CMS Guide to Consequential Loss in Germany

German law – unlike English or other common law jurisdictions – does not explicitly recognise the terms “consequential loss” nor the terms “direct” or “indirect loss”. The terms are not defined or used in the German Civil Code (Bürgerliches Gesetzbuch, “BGB”).  Losses are generally recoverable if they meet the test of adequate causation. These and other principles on the recoverability of losses are set out in Sections 249 et. seqq. of the BGB and an extensive body of court cases. Therefore there is no concept similar to Hadley v Baxendale in German law, subject to the caveat below under (3.).

Yes. Contractual exclusions of liability clauses for “consequential loss” are common in commercial contracts. The exclusion of certain types of losses along with a liability cap on recoverable losses is regularly seen in most industries. Some of these clauses only exclude certain economic or consequential losses – such as loss of profit, and loss of production – while others explicitly exclude all consequential losses, sometimes combined with a non-exhaustive list of examples and sometimes by just using the phrase “consequential loss” or “consequential and indirect losses”.  Despite the lack of a clear legal definition of the term “consequential loss”, it is rare for such exclusions to include their own definition of “consequential loss”.

Some contracts, especially for international construction projects, include a long list of examples of excluded damages in addition to the general exclusion of consequential losses, such as: 

• loss of use
• loss of data
• loss of profit
• loss of production
• loss of customers or contract
• incursion of financial charges
• or for any consequential or indirect loss or damage.

In contract law and especially insurance law, a concept of – regularly excluded – consequential losses (Folgeschäden or mittelbare Schäden) has developed. However, there is no uniformly accepted definition of such losses in German law.

As a German particularity, certain restrictions on standard business terms (Allgemeine Geschäftsbedingungen), originally conceived as a tool for consumer protection, also apply in business-to-business transactions. The restrictions on standard business terms limit the possibility to exclude liability for damages in contracts that are based on standard business terms to a considerable extent. Non-compliance with the principles developed to a large extent by German jurisprudence will cause the invalidity of the respective provision, provided it favours the party who proposed the standard terms.

There is no generally accepted definition or concept of consequential losses. 1  Court decisions on the interpretation of the meaning of consequential losses are very limited in number and not always coherent. Decisions on the matter regularly stress the fact that there is no generally accepted definition of consequential loss, and therefore require a case-by-case determination of the parties' intent. 2

In a limited number of cases, the federal supreme court (Bundesgerichtshof, “BGH”) and a higher regional court (Oberlandesgericht) ruled in the 1990s 3  that, in a contract which is subject to German law but written in English, terms such as “consequential loss”, which have a specific meaning in English law, will generally be construed according to English law principles. The court held that the parties’ use of terms that have a specific meaning in English law but not in German law hints at the parties’ intent that the specific meaning shall apply to the interpretation of the contract. This would mean that Hadley v Baxendale principles may apply to a German law contract if written in English. Whether these rulings would still apply today is unclear, as the underlying assumptions have been criticised by prominent scholars. 4  To our knowledge, the principle has neither been used nor rebuked since the 1990s.

Assuming consequential loss will be interpreted as Folgeschäden or mittelbare Schäden, it is not entirely clear which types of damages are excluded. It is generally agreed that costs to repair (or replace) damaged property or to heal an injured person are direct losses and not Folgeschäden or mittelbare Schäden and therefore not excluded as consequential loss. Beyond that, courts tend to look at the parties’ intent when signing the contract to establish which damages are excluded as consequential. 5  In a court ruling, the BGH stated that direct losses are losses that were to be expected as evident consequence of a breach according to the usual cause of things. In that case, interest payments due to increased financing costs were considered to be direct damages as they were considered to be an evident consequence of the breach. 6  This concept seems similar to the first limb of Hadley v. Baxendale. However, the similarity should not be over-interpreted, as courts stress their case-by-case approach to determine direct and consequential damages. In another case, BGH decided that statutory interest payments were not considered to constitute excluded indirect losses whereas higher interest damages were considered to be consequential losses. 7   

It is therefore difficult to state which damages would likely be excluded under German law as “consequential damages”.

Due to uncertainty about the type of damage that would actually be covered by an exclusion of consequential damages, at least in high value contracts parties often aim to specifically describe the types of losses they wish to exclude, most often by including a list of examples.  

As a general rule, each exclusion will be interpreted on its own in a first step with the aim of establishing the parties’ intent at the time of signature of the contract.  Courts are free to hear witnesses to establish what the parties intended. There is no parol evidence rule restricting proof of contract interpretations. In case of ambiguities, there is no contra proferentem rule, as a general principle. However, standard business terms (allgemeine Geschäftsbedingungen) will generally be interpreted to the detriment of the party proposing their inclusion in the agreement, §305c para.2 BGB.

If there is a long list of excluded damages, courts would – if there are no signs of a deviating intent by the parties – tend to treat the list of excluded damages as mutually exclusive. Damages that are not expressly excluded if other comparable damages are excluded would likely be treated as recoverable unless the list was structured as a non-conclusive description of consequential losses. Therefore, careful drafting of the exclusion can avert such risk, at least partially.

No, German law generally allows an action for specific performance irrespective of the extent to which damages would or would not be recoverable.