Some Things Never Change… Including, Apparently, T&Cs in Germany

With a judgment dated April 27 and published on June 4, 2021, the German Federal Court (Bundesgerichtshof – the “Court”) declared unfair and therefore illegal and unenforceable a common way to make changes to terms and conditions (“T&Cs”) used vis-à-vis consumers in Germany.

• While grounded in EU-wide minimum rules, Germany’s regime for T&Cs in consumer contracts is particularly strict, leading to many internationally accepted clauses being considered unfair, illegal and unenforceable by the German courts.
• This already included the vast majority of “change clauses,” i.e. clauses that allow businesses to make unilateral changes to their T&Cs with effect for existing customers under ongoing agreements (e.g., subscriptions).
• With its April 27 decision, the Court now invalidated a remaining approach used across industries for general change clauses: a workaround of framing changes to T&Cs not as unilateral acts, but as mutually agreed amendments, with the consumer’s acceptance deemed given so long as they do not explicitly object (“tacit consent”).
• Solutions relying on tacit consent remain possible only where the kind of changes that can be made without active consent by the consumer can be enumerated when the agreement is first entered into, provided further that such changes would not result in fundamental modification of the content of the agreement. All other changes will have to be made through actual, active consent.
• Continued use of illegal clauses will mean risks of enforcement while providing little gain, as these clauses cannot be relied on as a basis to make binding changes. T&Cs for Germany should, therefore, be reviewed and updated.
• This judgment applies to consumer agreements only and does not affect similar change clauses in T&Cs used for agreements between businesses.

THE DECISION

The Court finds that the following clause used by a bank to allow changes to its consumer T&Cs is unfair and unenforceable:

“Future amendments to these T&Cs […] shall be offered to the customer in text form no later than two months before their proposed effective date. […] The customer shall be deemed to have given their consent if they have not indicated their refusal before the proposed date on which the changes are to take effect. The Bank shall draw the customer’s attention to this effect of deemed approval in its offer. […] The customer may also terminate the […] contract affected by the amendment without notice and free of charge prior to the proposed date of entry into force of the amendments. The Bank shall specifically draw the customer’s attention to this right of termination in its offer.”

[Note that the clause was translated and simplified, as banking- and payment services-specific aspects are not discussed here.]

In short, the subject of this decision was – at least by international standards – a quite customer-friendly general change clause. It does not allow changes to be made unilaterally but instead to be “offered” to the customer, who is then given a reasonably long period of time to reject the changes before they are deemed accepted, as well as a right to terminate the agreement outright. This generally represents a type of change clause that is quite common in Germany, as more provider-friendly clauses were already considered clearly illegal for reasons outlined below.

Note that a similarly structured clause used for changes to prices suffers the same fate. This is less remarkable, seeing as the clause in question would have broadly permitted unilateral price increases without any specific triggers (such as increased costs) and that the German courts have long considered that – particularly as it would also allow increased profit margins – to require active consent by the consumer.

The following brief analysis will focus on the issue of changing or amending terms within consumer T&Cs in Germany, and is not necessarily applicable to changes of prices or performances, both of which follow their own, separate sets of rules.

WHY THE GERMANS DON'T LIKE CHANGE

The Court decision comes before the background of Germany’s notoriously difficult environment for T&Cs in general and for unilateral changes to T&Cs in particular.

The General Legal Framework for T&Cs in Germany and the EU

At the foundation of rules for consumer T&Cs throughout the EU lies Directive 93/13/EEC (the “Unfair Terms Directive”). This Directive requires all Member States to outlaw the use of “unfair” terms, i.e. terms that are “contrary to the requirement of good faith” and “causing a significant imbalance to the parties’ rights and obligation arising under the contract, to the detriment of the consumer.” Unfair terms do not become binding on the consumer.

In Germany, this concept has been expanded upon both in scope and effect. Importantly, German law on unfair terms makes it clear that offending clauses are void in their entirety and courts will not reduce them to any fair and permitted kernel that they may contain. This is combined with the time-honored tradition of German courts reading consumer T&Cs in ways that can often be characterized as outright malicious – i.e., “Can we imagine any situation, no matter how contrived, in which there would be any way that this clause could be read as unfair?” Together, the (entirely desired) effect is to push businesses to deviate in their T&Cs as little as possible from statutory defaults, which are considered “fair” and protective of the consumers interests.

The Rules for Change

Set against the background of the law on T&Cs are the more specific points to consider for change clauses.

At the EU level, the Annex to the Unfair Terms Directive directly addresses the subject of changes, stating that terms “enabling the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract” are deemed unfair. It then provides a safe harbor by stating that this is not the case where a business “reserves the right to alter unilaterally the conditions of a contract of indeterminate duration, provided that [the business] is required to inform the consumer with reasonable notice and that the consumer is free to dissolve the contract.” At the EU level, this already invalidates the (internationally quite common) simple change clauses such as “We may change these T&Cs from time to time upon notice at our reasonable discretion.” or similar. Note that the clause that is the subject of the decision discussed here would technically pass this EU-level restriction with flying colors, and that it may therefore be perfectly acceptable in other EU Member States.

Not in Germany, however. German case law goes beyond the EU-wide restrictions, and strongly emphasizes that T&Cs are part of a bilateral contract that can only be changed bilaterally. German courts do not just picture what may be unfair for an average experienced consumer but aim to protect the most “awkward” consumers. In result, outside of some very specific circumstances, clauses allowing strictly unilateral change – even where they would be in line with the EU requirements under the Unfair Terms Directive – are almost certainly against consumer law in Germany.

This leads to the use of change clauses like the one now invalidated by the Court: rather than attempting to unilaterally change T&Cs, they are instead formally based on a mutual, bilateral amendment, except that the consumer’s side of that bargain is not actual consent, but rather deemed or “tacit” consent. This was hoped to be made possible by German law stating, in summary, that clauses creating such “deemed declarations” are unfair if they do not give the other side reasonable time to make an actual declaration before their declaration is deemed – thus implying that they could be fair so long as they provide ample opportunity for objection.

WHAT’S CHANGED

Thanks to the decision at hand, we now know that that hope was in vain. This does not come as a great surprise, seeing as the validity of these change clauses had always been in some doubt, largely for the reasons that the Court now spells out: Firstly, the clause sets no limits for what changes it could effect. As the Court puts it, it could (if read with a little malice, see above) theoretically be employed to fundamentally change the content of the agreement, e.g., by adding further paid services or significantly decreasing the performance obligations of the supplier, or to change the change clause itself. This, the Court to argues, cannot be outweighed by a mere opportunity to object, no matter how generous, as a consumer could miss this opportunity for a number of reasons (the Court cites “lethargy,” “disinterest” and “excess of intellectual capacity” among the possibilities).

The Court leaves some doors open in an obiter dictum: it suggests that working with a deemed acceptance mechanism could be admissible if the change clause itself contains sufficiently specified limitations. In the absence of further explanations, one might suggest that such limitations could be either with regard to when a change can be made (e.g., if changes to the legal environment require them) or what can be changed (e.g., the way invoicing works). It is clear though that both would severely impact the very flexibility that change clauses are meant to provide.

In result, this – possibly final – way to frame general, unrestricted-in-scope change clauses for consumer T&Cs so that they might pass the scrutiny of German courts is now barred.

WHAT BUSINESSES IN GERMANY NEED TO CHANGE NOW

Those who do business in Germany should review and consider revising any change clauses contained in their consumer T&Cs, be they based on tacit, “deemed” consent or on other, likely long considered unfair mechanisms. The continued use of clearly held-to-be-unfair change clauses will mean both contractual risks resulting from their invalidity and enforcement risks resulting from infringements of consumer protection laws.

Changes to T&Cs Likely not Binding

The first and most obvious effect of a change clause being unfair is that it will be unenforceable in its entirety, and cannot be relied on to make binding changes to T&Cs. This means that – without a clear limit to how far back this would reach retroactively – any changes made in reliance on these clauses will also be at risk of being unenforceable unless and until the individual consumer in question is found to have actively agreed to a version of the T&Cs that contains the changes.

Ironically, the resulting situation will also formally make it difficult to remove unfair change clauses from existing T&Cs. That would be a change, after all, and there technically no longer is an enforceable basis in the T&Cs to effect it. Instead, a mutually agreed amendment to the T&Cs would have to be made with every single counterparty, a process that may seem daunting but, if carefully designed, is often possible even at scale. Future changes will realistically have to rely on such a process regardless, at least in Germany.

Risk of Cease and Desist Claims

In terms of enforcement risks, the most likely danger of using unfair terms in consumer contracts in Germany is that of facing cease and desist claims by competitors and by consumer protection or competition associations. Such claims are commonly brought through out-of-court cease and desist letters (“Abmahnung”), forcing the recipient to quickly cease illegal behavior. In some cases, particularly if cease and desist letters are ignored or rejected, plaintiffs may also seek injunctive relief through the courts – such as in the case underlying decision of the Court discussed here.

Large Fines on the Horizon

Last but not least, the use of unfair terms in consumer contracts is also among the offenses made subject to “GDPR-like” fines under Directive (EU) 2019/2161 (the “Enforcement and Modernisation Directive” or “Omnibus Directive”), which are set to apply starting in May 2022. These fines will be limited to cases of “widespread infringement” covering multiple Member States and their imposition will require a cumbersome “coordinated action” between national authorities, and where a clause is considered unfair only in Germany and not in other Member States, risks should be low. Still, the theoretical maximum fine will be up to 4% of the offender’s annual turnover in the affected Member States, so ensuring consumer law compliance should be on GC’s to do lists.

(The full decision by the German Federal Court that is the occasion of this missive is available in German as BGH Urteil vom 27. April 2021 – XI ZR 26/20).