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?
Yes, German law provides specific termination options; some of them are mandatory and may not be waived by the parties. In principle, the parties have wide discretion in determining the preconditions of termination and revocation and may in particular go beyond the statutory rights. German law provides, inter alia, the following termination rights:Extraordinary notice for cause
Section 314 of the BGB is the general rule when it comes to extraordinary notice for cause. For specific types of contract, German law provides specific rules on extraordinary notice for cause (eg, section 89a, HGB; section 543, BGB; section 626, BGB). Section 314 of the BGB establishes the opportunity for either party of an ongoing continuing obligation to terminate the contract for cause (ie, a compelling reason) without any notice period. This right of termination may not be excluded by agreement between the parties.Ordinary notice in commercial agency and distribution agreements
Section 89 of the HGB establishes a mandatory option to terminate commercial agency agreements if they were entered into for an indefinite period of time. Depending on the duration of the agency relationship, the notice period is between one and six months. This right to terminate without cause applies by analogy to distributorship and franchise agreements, if the distributor (franchisee) is embedded in the distribution system of the manufacturer, comparable to a commercial agent.Extraordinary termination with notice period
If the law does not set forth specific fallback rules (eg, as is the case with supply agreements or framework agreements), the Federal Court of Justice has - under specific preconditions - acknowledged a non-written right to terminate an ongoing continuing obligation with an adequate notice period (roughly six to 12 months). This unwritten right to terminate the agreement extraordinarily is given where:
- the parties have concluded an unlimited ongoing obligation;
- no other right to terminate the contractual relationship applies; and
- the parties did not expressly exclude the right to terminate the ongoing obligation ordinarily.
Under specific statutory reasons, the parties are entitled to rescind a purchase contract or a contract for work, pursuant to sections 323, 324, 326(5) of the BGB. This is the case, in particular, where a party does not perform its duties under the contract or a party is in breach of contractual duties despite a time limit for performance being set. Performances received and payments taken have to be returned in such a case.Notice period
If a contract does not include a notice period to terminate a contract, how is it calculated?
There is no general rule establishing notice periods. It depends on the contract type and the specific circumstances of the case.Automatic termination on insolvency
Will a commercial contract terminate automatically on insolvency of the other party?
According to section 116 of the German Insolvency Code (InsO), business management contracts (section 675, BGB) terminate automatically as of the opening of the insolvency proceedings over the assets of the insolvent principal. The rationale behind this is that the insolvency administrator is the only person authorised to administer the insolvency estate. Therefore, in particular commercial agency agreements, forwarding agreements and commission agency agreements (not franchise, distribution or freight agreements) expire automatically by the opening of the insolvency proceedings over the assets of the principal or shipper.
Apart from the exception of section 116 of the InsO, generally commercial contracts do not automatically end by the opening of the insolvency proceedings. However, in commercial contracts such as supply agreements, framework agreements or OEM agreements, the parties commonly agree on insolvency-related termination rights entitling the party to declare extraordinary notice of termination in case the other party becomes insolvent. It needs to be observed that the Federal Court of Justice has ruled that insolvency-related termination clauses in long-term agreements are invalid as far as they preclude the insolvency administrator’s discretion to continue a contract under section 103 et seq of the InsO. Recently, German courts tend to be very strict with regard to such termination clauses and also tend to declare termination clauses ineffective that have an ‘insolvency connection’.Termination for financial distress
Are there restrictions on terminating a contract if the other party is in financial distress?
No general restriction exists on terminating a contract if the other party is in financial distress with the only exception of the termination of lease contracts after application for the opening of insolvency proceedings according to section 112 of the InsO.
There is also no statutory law that generally authorises a party to terminate the contract where the other party is in financial distress. A party may, however, be able to terminate the contract in case of a continued violation of the contract where it is unacceptable for a party to be bound to the contract any longer; which may, for instance, be the case where the other party is in delay of payments or in the case of a material deterioration of the other party’s financial situation after conclusion of the contract. Any contract clauses that concede a right to terminate the contract due to financial distress need to be reviewed on a case-by-case basis.Force majeure
Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?
Yes, but only to a very limited extent. Pursuant to section 206 of the BGB, limitation is suspended for as long as, within the last six months of the limitation period, a party is prevented by force majeure from prosecuting its claims. Moreover, a party’s claim for performance is excluded to the extent that performance is completely impossible for the other party (section 275, BGB).
It is common and permitted to agree on comprehensive force majeure clauses in contracts that are regulating long-term relationships, such as framework and supply agreements, OEM agreements or distributorship agreements.