Effectiveness of contractual penalties in Standard General Terms and Conditions

Category: contract law Industry: mobility Year:

In its most recent judgement (BGH, judgement of 31 August 2017, VII ZR 308/16) on the effectiveness of contractual penalty clauses in Standard General Terms and Conditions (AGB), the BGH continues to take a tough line. Whilst in the past cases of this kind mostly involved the construction industry, this judgement was made on a dispute from catering. Having said that, the lessons to be learned from it can also be applied to other sectors. Particularly in the industrial sector, in which the significance of default clauses or confidentiality agreements is often underpinned by appropriate contractual penalties, the opinion of the BGH is one that should definitely not be neglected. 

In the case adjudged here, the publisher of a booklet of vouchers (‘gourmet book’) brought an action against a restaurateur. Restaurateurs could publish two-page advertisements in the gourmet book if in return they undertook to serve purchasers of a booklet the lower-priced main course free if the latter ordered two main courses after submitting the appropriate voucher. The plaintiff and the defendant had concluded a contract covering membership in the gourmet book for the year 2015. One part of this standard-form contract, concluded with all the participating restaurateurs, was a contractual penalty clause, which authorised the penalising of a deliberate breach of a contractual obligation by the restaurateur with a fine of 2500 EUR for each individual case of infringement. When several purchasers of the gourmet book had complained about non-redemption of vouchers on the part of the defendant, the defendant explained to the plaintiff that he only served smaller portions as free meals, that the rump steak did not count as a main course, and that in future he would not in fact be prepared to redeem any more vouchers at all. The plaintiff replied to that by drawing attention to the agreed contractual penalty clause and demanded payment of a sum of 2500 EUR from the defendant. The district court acceded to the claim. The appeal lodged against it was dismissed. Neither of the two courts was able to recognise any reason why the contractual penalty clause should not be applied. The BGH, however, upheld the appeal and dismissed the action. The plaintiff, said the BGH, could not avail himself of the contractual penalty clause, because it was invalid according to Section 307 (1) 1. of the German Civil Code (BGB). A breach of good faith, said the court, could be recognised in the fact that the clause made no distinction as to the severity of the defaults. The commensurability of a contractual penalty must be based on the most minor typical default. In the case in point, however, only minor defaults were conceivable (for example offering only seven main courses instead of the eight which had been agreed, serving smaller portions etc.), and these put much less of a burden on the business model of the defendant than, for example, a refusal to accept vouchers would. The court thus decided that a contractual penalty of 2500 EUR which also applied to these minor breaches was unreasonable.

Practical tips

In the application of contractual penalty clauses, the severity of the possible defaults and their potential (financial) impacts should first be taken into account. In the case of penalties for default in industrial supply relationships, for example, the decisive question will usually be what damage is to be expected to result from a slight overrun of the delivery period. Damage in these cases is regularly greater when there is a large order volume and strategically important parts than it is following the delayed delivery of small quantities, which may be able to be cushioned by goods stored on the customer’s premises. The user is left with the possibility of gearing the amount of the contractual penalty to the most minor default, or applying different penalties according to the individual defaults and the degree of their severity. Both variants entail the risk that the user may make a wrong assessment and that the clause may thus be invalid. A clause designed according to the so-called ‘Neuer Hamburger Brauch’ offers a safe alternative to the above. Here, the user reserves the right to determine a reasonable contractual penalty him or herself in an individual case of default. At the same time the contractual partner has the opportunity of having said penalty reviewed at court.

[October 11th, 2017]