In practice, contractual penalties are a common means of sanctioning breaches of cease-and-desist declarations. The declaration to cease and desist is “subject to penalty” precisely because a contractual penalty is due for the debtor or infringer if the obligation is breached. In this context, the Federal Court of Justice (BGH) had to deal with the question of when the claim for payment of the contractual penalty becomes time-barred (see BGH, judgment of 27.10.2022 – I ZR 141/21).
Particularly in the field of industrial property rights, the owner of property rights is well advised to agree a contractual penalty in the event of (renewed) infringement when drafting the cease-and-desist declaration.
It is up to the creditor of the (future) claim to decide whether he wants to determine the amount of the penalty for each case of infringement or whether he only wants to determine it at his “reasonable discretion” in the event of forfeiture.
This so-called “Hamburg custom” (see BGH, judgment of 17.09.2009 – I ZR 217/07) is permissible and is now common practice.
Of course, the question arises as to what is meant by “reasonable discretion”. The term appears in various regulations. For example, section 315 para. 1 of the German Civil Code (BGB) stipulates that, in case of doubt, when a unilateral right to determine performance is agreed, the determination must be made at “reasonable discretion”.
Employers should also be familiar with the term, as for example in labor law, the employer’s unilateral right of direction pursuant to Art. § Section 106 sentence 1 GewO must be made at “reasonable discretion”.
As always, such so-called undefined legal terms must be interpreted in order to concretize their content.
Case law, which may also fully review undefined legal terms (cf. only here Section 315 (3) BGB), understands this to mean that the interests of both parties must be weighed up taking into account the purpose of the contract and all significant circumstances of the individual case (BGHZ 41, 271, 279 = NJW 1964, 1617). Criteria can be (non-exhaustive): the business purpose, favorable or unfavorable contractual provisions, the distribution of risk between the contracting parties, the mutual needs of the contracting parties, the duration, nature and scope of the relationship, the time and effort spent on the contractual obligations, fault, malice, the nature and extent of the disadvantages or damage (e.g. size, severity), etc.
It is necessary to check when the debtor may refuse to pay the contractual penalty with the plea of limitation (Section 214 (1) BGB).
In the absence of special provisions, claims shall become time-barred in accordance with §§ 194 ff. BGB and, as a rule, within three years.
The limitation period begins in turn – subject to other regulations – in accordance with § 199 para. 1 BGB at the time at which the claim arose and the creditor became aware of it.
A claim arises when it can be asserted for the first time and enforced by legal action. This requires the claim to be due and payable, i.e. the creditor’s right to demand performance immediately and the debtor’s obligation to effect performance immediately (Section 271 (1) BGB).
The Regional Court of Cologne had initially based the due date on the act of infringement itself, of which the creditor of the claim for the contractual penalty had become aware.
The BGH has rejected this. The decisive factor is the exercise of the right to determine performance, i.e. the claiming of the contractual penalty at “reasonable discretion”. This is precisely where the case differs from one in which the amount of the claim for payment of a contractual penalty is specified from the outset in the cease-and-desist declaration. In this case, there is no unilateral right of the creditor to determine performance that still has to be exercised, so that the limitation period begins earlier – i.e. with the act of infringement and knowledge of the creditor.
This seems inappropriate at first. This is because the creditor could delay the limitation period by not exercising his right of determination. The BGH takes a different view and states that the debtor of the contractual penalty is entitled to claim a contractual penalty at any time in accordance with Art. § Section 315 para. 3 sentence 2 BGB to determine the performance in order to obtain certainty.
It remains to be seen whether the case law described will be reflected in current practice. For the time being, the owner of the property right is generally well advised not to determine the amount of the penalty from the outset in order to de facto delay the statute of limitations. Of course, this does not necessarily apply in every individual case, as the specific circumstances must always be taken into account.
Conclusion
Contractual penalties and their limitation period remain a relevant topic. The BGH has extended the scope of action for property right owners. However, both the determination of the amount “at reasonable discretion” and the defense against limitation of claims must still be examined and enforced on a case-by-case basis.
