In a decision dated November 7th, 2011, the District Court of Saarbrücken (Germany) found a “pay-when-paid” clause within a general terms and conditions contract used by a General Contractor to be invalid (3 O 201/11).
The Court held that, in the sub-contracting arena, there is no good reason to allow a General Contractor to pass the risk of non-payment by his debtors to the sub-contractor.
We now review only the facts and discussion of this case pertinent to our analysis of the future validity of “pay-when-paid” clauses:
Defendant was the General Contractor (“GC”); Plaintiff was a sub-contractor (“Sub”) for heating and sanitary work. Prior to the contractual relationship Plaintiff was provided with the General Terms and Conditions contract (“GTCs”) as well as payment conditions and safety clauses of Defendant. The dispute arose with regard to six invoices as a result of emergency repairs due to a pipe break.* All the work by the Sub was performed according to the professional standards and final invoices were provided to Defendant who in turn delivered said invoices – plus his margin – to his customer. The customer had no complaints with regard to the work performed as described in the disputed invoices.
Plaintiff therefore requested payment notwithstanding the “pay-when-paid” clause. Defendant motioned the Court for dismissal of the action, arguing that the clause and the GTCs were a) properly included in the contract and b) cannot be considered unlawful.
Although the Court found, in favor of Defendant GC, that the GTCs were properly included in the contract,** the Court rejected the notion that Defendant GC can successfully rely on the “pay-when-paid” clause within the GTCs. The Court held that this clause is invalid and a deferment of an outstanding claim/payment under this is disproportionate in light of 307 II Nr. 1 BGB (German civil code). The court found further that the clause in dispute inadequately discriminated against the Sub in light of the principal of “utmost good faith”. The court stated that the given “pay-when-paid” clause departs from the basic idea of the respective regulations in the German civil code and cannot be brought in a line with such.
If the GTCs in question together with the “pay-when-paid” clause were permitted, Defendant would be allowed a deferment of payment to the Sub beyond what is provided with regard to the due date of such invoices in the German civil code, section 641 II Nr. 2 BGB. It creates an imbalance insofar as the Sub’s compensation is conditioned not upon the quality of his work or proper performance but instead upon a contract to which the Sub is not a party. Moreover, the clause does not contain a provision in the case that the customer of the GC delays payment for an indefinite time, nor does it contain a provision permitting the Sub to request the GC to take any action against his customer in the case of delayed or non-payment. The Court did not see that modification of the clause was possible to the extent that would be legally acceptable under § 305 of the German Civil Code. Thus, the Court states that such indefinite and undue deferment is a fundamental deviation from the legal provisions of the German civil code (§ 641 II Nr. 2 BGB).***
The Court cited other case law and commentaries in its holding that a “pay-when-paid” clause, when used in GTCs between a GC and a Sub, is in violation of German law and therefore invalid.
The District Court confirms that a “pay-when-paid” clause within the GTCs between a General Contractor and a Sub-contractor is invalid under German law. While an individualized agreement might be considered valid, the prevailing practice in this industry is to use standardized terms, forms and contracts which often qualify as GTCs under German law.
Nevertheless, parties should consider modifying “pay-when-paid” clauses found within their GTCs according to the Court’s findings. In particular, this might include providing deadlines for any deferral of payment and/or providing conditions as to what actions the GC must take toward his customer in the case of deferred or non-payment.
*For the sake of simplicity, we leave aside the fact that one invoice relates to work performed by the Sub without specific and agreed upon GTCs.
**The Court found that the content, circumstances and form of the provisions constitute GTCs within the meaning of section 305 BGB (German civil code).
*** The Court acknowledged Defendant’s argument that a change of due date can be determined by the parties under § 641 II Nr. 2 BGB however only with regard to individualized agreements. If such changes are included in the GTCs, they must comply with § 307 of the German civil code.
und viele Grüße aus Charlotte
Reinhard von Hennigs