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15 15 Transfer of Rights and Obligations

• Published: March 2013
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This chapter compares the law on transfer of rights (i.e., assignment) in the Draft Common Frame of Reference (DCFR), English law, and German law. It first considers cases in which the three systems produce similar results before concentrating on situations in which the results and the interactions with other areas of law differ. It then deals with the transfer of obligations. In their basic aspects, the laws of England, Germany, and the DCFR provide for functionally similar systems of assignment, but there are some differences in the mechanisms involved. Should the current provisions of the DCFR on assignment be included in a later version of an optional instrument, there will be a number of interactions with both English and German law in the sense that it will matter which system governs the agreements, particularly the agreement for assignment. Key differences include, inter alia, the proprietary aspects of the assignor's insolvency where the assignor is paid by the debtor, the priority rule for competing assignments, and the effects of a non-assignment clause.

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Assignment / Abtretung

March 17, 2022

What is an assignment?

According to § 398 German Civil Code (BGB), an assignment (also kown as cession, from the Latin cessio) is the contractual transfer of a claim of the creditor to another. The assignment is a transaction of disposal. This means that the person of the creditor changes as a result of the contract of assignment.

The assignment according to § 398 BGB is regulated by law because it is a specific case of "acquisition of ownership", which is essentially different from the acquisition of ownership of movable things. According to the legal construction of § 929 S. 1 BGB, the ownership of movable things is transferred by the delivery of the thing with the intention to transfer the ownership. Essential for the transfer of ownership of things is therefore possession, or its transfer to another. The transfer of ownership according to § 929 p. 1 BGB is not possible if one can not exercise possession of the item to be transferred, i.e. can not hold it in one's hand. This is the case with claims. An example: Anyone who sells an item has a claim to payment of the agreed purchase price. Although the ownership of this claim can be proved by a contract, the claim itself is not physical. Of course, it must be possible for the seller(s) to sell his or her claim to the purchase price - he or she does not have to claim the purchase price himself or herself (for example, in the case of classic debt collection). Therefore, the owner can assign their claim to the purchase price to a third party, with the result that the third party becomes the new owner of the purchase price claim.

What are the requirements for assignment?

According to § 398 BGB, assignment is a contract in which it is agreed that the creditor(s) of a claim will transfer it to a third party. The only requirement under § 398 BGB for assignment is that there is consent between two persons on the transfer of a claim. For the assignment to be effective, the claim must of course actually exist in the person of the assigning creditor, i.e. he/she must be the owner of the claim. Furthermore, there must be no prohibition of assignment; such a ban results either from a contract between the debtor and the creditor, or from the law, for example from § 399 BGB.

What happens after the assignment?

• Identical rights of the new creditor

Through the (successful) assignment, another person becomes a new creditor of the claim. The new creditor has the same rights but also the same obligations as the original creditor.

• Transfer of ancillary and preferential rights

According to § 401 BGB, the accessory security rights are also transferred to the new creditor with the claim. Expressly mentioned are mortgages, ship mortgages or liens as well as the rights from an appointed guarantee. An analogous applicability of this provision is approved for the priority notice according to § 883 BGB, so that in the event of assignment of the claim to transfer of ownership of a property, a priority notice registered for the buyer also passes to the new creditor.

• Protection of the debtor

The person of the debtor has not changed due to the assignment. The debtor may not have been aware of the assignment, but a notification to the debtor that the person of the creditor has changed is not necessary for the assignment to be effective.

Without specific debtor protection rules, the debtor who did not know about the assignment would be in a difficult situation: if he/she paid e.g. to the old creditor(s), there would be no extinction by performance - the debtor would still have to pay to the new creditor. He would be entitled to reclaim from the old creditor what has already been paid. The legislator has recognised these dangers for the debtor in §§ 404 ff BGB.

• Objections against the old creditor remain valid

According to § 404 BGB, the debtor can assert in the new creditor in the objections existing against the old creditor.

• Protection of the debtor in case of ignorance of the assignment

In particular, the debtor who relies in the existence of the old creditor should not be in a worse position than without an assignment. According to § 407 BGB, legal acts against the old creditor also apply to the disadvantage of the new creditor.

• Possibility of set-off against the new creditor

According to § 406 BGB, the debtor may also set off against the new creditor. This provision helps to overcome the lack of reciprocity of claims, which means that a set-off against a claim against the old creditor is now also possible against the new creditor. However, this only applies if the debtor had no knowledge of the assignment at the time of acquisition of the counterclaim. The debtor shall remain entitled to set-off if, at the time when he/she becomes aware of the assignment, there was already an offsetting situation within the meaning of § 389 BGB.

Special types of assignments

Assignments are not only known as a simple sale of a claim, but in practice often occur in certain constellations.

• Assignment by way of security

In the case of assignment by way of security, a claim is assigned to provide a guarantee. The claim is thus used by the assignment to secure another claim.

• Extended title retention

If the parties agree on an extended retention of title, they actually agree on a "simple" reservation of title, so that the buyer of the first instance do not acquire ownership of the item, but the acquisition of ownership is subject to a condition precedent with regard to the payment of the purchase price. "Extended" is the retention of title because the buyer of the goods wants to resell them - in this case, however, the seller would lose the means of securing the retention of title. Therefore the seller allows a resale of "his/her" item, but he/she allow(s) to assign in advance the purchase price claims not yet arisen.

In "real" factoring, revolving receivables are transferred to the factor. Factoring is a mass assignment. The risk of loss of receivables (del credere risk) is carried by the factor, which is why the factor usually does not pay the full value of the receivable, rather only part of it.

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by Hein Kötz

• 1 1. Historical development and economic importance
• 2 2. Requirements of an effective assignment
• 3 3. Effects of assignment
• 4 4. Priorities
• 5 5. Recent developments in European private law
• 6 Literature

1. Historical development and economic importance

In an economy based on money and credit, rights arising from contracts must be freely transferable. However, even though the transferability of debts and other claims is generally recognized in modern legal systems, this was achieved only at the end of a long historical development. The original principle was that a contract right was something so highly personal as to be inseparable from the actual relationship between creditor and debtor. The law treated assignments with suspicion for fear that undesirable persons such as lawyers or speculators might make it a business to buy up contested rights cheaply in order to bring them to court, and there was also the concern that assignments might enable individuals to give away their last means of support. It was also held for a long time that an assignment could take effect erga omnes only when the debtor had expressly agreed to it or had been notified of the assignment by way of a formal declaration made either by the assignor or assignee.

Obviously, a modern law of assignment must take note of the fact that just as an owner can transfer or convey his chattels, so he must be able to transfer or assign intangible rights with the effect of making the transferee or assignee creditor in his place. Nor should it make a difference whether the assignor wants to sell the right for a price or to assign it to his creditor ‘by way of payment’ or to his bank as a means to provide security for a loan. There must also be a possibility to assign, by way of a single transaction, whole packages of hundreds of claims either to a bank as security or pursuant to a factoring agreement ( factoring ). Such bulk assignments must be valid in principle even though it may not be clear at the time of assignment whether and when the assigned claims will come into existence or become enforceable or who the debtor is. To some extent, such arrangements may run foul of mandatory assignment rules dating back to earlier historical periods. Where such rules still exist (as in the civil codes of France, Spain, Italy and Portugal) special legislation has been passed creating special statutory schemes for assignments to banks, factors or other assignees who make it a business, by way of what is called ‘securitization’, to create asset-backed securities and place them on the capital market. Adapting rules of assignment law to modern business needs is also a purpose pursued by the UNIDROIT Convention on International Factoring (1988) and the UN Convention on the Assignment of Receivables (2001). The PECL (Chapter 11: Assignment of Claims) and the UNIDROIT PICC (Chapter 9, Section 1: Assignment of Rights) also seek to modernize the general rules of the law of assignment. In some cases what the parties try to achieve is not simply an assignment, ie the transfer of a right to claim something from someone else, but the transfer of the contract as a whole so that one contracting party is replaced by someone else ( transfer of contract ).

2. Requirements of an effective assignment

In order for a right to be assigned the old and the new creditor must agree on the transfer. Some legal systems distinguish between the agreement whereby the assignment is effected and the underlying agreement which explains the reason why the parties effected it, this reason commonly being sale, gift, provision of security for an existing debt or an agreement under which the assignee undertakes to ask the debtor for payment and refund the proceeds to the assignor. While this distinction rarely leads to practical consequences, it does provide a persuasive reason why the rules relating to assignment should be placed not in the rules on sale, as the French Civil Code does, but in the general part of the law of obligations, as is done in most other European codes. In the Netherlands an assignment is regarded as a property transaction like the transfer of chattels, so the Dutch Civil Code deals with them both under the heading of ‘Transfer of Property’ (see Arts 3:83 ff).

Like any other contractual agreement, an agreement providing for the assignment of a right can be invalid by reason of its illegality or immorality or where it contravenes other mandatory rules. In particular, it is generally accepted that the assignment of a right is ineffective if there is a legal rule under which the right is ‘non-assignable’. Thus claims for wages, maintenance, support and social security benefits are non-assignable to the extent to which an assignment would, if valid, deprive the assignor of his ability to satisfy basic needs. A claim is also non-assignable if the debtor’s expectation that he be liable only to his original creditor deserves protection (Art 11:302 PECL; Art III-5:109 DCFR). On the other hand, where the claim is divisible it may be assigned in part (Art 11:103 PECL; Art III-5:107 DCFR). Nor are most legal systems opposed to the validity of the assignment of future claims. Consequently, a seller may assign his claim for the purchase price even though he has not yet concluded a contract with the buyer provided, however, that the claim for the price does come into existence at some later point and that it can be identified at that point as the claim to which the assignment relates (see Art 11:102 (2) PECL; Art III-5:106 (1) DCFR; Art 5 UNIDROIT Convention on International Factoring; Art 10 UN Convention on the Assignment of Receivables in International Trade).

The basic principle is that once a claim has been assigned it no longer forms part of the assignor’s estate so that it can neither be attached by his creditors nor claimed as part of the distributable mass by the trustee in the assignor’s bankruptcy. The assignment is described in this case as being effective not merely inter partes , but erga omnes . However, there is no agreement as to whether this applies also in cases in which the debtor has not been notified of the assignment or where he and the assignor have agreed that the claim should be incapable of transfer (‘no-assignment clause’). Clearly, if a notification of the debtor were required and no-assignment clauses were always held valid this would curtail the circulation of money rights, inhibit the readiness of credit institutions and factoring firms to accept assignments, and hobble the economically desirable provision of credit. Most of these objections against the free assignability of claims have therefore faded away in the face of the overwhelming practical needs of commercial practice. In particular, it is generally agreed that an assignment can be effective erga omnes even though the debtor knows nothing about it. After all, he will be released from liability if he pays the original creditor before learning of the assignment. As to no-assignment clauses, some legal systems allow the debtor to set them up against the assignee while other systems do so only where the assignee knew or ought to have known of the clause. In German law no-assignment clauses are ineffective only if both the assignor and the assignee are merchants who have agreed on the assignment in the course of their business (§ 399 German Civil Code, § 354 a German Commercial Code). Article 11:301 PECL adopts a compromise solution under which the debtor may not rely on a no-assignment clause if the assignee neither knew nor ought to have known of the clause or if the assignment is made under a contract for the assignment of future rights to payment of money. Similar rules may be found in Art 6(1) UNIDROIT Convention on International Factoring; Art 11 UN Convention on the Assignment of Receivables in International Trade; Art III-5:108 DCFR.

3. Effects of assignment

Under an agreement for the assignment of a claim the assignee may require the assignor to deliver to him all documents evidencing the debt assigned and provide the information needed for its collection. Furthermore, in the absence of indications to the contrary, the transfer carries with it any existing security rights such as pledge interests in movables, mortgages on immovables, and claims against sureties and guarantors. Where an agreement for the assignment of the claim has been made there is always a risk that the debt assigned does not exist or cannot, by reason of the debtor’s insolvency, be collected. It is for the parties to make any arrangements allocating this risk either to the assignor or the assignee, eg by a provision under which the assignor guarantees the existence and/or the collectability of the debt assigned. If no such arrangements have been made, all legal systems provide default rules to fill the gap (see Art 11:204 PECL; Art III-5:112(2) DCFR).

The fundamental principle is that an assignment should not prejudice the debtor. Accordingly, the debtor may set up against the assignee all defences to the assigned claim he could have asserted against the assignor regardless of whether the grounds of defence arose before or after the notice of assignment. Thus if a seller assigns his right to receive payment, the buyer can defend on the ground that the goods delivered to him under the sales agreement turned out to be defective or were not delivered at all. This applies even where the goods were delivered or found to be defective only after the buyer had received notice of the assignment. As to set-off , any debt which the debtor could have set off in a suit by the assignor may be asserted against the assignee provided that the debt existed at the time when a notice of assignment reached the debtor even though it may have matured and become fully enforceable only after the debtor’s receipt of notice of assignment (see Art 11:307 PECL; Art III-5:116 DCFR). In addition, there is a rule protecting a debtor in the event that a new creditor has been thrust upon him without his knowledge of the assignment. Under this rule, a debtor who knows nothing of the assignment obtains a good discharge by giving performance to the assignor, and this applies also where the debtor obtained a release or additional time to pay or some other favour from the assignor in the supposition that he was still the creditor (see Art 11:304 and 308 PECL; Art III-5:118 DCFR).

4. Priorities

Courts often have to deal with disputes over priorities, typically when a creditor purports to transfer a debt first to A and then to B, or where a debt, before or after its assignment, has been attached by one of the assignor’s creditors. Under the rule prior tempore potior iure the first to require the right obtains priority over anyone who acquires or attaches it later. Thus, if the debtor paid B in ignorance of an earlier assignment to A, his liability is extinguished, and A can claim the proceeds from B on the basis of his priority.

In some legal systems the principle of priority is applied with modifications or not applied at all in certain cases. The majority rule is that where there are successive assignments of the same claim, the assignee under the later assignment has priority over the earlier assignee if the second assignment was notified first to the debtor, provided that at the time of the later assignment the assignee neither knew nor ought to have known of the earlier assignment (Art 11:401 PECL; Art III-5:120 DCFR). Some legal systems have not accepted the results produced by the priority principle in some cases. In particular, German courts have made a significant inroad into the priority principle in cases where a seller of goods assigns the future right to the price both to a bank or a factor and to the party who supplied him with the goods under a title reservation clause. Here the supplier wins even if the assignment to the bank was earlier in time. There is a lot to be said for the view that the best solution would be the introduction of a non-mandatory system of registration under which an assignment, if entered in a publicly accessible register, would take priority over any earlier assignments of the same claim.

5. Recent developments in European private law

Both in Europe and in the world the development of assignment law is characterized by the fact that claims, in particular rights to the payment of money, are increasingly regarded as tradable assets and that, accordingly, all rules ought to be abolished or restricted that would impede or make impracticable assignments of claims, whether individually or in bulk, and regardless of whether the claim is sold outright, as in the typical factoring transaction, or assigned by way of security for a loan or other obligation. Meanwhile, it is generally accepted that the mere agreement between the assignor and the assignee is sufficient to transfer a debt and that future debts and parts of debts are freely assignable. Besides, the idea is gaining ground that no-assignment clauses, while valid inter partes , should not be an obstacle to the validity of assignments provided that the assignee neither knew nor ought to have known of the no-assignment clause. There is some doubt as to how the priority principle ought to be modified in the event of successive assignments. A persuasive argument has been made to solve these problems by the introduction of a system allowing the registration of assignments in a publicly accessible register.

Klaus Luig, Zur Geschichte der Zessionslehre (1966); Reinhard Zimmermann, The Law of Obligations (1990) 58 ff; Hein Kötz, ‘Rights of Third Parties. Third Party Beneficiaries and Assignment’ in IECL VII/2 (1990) ch 13, paras 58 ff; WJ Zwalve, Hoofdstukken uit de Geschiedenis van het Europese Privaatrecht , vol I : Inleiding en zakenrecht (1993) 265 ff; Tony Weir (tr), Hein Kötz, European Contract Law , vol I (1997), 263 ff; Tony Weir (tr), Konrad Zweigert and Hein Kötz, Introduction to Comparative Law (3rd edn, 1998) 442 ff; Hugh Beale, Arthur S Hartkamp, Hein Kötz and Denis Tallon (eds), Cases , Materials and Text on Contract Law (2002) 935 ff; Filippo Ranieri, Europäisches Obligationenrecht (2nd edn, 2003) 433 ff; Horst Eidenmüller, ‘Die Dogmatik der Zession vor dem Hintergrund der internationalen Entwicklung’ (2004) 204 AcP 457; Claudia Rudolf, Einheitsrecht für internationale Forderungsabtretungen (2006); Arthur F Salomons, ‘Deformalisation of Assignment Law and the Position of the Debtor in European Property Law’ (2007) 639 ERPL 15.

Retrieved from Assignment – Max-EuP 2012 on 28 August 2024.

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Commercial Contracts in Germany

Use the  Lexology Getting the Deal Through   tool to compare the answers in this article with those from other jurisdictions.

Contract formation

Good faith in negotiating

Is there an obligation to use good faith when negotiating a contract?

Yes. The principle of good faith (section 242, German Civil Code (BGB)) is a fundamental principle of law in Germany, which applies when contract negotiations commence.

According to German law, the initiation of contractual relationships and preparatory business communications establishes (pre-contractual) rights and obligations for the contracting parties (sections 311(2) and 241(2) BGB). A violation of duties to protect and exercise proper care can render a party liable for damages.

The principle of good faith requires, for example, that the parties in contract negotiations clarify circumstances to the other party that are of great importance with respect to conclusion of the contract.

Another example is the termination of contract negotiations in breach of trust. When it can be safely assumed that the contract will be concluded after negotiations between the parties, and expenses are incurred prior to the contract’s conclusion based on the trust established by this, a party may have to reimburse the costs for violation of good faith if that party refuses to conclude the contract at a later date without a valid reason. Owing to the principle of contractual freedom, however, costs or damages are only awarded in clear-cut cases.

‘Battle of the forms’ disputes

How are ‘battle of the forms’ disputes resolved in your jurisdiction?

In the case of conflicting declarations of intent, it is necessary to distinguish between three different situations:

• A contract is created by two corresponding declarations of intent (offer and acceptance). If acceptance materially deviates from the offer, section 150(2) BGB stipulates that this declaration of intent is deemed to be a rejection combined with a new offer. The new offer must then in turn be accepted. Offer and acceptance do not, however, need to be expressly declared. A contract can also be concluded by implied conduct. If a party makes a new offer for the order of goods by way of a different contract form, the contract is created, for example, if the other party supplies the ordered goods.
• In commerce, the principles of the ‘commercial letter of confirmation’ (kaufmännisches Bestätigungsschreiben) apply, according to which a verbal contract can be overridden by a letter from a contract party on changed conditions unless the recipient of the letter objects to it without undue delay. In commerce, the silence of a party is deemed to be consent.
• If the conflicting declarations of intent of the parties to the contract are based on their general terms and conditions, the legal position is different again. The widespread use of general terms and conditions in business transactions often has the effect that both parties to an envisaged transaction have pre-formulated contract terms which are to be included. Conflicting general terms and conditions frequently occur in contracts between companies due to, for example, reference to the terms and conditions of sale and delivery on the one hand and the (conflicting) terms and conditions of purchase on the other hand. The conflict can, moreover, appear when clauses expressly waive the validity of general terms and conditions included in the contract other than their own. As a rule, court rulings today assume that the general terms and conditions of both parties only become an integral part of the contract to the extent that they correspond with each other. Otherwise there is a lack of agreement (sections 154-155 BGB). Conflicting clauses are replaced according to section 306 BGB by statutory provisions.

Lack of agreement is not an obstacle to the creation of the contract if the parties start implementing the contract by mutual consent and by doing so show that they do not regard the lack of conformity to be material.

If the conflict arises from a commercial letter of confirmation contradicting the general terms and conditions of one party, it is necessary to examine any protective clause in the general terms and conditions. Protective clauses are used in general terms and conditions to exclude any contradicting conditions. Only when this examination indicates that the confirming party could reasonably assume that the recipient - despite the protective clause - agrees with the modifications in the commercial letter of confirmation, can the conflict be resolved and the terms of the letter of confirmation prevail.

Language requirements

Is there a legal requirement to draft the contract in the local language?

The parties are, in principle, free to select the language of the contract. It should be noted, however, that the official language in court is German. It is, therefore, recommended that contracts include a German version. It should then be determined which version of the contract prevails in case of doubt.

Consumer contracts are an exception. If the company’s offer is aimed at consumers resident in Germany, the general terms and conditions must be provided in German, otherwise they are not valid pursuant to section 307(1) BGB. In B2B-transactions, however, English is usually acceptable as a common business language.

Some regional courts have established English-speaking civil divisions, where legal disputes can be conducted in English, such as the Higher Regional Court of Cologne and the regional courts in Cologne, Bonn and Aachen. Oral hearings are conducted in English. The statement of claim and other pleadings as well as the judgment and records of proceedings have, however, to date been produced in German.

The establishment of English-speaking divisions is a pilot experiment preceding a draft law of the Federal Council of 6 March 2014, according to which international commercial divisions are to be established at regional courts, where proceedings are to be conducted in English. According to the draft law, orders, records of proceedings and judgments as well are to be drawn up in English.

Online contracts

Is it possible to agree a B2B contract online?

Yes. It is in principle possible unless the law prescribes a specific form such as in the case of a property purchase agreement (section 311(b) BGB).

There are certain requirements for ‘electronic commerce agreements’ on the delivery of goods or the provision of telemedia services as to how contracts are concluded. The customer must, for example, have the technical means to correct input errors prior to placing the order. The business must furthermore inform the customer about the languages available and about receipt of the order by the business.

Statutory controls and implied terms

Controls on freedom to agree terms

Are there any statutory or other controls on parties’ freedom to agree terms in contracts between commercial parties in your jurisdiction?

Contractual freedom may be one of the most important basic principles of German civil law but it is also subject to some important limitations.

The law on general terms and conditions (sections 305 et seq BGB)

If agreements concluded between the parties are contract terms that were pre-formulated for several contracts and that one contracting party provides to the other when concluding a contract (general terms and conditions), the provisions of the BGB on general terms and conditions apply.

German law on general terms and conditions is very strict and greatly limits contractual freedom not only for B2C contracts but also for B2B contracts. Court rulings in particular have increasingly applied consumer protection principles to professional business transactions.

For example, according to the provisions of the BGB on general terms and conditions, a clause that excludes liability for damages in the event of personal injury or death, or gross negligence is invalid. Also, with regard to limitation of liability, very strict mandatory rules exist. If the BGB’s provisions on general terms and conditions are violated the respective contractual clause is void.

Violation of a statutory prohibition (section 134 BGB)

In principle all contracts that violate a statutory prohibition are null and void. It should be examined in the particular case whether the purpose of the statutory prohibition calls for the invalidity of the contract.

Statutory and official prohibition to sell

Statutory prohibition to sell is rare. Official prohibitions to sell are ordered above all in execution and insolvency proceedings and subject to forfeiture under criminal law pursuant to section 73(e) of the Criminal Code (StGB) or as attachment under criminal procedure pursuant to section 111(c) of the Code of Criminal Procedure.

Contracts contrary to public policy

Contracts are null and void if they violate public policy (section 138(1) BGB).

Prohibition of usury

Although the contracting parties are generally free to agree on any consideration, if significant disparity between performance and consideration has been attained by exploiting the hardship, imprudence or inexperience of the contracting partner, then the contract is null and void by reason of usury (section 138(2) BGB).

Prohibition of agreements in restraint of competition

Antitrust law has been gaining even greater importance recently, especially in the case of distribution agreements and trade agreements that regulate prohibition of competition, exclusive purchase obligations, exclusive supply obligations, etc. Section 1 of the Act against Restraints of Competition and article 101 of the Treaty on the Functioning of the European Union prohibit those agreements between undertakings, decisions by associations of undertakings and concerted practices that have as their object or effect the prevention, restriction or distortion of competition.

Standard form contracts

Are standard form contracts treated differently?

German courts tend to use the BGB’s provisions on general terms and conditions as a corrective measure when judging the validity of contractual clauses.

This applies equally in B2C and B2B transactions because the lists of prohibited contractual clauses contained in sections 308-309 BGB, which originally only applied to consumers (B2C), have, according to the Federal Court of Justice (BGH), a statutory model character and apply to general terms and conditions with respect to companies (B2B) as well. Compared with other legal systems, German law on general terms and conditions in B2B transactions is, therefore, especially strict.

Only contracts negotiated individually between the parties are not included in the BGB’s provisions on general terms and conditions. ‘Negotiated’ here means, however, more than merely bargained. The party proffering the terms must seriously subject the core content of its general terms and conditions to negotiation and give the other party a real degree of freedom to safeguard its own interests and an actual opportunity to influence the content of the contract terms. The party proffering the terms must be prepared to agree to requested amendments of the agreement and inform the other party to the contract on the content and implications of the clauses. These exceptions are fulfilled only rarely.

Implied terms

What terms are implied by law into the contract? Is it possible to exclude these in a commercial relationship?

The law on the sale of goods in section 437 BGB and in the law on contracts for work in section 634 BGB specifies the rights to which the purchaser or ordering party is entitled in contracts where a defect exists.

The purchaser or ordering party in principle only has the right to supplementary performance (sections 439 and 635 BGB). Only if the seller or contractor has failed to comply with the request for supplementary performance within the (reasonable) time limit set out does the purchaser or ordering party have other rights, such as right of rescission or entitlement to damages. Claims based on defects become statute-barred in most cases two years after the delivery of the purchased item or acceptance of the work.

Exclusion of warranty is possible in German law only to a very limited extent because the lists of clauses contained in sections 308-309 BGB have, according to the BGH, a statutory model character and, therefore, apply to general terms and conditions in B2B transactions as well. For example, exclusion of liability for damages is invalid in the event of personal injury or death, or gross negligence (section 309 (7) BGB). Exclusion of liability in the case of negligent violation of material contractual obligations is also invalid. In the case of contracts for deliveries of newly manufactured items and for work, a limitation of the customer’s rights to supplementary performance is in principle invalid (section 309 (8) (b) (bb) BGB). The limitation period may only be reduced at most to one year. This, inter alia, does not apply to damage claims within the meaning of section 309 (7) BGB and damage claims for negligent violation of material contractual obligations.

Vienna Convention

Is your jurisdiction a signatory to the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention)?

Yes. The UN Sales Convention has been ratified and promulgated in Germany. It is accordingly part of German civil law and, therefore, applicable where the choice of law is German law unless the UN Sales Convention is separately and explicitly excluded. While the Convention was normally excluded in the past, exclusion is waived as a rule these days because the Convention often contains provisions that the parties to the contract deem appropriate and in their interests.

Good faith in entering and peforming

Is there an obligation to use good faith when entering and performing a contract?

Yes. The principle that every party has to act in good faith in exercising its rights and performing its obligations (section 242 BGB) is fundamental to German civil law.

The principle of good faith is the basis for a host of performance-related obligations and obligations to protect and maintain. If such obligations are violated, the party concerned can be held liable for damages (sections 280 (1) and 241 (2) BGB).

Limiting liability

Prohibition on exclusions and limitations

What liabilities cannot be excluded or limited by a supplier in a contract?

Most contracts fall within the scope of the BGB’s provisions on general terms and conditions. For this reason, there is only limited potential for limiting contractual obligations.

Exclusion of liability is therefore generally not possible with respect to:

• intentional or grossly negligent breach of duty;
• violation of material contractual obligations (the BGH has held that these are ‘obligations, the fulfilment of which determines the contract, and on which the customer may rely’);
• personal injury or death;
• default, if delivery by a fixed date is agreed;
• where a guarantee for the quality or existence of an outcome of performance or a procurement risk is assumed; and
• liability under mandatory statutory provisions, in particular the Product Liability Act.

If a clause re the exclusion of liability does not include one of these (mandatory) limitations, it will be invalid.

Financial caps

Are there any statutory controls on using financial caps to limit liability for breach of contract?

It is possible to limit the scope of liability to ‘typical’ and ‘foreseeable’ damages that are not based on intentional or grossly negligent breach of duty. Caps to limit the liability for breach of contract must, however, take into account the exceptions pointed out under question 10.

Furthermore, caps must be reasonable and reflect the ‘average damages in the relevant industry sector’. Caps with too low an amount are considered void by German courts.

Indemnities

Are there any statutory controls on indemnities used to cover liability risks in contracts?

In standard form contracts indemnities must be reasonable and reflect the average damages that usually arise in similar cases. Indemnities exceeding a reasonable amount or that are considered too one-sided or unjustified are void.

Liquidated damages

Are liquidated damages clauses enforceable and commonly used in your jurisdiction?

Yes. Contractual penalties or liquidated damages are customary and enforceable in German law. A contractual penalty can be incurred irrespective of whether damage occurred and how high it may actually be. The purchaser can in addition still request the ordered goods under BGB’s provisions on the sale of goods.

The purpose of such undertakings to pay penalties is to induce the debtor to act in conformity with the contract. Furthermore, the creditor can assert the contractual penalty as minimum damages in the event of breach of contract without having to rely on contractual or statutory claims. When asserting a penalty, the burden of proving the amount of the precise damage would lie with the creditor.

Agreements on contractual penalties are frequently found in German labour contracts, contracts for work, especially in construction contracts or toll manufacturing agreements, commercial contracts and in undertakings to cease and desist.

The purpose of the contractual penalty in competition law is to ensure that anticompetitive behaviour will cease. This also includes, for example, ceasing to use invalid general terms and conditions.

Contractual penalties are as a rule precisely quantified or can, however, be easily determined and calculated and can, therefore, also be easily enforced. The ‘modified Hamburg practice’ is found in competition law to determine the amount of the contractual penalty, according to which the creditor can determine the contractual penalty but the debtor has the possibility of having the determined amount verified by a competent court of law.

Payment terms

Statutory time limits on payments

Are there statutory time limits for paying invoices? Is it possible to agree a different payment period?

Unless a different payment agreement was concluded, invoices must be paid immediately.

If payment is not made within 30 days of the due date, the debtor will be automatically in default (section 286(3) BGB). However, the consequences of default must be indicated to the debtor on the invoice, typically in the general terms and conditions. Once default occurs, default interest is incurred.

Section 271 (a) BGB must be complied with when payment terms are agreed for individual agreements. According to this, an agreement by which the creditor can request remuneration only after 60 days of receipt of the creditor’s performance, is only valid if expressly agreed and is not grossly unfair in respect of the creditor’s interests.

Where a payment date is agreed through one party’s general terms and conditions, the legal framework is even stricter: according to section 308 (1) (a) BGB, a provision reserving a period of more than 30 days for the debtor to pay after receipt of the creditor’s consideration is invalid.

Late payment interest

Is statutory interest charged on late payments? Is it possible to agree a different rate of interest?

Yes, according to article 288 BGB there is a maximum interest rate of 5 per cent above the base rate for B2C and 9 per cent above base rate for B2B transactions.

Statutory default interest is optional so it can be provided for differently in agreements. The contractual agreement of a higher rate of default interest is, therefore, in principle admissible. If such agreements are, however, enshrined in general terms and conditions, section 309 (5) BGB must be complied with. According to this, the agreement of a higher interest rate will be invalid if the agreed default interest exceeds the damage to be expected in the ordinary course of events (section 309 (5) (a) BGB).

Civil penalties

What are the civil penalties for failing to comply with statutory interest rate or late payment of invoices?

Late payments, etc, may lead to claims for damages and - after setting out a reasonable deadline for payments - may lead to termination rights.

Termination

Do special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?

If the debtor fails to perform or fails to perform in conformity with the contract, or violates protective obligations when performing, German law provides for a statutory right of rescission.

The statutory provision distinguishes between whether performance is still possible or not. If performance is still possible, the creditor must in principle first set an extension of time to allow the debtor to perform (precedence of supplementary performance, section 323 BGB). If supplementary performance is impossible, however, no time limit has to be set (section 326 (5) BGB).

The statutory right of rescission cannot be excluded. However, it is possible to agree on reasons for rescission that go beyond the statutory right.

Notice period

If a contract does not include a notice period to terminate a contract, how is it calculated?

It depends on the contract. If it becomes apparent, in the case of a purchase contract or contract for work, that the item is defective, the purchaser or ordering party must first set the seller or work contractor a reasonable period for supplementary performance (section 323 BGB). How long the period must be for it to be reasonable will depend on the circumstances (eg, the product and the concrete possibilities for supplementary performance).

A lease of indefinite duration for business premises can only ever be terminated at the end of the next calendar quarter.

Automatic termination on insolvency

Will a commercial contract terminate automatically on insolvency of the other party?

No. A commercial contract will not automatically terminate on insolvency of the other party.

Furthermore, in its decision of 15 November 2012 (IX ZR 169/11), the BGH decided the question of whether an insolvency-related termination clause in a bilateral long-term agreement is valid. The BGH concluded that in general contractual termination clauses that relate to the opening of insolvency proceedings (or the requirements for it) are void under section 119 German Insolvency Act (InsO) as they preclude the insolvency administrator from exercising its discretion to continue a contract under section 103 InsO.

Although the judgment was passed in a specific case concerning energy contracts, it is generally understood (and also the explicit understanding of the BGH) that this judgment applies to all types of long-term supply and similar contracts.

The purpose of the administrator’s discretion under section 103 InsO is to protect and enhance the insolvency estate for the benefit of an even and equal distribution to the creditors. This purpose is defeated if a solvent counterparty could terminate a contract beneficial for the insolvency estate. German courts now tend to be very strict with regard to such termination clauses and also tend to declare termination clauses void that have an ‘insolvency connection’.

Termination for financial distress

Are there restrictions on terminating a contract if the other party is in financial distress?

Provisions stipulating a termination right in case of a continued violation of the contract, default in payments or - generally speaking - in cases where it is unreasonable or unacceptable for one party to be bound to the agreement any longer, are generally accepted by the courts. The BGH, however, wants to reduce the possibilities for terminating a contract because of indirect reasons. Financial distress that could have an impact on the long-term business relationship with a company is one such reason. It might be possible to stipulate a clause providing that it is unacceptable for a company to work with financially distressed suppliers in a long-term business relationship, as the company fears supply disruption and damages. Another argument is that potential warranty claims of the company against such suppliers may not be of any value.

However, clauses that protect a company from financially distressed suppliers must be worded very carefully and always contain a severe risk of being declared void by German courts. Courts might argue that the reasons for a party to terminate the contract are still not accurate enough and still leave room for interpretation.

Such clauses can only refer to circumstances prior to any insolvency related failures or risks and to general violations of the mutual contract.

Force majeure

Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?

In principle, the parties are free to agree to a right of termination or a right of rescission for force majeure or other legal consequences. Attention should be paid in the respective clause or agreement to the definition of the term force majeure to avoid uncertainty.

In the absence of any agreement and if this also cannot be determined by interpretation of the contract, the legal consequences for the contract are governed by the provisions of impossibility (sections 275, 326 BGB) and the cessation of the basis of the transaction (section 313 BGB). It is possible, for instance, that the obligation to perform ceases to apply completely because of impossibility or that the parties have a right of rescission.

Subcontracting, assignment and third-party rights

Subcontracting without consent

May a supplier subcontract its obligations under the contract without seeking consent from the other party?

The question whether the contractual partner may use subcontractors is determined by the contract. If there are no provisions for this, interpretation has to determine whether the principal may insist on performance of the contract by the contractor alone, however as a general rule section 278 BGB stipulates the freedom of a contractual party to use subcontractors unless a contractual prohibition is in place and with the exceptions of strictly personal services (eg, by artists) and expert opinions.

Statutory rules

Are there any statutory rules that apply to subcontracting in your jurisdiction?

Contracts establish rights and obligations in principle only with effect between the contractual parties, unless the contract expressly unfolds protective character on behalf of third parties. However, it is generally possible to subcontract parts of services or works in a contract without the prior written consent of the other party.

Assignment of rights and obligations

May a party assign its rights and obligations under the contract without seeking the other party’s consent?

Obligations can be assigned to a third party, also without prior consent, unless there is a contractual clause in place demanding such consent. Default of performance caused by a subcontractor is, however, treated as default of performance by the main company in the relationship of the main company to the principal. Any negligence of the subcontractor is attributed to the main company. In its relationship with the principal, the main company bears the risk of the subcontractor’s insolvency.

What statutory controls apply to the assignment of rights or obligations under a supply contract?

Section 399 BGB stipulates that a receivable cannot be assigned if performance cannot be made to a party other than the original creditor without changing its content or if the assignment is excluded by contractual agreement with the debtor. This protects the debtor’s interests in respect of the clarity and transparency of the implementation of the contract.

The contractual prohibition of assignment is, however, significantly limited by section 354(a) of the Commercial Code in commercial transactions and with respect to certain debtors.

Other prohibitions of assignment arise from other regulations, for example section 134 BGB in conjunction with prohibitive statutory provisions such as section 203(1) StGB (violation of private secrets), section 400 BGB (unattachable receivables), section 473 BGB (pre-emptive right), and section 717 BGB (shareholders’ rights).

Enforcement by third party

How may a third party enforce a term of the contract?

A third party cannot, in principle, require performance of a contract concluded between two other parties. The situation is different if it is a contract for the benefit of a third party (section 328 BGB), for example, if the performing parties knew and intended that a third party should benefit from the contract. In that case, the third party can require performance, if necessary with judicial assistance.

Limitation periods

What are the limitation periods for breach of contract claims? Is it possible to agree a shorter limitation period?

The general limitation period is three years, commencing at the end of the year in which the claim occurs and the creditor becomes aware of the circumstances establishing the claim or should have become aware without gross negligence (section 199 BGB). In sales of goods and contracts for work, however, other limitation periods apply. The limitation period is two years as of handover of the delivery item (goods) or acceptance of the work comprising the manufacture, maintenance and modification of an item.

A reduction or extension in the limitation period is only possible in very narrow circumstances (see question 7).

Choice-of-law clauses

Do your courts recognise and respect choice-of-law clauses stipulating a foreign law?

Choice-of-law clauses are in principle admissible in B2B contracts.

The conflict-of-law public policy exception must be observed, however. According to this, foreign law is by way of exception not applicable if it is contrary to fundamental principles of the national law. It is in particular not applicable if its application is not consistent with fundamental rights. The conflict-of-law public policy exception in Germany is mainly regulated by article 6 of the Introductory Act to the BGB and article 21 of the Rome I Regulation on the law applicable to contractual obligations.

Do your courts recognise and respect choice-of-jurisdiction clauses stipulating a foreign jurisdiction?

According to article 25 of the Brussels I Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast), an agreement, by which the parties agree, irrespective of their place of residence, that a court or the courts of a member state shall have jurisdiction to settle a legal dispute which has already arisen or may arise in the future in connection with a particular legal relationship, is admissible unless the agreement is materially null and void according to the law of that member state.

That court or the courts of that member state shall have exclusive jurisdiction unless otherwise agreed by the parties.

Efficiency of local legal system

How efficient and cost-effective is the local legal system in dealing with commercial disputes?

German courts compare favourably with other EU member states as demonstrated by the current European Union Justice Scoreboard. This includes an overview of the quality, independence and efficiency of the justice systems of the individual EU member states.

Regarding the use of alternative methods of dispute resolution, for example, Germany ranks first in Europe. Around 70 per cent of Germans and German companies perceive the level of judicial independence to be very good or fairly good.

The duration of proceedings is reasonably short in Germany compared with other European countries. Nevertheless, complex legal disputes can last up to two or three years.

New York Convention

Is your jurisdiction a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Which arbitration rules are commonly used in your jurisdiction?

Yes. Germany has been a signatory to the New York Convention since 30 June 1961.

The International Chamber of Commerce arbitration rules and arbitration rules of the German Institute for Arbitration are usually applied.

Available remedies

What remedies may a court or other adjudicator grant? Are punitive damages awarded for a breach of contract claim in your jurisdiction?

Courts can order a defendant to fulfil its contractual obligations to perform, to cease and desist from specific conduct, or to pay damages.

Punitive damages are not provided for. The agreement of contractual penalties in contracts is possible.

Update and trends

Are there any other current developments or emerging trends that should be noted?

The German Civil Code (BGB) was amended on 1 January 2018. According to article 229 EGBGB, the new regulations apply only to obligations or contracts concluded after 1 January 2018. The amendments include new regulations with regard to contracts for the sale of product but especially with regard to construction agreements.

According to section 439 (3) BGB the seller or supplier shall also be liable in the case of warranty claims in B2B-transactions for any removal and installation costs incurred in the course of repair or supply. The precondition is that the buyer has installed a defective item ‘according to its type and purpose’ in another item or has attached to another item, §439 paragraph 3 sentence 1 of the German Civil Code (BGB). According to §§ 445a, 445b BGB, the supplier can take recourse to the pre-supplier with regard to these removal and installation costs.

In addition, there have been numerous other changes in the law on contracts for work and services, including a new or different definition of acceptance (if not refusal stating at least one defect (§ 640 paragraph 2 BGB)), a right to a joint assessment of performance (§ 648a IV BGB) and a unilateral right of the client to order and amend works in construction agreements (§§ 650b and 650c BGB).

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• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Litigation & Dispute Resolution Laws and Regulations Germany 2024

ICLG - Litigation & Dispute Resolution Laws and Regulations - Germany Chapter covers key topics including efficiency and integrity, injunctions, cross-border issues, disclosure and privilege, costs and funding, settlement and mediation, and arbitration and expert determination.

Chapter Content Free Access

1. litigation – preliminaries, 2. before commencing proceedings, 3. commencing proceedings, 4. defending a claim, 5. joinder & consolidation, 6. duties & powers of the courts, 7. disclosure, 8. evidence, 9. judgments & orders, 10. settlement, 11. alternative dispute resolution.

1.1        What type of legal system does your jurisdiction have? Are there any rules that govern civil procedure in your jurisdiction?

Germany is a civil law jurisdiction.  Civil proceedings are primarily governed by the German Code of Civil Procedure ( Zivilprozessordnung – ZPO).  In addition, the German Act on Proceedings in Family Matters and in Matters of Non-Contentious Jurisdiction (FamFG) applies to certain corporate law, family law and other matters.

1.2        How is the civil court system in your jurisdiction structured? What are the various levels of appeal and are there any specialist courts?

Germany has a unified court system; there is no parallel system of state and federal civil courts.  First-instance and appeal proceedings are handled by local courts ( Amtsgericht ), regional courts ( Landgericht ) and higher regional courts ( Oberlandesgericht ).  The regional court is usually the first-instance court in commercial matters.  Local courts have jurisdiction to hear lower-value disputes (up to EUR 5,000) and certain types of cases (e.g., residential landlord–tenant disputes), irrespective of value.  First-instance decisions can be appealed before the next higher court.  Higher regional courts have special first-instance jurisdiction on select matters, e.g., concerning arbitration proceedings.  The highest civil court is the German Federal Court of Justice ( Bundesgerichtshof – BGH) which hears appeals on points of law (see question 9.5).

State law may allocate specific types of disputes, e.g., patent disputes, to one particular civil court in the state.  Regional courts usually have specialised chambers for particular matters, e.g., chambers for financial or construction disputes.

There is a separate three-tier court system for employment law matters.

1.3        What are the main stages in civil proceedings in your jurisdiction? What is their underlying timeframe (please include a brief description of any expedited trial procedures)?

The claimant initiates civil proceedings by submitting a statement of claim to the court, which serves it on the defendant.  The court either directly schedules an early hearing or lets the parties exchange further written pleadings.  If necessary, the court takes evidence during an evidentiary hearing.  The average time to judgment before regional courts is 13 months, but is subject to the court’s workload and complexity of the case.  The first-instance judgment can be appealed to the competent court of appeal, with a similar timeframe for the appeal proceedings.  There is a potential subsequent second appeal to the BGH on points of law (see question 9.5), which usually decides on admissibility in less than a year, whereas proceedings on the merits usually take longer than a year.

A claimant may obtain a judgment faster in a special documents-only proceeding ( Urkundenprozess ) primarily concerning claims for money payments.  A claimant may also apply for a payment order ( Mahnbescheid ) in a formalised, mostly electronic proceeding.  However, the defendant can easily oppose a request for such order, leading to regular court proceedings.

1.4        What is your jurisdiction’s local judiciary’s approach to exclusive jurisdiction clauses?

Merchants are free to agree on exclusive jurisdiction.  Exclusive jurisdiction agreements with non-merchants are generally permissible only after the dispute has arisen.  The court will review the validity of the jurisdiction clause.  In particular, a jurisdiction clause is invalid if statutory provisions assign exclusive jurisdiction to a different court.

1.5        What are the costs of civil court proceedings in your jurisdiction? Who bears these costs? Are there any rules on costs budgeting?

German civil litigations follow the “loser pays” principle.  The court allocates the costs to the parties in its decision.  While a party is free to agree hourly rates with its lawyer, it may only seek compensation by the losing party up to the statutory fee amount.  The statutory court fees and statutory attorney’s fees are, in principle, calculated based on the value in dispute.  The claimant generally needs to advance court fees to trigger service of the statement of claim.  There are no rules on costs budgeting.

1.6        Are there any particular rules about funding litigation in your jurisdiction? Are claimants and defendants permitted to enter into contingency fee arrangements and conditional fee arrangements?

A party may apply to the court for state aid to cover its court and attorney’s fees if it is unable to bear these costs.  Its action or defence must show sufficient prospects of success and must not seem frivolous.  It is also common (primarily for private parties) to have legal expenses insurance, which covers legal costs.  Third-party funding by non-lawyers is generally permissible.  Contingency fees or similar arrangements are generally prohibited, with some narrow exceptions.

1.7        Are there any constraints to assigning a claim or cause of action in your jurisdiction? Is it permissible for a non-party to litigation proceedings to finance those proceedings?

German civil law generally permits assignment of claims.  Party agreement or statutory law may exclude assignment.  Contractual exclusions have only limited effect on assignments of claims among merchants.  Assignments made for purposes of claims collection, including to form a mass claim, are subject to specific requirements on the assignee.  If the assignee conducts collection services as a business, it must register with the competent authority – and is subject to certain rules and duties – or be a law firm.  Failure to comply with these requirements renders the assignment void.  Third-party funding is generally permissible.

1.8        Can a party obtain security for/a guarantee over its legal costs?

A defendant can request that the claimant provide security for costs if the claimant is not resident in an EU or EEA state.  International treaties may exclude security for costs.  Defendants who are counterclaimants do not have to provide security.

2.1        Is there any particular formality with which you must comply before you initiate proceedings?

State law or party agreement may require an attempt to amicably resolve the dispute by a designated conciliation office before initiating proceedings.  Otherwise, there is no particular formality to observe.

2.2        What limitation periods apply to different classes of claim for the bringing of proceedings before your civil courts? How are they calculated? Are time limits treated as a substantive or procedural law issue?

The regular limitation period under German law is three years, commencing at the end of the year in which the claim arose and the claimant obtained or should have obtained knowledge of the facts giving rise to the claim and the identity of the defendant.  Absolute knowledge-independent limitation periods of 10 to 30 years depending on the claim apply, in addition to the regular limitation period.  Statutory law or party agreement may provide for shorter or longer limitation periods of up to 30 years.  The limitation period may be tolled by party agreement, by formal pursuit of the claim or through negotiations between the parties.  German law treats limitation periods as a substantive law issue.

3.1        How are civil proceedings commenced (issued and served) in your jurisdiction? What various means of service are there? What is the deemed date of service? How is service effected outside your jurisdiction? Is there a preferred method of service of foreign proceedings in your jurisdiction?

Civil proceedings are formally commenced by service of the statement of claim on the defendant.  The claimant submits the statement of claim to the court and pays the court fee.  Attorneys are required to file electronically.  The court will serve the document on the defendant or another person, as specified by statutory law, at the defendant’s designated residential or business address, or if not possible place it in the mailbox and issue a certificate of service.  Service is deemed effected on the date when the document is served as recorded in the certificate.  For purposes of observing a limitation period, the date when the court receives the statement of claim is considered decisive if the document is served on the defendant without undue delay.

Intra-EU service (incoming and outgoing) is done in compliance with Regulation (EU) 2020/1784, which allows serving judicial documents by postal service, among other options.  Incoming requests for service from non-EU countries that are members of the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters are generally processed through a central authority in each of the 16 German States, which will effect service or refer the matter to a local court for service.  Outgoing service by postal service is preferred where permitted, and otherwise service by the foreign state’s authorities.

3.2        Are any pre-action interim remedies available in your jurisdiction? How do you apply for them? What are the main criteria for obtaining these?

Yes, in the form of asset freezes and interim injunctions.  Freezing movable or immovable assets serves to secure monetary claims and is available when there are indications that a debtor is moving assets to hide them.  Interim injunctions serve to prevent a status change that would prejudice the applicant’s claim.  For either measure, the applicant must file an application with the court that has jurisdiction over the main proceedings, or with the local court at the location of the asset to be seized.  The applicant must credibly demonstrate (preponderance of probability) the existence of the underlying claim and a justification for the interim remedy, including urgency.  For this purpose, the applicant may rely inter alia on affidavits.

3.3        What are the main elements of the claimant’s pleadings?

At a minimum, the statement of claim must designate the parties and the court, describe the relevant facts underlying the claim and state a request for relief.  Legal arguments are not required, but generally expected.

3.4        Can the pleadings be amended? If so, are there any restrictions?

After the pleadings have been served on the defendant, amendments require the defendant’s or the court’s permission.  The request for relief may be limited or extended without such restrictions.  Factual and legal assertions may be amended subject to the rules on preclusion.

3.5        Can the pleadings be withdrawn? If so, at what stage and are there any consequences?

The claimant may withdraw the entire action prior to the merits phase at a hearing.  Subsequently, withdrawal requires the defendant’s consent.  Generally, a claimant who withdraws the action must bear all costs.  If the asserted claim ceases to exist before service on the defendant (e.g., because the defendant paid), the claimant may withdraw the action and the court will allocate the costs as it finds appropriate.  The claimant may also declare that the pleadings became moot after service on the defendant ( Erledigung ).  If the defendant agrees or fails to timely object, the proceedings are terminated and the court renders a discretionary decision on costs only.  If the defendant objects, e.g., because it believes that the claim never existed, the court renders a decision on the merits and allocates costs accordingly.

4.1        What are the main elements of a statement of defence? Can the defendant bring a counterclaim(s) or defence of set-off?

The statement of defence usually contains a counterstatement of facts and any defences (e.g., time bar, satisfaction of claim, etc.).  A discussion of the law is common practice, but not required.  The defendant can bring counterclaims if there is a nexus to the primary claim and no exclusive jurisdiction of a different court.  The defendant can also raise a set-off defence.

4.2        What is the time limit within which the statement of defence has to be served?

The court sets a time limit for the filing of the statement of defence.  The statutory minimum is two weeks.  The court has discretion to set a longer time limit and grant extensions.  As a rule of thumb in standard cases, the court will set a time limit of two weeks for the defendant to indicate whether it intends to defend the claim, and an additional four weeks to submit the statement of defence.

4.3        Is there a mechanism in your civil justice system whereby a defendant can pass on or share liability by bringing an action against a third party?

A litigant may file a third-party notice ( Streitverkündung ) against a third party with the court.  Such third-party notice must describe the litigant’s potential claims in relation to the third party and the status of the pending court proceeding.  The court serves the notice on the third party, which is free to join the proceedings or abstain.  In either scenario, the decisive factual and legal findings of the court are binding on the third party in a subsequent court proceeding with the litigant.

4.4        What happens if the defendant does not defend the claim?

The claimant may request a default judgment, which is granted if the court finds that (i) the claimant’s factual allegations, if conceded, support the claim, and (ii) the defendant was in default.  The defendant has two weeks to file an objection against the default judgment.  Otherwise, the judgment becomes legally binding.  If the objection is admissible, the court proceeding is reinstated to the status before the default occurred.

4.5        Can the defendant dispute the court’s jurisdiction?

Yes.  The defendant usually submits objections to the court’s jurisdiction at the outset of the proceeding due to the risk of waiver.  If the defendant does not object to jurisdiction, jurisdiction of the court is established, except if exclusive jurisdiction lies with a different court.

5.1        Is there a mechanism in your civil justice system whereby a third party can be joined into ongoing proceedings in appropriate circumstances? If so, what are those circumstances?

The claimant can add further defendants to a proceeding by submitting a statement of claim against them.  The defendant can direct a counterclaim against a third party, who then becomes party to the proceedings.  Such third-party counterclaim must typically be directed jointly against the claimant and the third party, have a legal nexus to the case and either the third-party consent or the court consider the addition expedient.  An isolated counterclaim against the third party is only permissible in exceptional circumstances.

A third party may join a proceeding as an intervener in support of a party (without becoming a party itself) if it has a legal interest in the outcome of the case.  The parties can actively join a third party with essentially the same effect by serving a third-party notice (see question 4.3).

5.2        Does your civil justice system allow for the consolidation of two sets of proceedings in appropriate circumstances? If so, what are those circumstances?

Yes.  The court may combine separate proceedings if there is a legal nexus between the underlying claims, or they could have been brought in the same action.  In practice, courts frequently schedule joint hearings for related litigations among the same parties, without formally joining them.

5.3        Do you have split trials/bifurcation of proceedings?

Yes.  A court may split a litigation, which asserts several claims, into separate proceedings for the sake of expediency.  It can bifurcate proceedings and rule on isolated legal issues (e.g., on its jurisdiction) or issue separate rulings on liability and the amount of damages.  A claimant can initiate multi-tiered proceedings ( Stufenklage ), starting with a claim for disclosure of relevant information followed by a claim for payment based on said information.

6.1        Is there any particular case allocation system before the civil courts in your jurisdiction? How are cases allocated?

Each civil court has an internal allocation schedule.  Cases are allocated to a panel or sole judge based on abstract, neutral criteria (e.g., type of dispute, alphabetical distribution, number of matters handled by a panel or sole judge).

6.2        Do the courts in your jurisdiction have any particular case management powers? What interim applications can the parties make? What are the cost consequences?

The courts have some discretion and procedural tools to structure civil litigations, although in practice these tools are not used frequently.  Courts set time limits for written pleadings and may issue preliminary views on all or certain matters to be decided.  The parties can make various procedural applications, e.g., for extension of time limits, moving a hearing, suspension or stay of proceedings (see question 6.7), security for costs (see question 1.8) regarding the taking of evidence and challenging a judge or court-appointed expert.  Such procedural applications typically do not have cost consequences.  The parties can also apply for substantive interim measures (see question 3.2).

6.3        In what circumstances (if any) do the civil courts in your jurisdiction allow hearings or trials to be conducted fully or partially remotely by telephone or video conferencing, and what protocols apply? For example, does the court – and/or may parties – record and/or live-stream the hearings and may transcriptions be taken? May participants attend hearings remotely when they are physically located outside of the jurisdiction? Are electronic or hard-copy bundles used for remote hearings?

The court may permit participation at an oral hearing via image and sound transmission upon request or ex officio .  Witnesses and experts may also participate remotely upon request.  This may lead to hybrid hearings.  The judges are always in the courtroom.  The decision to offer a hearing via video conference is subject to the court’s discretion and technical capabilities.  The judges must be visible in the video feed at all times.  Recordings of the broadcast are not permitted.  The public may attend in the courtroom; there is no broadcasting of the hearing to the general public.  The currently prevailing view is that remote participants need to be physically located in Germany.  Hearing bundles are uncommon.  Attorneys are generally required to submit all documents to the court electronically.  The court handles its own files.

6.4        What sanctions are the courts in your jurisdiction empowered to impose on a party that disobeys the court’s orders or directions?

At a hearing, the court has the power to order a fine, removal from the courtroom or detention against a disruptive party.  The court can also fine a party who disobeys certain orders, e.g., to personally appear at a hearing.

6.5        Do the courts in your jurisdiction have the power to strike out part of a statement of case or dismiss a case entirely? If so, at what stage and in what circumstances?

Subject to the rules of preclusion, the court has the power to reject belated pleadings and thus not consider them in its decision.  If a party submits pleadings past a set time limit, the court admits them only if doing so will not cause delay to the proceedings or the party provides a sufficient excuse.  Absent a time limit, a party is nonetheless obligated to submit pleadings in due time in preparation of or at the hearing.  If it fails to do so, the court has discretion to reject such pleadings if admitting them would cause delay and their delayed submission is the result of gross negligence.

6.6        Can the civil courts in your jurisdiction enter summary judgment?

There is no summary judgment procedure.  A court can dismiss an action by regular judgment without taking evidence if it concludes that the action is unfounded, even if the claimant’s allegations were true.

6.7        Do the courts in your jurisdiction have any powers to discontinue or stay the proceedings? If so, in what circumstances?

Court proceedings are interrupted by operation of statutory law in certain situations, including the opening of insolvency proceedings over a party’s assets.  The court may, or in some cases must, order suspension of the proceedings at a party’s request or ex officio , e.g., if the dispute depends on a legal relationship at issue in a separate proceeding, or to await a preliminary ruling by the Court of Justice of the European Union (CJEU) on a decisive issue.  The court has to order a stay of proceedings at the request of both parties if a stay is expedient due to pending settlement negotiations or other sound reasons.

7.1        What are the basic rules of disclosure in civil proceedings in your jurisdiction? Is it possible to obtain disclosure pre-action? Are there any classes of documents that do not require disclosure? Are there any special rules concerning the disclosure of electronic documents or acceptable practices for conducting e-disclosure, such as predictive coding?

Disclosure is generally not available in German civil litigation.  As a general rule, each side has to adduce the evidence to support its case.  The court may order a party or a third party to produce a specific document that a party relied on, taking into account the interests of all persons involved.  A production order is not enforceable against a party to the proceeding (unlike against a third party).  Instead, if a party disobeys the order, the court may freely consider the refusal, e.g., draw negative inferences, treat it as an admission of the counterparty’s allegation or conclude that the party failed to meet its burden of proof.

In specific areas of intellectual property and competition law, parties have broader enforceable substantive rights to obtain documents or information from counterparties and third parties.

7.2        What are the rules on privilege in civil proceedings in your jurisdiction?

German privilege-like rules are narrow.  There is no privilege attached to a document; instead, Germany follows the rules of professional secrecy.  Certain groups of persons (e.g., attorneys, physicians, clergy) may refuse to testify or produce documents.  Professionals with a duty of confidentiality must exercise this right unless their client waived confidentiality.

7.3        What are the rules in your jurisdiction with respect to disclosure by third parties?

A court may order a third party to produce specific documents.  The third party may refuse production if it is unreasonable, and to the extent the party is permitted to refuse testimony.  There are broader disclosure rules in competition law.

7.4        What is the court’s role in disclosure in civil proceedings in your jurisdiction?

Regarding the court’s role in disclosure in German civil proceedings, see question 7.1.

7.5        Are there any restrictions on the use of documents obtained by disclosure in your jurisdiction?

The use of documents obtained by court order is generally not restricted (with only narrow exceptions).  Disclosure in competition law disputes may be subject to the parties agreeing on a confidentiality regime.

8.1        What are the basic rules of evidence in your jurisdiction?

As a rule, a party bears the burden of proof for the factual elements of its claim or defence.  If a fact is disputed, each party has to offer evidence in support of its factual allegations.  The court decides which of the offered evidence is relevant to deciding the case, and orders the taking of evidence accordingly.

8.2        What types of evidence are admissible, and which ones are not? What about expert evidence in particular?

Evidence admissible under the ZPO includes visual inspection, witnesses, court-appointed experts, documents and examination of a party.  A party cannot be a witness.  It can be formally examined if the other party consents, or informally at the discretion of the court.  In proceedings regarding interim relief, additional means of proving factual allegations are admissible (see question 3.2).

8.3        Are there any particular rules regarding the calling of witnesses of fact, and the making of witness statements or depositions?

A party offers witness evidence by identifying the witness and – in broad terms – the facts supported by such witness’ testimony.  Written witness statements are not common outside of interim relief proceedings and are not witness evidence.  If the court decides that the offered witness testimony is relevant to deciding the case, the court summons the witness for examination at a hearing.  Typically, the court questions the witness.  The parties and counsel may also pose questions and, with the court’s permission, directly address the witness.  There are no depositions.

8.4        Are there any particular rules regarding instructing expert witnesses, preparing expert reports and giving expert evidence in court? Are there any particular rules regarding concurrent expert evidence? Does the expert owe his/her duties to the client or to the court? 

Only a court-appointed expert provides expert evidence.  Reports by party-appointed experts are considered pleadings of the submitting party.  If it believes the expert evidence is relevant to resolving the case, the court appoints and instructs the expert, who owes his/her duties to the court.  One or both parties are typically requested to pay an advance of the expert’s costs prior to its retention.  Court-appointed experts are subject to similar rules relating to challenges for lack of independence and impartiality as judges.

9.1        What different types of judgments and orders are the civil courts in your jurisdiction empowered to issue and in what circumstances?

German courts can issue a variety of judgments and orders, including:

• Final judgments, granting and/or dismissing a claim fully or partially.
• Partial judgments concerning a claim or a separable part thereof.
• Judgments subject to a reservation, e.g., if the court has yet to rule on a defendant’s set-off claim.
• Interim judgments in bifurcated proceedings, e.g., on procedural issues or liability.
• Non-contentious judgments in cases of waiver or acknowledgment of claims or default judgments.

Judgments can also be distinguished by the type of relief granted:

• Judgments ordering performance (specific performance, damages, injunctive relief).
• Declaratory judgments (ruling on a legal relationship).
• Reform judgments (changing a legal status, e.g., divorce judgment).

Courts may also issue judgments and orders on interim measures (see question 3.2).

9.2        Are the civil courts in your jurisdiction empowered to issue binding declarations as to (i) parties’ contractual or other civil law rights or obligations, (ii) the proper interpretation of wording in contracts, statutes or other documents, (iii) the existence of facts, or (iv) a principle of law? If so, when may such relief be sought and what factors are relevant to whether such relief is granted? In particular, may such relief be granted where the party seeking the declaration has no subsisting cause of action, and/or no party has suffered loss, and/or there has been no breach of contract/duty?

Courts may issue declaratory judgments concerning a legal relationship, which are binding among the parties, including on the (non-)existence and nature of civil law relationships, rights and obligations.  A declaratory judgment cannot be issued on abstract questions of law or the (non-)existence of facts, with the exception of declaring the authenticity of a document.  As a prerequisite for a declaratory judgment, the claimant must show a legal interest in the declaration, i.e., it must be suitable to remove a current threat or uncertainty.  The legal interest is lacking if the claimant has a more effective procedural alternative available, including seeking a judgment ordering performance.

9.3        What powers do your local courts have to make rulings on damages/interests/costs of the litigation?

As a matter of principle, German law only awards compensatory damages, not punitive damages.  Courts must not grant damages exceeding the requested amount.  The court may order payment of post-litigation interest and, if the law or contract stipulates interest, pre-litigation or default interest.  The court rules ex officio on the allocation of costs, usually guided by the “loser pays” principle (see question 1.5).

9.4        How can a domestic/foreign judgment be recognised and enforced?

Domestic judgments and foreign judgments that fall within the scope of the Brussels I Regulation (recast) or certain other European legislation can be enforced in Germany without requiring recognition or a declaration of enforceability.  Other foreign judgments within the scope of certain international treaties, e.g., the Lugano Convention or the Hague Judgments Convention, are subject to simplified recognition and enforcement proceedings.  Holders of foreign judgments that are outside special enforcement regimes need to obtain a declaration of enforceability in regular German court proceedings.

9.5        What are the rules of appeal against a judgment of a civil court of your jurisdiction?

The time limits for an appeal are one month (not extendable) for the notice of appeal and two months for the grounds of appeal (extendable under limited circumstances), each counted from the day of service of the first-instance judgment.  Grounds for appeal can be legal error and/or a new finding of facts if there are doubts that the first-instance court correctly and completely established the facts relevant for its decision, or if there are new admissible facts to be considered.  A party can file a second appeal on points of law against the appellate court judgment with the BGH.  The second appeal is admissible only if the legal matter has fundamental significance, or a decision is necessary to further develop the law or ascertain uniform adjudication by the courts.

10.1      Are there any formal mechanisms in your jurisdiction by which parties are encouraged to settle claims or which facilitate the settlement process?

German civil courts are required to consider an amicable settlement at all stages of the proceeding.  Hearings are generally commenced by a conciliatory phase in which the court discusses the case with the parties and shares preliminary views, and sometimes also suggestions for settlement.  The court may refer the parties to a conciliation judge or suggest that the parties pursue mediation or other alternative dispute resolution procedures.  Court fees are lowered if the proceeding is terminated by settlement.

11.1      What methods of alternative dispute resolution are available and frequently used in your jurisdiction? Arbitration/Mediation/Expert Determination/Tribunals (or other specialist courts)/Ombudsman? (Please provide a brief overview of each available method.)

• Arbitration, either institutional or ad hoc .  Germany is an arbitration-friendly jurisdiction.
• Conciliation, with the aid of a designated conciliation office or industry-specific consumer conciliation body.
• Mediation, either before a trained mediator or a conciliation judge.
• Expert determination, including technical expertise and/or accounting expertise, e.g., an independent auditor to resolve disputes over purchase price adjustments.
• Dispute adjudication boards, particularly used for construction projects.

11.2      What are the laws or rules governing the different methods of alternative dispute resolution?

As alternative dispute resolution is (mostly) at the disposition of the parties, party agreements usually take precedence to the extent they are legally permissible.  The parties can choose institutional rules, for example of the German Arbitration Institute ( Deutsche Institution für Schiedsgerichtsbarkeit – DIS) (see question 11.6) or the International Chamber of Commerce (ICC), which address different methods of alternative dispute resolution.  Different German statutory laws contain relevant provisions:

• Arbitration: The 10 th Book of the ZPO (in large part based on the 1985 UNCITRAL Model Law on International Commercial Arbitration).
• Meditation: The Mediation Act sets forth rudimentary provisions.
• Conciliation: The Act on Alternative Dispute Resolution in Consumer Matters and certain speciality laws.  State law may provide rules concerning conciliation before designated conciliation offices.
• Expert determination and dispute adjudication boards: Basic conditions are derived from an analogous application of substantive law provisions governing the specification of performance by a third party.

11.3      Are there any areas of law in your jurisdiction that cannot use Arbitration/Mediation/Expert Determination/Tribunals/Ombudsman as a means of alternative dispute resolution?

Disputes that do not concern rights over assets and are outside the parties’ disposition to settle (in particular family law matters) are not arbitrable.  Likewise excluded from arbitration are most employment law disputes and certain disputes over the existence of a tenancy relationship concerning residential spaces in Germany.  Arbitration agreements with consumers are subject to stricter formal requirements.

11.4      Can local courts provide any assistance to parties that wish to invoke the available methods of alternative dispute resolution? For example, will a court – pre or post the constitution of an arbitral tribunal – issue interim or provisional measures of protection (i.e. holding orders pending the final outcome) in support of arbitration proceedings, force parties to arbitrate when they have so agreed, or order parties to mediate or seek expert determination? Is there anything that is particular to your jurisdiction in this context?

German courts are generally arbitration-friendly and support arbitration proceedings at all stages.  Courts must dismiss a case as inadmissible if the defendant invokes a valid arbitration agreement.  If the parties have agreed that a certain method of alternative dispute resolution, e.g., mediation, needs to be attempted before a court action may be initiated, the court must reject a case as inadmissible if the condition has not been met.  If an agreed-on expert determination has not been completed, the court must either set a time limit for obtaining the expert determination or dismiss the case as unfounded at the time.

There are numerous proceedings by which German courts support arbitration, including:

• Before an arbitral tribunal is constituted, a party can call on the court to declare that an arbitration proceeding is (in)admissible. 
• In ad hoc proceedings, a court can appoint arbitrators if the parties cannot agree on a candidate or fail to make an appointment. 
• A court can permit enforcement of interim measures that an arbitral tribunal ordered.  Most courts will also order interim measures before and after the arbitral tribunal’s constitution.
• A court can assist an arbitral tribunal in the taking of evidence or other judicial acts, e.g., formal service abroad.

11.5      How binding are the available methods of alternative dispute resolution in nature? For example, are there any rights of appeal from arbitration awards and expert determination decisions, are there any sanctions for refusing to mediate, and do settlement agreements reached at mediation need to be sanctioned by the court? Is there anything that is particular to your jurisdiction in this context?

An arbitral award issued in Germany has the effect of a final and binding court judgment among the parties.  A court can set aside an arbitral award based only on limited statutory grounds.  With certain exceptions (e.g., EU and German competition law, which is deemed part of German public policy), there is no révision au fond .  An expert determination is binding on the parties unless it is obviously incorrect or inequitable, which a court or arbitral tribunal can review.

A settlement concluded before the court or a conciliation office pursuant to state law constitutes an enforceable legal title.  In contrast, a settlement reached in out-of-court mediation is merely a substantive law agreement unless notarised.  If a party refuses to comply with the settlement, the other party must seek its enforcement by initiating litigation.  Settlements concluded between attorneys representing their respective clients or in the form of arbitral awards on agreed terms are declared enforceable by a court or – if the parties agree – by a notary in a streamlined fashion.

11.6      What are the major alternative dispute resolution institutions in your jurisdiction?

The leading dispute resolution institution in Germany is the DIS.  It offers rules for various types of alternative dispute resolution, including arbitration, mediation, expert determination and adjudication, as well as services to administer dispute resolution.

Production Editor's Note

This chapter has been written by a member of ICLG's international panel of experts, who has been exclusively appointed for this task as a leading professional in their field by Global Legal Group , ICLG's publisher. ICLG's in-house editorial team carefully reviews and edits each chapter, updated annually, and audits each one for originality, relevance and style, including anti-plagiarism and AI-detection tools. This chapter was copy-edited by Helena Webb , our in-house editor.

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Proposed EU assignment law regulation and its impact on receivables financing transactions

Introduction .

Using receivables, such as claims resulting from the supply of goods and services, as a source of funding is a popular way of working capital financing. Receivables can be sold as part of a factoring, securitisation or similar transaction, or can be pledged or assigned as security for obligations under loan facilities or other forms of debt financing.

If the transaction relating to the receivables has an international character, for example the debtors of the receivable are located in different countries, the receivables are governed by foreign law or the purchaser or pledgee of the receivables is located abroad, then it may be necessary to determine what law applies to the various elements of which an assignment or pledge is composed. For example, (i) what should be the governing law of the agreement to assign or pledge the receivables, (ii) what laws applies to the assignment or pledge itself in order to ensure that the receivable is actually transferred or pledged and that such transfer or pledge is effective against the assignor or pledgor and its creditors (i.e., the proprietary (in rem) effect of the assignment or pledge), and (iii) what law determines what needs to be done in order to make the assignment or pledge effective against the receivable's debtor. 

Rome 1 Regulation 

Within the European Union, the first and the third question are addressed in the so-called Rome 1 Regulation  With regard to the first question, the Rome 1 Regulation provides that the governing law of a contract for an assignment with an international character must be determined in accordance with the rules of the Rome 1 Regulation that apply to contracts. This means that the parties are free to choose such governing law. In relation to the third question, what law determines what needs to be done in order to make the assignment effective against the receivable's debtor, the Rome 1 Regulation provides that this is the law governing the relevant receivable. 

It was for a long time unclear whether the Rome 1 Regulation (and its predecessor, the Rome Convention on the law applicable to contractual obligations) also covered the second question, i.e., what law applies to the assignment itself. The laws of some member states provide, and numerous legal scholars have argued, that that this question should be answered in the same way as the first question, and that the Rome 1 Regulation did not intend to differ between the law that governed the agreement obliging the parties to assign a receivable, and the law that applies to the assignment itself. Since the parties are free to choose the governing law of the assignment agreement, it could therefore also choose the law applying to the assignment. 

This implies that, where the receivables transaction has an international character, the parties can choose the governing law of the assignment. By making such choice they can avoid cumbersome assignment formalities that apply for example pursuant to the governing law of the receivables. For example, under Dutch law it is a requirement that the instrument effecting an undisclosed assignment is included in a notarial deed or is registered with the Dutch tax authorities. By making the assignment of these Dutch law receivables subject to English law, the assignment formalities are those that apply under English law (which are much easier to comply with), so that the complicated Dutch law formalities can be avoided.

However, the view of other scholars is that the Rome 1 Convention does not deal with the assignment itself and that therefore the question what laws should govern an assignment should be determined in accordance with each member state's private international laws. This created uncertainty as to what law applies to an assignment of receivables. The laws of a considerable number of member states accepted that the parties are free to choose the governing law of the assignment. However, there are various exceptions. For example, the leading German law position is that the assignment has to be effected under the laws that apply to the receivables themselves. The position under Belgian law is that the assignment is subject to the laws of the country in which the assignor is located.

Proposed EU Assignment Law Regulation 

Although it can be argued that the financial community was able to live with these differences and did find practical solutions to deal with them, the European Commission nonetheless considered it necessary to regulate this matter. It intends to do so by way of the proposed Regulation of the European Parliament and of the Council on the law applicable to the third-party effects of assignments of claims (the "Assignment Regulation"). The latest text version of this proposal dates from 28 May 2021. As it did with the Rome 1 regulation, the European Commission has decided to regulate this matter by way of a regulation, which has direct effect in the member states. This means that it automatically overrides the laws of member states that have different rules from those set out in the Assignment Regulation. Because of the special status of these countries, the Assignment Regulation will not apply in Denmark and Ireland.

The Assignment Regulation can be considered as a supplement to the Rome 1 Convention and the scope of the type of contracts and other legal arrangements to which it applies are intended to be broadly similar. It removes the ability of parties to an assignment to choose the governing law of the assignment of a claim. Its basic rule is that an assignment of a claim should be governed by the law of the country in which the assignor of the claim is habitually resident. However, for certain types of claims, the assignment should be governed by the laws applying to the claims. The rules also provide that in respect of particular transaction the parties can choose to effect the assignment under the laws of the country in which the assignor of the claim is habitually resident or the laws that apply to the relevant claim.

Unfortunately, the current draft of the Assignment Regulation (the text of which is however not expected to be amended in any material way) could potentially create quite a bit of confusion in practice, for example, due to the various exceptions that apply to its scope and the application of two different rules, depending on the nature of the claims involved.  Scope. 

The Assignment Regulation applies in situations involving a conflict of laws, to the third-party effects of voluntary assignments of claims in civil and commercial matters. This means that the courts in all concerned member states should apply the rules set out in the Assignment Regulation if they are asked to consider a question regarding an assignment of claims that involves more than one jurisdiction. The Assignment Regulation therefore not only applies to claims that are governed by the laws of one of the member states, but also to claims that are governed by laws of other states. Equally, the courts of the EU member states will also need to apply the rules if it concerns a claim that is governed by the laws of a member state, but the assignor and/or assignee of the claim are located outside the EU. However, the Assignment Regulation does not apply to arrangements whereby the rights as well as the obligations under a contract are being transferred (including by way of novation).

Below we will set out how the new rules could affect cross-border receivables transactions that involve parties located in member states of the European Union (other than Denmark and Ireland). A first point to note is that according to the Assignment Regulation, it will no longer possible for the assignor and assignee to choose the governing law of the assignment. Therefore, choosing a law with less complicated assignment formalities, or applying a single law applying to the assignment for receivables that include assignors in various jurisdictions or receivables with different applicable laws will no longer de possible.

As mentioned above, there are various categories of claims to which the Assignment Regulation does not apply. Although most of these exceptions are less relevant in the context of receivables resulting from the supply of goods or services, the excluded claims include those resulting from revenue, customs or administrative matters, crypto-assets, claims under bills of exchange, cheques and promissory notes and other negotiable instruments and claims incorporated in a certificate or represented by a book-entry.

General Rule 

As a general rule, the assignment of receivables to which the Assignment Regulation applies must be governed by the laws of the country in which the assignor has its habitual residence at the time of the conclusion of the assignment contract. This rule also applies if the assignor's habitual residence is not located in the EU. For example, if the assignor's habitual residence is located in South Africa, then the assignment of claims should be governed by South African law, even if the governing law of the claims is Dutch law and the assignee and the debtor under the claim are located in The Netherlands.

Alternative Rule 

An alternative rule applies to certain categories of claims. Pursuant to this rule, the assignment should be governed by law applicable to the assigned claim. Categories of claims to which this alternative rule applies are, amongst others, claims arising out of financial contracts, such as commodities sale and purchase agreements, and loan agreements. 

In the context of a trade receivables transaction, claims often originate from commodities contracts. Although trade and service-related claims are in general unlikely to be considered as loans, there are situations where a supplier or service provider extends credit to a customer and reflects this as a loan. As a result, the assignment of claims resulting from the commodities contract or the loan will need to be governed by the law of the commodities contract or the loan (as the case may be). 

Securitisations and covered bonds

The Assignment Regulation provides that for particular transactions, the parties can choose between the general rule and the alternative rule. This is the case for transactions that qualify as securitisations and covered bonds under applicable EU regulations. These options are therefore only available for transactions that actually meet these regulatory criteria and not for transactions that are akin to them. For example, a structure whereby an SPV purchases claims and receives senior and subordinated funding, is likely to be considered as a securitisation, because it involves debt-tranching, and can therefore benefit from the special regime. A similar structure where the funding to the SPV would be provided on a pari passu basis, would not qualify, since it is not considered as a securitisation under applicable EU regulations. The assignment of claims in the latter transactions would therefore need to be effected in accordance with the general rule or, if the claim results from a commodities contract or a loan, the alternative rule.

Security Rights 

The Assignment Regulation will, like the Rome 1 Regulation, also apply to the creation of security rights in receivables, such as pledges and security assignments. The same rules that apply to assignment also apply to the creation of such security rights. 

Implementation and Application

The drafting discussions regarding the Assignment Regulation have already been going on for quite a while, with different rules having been proposed. However, given the current advanced stage of the proposal, it is unlikely that there will be material amendments to the rules set out in the Assignment Regulation. It is also expected that the Assignment Regulation will be adopted in the course of 2022. It will then become effective 20 days after its publication in the EU's Official Journal and start to apply 24 months after its coming into force. It shall then apply to assignments that have been concluded after the first day of its application. It is likely that it shall apply from that date also to assignments that are made under master or framework agreements that have been concluded prior to the application date, since the reference is to the assignment itself rather than the agreement pursuant to which such assignment is made.

Impact on transactions

The Assignment Regulation will have a considerable impact on cross-border receivables financing transactions. Firstly, most transactions are being structured on the basis that the assignment is effected either under the chosen law by the parties or in accordance with the law applying to the receivables. However, the general rule will now be that the law of the habitual residence of the assignor must apply to the assignment. This is therefore quite different from current market practice. Furthermore, the current private international law rules of member states do not distinguish between receivables resulting from loans or commodities contracts and those resulting from other contracts when determining the law that should apply to the assignment. 

Another complication is that under the Rome 1 Regulation, the law applying to the claim determines what needs to be done to make the assignment effective against the receivable's debtor. When according the to Assignment Regulation, the assignment needs to be effected in accordance with the general rule (i.e., laws of the country in which the assignor has its habitual residence at the time of the conclusion of the assignment contract), it will still be necessary to apply with the law applying to the receivable itself to make the assignment effective against the receivable's debtor.

Furthermore, the rules under the Assignment Regulation could result in a situation that receivables that qualify as claims under loans and commodities contracts need to be assigned in accordance with the laws applying to such claims, and other receivables under the laws applying in the habitual residence of the assignor. This is not really helpful from a cost and transaction management perspective if a transaction includes both types of receivables. 

If the Assignment Regulation's drafters considered it undesirable that parties to a transaction have the freedom to choose the law applicable to an assignment, it would from a practical point of view have been better if they would have made it possible to opt for the general rule or the alternative rule in all transactions rather than limiting this option to securitisations and covered bonds only.

Although the Assignment Regulation will probably only become applicable in 2024, parties may wish to take the rules into account when structuring receivables financing transactions that are intended to have a lifespan (at least as far as the structure and legal documentation is concerned) beyond 2023. Where possible, the parties could anticipate the new rules by already applying them to their transaction (in particular where they can currently choose the governing law of the assignment), so that there is no need to amend and restructure the transaction to make it compliant with the Assignment Regulation before it starts to apply.  

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