(e)  German law

It is important first of all to note that in German law the basic principle is that there must be fault before a claim can be raised for damages (the socalled fault principle or Verschuldensprinzip). Fault means either intention or negligence.184 This evidently marks an important difference in principle with the approach taken by the Common law and mixed systems, where any non-conforming performance gives rise to liability for damages, whether it was the breaching party’s fault or not (with an exception applicable to cases of frustration). Justifications that have been offered for the German approach are that it is ethically superior185 or fairer,186 but such claims seem to be predicated on the supposition that a promisor only makes himself responsible for fault-based failures, which is highly questionable given the nature of some promises. The alleged superiority of the German view also seems to be based upon a supposition that the Common law of contract invariably imposes strict guarantees on promisors concerning their contractual performances, whereas the English courts have been quite careful to distinguish those contractual undertakings which amount to guarantees of a specific result from those which impose only fault-based liability,187 the point being that, contrary to the German characterisation of the Common law, it does not hold all contractual duties to be of the former type.

There are, however, a number of ways in which the German apparent insistence on fault as a prerequisite for a damages claim is softened. For instance, contracting parties are held implicitly to have guaranteed that they have the skill necessary to perform the duties they have promised to fulfil, so that it is no defence to a claim for work improperly carried out that the promisor did ‘his best’ and was thus not at fault in lacking the necessary skill.188 Furthermore, strict liability is recognised in relation to certain types of breach of duty, such as monetary debts and delivery of generic goods, and in general a plea will not be entertained that a debtor was financially unable to perform a duty.189 Also, it ought not to be forgotten that §276(1) BGB allows parties to impose a regime of strict liability

184 §276(1) BGB. 185 Heldrich et al., Festschrift für Claus-Wilhelm Canaris, pp. 1, 22.

186Huber, Leistungsstörungen, vol. 1, p. 31.

187An example of a contract term imposing only fault-based liability would be one in a contract for professional services in terms of which the professional party undertakes to provide the services with due skill and care.

188BGH NJW 2000, 2812.

189See further Markesinis et al., German Law of Contract, pp. 448–9.

for breach if they so desire. The fault of a party engaged by a promisor to undertake a duty is imputed to the promisor.190 While these exceptions go some way to dealing with cases where promisors appear to have accepted liability for the absolute achievement of certain outcomes, they are somewhat sporadic and do not achieve a proper differentiation between strict duties and fault-based duties.

The second thing to note about the German law is that, as in Scots law but not English law, there is a primary right to performance; damages is a secondary remedy. But German law goes even further. While in Scotland there is a primary entitlement to enforcement, the German regime may be called one of mandatory performance – a creditor is, following breach by the debtor, required to make at least one further attempt to keep the contract alive after breach, before resorting to damages.191 Damages are also a subordinated remedy in a second way, namely that, according to §249(1) BGB, a person who is obliged to compensate for damage must effect a restoration to the position that would have existed if the circumstance obliging him to effect such compensation had not occurred. Effecting restoration in kind is thus a prior duty of the debtor (unless this is not possible, when damages are automatically available): §250 states that only if such restoration does not occur within a reasonable time does the party become liable for monetary compensation (Schadensersatz in Geld), that is, damages.

Damages are primarily compensatory,192 so are to reflect the loss of the promisee. So, as in other systems, damages do not disgorge gains made by the other party, nor do they penalise the other party.193 As §252 BGB makes clear, damages may include expected lost profits, either arising in the normal course of events or by virtue of special circumstances.194 Damages may be claimed, as in other systems, alongside the right to ­terminate the contract.

There is no exact equivalent in German law of the Common law concept­

of foreseeability of loss as a brake on recoverable damages. Instead, limitation on recoverable damages is based upon the principle of causality.195

190 §278 BGB. 191 Markesinis et al., German Law of Contract, p. 381.

192Ibid., p. 443; Lange and Schiemann, Schadenersatz, p. 9.

193See, however, the discussion below at pp. 401f concerning the extent to which penalty clauses are permissible in German law.

194An interesting comparison may be drawn here with the English case of Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd [1949] 2 KB 528, where ordinary lost profits of a business were claimable but not profits from unusually lucrative contracts, as these could not have been foreseen by the party in breach.

195Markesinis et al., German Law of Contract, p. 473.

This requires, in addition to sine qua non causation, a demonstration that the defendant’s breach of contract was an ‘adequate cause’ of the loss (the Adäquanztheorie of causation), though an alternative theory suggests that the extent of liability should depend upon the purpose of the rule imposing liability for breach (the purposive approach).196 There is some disagreement about whether the purposive approach to loss can be compared to foreseeability, and indeed, if foreseeability is conceived of as meaning reasonably foreseeable as a possible or probable outcome,197 then a plausible comparison with causation will be evident. The BGH has, however, stated that the theory of adequate causation is less a causal doctrine and more about determining the boundaries ‘within which the originator of a condition can equitably be presumed liable for its consequences’.198 Adequate causes, said the court, are those which increase the objective probability of an occurrence of the type which happened (the damage), such objective probability being determined by the observations of an imaginary ‘optimal observer’ at the time of the breach. Put this way, there do appear to be comparisons between the question of what the contracting parties might have foreseen about the outcome and the observations of an optimal observer about the probability of damage, though clearly the former formulation is a subjective one and the latter an objective one. As an objective exercise, the German approach to limiting damages demonstrates even less possibility of linkage with some presumed promise of the contract breaker than does the Common law approach.

The revised BGB damages provisions have made damages for nonperformance­ of contractual duties easier to claim: no longer does the innocent party have to serve a warning notice requiring performance in every case, and no longer does the innocent party himself have to threaten not to perform after the expiry of the reasonable period set for performance.199 The revised provisions, in making damages easier to claim, can therefore be said to have increased pressure on the debtor to perform his obligation, and are therefore more supportive of promissory liability.200

The BGB contains provisions regulating the claiming of damages in specific circumstances, including cases of: (a) ‘simple damages’ (or

196Rabel, Recht des Warenkaufs, pp. 495 f.

197See Koufos v. C Czarnikow Ltd (‘The Heron II’) [1969] 1 AC 350; [1967] 3 All ER 686.

198 BGHZ 3, 261. 199 As to which, see now §281(1) BGB.

200See further on the change in emphasis in the new damages provisions, Schulte-Nölke, ‘Vertragsfreiheit und Informationszwang’, pp. 72 f, and Schulte-Nölke and Schulze, ‘Schuldrechtsreform und Gemeinschaftsrecht’, pp. 3 f.

damages alongside performance);201 (b) damages in lieu of performance;202

(c) damages for delay;203 (d) damages for wasted expenditure;204 and

(e) damages in case of mistake.205 T hese separate provisions provide for results largely equivalent to those arrived at by courts in systems without the benefit of a code. Thus, types (a), (b), and (c), are generally conceived of as providing an entitlement to damages protecting the performance interest (Erfüllungsinteresse) and not the restoration interest (Vertrauensschaden).

Protection of the restoration interest is applicable only under type (d) claims, those for wasted expenditure. §284 BGB provides that ‘in place of damages in lieu of performance, the creditor may demand reimbursement of the expenses which he has made and in all fairness was entitled to make in reliance on receiving performance, unless the purpose of the expenses would not have been achieved, even if the debtor had not breached his duty.’ A comparison is often drawn between this type of recovery and so-called ‘reliance damages’ in the Common law. However, as has been remarked,206 the wording of §284 – that the reliance be ‘of receiving performance under the contract’ – is narrower than the reliance normally required in the Common law, which is merely reliance generally on the contract (thus allowing a claim for all losses flowing from the breach).207

A further difference from Common law restoration damages is that §284 does not limit the right to claim damages to cases where it is impossible to calculate compensatory damages, or to cases where restoration damages are less than compensatory ones, limitations which apply to a claim for wasted contractual expenditure in English law. In German law, the creditor can choose the claim which is most advantageous to him.

201§280(1) BGB. This section also encompasses damages for culpa in contrahendo, though in such a case damages are not restricted to the performance interest.

202§§280(3), 281 BGB. Damages in lieu of performance may be claimed if the creditor has set a reasonable period for the debtor to perform, he has not done so, and the breach is material (§281(1)). As soon as damages are demanded in lieu of performance, the claim to actual performance is excluded (§281(4)), as one would expect.

203§§280(2), 286 BGB. As to such damages, Zumbansen has written that ‘[t]he creditor can claim compensation for all damages resulting from this delay, such as lost profits or substitution costs’ (Zumbansen, ‘The Law of Contracts’, p. 193). This type of claim is designed to put the creditor in as good a position as if the debtor had performed correctly and fully (ibid., p. 194).

204§284 BGB. 205 §122 BGB.

206Markesinis et al., German Law of Contract, pp. 461–2.

207As Lord Denning MR put it in Anglia Television Ltd v. Reed [1972] 1 QB 60, 64, the party suffering the breach may ‘claim … the expenditure which has been thrown away, that is, wasted, by reason of the breach’.

As Zumbansen has commented, the creditor ‘will calculate whether the damages for faulty performance or non-performance exceed her incurred costs and will choose her remedy accordingly’.208

Despite these differences, comparisons can be be drawn between §284 and some claims of damages for wasted expenditure which are permitted in the Common law: for instance, the wasted expenditure recovered in Anglia Television Ltd v Reed,209 expenditure which had been incurred by a television company in preparing to perform its contractual duties with an actor, would similarly be recoverable under §284. Although a similar result would be reached in Germany on such facts, this type of recovery was (prior to the reform of remedies under the BGB) rationalised by German courts as a kind of performance interest damages, the wasted expenses being fictionally presumed to be amounts that would have been recovered as profits had the contract been performed.210 This conceptualisation reflected a fundamental antagonism in German law to permitting the ‘reliance damages’ awarded by the Common law; indeed the recommendation of the Commission looking at the reform of remedies in the BGB that a general ‘reliance’ damages provision be introduced was rejected­ .211 However, given that §284 now expressly covers wasted expenditure, as well as the fact that it covers cases where any contractual profit may be very speculative (circumstances like the Anglia Television case) and cases where the contract was not even entered into with any intention of making a profit, the former rationalisation now looks very strained. The most accurate description of §284 liability would perhaps be that it provides for limited (or targeted) protection of the restoration interest. The narrow focus of §284 is a reflection of the German preference for performance, something which restricts the extent to which the BGB is willing to permit­ recovery for wasted expenditure.

As to the last specific type of damages mentioned above, type (e) – ­damages for mistake – these are designed to compensate for losses suffered as a result of the reliance of the other party on the validity of the declaration of the avoiding party.212 The overall effect of this provision

211German Federal Ministry of Justice, Final Report of the Commission to Revise the Law of Obligations (1992), p. 173; rejected, Bundestags-Drucksache 14/6040, 144.

212§122(1). Such damages for reliance are not permitted to exceed the interest which the non-rescinding party has in the validity of the declaration, i.e. they cannot give him more than he would have got had the contract been performed according to its objective meaning.