General conditions in contracts in Germany
(By Verbraucher - Zentrale Hamburg e.V.)

General conditions in financial services: the contracts of adhesion and the judical and administrative injunction

Incorporation European Normative to the National Legislation: The Implementation of the EC Directive 93/13 on unfair contract terms and EC Directive 98/27 on injunctions in Germany
Due to standardisation of financial contracts and failing willingness of providers to negotiate directly with consumers about the standard terms and conditions, financial contracts are categorised as so called “contracts of adhesion”. The consumer may choose to conclude the contract on the basis of the standard conditions or may stay away from concluding the contract. Therefore amendments of financial contracts on the initiative of consumers are highly unlikely. Owing to their weaker (“take it or leave it”) basis of negotiation, consumers often face unfair contractual terms. This is why administration, judiciary and legislation must take an active part in controlling contracts of adhesion.
In Germany the doctrine on the control of standard business conditions has a long tradition. German judiciary already exercises the control of unfair contract terms since the beginning of the 20th century. German courts examined whether contractual standard terms and conditions complied to the “good faith” and to the “bones mores”. In 1976 the German legislature adopted the “Gesetz zur Regelung der Allgemeinen Geschäftsbedingungen”, AGBG (Act regarding the provisions of standard business conditions). In 2001 the provisions of the AGBG concerning the control of standard terms and conditions were transferred into the German civil code (“Bürgerliches Gesetzbuch”, BGB).
As for the methodology, there has been a long tradition of group actions in Germany. Anyhow, group actions have been poorly documented and discussed until the implantation of the Directive 98/27/EC on injunctions for the protection of consumer’s interests into the German Act regarding the action for an injunction (“Unterlassungsklagegesetz”, UKlaG) in June 6, 2000.The provision of § 13 II 1. AGBG for the right of consumer advisory agencies to file for injunctive relief has been translated into §§ 3 I 1., 1 UklaG.
There are different ways to control unfair general terms and conditions discussed and exercised in Germany: control through the legislator, such as obligatory contract provisions given in the German insurance contract act, administrational control and jurisdictional control.
The administrational control scheme in Germany has become less important during the last 10 years. Some general conditions need administrational permission, such as general business conditions of building and loan associations, conditions of securities trading banks and mortgage banks. As far as administrational control of insurance contracts is concerned, there has been an important change in 1994. Before that year standard terms and conditions of insurance contracts had to be authorised by the federal advisory office for the insurance industry. Once authorised, the standard terms and conditions had only been object of very limited jurisdictional control. Effective from Jule 1st, 1994, the obligation to obtain a permit does not apply any more. Since that time standard conditions in insurance contracts are subject to complete jurisdictional control. Since then courts have rendered some encouraging judgements in favour of the consumers based on the transparency principle.
Today there is only the federal cartel office taking part in administrational control: German trade organisations intending to elaborate standard business conditions for their respective economic sector have to bring these recommendations to the attention of the federal cartel office. The office holds a hearing with the respective partners including the consumer organisations before these recommendations are published in the federal bulletin. In contrast to former legal position, all kinds of administrative control do not pre-empt judiciary control any more.

However, in Germany the main focus is aimed at control by courts and consumer associations The common means to stop the use of unfair standard conditions is the claim for injunction, performed by so called qualified entities, according to § 4 UklaG. At the moment there are 76 registered qualified entities in Germany, among them 15 consumer advisory organisations of the “Bundesländer” (German federal states). The judiciary requires the associations to whom the group action is granted, such as the consumer advisory organisations, before filing a claim, to try to reach a contractual stop-use-agreement with the user of the standard business conditions. The technical means of the supplier is to sign a submittance declaration. If he had done so and then violates the submittance declaration he would have to pay a contractual penalty. If, as usual, the supplier refuses to sign the submittance declaration, the case normally goes to court. The German civil code differentiates between a black list of forbidden clauses (§ 309 BGB), a grey list (§ 308 BGB) and the general clause based on “good faith”. The courts may start with the black, turn to the grey list and then apply the general clause. Germany follows the traditional approach to eliminating unfair terms based on actions for injunctions. This is a "negative" system. Once a term is deemed to be unfair, the court orders that it be removed from the contracts. The professional must cease to use this term in consumer contracts.
The German consumer advisory agencies have launched ZEDA-database concerning the actual stop-use proceedings performed by the consumer agencies. At the moment (November 2004) the database contains about 4,500 cases concerning standard business conditions, thereof 558 cases affecting the banking sector and 163 cases affecting the insurance sector.
Main problems for the consumers
In the first place there is a financial problem: Responsibility for the control of unfair standard business conditions lies very much with the consumer advisory agencies. Although the consumers advisory agencies of the German federal states, the Bundesländer, are not formally administrative bodies but associations under private law, they are largely subsidised by public funds for fulfilling missions of general interest. However, the budgets of German federal states consumer agencies are often insufficient. The Verbraucherzentrale Hamburg e.V., Hamburg’s federal consumer’s agency, is a case in point: Its yearly respective budget amounts to € 5,000.00 – just sufficient to bear the costs of two litigations of injunctions a year! In particular, because courts' expenses and attorneys' fees are calculated by a percentage of the amount-in-controversy (which is the rule in Germany), the risk involved in losing a case of great public importance and then having to pay all the costs (including the opposing attorneys' fees) severely reduces these semi-public and necessary control activities. Though the § 5 UklaG provides for the court's power to reduce the amount-in-controversy if the costs of litigation seem to overtax one party, this provision does not apply for consumer agencies: jurisprudence does not make use of this provision when consumer associations are concerned. From the courts’ point of view, associations have to have the necessary capital to file a claim for injunction and to exhaust remedies.
Second, the German UKlaG only provides for a group actions for injunction, but not for damages. In Germany damage relief may only be obtained by filing individual claims. Consumers sometimes do not file claims for damages because of rational disinterest or for legal reasons, e.g. cases of minor loss, such as cases of illegal bank charges, where individual damages often only amount to a small sum of money. On the other hand suppliers often realise substantial profits as a result of a multiplicity of small damages caused by unfair business terms. In this regard actions for injunction are not sufficient, for they only ban suppliers from mistaken conduct in the future.
Third, regarding the object of control, i.e. the standard business terms used by the suppliers, consumer organisations mainly depend on information consumers provide. Neither Directive 93/13, nor Directive 98/27 do contain a right of access to positive information about standard business terms for interested persons, such as consumer organisations. Consumers do not have the right to demand for a copy of the relevant terms before entering into a contract. In addition, consumer agencies face substantial difficulties to effectively control whether the suppliers of the terms respect the court decisions.
Fourth, a court decision declaring a term to be unfair is binding only on the professional who is party to the dispute and so the effects of the decision do not directly affect other professionals who use identical terms. Therefore these decisions are not much help cleaning up the market. However, the respective decision may be a substantial argument for consumer agencies to achieve stop-use agreements with other professionals using the same unfair terms. Facing the respective decision, professionals will as likely as not sign a submittance declaration in order to avoid to be filed with a claim.
Finally, there is a contradiction between the goal of the legislation on unfair terms and the result of its enforcement. The reason for declaring a term to be unfair is the imbalance which the term creates between the supplier and the consumer. However the force of res judicata of a decision enjoining the elimination of an unfair term is limited to the actual wording of the term itself. The effects of the term, which underlie the court's decision, lie outside the scope of the force of res judicata. This means that professionals who have been prohibited from using a term found to be unfair may circumvent the judgment by replacing the offending term by another one whose effect is also unfair.
Proposel of Modification of the European Norm
In cases of widely spread minor losses, such as illegal bank charges, consumer organisations should have the right to file a claim in order to obtain damage relief. This could be dealt with by traditional procedural instruments of representation, such as mandate or assignment, and therefore would not require special legislation in Germany. On the other hand damage relief could be achieved by extending the already existing group action to claims for damages. As an exception and in contrary to the German doctrine of damages being an individual burden to be compensated, it should be taken into consideration to abandon consumer organisations from distributing small sums to the damaged consumers. Moreover, money raised in such way could be used to put up budgets of consumer organisations in order to enable them to control the market.
Moreover, group actions performed by consumer organisations need some kind of discharge of the plaintiff's risk, as the consumer organisations obviously do not litigate for their own economic advantage. The existing provision to leave reduction of the amount-in-controversy to the courts’ discretion is insufficient. In cases of group litigations performed by consumer organisations the amount-in-controversy should be reduced in any case, without discretion.
As far as access to information is concerned, interested persons, such as consumers and consumer organisations, should be entitled to claim information regarding standard business conditions used by suppliers. On the other hand, in order to decrease the drawbacks posed by the principle of the res judicata effect, a register of standard business terms which have been declared unfair by final court decisions should be set up and make available for the public. Interested persons and courts should be entitled to consult the files in order to examine whether other courts have been involved in similar cases. The above mentioned German ZEDA-database and the European CLABUS-database could be the initial point.