Software as a Service under standard terms and conditions

Germany is not only the biggest software market in Europe – making up nearly a quarter of the continent’s total market – but also the fastest growing. Especially due to Germany’s relative economic stability, the country is gradually becoming more attractive to SaaS-driven businesses looking to enter its software market and provide services to the German industry.

Understandably, most market entrants rely on standard contracts drafted for a (at best) global use, minimizing contract management and local adjustments. As many SaaS-solutions aim at a widespread use in many business areas with clients receiving scalable services under subscription models, SaaS-providers are keen to avoid broad liability (especially for loss of revenue or loss of profits) by introducing limitations used in common law jurisdictions.

Such attempt is commercially sound. As customers may vary from smaller entities to German global top brands, the effects of a service level default are not generally foreseeable or calculable. Such unpredictability contradicts price-sensitive and transparent subscription models.

The concept of “general terms and conditions”

In light of the above, it becomes increasingly pertinent to examine the legal requirements posed when determining the validity of standard contracts used by potential market entrants to establish business relations.

The starting point in this regard is Section 305 Subsection (1) Sentence 1 of the German Civil Code (BGB), which defines “general terms and conditions” as all preformulated contract terms intended for multiple use, which one party to the contract presents to the other to conclude an agreement. There are strict requirements which such general terms and conditions must fulfil so as not to be declared invalid according to the German Civil Code. Unlike many other jurisdictions, such requirements are not limited to B2C contracts but (albeit too some lesser degree) apply in a B2B context as well.

Specifically Sections 308 to 309 of the German Civil Code provide long catalogues detailing under what circumstances such general terms and conditions can be declared invalid by the courts. A noteworthy provision is for instance Section 309 no. 7 lit. b., which sets forth that terms and conditions regulating the exclusion or limitation of liability for damages arising from a grossly negligent breach of duty are to be declared invalid. A further provision is Section 309 no. 5, wherein it is set forth that terms and conditions containing an agreement on liquidated damages can also be deemed invalid under certain conditions.

“Individual negotiation”- a route to escape?

Many such requirements/limitations might seem strange and perhaps even overburdening for potential market entrants coming from other jurisdictions with less strict requirements set forth for general terms and conditions especially when dealing with business entities that have legal advice at hand. Thus, it becomes more pertinent to take a look at Section 305 Subsection (1) Sentence 3 of the German Civil Code. According to this provision, contract terms do not become general terms and conditions in the sense of Section 305 Subsection (1) Sentence 1 of the German Civil Code, if an (truly) “individual negotiation” (German: “aushandeln”) regarding the specific clause at question has taken place. This means that once an “individual negotiation” regarding a specific provision has taken place, the very provision in question is not viewed as “general terms and conditions” according to the German Civil Code and is therefore not subject to specific standard T&C review by the courts.

Strict Requirements

However, there are also strict requirements when determining whether an “individual negotiation” has been conducted to avoid circumventing and undermining the authority of courts tasked to review general terms and conditions and their compliance with the German Civil Code.

First and foremost, to exclude such general provisions from T&C review by the courts, the very single provision must be individually negotiated in detail, meaning that the parties to the contract cannot negotiate the terms of the contract as a whole, on the contrary they must negotiate every single section separately if they intend to avoid T&C review for the whole contract.

Moreover, to count as a “negotiation”, an actual negotiation situation regarding the provision in question must have taken place. It does not suffice to simply assent to a provision, but rather the party setting forth the terms must on the one hand inform the customer on the content of the specific section, along with its scope and implications. On the other hand, they must be willing and ready to put the very provision(s) up for debate, allowing the other party to dispose of the provision(s) so as to come to a new agreement.

Lastly, in any case the parties of the contract must have sufficient proof that these provisions were individually negotiated in detail.

Having this in mind, it is worth to comprehensively assess the compliance of global term & conditions with German T&C laws before using them in the German market.