Limitations and exclusions of liability in business to business contracts in Germany

The general legal framework governing contractual limitations and exclusions of liability in Germany is rooted in the principle of freedom of contract as incorporated in the German Civil Code (Bürgerliches Gesetzbuch – BGB). This principle allows commercial parties broad discretion in allocating risks, including through limitation and exclusion of liability clauses. However, this freedom is not unlimited. The BGB sets out specific rules governing the permissibility of such clauses both under general contract law and, notably, under the law on General Terms and Conditions (Allgemeine Geschäftsbedingungen – AGB/GTC). A peculiarity under German law and one that international parties should be particularly aware of is that the strict statutory provisions on standard contracts and GTC apply not only in consumer contracts but also, to a significant extent, in B2B transactions. In addition, the courts, in particular the German Federal Court of Justice (Bundesgerichtshof – BGH), have developed a substantial case law on the applicability of statutory restrictions to standard contracts and GTC also to B2B transactions.

German law contains a few mandatory provisions that render certain limitations or exclusions of liability void or unenforceable, for example:

• Common decency: Sec. 138 para. 1 BGB states that legal transactions that offend common decency are void. This may include limitations of liability, however, the threshold is substantially high.
• Liability for intent: Sec. 276 para. 3 BGB states that the obligor may not be released in advance from liability for intent.
• Injury to life, limb or health: Sec. 309 no. 7 (a) BGB, which applies to standard contracts and GTC, states that an exclusion or limitation of liability for damage from injury to life, limb or health is invalid.
• Gross negligence: Sec. 309 no. 7 (b) BGB, which applies to standard contracts and GTC, states that an exclusion or limitation of liability arising from a grossly negligent breach of duty is invalid.
  • Both provisions (Sec. 309 no. 7 (a) and 7 (b) BGB) originally refer to B2C transactions, however, according to the German Federal Court of Justice (BGH) case law has established that they are also to be applied by analogy to B2B transactions.
• Material contractual obligations: According to sec. 307 para 2 no. 2 BGB, liability for material contractual obligations cannot be excluded in standard contracts and GTC, even in cases of ordinary negligence. However, in cases of slight negligence in breach of material contractual obligations, liability may be limited to the foreseeable damage typical for the respective contract.
• Fraudulent concealment or guarantee: Regarding purchase agreements, para. 444 BGB states that rights of the buyer cannot be restricted if the seller: (i) fraudulently concealed the defect; or (ii) granted a guarantee (Garantie). 

In individually negotiated contracts, the parties enjoy broad discretion to exclude liability for consequential, indirect or special losses. Such exclusions are subject only to the general limits of sec. 138 and sec. 276 para. 3 BGB (common decency and liability for intent).

In standard contracts and GTC (including in B2B transactions), such limitation is only permissible within the mandatory limits outlined above, in particular those relating to injury to life, limb or health, gross negligence and material contractual obligations. General exclusions of liability for indirect or consequential losses are thus invalid in standard contracts and GTC.

In respect of unforeseeable damage (i.e. damage that was not reasonably foreseeable at the time of contract conclusion as a typical consequence of a breach) liability may be effectively excluded in cases of slight negligence. 

It should be noted that the distinction between direct, consequential, indirect or special losses as commonly found in common law jurisdictions is not recognised as a legal category under German law. German law does not attach specific legal consequences to such classifications. 

It is therefore recommended to list and contractually define relevant categories of loss (e.g. loss of profit, loss of data, etc.) in the contract clause itself, rather than relying on the generic terms "indirect" or "consequential" losses. In the absence of clear statutory definitions, parties frequently litigate about the extent of liability related to direct and indirect losses, hence a clear contractual definition significantly reduces the risk of ambiguity and litigation.

Yes, to a certain extent. As outlined above, under German law it is not the classification of a loss as loss of profit, revenue, data, goodwill or anticipated savings that is decisive for the permissibility of an exclusion, but rather compliance with the mandatory principles, in particular those relating to material contractual obligations and foreseeability.

Yes, financial caps on liability in German B2B contracts are commonly upheld. In individually negotiated contracts, the parties are largely free to agree on financial caps, provided the mandatory rules are observed. 

In standard contracts and GTC, the German Federal Court of Justice (BGH) has established that a financial cap on liability is only permissible if the maximum liability limit adequately covers the foreseeable losses typical for the contract. The cap must furthermore be transparent and understandable for the other party. In all cases, the agreed cap must be proportionate and reasonable in relation to the contractual subject matter and the risks assumed; a cap that is disproportionately low may be deemed invalid as an unreasonable disadvantage to the other party pursuant to sec. 307 para. 1 BGB.

"Exclusive remedy" clauses are generally enforceable in Germany in individually negotiated contracts. Exceptions to enforceability are fraudulent concealment of material defects or a granted guarantee (sec. 444 BGB).

In standard contracts and GTC, additional restrictions apply pursuant to sec. 309 no. 8 (b) BGB, which governs contracts relating to the supply of newly manufactured goods and contracts relating to the performance of work. Under this provision, an exclusive remedy clause that limits the customer's rights solely to subsequent performance (repair or replacement) is ineffective if it does not preserve the customer's right to rescind the contract or to reduce the price as a secondary remedy in the event that the exclusive remedy fails (i.e. where subsequent performance is refused, is impossible, has failed, or is unreasonable for the customer).

Pursuant to sec. 306 para. 1 and 2 BGB, where a provision in GTC has not become part of the contract or is ineffective, the remainder of the contract remains in effect. To the extent that the terms have not become part of the contract or are ineffective, the content of the contract is determined by the statutory provisions. It should be noted that German law does not permit a court to reduce an invalid clause to its permissible content. 

With regard to a specific GTC clause, the remaining wording of a clause can only be preserved if the rest of the clause is substantively independent, the invalid part can be clearly separated from the rest of the wording, and the remaining part is comprehensible and meaningful in its own right. From a drafting perspective, it is therefore advisable to structure provisions that carry a significant risk of invalidity as a separate, self-contained clause. This ensures that, in the event of invalidity, only the specific clause in question is affected, while the remaining contractual provisions, including other limitation or exclusion of liability clauses remain enforceable.

Under German law, the parties may in principle contractually shorten or extend statutory limitation periods. However, this freedom is subject to mandatory constraints. Pursuant to sec. 202 para. 1 BGB, the limitation period may not be shortened in advance in respect of liability for intentional conduct. Conversely, pursuant to sec. 202 para. 2 BGB, the limitation period may not be extended beyond a maximum period of thirty (30) years from the statutory commencement date. 

In standard contracts and GTC (including in B2B transactions), further restrictions apply. The German Federal Court of Justice (BGH) has consistently held that the contractual shortening of limitation periods constitutes a limitation of liability within the meaning of the GTC provisions. Accordingly, such clauses are subject to the same mandatory limits as other limitation of liability clauses, in particular those set out in sec. 309 no. 7 (a) and (b) BGB (i.e. the prohibition of limiting liability for injury to life, limb or health and for grossly negligent breaches of duty). A contractual shortening of limitation periods in GTC that would effectively deprive the other party of its claims arising from such breaches is therefore invalid.

In addition to the specific statutory provisions set out above, German law recognises general public policy considerations that may override contractual limitation or exclusion of liability clauses. In particular, sec. 138 para. 1 BGB renders void any legal transaction that offends common decency, and sec. 242 BGB requires that all contractual obligations be performed in accordance with the principle of good faith. These general clauses serve as a residual corrective mechanism and may, in exceptional cases, render a limitation or exclusion of liability clause unenforceable even where the specific statutory provisions on GTC control do not apply, for example, in individually negotiated contracts. However, in practice, the practical significance of these general clauses in the context of liability limitations is limited, as the more specific provisions governing standard contracts and GTC and the mandatory framework outlined above typically provide a more specific legal basis for challenging such clauses.

The applicable framework for both scenarios is Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I Regulation). 

Regarding scenario (a), where the contract is governed by German law but the supply of goods or services is performed abroad, German law will generally govern the validity and effects of limitation and exclusion of liability clauses as described above, irrespective of the place of performance. This follows from the principle that the law chosen by the parties (or determined under the Rome I Regulation) governs the contract in its entirety, including the assessment of the permissibility of limitation of liability clauses. However, two exceptions may apply: (i) the courts of the country of performance may give effect to overriding mandatory provisions, i.e. provisions the respect for which is regarded as crucial by that country for safeguarding its public interests, such as its political, social or economic organisation; (ii) the application of German law may be refused if it is manifestly incompatible with the public policy (ordre public) of the forum. 

Regarding scenario (b), where the contract is governed by a foreign law but the supply of goods or services is performed in Germany, the validity of limitation and exclusion of liability clauses is generally assessed under the chosen foreign law. However, German courts may take into account German overriding mandatory provisions and may refuse to apply a provision of the foreign law if such application would be manifestly incompatible with German public policy (ordre public).