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Knock-for-knock liability – new territory for German courts?

News / / Knock-for-knock liability – new territory for German courts?

German courts and arbitral tribunals are dealing with an increasing number of disputes related to offshore wind farm projects in the German EEZ. Many of these contracts are based on standard forms such as BIMCO’s SUPPLYTIME, BIMCO’s WINDTIME or the LOGIC contracts, all of which have been developed against the background of English law. All of these standard forms contain so-called “knock-for-knock” clauses, which set out a liability regime whereby damages and losses are covered by the party incurring the loss irrespective of fault.

Whilst this risk allocation regime is well-established in the offshore wind industry in countries such as the UK, it is still fairly unknown in Germany.  German courts have very little practical experience with the interpretation of SUPPLYTIME 2005, let alone the revised SUPPLYTIME conditions due to be published in 2017. In addition, the applicable German law of time charterparties (s.557 et seq. of the German Commercial Code) is relatively new (coming into force in April 2013), so very little case law exists in relation to the underlying statutory law.

Accordingly, there are a number of issues for parties to consider during negotiations and before signing a German law contract based on SUPPLYTIME or other industry standard forms.

German law restrictions on knock-for-knock clauses

German rules on general terms of business in the form of s.305 et seq. of the German Civil Code ("BGB") could jeopardize the entire structure of the rights and obligations under the charterparty. Standard forms such as SUPPLYTIME will be considered general terms and conditions unless the particular clause in question has been individually negotiated between the parties.

According to the German Federal Supreme Court, “negotiating” in the sense of s.305 (1) of the BGB requires more than simply discussing the terms of a contract. In fact, the user of general terms and conditions has to allow its contractual counterparty to actively protect its own interests and demonstrate its willingness to negotiate terms in principle.

German courts will also examine whether any of these clauses are considered to be unfair to the detriment of one of the parties, taking into account the practices and customs that apply in business dealings in the respective industry. However, given that the wind industry is still rather young, courts may find that such practice and customs have not yet firmly been established.

Although there is now some case law available on knock-for-knock clauses under German law, it is still quite difficult to foresee whether German courts and arbitral tribunals will consider a knock-for-knock clause unfair and thus invalid. German courts need to reconcile the offshore wind industry’s customs and practices with the guidance taken from the general principles contained in s.305 et seq. of the BGB. Since  the liability regime of a knock-for-knock clause is contrary to any German civil liability regime, which is for the most part a fault-based liability regime, knock-for-knock clauses would be considered foreign by many courts.

Regardless of whether a particular knock-for-knock clause is deemed to be part of general terms and conditions or not, certain restrictions apply to any clause providing for civil liabilities under German law. Most importantly, it is not possible to exclude liability for damages resulting from wilful or intentional misconduct. Hence, a valid knock-for-knock clause under German law must always contain a "carve-out" for this particular type of damages.

Our recommendations

For a contract governed by German law, the best approach seems to be to avoid agreeing on knock-for-knock clauses by way of standard terms, but rather to enter into a bespoke agreement. In order to do that, we recommend the following:

(i)  Never refer to standard contracts: always customise the contract for the specific purposes;

(ii)  Before entering into a contract under German law, consider allowing the other party to propose and negotiate the wording of the knock-for-knock clause; in addition, during contract negotiations the parties should always express their willingness to really negotiate;

(iii)  Ensure that it can be proved that negotiations took place, ideally by way of clear written correspondence between the parties; and

(iv)  Most importantly, change the knock-for-knock clause to be compatible with German law - inter alia, do not exclude liability for wilful/intentional misconduct.

Please note that these recommendations will not automatically validate under German law a knock-for-knock clause contained in standard terms. Adhering to these basic steps will however ensure that your chosen liability regime is not invalid from the outset and will strengthen your position to argue that a bespoke contract was entered into, and therefore the strict rules of the BGB should not apply.

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