German Civil Code (BGB), agency directly affects the principal, provided the agent acts within their power of representation.
  • An agent differs from a messenger in that they make their own declarations of intent on behalf of the principal, which must be recognizable externally according to the principle of transparency.
  • Power of representation can be established in various ways, including by legal transaction, through corporate bodies, or by law, and it can be interpreted as individual or joint representation.
  • Power of attorney, as a representation authority granted by legal transaction, regulates the relationship between the agent and the third party and is granted according to § 167 BGB.
  • Commercial law agency rules, such as procuration, extend these foundations to protect legal transactions and increase flexibility in trade. Commercial powers of attorney vary in scope and can be specific, type-related, or general.

Prerequisites and Effects of Agency

  • If someone makes a declaration of intent within the scope of their power of representation on behalf of the principal, it takes effect for and against the principal according to § 164 para. 1 sentence 1 of the German Civil Code (BGB).
  • In the case of a contract concluded by an agent, it must be examined whether the prerequisites for agency are met when making an offer or acceptance. Only then does the legal consequence described in § 164 para. 1 sentence 1 BGB take effect.

Agent, Messenger, and the Principle of Transparency

  • The agent must make their own declaration of intent ("I declare…") and not merely transmit someone else's declaration ("I am supposed to convey that…").
  • This distinguishes them from a messenger.
  • Furthermore, the agent must act - recognizably to others - in the name of the principal ("Principle of Transparency").

Power of Representation and its Manifestations

  • If the representative wants to effectively bind the represented party, they must make the declaration of intent within the scope of an existing power of representation.
  • The power of representation can be established by legal transaction, by virtue of corporate position, or (otherwise) by law.
  • Both individual representation and joint representation are possible:
    • Individual representation exists when one person alone is authorized to represent.
    • Joint representation exists when multiple persons can only bring about the consequences of representation collectively.
  • This is legally or contractually provided for the protection of the represented party against ill-considered or inappropriate actions by the representative

Power of Attorney

  • Power of attorney is a representation authority granted by legal transaction and only concerns the external relationship between the agent and a third party.
  • Its granting is regulated by § 167 BGB.
  • It confers upon the authorized person the legal power to bring about legal consequences for and against the principal in the principal's name.
  • According to the legal definition in § 166 para. 2 BGB, power of attorney is a representation authority granted by legal transaction.
  • In § 167 para. 1 BGB, the legislator distinguishes between internal and external power of attorney.

Commercial Law Rules of Agency

  • The provisions of the German Civil Code (BGB) on agency also apply to all legal transactions in commercial dealings.
  • The German Commercial Code (HGB) limits itself to partly supplementary, partly modifying regulations for the legal representation of merchants; the commercial law powers of attorney serve to provide increased protection of legal transactions, greater legal clarity, and higher flexibility.
  • Procuration, like any power of attorney, is granted as a unilateral legal transaction by a declaration of intent requiring receipt (§ 167 BGB).
  • This can only be done by the owner of the commercial business.
  • Only a natural person can be a procurist.
  • The scope of procuration is legally defined in § 49 HGB.
  • This scope can only be limited in the external relationship by legal transaction in exceptional cases (cf. § 50 HGB).
  • The owner is only free in whether to grant procuration, but not in determining the effects towards third parties.

Types of Commercial Powers of Attorney

  • The commercial power of attorney (Handlungsvollmacht) is the most widespread type of commercial authorization.
  • In contrast to procuration, there is no legally defined scope for the commercial power of attorney.
  • The commercial power of attorney is an authorization whose scope is determined by the owner.
  • General commercial power of attorney (Generalhandlungsvollmacht) authorizes all industry-standard transactions belonging to the operation of a commercial business and is thus almost as comprehensive as procuration.
  • However, unlike procuration, it only covers transactions occurring in ordinary business operations, not extraordinary transactions.
  • The holder of type-specific commercial power of attorney (Arthandlungsvollmacht) may conduct certain types of transactions belonging to a commercial business (for example, in used car trading, an employee's sales and purchase authorization).
  • Special commercial powers of attorney (Spezialhandlungsvollmachten) allow the representative to conduct individual transactions belonging to a commercial business, as specified in the granting of the power of attorney.

Statutory Representation and its Limits

  • The statutory power of representation is generally comprehensive:
    • Parents and guardians are entitled to represent the child or ward in all personal and property matters.
  • Restrictions exist primarily due to conflicts of interest (§ 1629 para. 2 BGB, §§ 1795 f. BGB, § 181 BGB), requiring a supplementary guardian, and for particularly important transactions (§§ 1643, 1821 f. BGB) where the approval of the family court is necessary.
  • The scope of the power of representation is subject to stronger restrictions for custodians and caregivers in order to protect the represented person as an individual.

Corporate Representation in Civil Law Partnerships (GbR)

  • The corporate power of representation is determined by the articles of association or the partnership agreement, as well as by statutory regulations.
  • In the civil law partnership (GbR), according to § 720 BGB, the principle of joint power of representation applies.
  • The scope of the power of representation extends, according to § 720 para. 3 BGB, unlimitedly and unrestrictably to all business of the company.
  • The power of representation can be withdrawn in whole or in part according to § 720 para. 4 BGB.
  • Moreover, each partner with active power of representation is also entitled to passive individual representation according to § 720 para. 5 BGB.

Power of Representation in General Partnerships (oHG) and Limited Partnerships (KG)

  • In a general partnership (oHG) (§ 124 HGB), the partners, and in a limited partnership (KG) (§§ 161 para. 2, 124 HGB), the general partners - i.e., the personally liable partners - are the corporate statutory representatives of the company. Non-partners are excluded, as are the limited partners in a KG (§ 170 para. 2 HGB).
  • The partnership agreement can also provide for genuine joint representation by partners (§ 124 para. 2 HGB), mixed joint representation with a procurist (§ 124 para. 3 HGB), or a complete exclusion of individual partners from representation (§ 124 para. 1 half-sentence 2 HGB).
  • According to § 124 para. 4 HGB, the partners' power of representation extends to all business of the company, including the sale and encumbrance of real estate as well as the granting and revocation of procuration.
  • A limitation of the scope of the power of representation is ineffective towards third parties.

Representatives of a Limited Liability Company (GmbH)

  • According to § 35 para. 1 GmbHG (Limited Liability Companies Act), the legal representative of a limited liability company (GmbH) is the managing director.
  • The appointment is made according to § 6 para. 3 sentence 2 GmbHG either in the articles of association or by resolution of the appointing body.
  • The appointment only becomes effective when it is declared to the appointee and they accept it.

Appointment of Managing Directors and Power of Representation in a GmbH

  • The legal requirements for the personal characteristics and professional abilities of a managing director are set rather low and are primarily established by § 6 para. 2 GmbHG (Limited Liability Companies Act).
  • Statutory eligibility requirements have an absolute effect. Their absence in positive circumstances or their presence in negative circumstances makes the appointment void because it violates a statutory prohibition.

Power of Representation of the GmbH Managing Director and Protection of Legal Transactions

  • Regarding the scope of the power of representation of the GmbH managing director, § 37 para. 2 GmbHG is significant.
  • For reasons of protecting legal transactions, the failure to observe internal representation restrictions does not affect the validity of legal transactions entered into by the managing directors on behalf of the company.
  • § 37 para. 2 GmbHG aims to protect legal transactions, which should be able to rely on the statutory power of representation of the managing director.
  • However, transactions with shareholders and members of corporate bodies are excluded from the scope of § 37 para. 2 GmbHG.

Representatives of a Stock Corporation (AG)

  • According to § 78 para. 1 sentence 1 AktG (Stock Corporation Act), the legal representative of a stock corporation (AG) is the Management Board.
  • Its appointment, for a maximum of five years, is made by the Supervisory Board according to § 84 para. 1 sentence 1 AktG.
  • The effectiveness of an appointment as a member of the Management Board requires their express consent.

Power of Representation and Appointment of Management Board in the AG

  • Similar to the GmbH, Article 76 para. 3 AktG sets requirements for the personal characteristics and professional abilities of a Management Board member.
  • If one of the aforementioned eligibility requirements is missing, the appointment is void according to § 134 BGB; if a requirement ceases to exist after the appointment, this leads by law to the definitive loss of office.

Unrestricted Nature of the Management Board's Power of Representation

  • According to § 82 para. 1 AktG, the power of representation of the Management Board cannot be restricted.
  • Restrictions on the power of representation not based on law are only effective internally towards the company, but not externally towards third parties. Limits on internal management authority do not affect the power of representation.

Protection through Apparent Authority

  • Apparent authority serves to protect legal transactions.
  • Only covers cases where a power of attorney was originally granted.
  • Primarily given to the trust in continued existence if revocation is not declared.
  • Removal of the power of attorney requires the same publicity as an actus contrarius.
  • Does not cover cases where the "representative" acts without authorization.
  • Case law created tolerated authority and apparent authority.

Tolerated Authority and Apparent Authority

  • Tolerated authority exists when the represented party knowingly allows the unauthorized third party to act as a representative, and the business counterpart understands this tolerance.
  • Apparent authority exists when a party does not know about the behavior that creates the appearance of a power of attorney towards third parties but could have recognized and prevented it.
  • The legal consequences are largely identical to those of legally granted power of representation.

Power of Representation of Shop Employees

  • § 56 HGB contains a special regulation for employees in shops or warehouses, according to which this group of people is considered authorized for sales and receipts that usually occur in such a shop or warehouse.
  • Some classification of § 56 HGB as an independent form of power of representation, while others see the regulation as a presumption, as a form of apparent authority, or as a legal appearance regulation for the existence of power of representation.

Contestation of Declarations of Intent and Powers of Attorney

  • The represented party can contest the declaration of intent of the representative if it was affected by a defect of will (§§ 116-123 BGB).
  • § 166 para. 1 BGB clarifies that it depends on the defects of will of the representative if the declaration was influenced by any defects of will.
  • Views on whether contestation is permissible after the power of attorney has been used differ.

Avoiding Conflicts of Interest According to § 181 BGB

  • § 181 BGB serves to avoid conflicts of interest in the person of the representative and the associated risk of disadvantage to the represented party.
  • The representative may not act on both sides of the legal transaction and, as a representative, conduct a legal transaction in the name of the represented party with themselves or simultaneously as a representative of a third party.
  • Such restrictions on self-dealing apply not only to voluntary representatives but also to legal and corporate representatives.

Consequences of Lacking or Exceeding Power of Representation

  • If the representative acts without power of representation or exceeds their power of representation, §§ 177, 179 BGB apply.
  • According to § 177 para. 1 BGB, the represented party is free to approve the transaction if they consider it advantageous. Otherwise, the representative is liable according to § 179 BGB.
  • The content of the claim depends on whether the representative knew of the lack of their power of representation when concluding the contract or not.

Impossibility

  • Section 275 of the German Civil Code (BGB) stipulates that a debtor is released from their obligation to perform in kind if the performance becomes impossible.
  • This includes both objective impossibility, where no one can perform the obligation, and subjective impossibility, where only the debtor, but not others, cannot perform.
  • The impossibility can be due to physical or legal reasons.
  • For absolute fixed-date transactions, a delay leads to the impossibility of performance.
  • Subjective impossibility occurs when a debtor is specifically prevented from performing, but it would not be impossible for third parties.
  • Section 275(2) BGB refers to practical impossibility, where the effort required to perform is grossly disproportionate to the interest in performance.
  • If performance is impossible, the obligation to provide consideration ceases according to Section 326(1) BGB, unless the debtor or creditor is responsible for the impossibility.
  • Claims for damages may arise from initial or subsequent impossibility.

Limitations of the obligation to perform according to § 275 BGB (German Civil Code)

  • § 275 BGB limits the creditor's authority to demand performance in kind based on the obligation.
  • Objective impossibility (§ 275 para. 1 2nd alt. BGB) can have various causes:
    • Physical impossibility
    • Subject of performance has ceased to exist

Impossibility in absolute fixed-date transactions

  • In an absolute fixed-date transaction, a delay in performance beyond the usually short performance period leads to the impossibility of performance.
  • Absolute fixed-date transaction:
    • Where the time of performance is so crucial that the performance can only be rendered at a specific time, and not at all afterward.
  • Classic example: ordering a taxi for a specific time to catch a train.

Subjective impossibility and its limits

  • In cases of subjective impossibility (inability) (§ 275 para. 1 1st alt. BGB), the debtor cannot perform, but someone else could.
  • It does not exist if the debtor is readily able to obtain or re-obtain the owed item from a third party, or can influence the third party on whom the performance depends through legal or factual means to perform.

Factual impossibility and § 275 para. 2 BGB

  • § 275 para. 2 BGB regulates the so-called factual or practical impossibility.
  • The performance can only be rendered with an effort that is grossly disproportionate to the creditor's interest in performance.
  • Claim for performance.
  • § 275 para. 3 BGB
    • Specifically for performance rendered personally

Obligation for counter-performance in case of impossibility of performance (1)

  • When the fulfillment of the performance obligation has become impossible, it is questionable what happens to the counter-performance obligation in mutual contracts.
  • In § 326 para. 1 sentence 1 BGB, the legislator decided for mutual contracts to have the debtor bear the price risk from the time of contract conclusion until the achievement of performance.
  • The debtor does not receive compensation for any expenses or investments.
  • § 326 para. 1 sentence 1 BGB presupposes that neither of the contracting parties or the debtor alone is responsible for the obstacle to performance.
  • If the creditor is solely or predominantly responsible for the obstacle to performance, § 326 para. 2 BGB applies.

Obligation for counter-performance in case of impossibility of performance (2)

  • If the creditor is solely or predominantly responsible for the obstacle to performance, § 326 para. 2 BGB applies.
  • Extent of creditor’s responsibility must usually exceed 80-90%.
  • According to § 326 para. 3 BGB, the creditor must also provide the counter-performance if they claim for themselves a substitute or substitute claim that the debtor has obtained instead of the owed object under § 285 BGB.

Damages in case of impossibility of performance

  • The creditor's claims for damages for performance that has become impossible under § 275 BGB arise from § 311a para. 2 BGB in case of initial impossibility, and from §§ 280 para. 1, 3, 283 BGB in case of subsequent impossibility.
  • According to § 311a para. 2 BGB, if objective impossibility or inability of the debtor already existed at the time of contract conclusion, the creditor can demand damages instead of performance, unless the obstacle to performance was unknown to the debtor and the debtor was not responsible for this lack of knowledge.
  • Positive interest is to be compensated

Claim for surrender according to § 285 BGB

  • According to § 285 para.