Last Updated October 31, 2018

Law and Practice

Authors



Luther Rechtsanwaltsgesellschaft mbH (Cologne) has more than 380 lawyers and tax advisers in ten national and six international offices, of which 16 specialise in outsourcing in the offices in Cologne, Frankfurt, Essen, Berlin and Stuttgart. The firm's key areas of practice are technology, media and telecommunications, data protection law, IT security, and public procurement law in the field of IT.

To list all the possible measures for customer protection would go beyond the scope of this contribution. Some typical measures are:

  • milestone plans and definitions of deliverables of the provider and customer;
  • comprehensive service level agreements;
  • detailed frameworks for adjustments of remuneration;
  • benchmarking;
  • gain-share models, or continuous improvement programmes;
  • governance;
  • balanced change request procedures;
  • granting of rights to the customer, even after the term of the contract; and
  • transition services.

In practice, we observe that some customers tend to push too hard in this regard, resulting in a provider making losses and accordingly decreasing service quality. The key to effective customer protection seems to be a good balance and understanding of both parties’ needs.

IT outsourcing contracts usually have a fixed initial term, due to the initial investment that the IT outsourcing provider has to make for the implementation. In the long term, an automatic extension of the contract is often provided for, unless one party terminates the contract at a certain point in time. Typical fixed terms are three to five years in duration, in larger projects five to seven years, with break options (against compensation of non-amortised investments).

However, the right to terminate for cause ('aus wichtigem Grund') cannot be excluded even during the fixed term. According to §314 of the BGB, either party may terminate for cause without observing a period of notice (extraordinary termination). According to §314 paragraph 1 S2 of the BGB, such cause only exists if the terminating party cannot reasonably be expected to continue the contract until the agreed termination. It is worthy of note that a prior warning letter is regularly mandatory and courts require a somewhat severe breach of obligations. The customer's termination rights are frequently encountered in the event of serious violations of service levels and in the event of a serious deterioration in the provider's financial situation. It is advisable to specify examples of when a termination can be considered. In addition to the severity of the breach, the significance of the service level for the course of business must also be taken into account. In any case, extraordinary termination must remain the last resort. Sanctions in the form of contractual penalties or lump-sum damages shall take precedence. With regard to an extraordinary termination by the provider, payment default by the customer should be considered in particular.

Under German law, a limitation of liability both in terms of amount and differentiation according to the type of damage (direct and indirect damage) is contained in very few special provisions, for example in the area of logistics. In general, German law is not aware of the Anglo-Saxon distinction. Rather, the person responsible has to compensate all damages which have arisen causally through a breach of duty. However, contributory negligence of the injured party may have to be taken into account (§254 of the BGB).

With regard to the type of damage, according to the statutory regulation (defect and consequential damages), unlimited and comprehensive damages are included. This includes in particular consequential damages such as loss of profit. According to the legal logic, those damages are also to be compensated in, eg, the event of a standstill of the production line.

Since, however, this would be completely out of proportion for the provider of the outsourcing, limitations of liability are very common and also appropriate. The provider has a legitimate interest in modifying the legal situation in such a way that a reasonable limitation of liability is agreed upon. Market practice is that the obligation to pay compensation for typical operating risks such as loss of profit or goodwill is excluded or at least limited, and that the limit will be calculated by way of a percentage of the provider’s turnover with the business.

Very far-reaching limitations of liability can be made in contracts and it is also quite common (unlike in Anglo-Saxon contracts) that liability is also limited in cases of gross negligence. In this respect, it should be pointed out that the German courts tend to assume gross negligence quite easily. In 'general terms and conditions' (ie, contracts which were not negotiated), such limitations of liability are only possible within very narrow limits. In the market, however, the liability regulations are negotiated individually (for good reasons, since every project is different).

German law provides for a number of reliable implied terms, even if the parties do not explicitly agree on a contractual provision. See 3.1 Standard Supplier Customer Model, above, regarding basic legal framework.

Luther Rechtsanwaltsgesellschaft mbH

Anna-Schneider-Steig 22
50678 Cologne

+49 221 9937 0

+49 221 9937 110

cologne@luther-lawfirm.com www.luther-lawfirm.com
Author Business Card

Authors



Luther Rechtsanwaltsgesellschaft mbH (Cologne) has more than 380 lawyers and tax advisers in ten national and six international offices, of which 16 specialise in outsourcing in the offices in Cologne, Frankfurt, Essen, Berlin and Stuttgart. The firm's key areas of practice are technology, media and telecommunications, data protection law, IT security, and public procurement law in the field of IT.

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.