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Germany strengthens rules on default of payments

Concerned about the increasing number of delayed payments, which significantly endanger the cash flow and liquidity of smaller businesses, Germany has recently amended its law concerning default.

Before May 1 2000, default only occurred if the debtor did not satisfy his due obligation after receiving an explicit warning from the creditor, or if the debtor ignored a contractually stipulated time fixed by the calendar for the performance (Section 284 BGB, German Civil Code). Inexperienced or foreign businessmen were often not aware that an additional warning was required after sending an invoice. Consequently, when such warning was not given, the debtor was not in default and therefore not liable for any damages arising from his non-payment. Moreover, the statutory interest rate for default was only 4% per annum. If the creditor could not prove that higher damages had occurred, it was often cheaper for the debtor to delay payment than to take a bank loan to satisfy the outstanding debt.

On May 1 2000, the Statute for Acceleration of due Payments came into force and significantly changed the old rules on default. Under the new Section 284 paragraph 3, German Civil Code, a debtor is in automatic default if he or she does not pay 30 days after receipt of an invoice or a similar request for payment. No additional warning is necessary. The money debt bears interest during the default period at 5 percentage points above the so-called basis rate, as set by the Deutsche Bundesbank, which at present results in a hefty interest rate of 8.42 %per annum (Section 288, German Civil Code). The creditor continues to have the right to prove that higher damages have occurred. By creating these new regulations, the German legislative body hoped to abolish any incentive for delaying payments without cause.

The new law has one significant drawback which endangers the overall legislative aim to speed up payments: the new rule is exclusive to money defaults. Default occurs 30 days after non-payment of a bill, not earlier. However, for regular payments, such as monthly rental payments or instalment payments, the old law still applies. In all other cases, the creditor can no longer put the debtor in default by sending him a warning after the payment becomes due. Consequently, the debtor may profit from a kind of grace period of thirty days before he must fear the harsh legal sanctions of default. Since the right to rescind a contract is often subject to a prior default of the debtor, the new law weakens the position of the creditor even further.

It should be noted that the new rules on default are not cogent law. Prudent parties will therefore include explicit provisions in their contracts, stipulating that default automatically occurs if payment has not been received on a certain date fixed by the calendar or after receipt of an explicit warning. An interesting question is whether this situation can be achieved by respective clauses in standard contractual terms and conditions. At least with regard to consumers, a deviation from the new law might be considered unfair treatment, rendering a respective clause void under the Statute on General Terms and Conditions (AGB-Gesetz). Buyers are likely to include defensive clauses into their standard purchase terms directed against any deviation from the statutory default rules which are favourable to them. In any case, businesses are well advised to examine their general contractual terms and conditions to determine whether they should be amended in view of the new default rules, as well as considering these new rules when negotiating contracts. Jörg Risse

Baker & McKenzie
Tel: +49 69 29 9060
Fax: +49 69 29 908108

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