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827). In the case before the Court of Appeal, a factory was burned down due to the negligence of the defendant contractor. Lord Denning MR, who gave the leading judgment of the court, pointed out that the destruction of a building is different from the destruction of a chattel, as for instance where a second-hand car is destroyed. In this case the owner gets its value because he can go to the market and replace it. He cannot charge the defendant with the cost of a new car. But when the plaintiffs’ mill was destroyed they had no choice: ‘They were bound to replace it as soon as they could, not only to keep their business going, but also to mitigate the loss of profit for which they would be able to charge the defendants’ (per Lord Denning, MR, cited above, at 468). The result was an improved, more modern, building. The plaintiffs got ‘new for old’, without giving credit under the heading of ‘betterment’. (See also, the cases often discussed under the heading of ‘mitigation in fact’, especially where the claimant’s performance of his duty to mitigate may cause him to benefit, which benefits may then be taken into account in assessing his damages claim against the defendant. For example, taking another job after wrongful dismissal from previous employment: Cereberus Software Ltd v Rowley [2001] ICR 376; EWCA Civ 78. Functionally, this approach might sometimes lead to similar results to the German cases discussed in the next paragraph.)

The Bundesgerichtshof has had to deal with comparable fact-situations at least twice. In both cases buildings were burnt down. In the first case, decided in 1959 (BGHZ 30, 29, case no 119), the defendants had set fire to an agricultural building and in the more recent case of 1987, a residential building was badly damaged in a fire negligently caused by the defendant. In both cases, there was no question about the existence of liability on the part of the defendants, but the extent of their liability was in doubt. Applying § 249 et seq BGB, the Court was confronted with the following alternative: if Naturalherstellung were deemed possible, the sum of money which the owner may claim under § 249 II BGB for the purpose of reconstructing the building would not cover the total amount necessary for all materials, work and labour. The Court will hear an expert in order to find out the market value of the former building and will then strike a balance between this value and the increased value of a new building of the same type. In the end, this will result in a deduction of ‘new for old’ under the heading of ‘betterment’. This corresponds with the solution that would have been reached in cases falling under § 251 II BGB, ie where restitution in kind is possible only through disproportionate outlays. In other words: the sum of money which may be claimed for Naturalherstellung under § 249 II BGB is the same as the compensation in money under § 251 II BGB (see BGHZ 30, 29, case no 119, and BGHZ 102, 322).

6. PRESCRIPTION

Leenen, ‘Die Neuregelung der Verjährung’ JZ 2001, 552; Mansel, ‘Die Neuregelung des Verjährungsrechts’ NJW 2002, 89; Eidenmüller, ‘Zur Effizienz der Verjährungsregeln im geplanten Schuldrechtsmodernisierungsgesetz’ JZ 2001, 283; Law Commission, Limitation of Actions (Consultation Paper No 151, 1998); Law Commission, Limitation of Actions (Law Com No 270, 2001); McGee, McGee on

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Limitation (4th edn, 2002), especially chapters 2 and 10; Prime & Scanlan, The Law of Limitation (2nd edn, 2001), chapter 4; Wagner, ‘Die Verjährung gewährleistungsrechtlicher Rechtsbehelfe nach neuem Schuldrecht’ ZIP 2002, 789; Wagner, ‘Mangelund Mangelfolgeschäden im neuen Schuldrecht’ JZ 2002, 475; Zimmermann, Leenen, Mansel and Ernst, ‘Finis Litium? Zum Verjährungsrecht nach dem Regierungsentwurf eines Schuldrechtsmodernisierungsgesetzes’ JZ 2001, 684 et seq; Zimmermann, Comparative Foundations of a European Law of Set-Off and Prescription (2002).

(a) Preliminary Observations

Rights of action arising from breaches of obligations are not enforceable forever, and after a certain period of time has lapsed, the pursuit of legal remedies is barred. The BGB contains detailed rules on prescription (Verjährung) in its first book, ie the General Part (Allgemeiner Teil): §§ 194–218 BGB. These rules are no longer mandatory; prescription can be made more onerous by agreement of the parties (although it cannot extend beyond thirty years). Also, prescription may not be facilitated by advance agreement for intentional breach (§ 202 BGB). However, the provisions in the first book do not exhaust this subject. Numerous special provisions dealing with prescription may be found in the four books of the BGB that follow the general part as well as in other statutes dealing with matters of private law. Only the most important among them can be mentioned in the short survey of this area that follows here.

The recent reform has completely changed the law. Before we discuss some key aspects of the new system of prescription, it may be useful briefly to illustrate some of the reasons why reform was regarded as desirable (see, for an overview of the ‘defects’ of the old law: Bundestags-Drucksache 14/6040, p 87 et seq). As already stated in our general introduction to the reform (sections 1 and 2, p 391), this was an area of the law where the need for reform was perhaps most obvious.

The great variety of periods of prescription had led to discrepancies in some areas of private law, particularly with regard to the special rules governing warranties in the fields of sales law (under the old § 477 BGB, six months) and contracts for work and labour (under the old § 638 BGB). The short length of these periods provided an incentive for plaintiffs to avoid wherever possible the special rules on non-conforming performance and recover for this type of breach under a different head of claim, in order to avail themselves of a longer period of prescription. The interaction of these rules with the general rules of prescription applicable to actions for breach of contract led to artificial distinctions and forced the courts to bend the law in order to avoid unsatisfactory consequences in individual cases. Since, furthermore, the rules on periods of prescription used to be mandatory, the courts were not in a position to correct inconsistencies. Suggestions aimed at manipulating the beginning of prescription periods (so as to prolong this period in cases where the law has laid down extremely short periods) were regarded as contra legem. The regular period of prescription was thirty years (the former § 195 BGB). There was widespread agreement among lawyers in Germany that this period was too long. Even the draftsmen of the BGB had realised that in a large number of everyday transactions, practical justice requires much shorter periods of prescription. As a result, the former § 196 BGB contained a long list of claims to which a prescription period of two years applied (which list,

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however, became increasingly out-of-date). It covered the claims of merchants, manufacturers, artisans and those who engage in handicrafts, for the delivery of goods, performance of work and care of others’ affairs, and it extended to public carriers, innkeepers, lawyers, notaries, medical practitioners, etc.

It therefore came as little surprise that the Ministry of Justice, in preparation of a more general reform of the law of obligations, also commissioned a report in relation to prescription periods. In their pursuant report of 1981, Peters and Zimmermann (Gutachten und Vorschläge zur Überarbeitung des Schuldrechts) suggested that a unitary approach to prescription should be adopted. The regular period of prescription was to be two years and it would cease to run if the creditor did not know of the claim or the person of the debtor. This is referred to as a ‘subjective’ approach, because the period of limitation depends on the knowledge of the creditor, both of the fact that the claim has arisen and of the person of the debtor. The First Commission in their Abschlußbericht of 1992 did not follow this approach but preferred an objective approach. An ‘objective’ approach determines prescription by events in the outside world, which operate independently of the (imputed) knowledge of the creditor. Eventually, the Second Commission switched back to a subjective approach to presecription as general rule and supplemented it with objective periods of limitations in relation to specific contracts. This has become the present position of German law. By contrast, the PECL adopt a uniform approach (see Article 14:201). The argument is straightforward: the simpler the regime of prescription, the more effectively it avoids litigation on whether or not prescription has occurred in the individual case (cf comment on Article 14:201 in Lando, Clive, Prüm and Zimmermann, PECL, vol 3 (2003), p 162). The reason for maintaining special objective periods for nonconforming performance is also easy to make out. It enables the promisee (usually a dealer, professional contractor or merchant) to ‘close the books’ after a certain date, which thus enhances commercial certainty and convenience. A unitary subjective approach cannot ensure this, for prescription will not easily take effect in relation to hidden or latent defects.

Before we examine the rules of the BGB in more detail, it is useful to add a few comparative remarks. In English law, consolidating legislation—in the form of the Limitation Act 1980—sets out the basic rules. Thus, the limitation period for a claim arising from a simple contract is six years from the date at which the cause of action accrues (section 5), and where the action is founded on a specialty contract, the period is twelve years from the date at which the cause of action arises (section 8; on ‘specialty’, see Prime & Scanlon, The Law of Limitation (2nd edn, 2001), pp 106–8 for a useful summary). A cause of action arises at the time of breach and not when the contract is concluded (see Gibbs v Guild (1881) 8 QBD 296, at 302 and note that the Latent Damage Act 1986 does not apply to claims for breach of contract). Until 1984, the year when the Foreign Limitation Periods Act came into force, English law was committed to the view that statutes of limitation, if they merely specified a certain time after which rights could no longer be enforced by action, were procedural and not substantive. This led to serious conflicts in disputes containing foreign elements, in particular in cases where the proper law of contract was the law of a country where limitation of actions or, for that matter, prescription (Verjährung) was regarded as a matter of substantive law (materiellrechtlich). Since procedure is governed by the lex fori, English courts ignored any classification of the foreign rule as substantive and

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applied the limitation statutes of the forum. This conflict of classification has its basis in the distinction between (substantive) right and (procedural) remedy. The terminology used in English law—that is to say, of ‘limitation of actions’—is evidence of the procedural approach to the problem. It is the ‘remedy’ that is barred after a certain period of time. However, if seen in an international context, the emphasis on the remedy is very often artificial, because the decisive question must necessarily be whether a right has been created, and it is only fair to leave the decision whether this right is still enforceable to the legal system under which this right has arise. The Foreign Limitation Periods Act 1984 has abandoned the common law approach, which favoured the application of the domestic law of limitation. Instead, an English court is now expected to apply the proper law of contract that governs the substantive issue according to the English choice of law rules (see Cheshire & North’s, Private International Law (13th edn, 1999), p 73).

(b) Periods of Limitation

The BGB now provides for certain special periods of limitation and a general period of limitation. The standard limitation period is three years: § 195 BGB. According to

§199 I BGB, this period commences from the end of the year in which the claim arises and the creditor acquires knowledge of the circumstances forming the basis of the claim and the identity of the debtor, or would have done so had he not been grossly negligent. Further, § 199 II, III and IV BGB stipulate for certain objective maximum periods of limitation. It would serve no practical purpose to repeat the lengthy wording of these provisions. Their object is to make sure that even if the creditor does not have imputed knowledge of the claim, or at least the debtor cannot prove this, the debtor is able to invoke prescription after the lapse of relatively long periods of time (thirty years after the event giving rise to liability or ten years after the accrual of the claim, depending on the nature of the claim); this provision aims to increase certainty in the law.

The legislator supplemented this general period with special objective periods of limitations for non-conforming performance (§§ 438, 548, 634a, 651g II BGB). They begin to run independently of the imputed knowledge of the promisee: for instance, in relation to sale of goods the period commences with the delivery of the thing (§ 438 II BGB). However, these special objective periods are considerably longer than they used to be. The shortest period under the old law has been raised from six months to two years (eg, § 438 I Nr. 3 BGB; § 548 BGB being the only exception retaining the sixmonth period). In relation to the law of consumer sales, this was also required for the implementation of Article 5 of Directive 1999/44/EC (which caused no specific implementation problems in the UK, since the applicable limitation period was already over the two-year minimum laid down by Article 5). Moreover, in relation to certain claims concerning land § 438 I Nr. 1 BGB extends prescription to a thirty-year period;

§438 I Nr. 2 BGB provides for a period of five years in relation to building works. As was explained in the section on damages, p 469 (section 5(h)), the promisee may

recover in contract what was there referred to as ‘simple’ damages (§ 280 I BGB) for any ‘consequential’ loss caused by the non-conforming performance. To give an example: suppose a chair supplied is defective and collapses, injuring the buyer who sat on it, he may (in addition to a claim in tort under § 823 I BGB) also recover

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damages in contract law in respect of the personal injury (§§ 437 Nr. 3, 280 I, 249 BGB, see above). The tort claim is subject to the (essentially subjective) general period of limitation in § 195 BGB (at least if the previous approach of the courts is continued in relation to the new law: BGH NJW-RR 1993, 1113). According to the wording of § 438 I Nr. 3 BGB, the contract claim, which may be advantageous in relation to vicarious liability (§ 278 BGB), is subject to the objective limitation period of limitation of two years. In relation to this so-called Mangelfolgeschaden, it is controversial whether the short period of limitation is appropriate: some argue in favour of restricting the scope of application of § 438 BGB for any violation of the interest in the integrity of one’s other rights or interest (Integritätsinteresse, cf Canaris, Karlsruher Forum 2002, at p 98; Wagner, JZ 2002, 475, 479). This ‘correction’ of the legislative intention once more in effect attempts to remedy deficiencies of the law of tort by the means of contract law. (See, further, Beale, Hartkamp, Kötz and Tallon, Ius Commune Casebooks on the Common Law of Europe—Cases, Materials and Text on Contract Law (2002) 70–2.) Whether the courts will follow this suggestion to disapply a newly introduced law remains to be seen (opposing the view aforementioned on this ground: eg, Faust, in Bamberger and Roth (eds), BGB, (2003), § 438 Rn. 9; Mansel NJW 2002, 89, 95).

Paragraph 196 BGB contains yet another special period of limitation of ten years for claims in relation to a proprietary interest in land (when they begin is determined objectively, § 200 BGB). Finally, § 197 BGB subjects certain specific claims to a period of prescription of thirty years. This concerns, eg, claims that have been confirmed in legal proceedings (§ 197 I Nr. 3 BGB) as well as claims from the field of family law and the law of succession (§ 197 I Nr. 2 BGB). The commencement of these periods is objective (regulated in § 200 and § 201 BGB and depends on the nature of the claim).

(c) Suspension, Restart and Effects of Prescription

The beginning of the period of prescription was described in the previous section. Here we are concerned with any action or measure that the creditor may take that prevents the period from lapsing. The BGB recognises three types of measures.

First, the ‘suspension’ of the period of prescription (Hemmung der Verjährung) is possible. This means that the period during which prescription is suspended is not reckoned in the period of prescription (§ 209 BGB). Thus, prescription is suspended for so long as the injured party and the person claimed to be liable are engaged in negotiations with each other aimed at achieving a settlement (§ 203 BGB). Suspension also takes effect for the sake of keeping the ‘family peace’: prescription of claims between spouses is suspended as long as the marriage continues (§ 207 I 1 BGB). The same applies, for instance, to claims between parents and children during the minority of the children (§ 207 I 2 Nr. 2 BGB). The most important instance of suspension now is the commencement of legal proceedings (§ 204 BGB). The paradigm case is that of bringing an action for the enforcement of the obligation (§ 204 I Nr. 1 BGB), although note that the same effect is attributed to a number of other procedural techniques.

Secondly, in §§ 210 and 211 the BGB regulates what is known as Ablaufhemmung, a special form of suspension. It suffices to refer to § 210 BGB (legal capacity) as an illustration. If a person who is not legally competent, or who is restricted in his legal

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competence, is without a statutory representative, a limitation period running for or against that person will not start before the expiry of six months after the point in time at which the person becomes fully legally competent or the lack of representation is removed.

Thirdly, a more effective device is the measures of the creditor that entail a restart of the period of prescription (Neubeginn der Verjährung), previously known as ‘interruption’. The restart means that the time that has elapsed before the interruption is not taken into consideration, and a new period of prescription can begin only on the termination of the interruption. The reasons leading to a restart of prescription are laid down in § 212 BGB, the most important among them being a restart by acknowledgement (Anerkenntnis, § 212 I Nr. 1 BGB).

It is important to realise that the effect of Verjährung or prescription is not to extinguish a claim; rather, it gives the person claimed to be liable only a countervailing right (or plea) to refuse performance (Einrede der Verjährung, § 214 I BGB). It is up to the defendant to plead Verjährung, for the court will not take notice of this fact ex officio. Another consequence of this approach is that a debtor, who has made payment even though the creditor’s claim had already prescribed, has paid cum causa. If the debtor afterwards finds out that he could have refused payment, he cannot bring an action for the return of unjust enrichment (§§ 813 I 2, 214 II BGB). Moreover, if the creditor’s claim is secured by a mortgage or pledge, he is not prevented from seeking satisfaction from the charged object by the prescription of his claim (§ 216 I BGB). In relation to the right of termination, special considerations apply.

The right to terminate a contract (Rücktritt) is not a ‘claim’ in the technical sense of the word. § 194 I BGB clarifies that only the right to demand a positive act or an omission from another is subject to prescription. This is also the only abstract definition of what in German law is the equivalent notion of ‘claim’, namely Anspruch. The right to terminate the contract is categorically a different right. It entails a power to affect the legal position of creditor and debtor by unilateral declaration (Gestaltungsrecht). Nevertheless, it would be inconsistent to subject the right to claim damages to prescription, yet to allow the innocent party indefinitely to hold the right to terminate the contract and satisfy his interest in the restitution of the counter-performance. In order to tackle this problem, § 218 BGB was introduced. It states as a general rule that the right to termination is excluded if the right to demand performance or to require that the performance be brought into conformity with the contract would be time-barred and the debtor has invoked prescription. It should be noted that this would also exclude the right, where applicable, to demand a price reduction.