Contract negotiation advice for non-legal employees (Part 1)

The aim of the law governing general terms and conditions is to protect the party receiving such an offer (the “Recipient”) from the bargaining and drafting power of the party submitting a contract offer that was prepared on the basis of a template (the “User”). The actual balance of power between the parties in the individual case is not legally relevant. It also makes no difference whether or not the parties would have agreed many of the provisions that are contained in the used template, anyway. Furthermore, it does not matter whether the Recipient expressly agrees to all or some of the proposed provisions or whether the parties even reformulate some of the proposed provisions after negotiations.

Consequently, all provisions that are not individually renegotiated by the Recipient are subject to the law governing general terms and conditions. This may result in many seemingly harmless clauses being invalid, with the result that they are removed and replaced by the relevant provisions provided for by law. While these statutory provisions may be much more balanced, they sometimes also come as a surprise to both parties (to give an example: the template used by the customer provides for a payment term of 90 days, whereas the supplier might have accepted a payment term of 30 days, but the parties then learn that instead of the customer’s invalid standard provision of 90 days, the law requires immediate payment on/against delivery; cf. below 4.).

By contrast, the single clauses that are renegotiated individually between the parties(which usually entails a change to the text, without this being a mandatory requirement, however) cease to be subject to the protection offered in favour of the Recipient by the law governing general terms and conditions. Therefore, not only the question of which of the parties provides the draft contract (as a basis for negotiations) but also the question of whether certain terms proposed therein should be discussed by the Recipient at all is of great practical relevance if the proposed text is made up of model provisions.

The Recipient, if analysing its situation correctly, can take advantage of this: where proposed provisions may initially appear disadvantageous and unacceptable to the Recipient, this often indicates that they may be invalid precisely because they are so one-sided. Many Recipients instinctively misjudge this situation strategically. They get bogged down in long and dogged negotiations over provisions of the User that are actually invalid, which may ultimately cause a badly needed transaction to fail or – perhaps even worse – lead to the renegotiated clause being considered an individually agreed clause now due to the negotiations about it, thus allowing it to “become legally effective” in the first place after having initially been invalid.

While it may be worthwhile for the Recipient to accept or ignore invalid disadvantageous clauses and concentrate on renegotiating the valid proposals, the initial situation in which the User finds itself is different. Being in the actually advantageous position of being able to provide the initial contractual text, the User should not ruin this opportunity by drafting provisions that are too one-sided and, hence, invalid. In terms of negotiating tactics, the User will therefore often be well advised to try and propose the “absolute minimum/maximum of what is permitted by law”, rather than exceeding this limit and proposing blatantly one-sided provisions that would be invalid.

But which provisions are typically invalid? As the invalidity of a clause ultimately always depends on its exact wording, it is difficult to make a general assessment; instead, each relevant clause must be examined based on its exact wording. Nevertheless, people engaging in negotiations can use the following exemplary checklist, which looks at some common clauses, to increase their awareness of the problem:

• Payment period (with the customer as the User): The customer can only validly propose a payment period of up to 30 days from the date of performance (even if negotiated individually, the maximum payment period that can be validly agreed for regular cases is 60 days). Any longer payment period will be invalid with the result that payment must be made immediately upon delivery. Therefore, there is no legal reason for the customer to propose (or the supplier to engage in negotiations over) a longer payment period.
• Contractual penalty (with the customer as the User): Many customers insist on agreeing to a contractual penalty for late delivery. From a legal perspective, this involves significant legal risks for the customer, as both the daily/weekly percentage rate and the maximum total amount possible must be appropriately limited. According to case law, a contractual penalty clause that provides for a contractual penalty in an aggregate amount greater than 5% of the contract value is invalid, at least in standard cases. If the customer’s model contract provides for a higher contractual penalty than this, there is no need for the supplier to enter into negotiations in this respect, as the relevant clause should be invalid.
• Warranty period (with the customer as the User): The customer may be interested in extending the statutory warranty period (which is generally 24 months for the supply of movable goods). According to case law, it is generally possible to validly extend the warranty period to 36 months, even in customer GT&Cs. It remains to be seen whether an even longer extension will also be considered to be valid. Consequently, the customer as the User will normally be on the safe side with 36 months; as for the supplier, there will be no harm in entering into negotiations over 36 months, given that an invalidity of the clause with the resulting application of the statutory warranty period cannot be relied upon here.
• Warranty period (with the supplier as the User): The supplier of a movable item to be newly manufactured may limit the statutory warranty period in its model contract to a minimum of 12 months from handover. Anything shorter than that will be critical, so the supplier will be well advised (from a purely legal point of view) to propose 12 months. The customer as the Recipient, on the other hand, will be well advised not to enter into negotiations to try and increase an even shorter (and therefore invalid) warranty period proposed by the supplier. This is because in the event of a warranty claim, the customer will be in the comfortable position of being able to rely on the statutory 24-month period. By contrast, if the supplier proposes 12 months or more, negotiations will not harm the customer’s legal position.
• Limitation of liability (with the supplier as the User): A supplier will often endeavour to limit its liability (to the value of the contract, for example). While the validity of an exact amount as an upper limit cannot be assessed across the board, it should be noted that a limitation of liability clause may be invalid as a whole solely because it does not expressly exclude from the limitation the claims for damages by the customer arising from injury to life, limb or health, or from gross negligence or intent onthe part of the supplier or the supplier’s vicarious agents. This is because a supplier is always liable for the above-mentioned damages, without limitation. If the supplier’s wording does not include these exceptions, there is generally no need for the customer to enter into negotiations over the clause, as such a limitation of the supplier’s liability is likely to be invalid as a whole.

The limits set out in the above checklist which, if exceeded, will lead to the invalidity of the relevant clauses are linked to the position of User and are not to be understood as general limits. More concretely, if the supplier proposes a warranty period of 6 months in the situation described above (for example, in the commercial terms and conditions of its offer), this warranty period will generally be invalid. If, on the other hand, the customer makes the first move in this respect and proposes a 6-month period (for example, in the commercial terms and conditions of its purchase order), this can be validly agreed.

As the above-mentioned provisions – and many other clauses not even dealt with here – frequently concern aspects that are of fundamental importance to both parties, anyone engaging in negotiations should be aware of the importance of the discussed basic decisions (regarding whether to submit a contract or let the other side take the lead; and whether or not to enter into negotiations over certain terms of a received contract offer). In many cases, an analysis of these decisive issues will be more helpful and efficient than lengthy negotiations. The task of people conducting commercial negotiations is not necessarily to carry out this analysis themselves, but to recognise the need for such an analysis in the first place.