One must keep one's promises…

…or perhaps not after all? The Federal Court of Justice (BGH) had to decide whether a contractual penalty promise made in connection with a declaration of obligation to cease and desist is valid or not.

The Central Association of German House, Residential and Property Owners (Zentralverband der Deutschen Haus-, Wohnungs- und Grundeigentümer e.V.) had issued a cease-and-desist letter to a real estate broker company in Thuringia, which originally operated under the name "Eigentum Haus & Grund GmbH", on account of the unlawful use of the company name component "Haus & Grund".

The recipient of the cease-and-desist letter signed the pre-formulated declaration of obligation to cease and desist that was attached to the cease-and-desist letter and, in this connection, promised to pay a contractual penalty of EUR 25,000 for each breach of this obligation.

Subsequently, the recipient of the cease-and-desist letter breached the obligation to cease and desist and was called upon to pay the contractual penalty of EUR 25,000. However, she refused to pay this amount, asserting that the amount of the contractual penalty was unreasonably high. She contends that the clause concerning the agreed contractual penalty constitutes a general terms and conditions clause that disadvantages her inappropriately and is therefore invalid.

Decision of the Court

The BGH decided by means ofjudgment of 13.11.2013 – Az. I ZR 77/12 (Haus & Grund)that a contractual penalty promise prompted by competition law or intellectual property rights law within the scope of a declaration to cease and desist is invalid only under § 307 Abs. 1 BGB if the contractual penalty is, at first glance, manifestly disproportionate to the breach sanctioned by the contractual penalty and to the risks associated with possible future breaches for the party issuing the cease-and-desist letter.

However, according to the BGH, a stricter standard must be applied than in the case of reducing contractual penalty promises individually negotiated in contracts, in which a reduction in accordance with the principles of good faith is also possible in commercial dealings.

The BGH regarded a recipient of a cease-and-desist letter acting in commercial dealings as typically not in particular need of protection in factual situations of the present kind, since there is no particular state of duress for him/her that would compel him/her to conclude the contractual penalty agreement desired by the issuer of the cease-and-desist letter.

Thus, on the one hand, the recipient of the cease-and-desist letter could, instead of the requested contractual penalty promise, submit a declaration of submission with a lower but still appropriate contractual penalty, or alternatively submit a declaration of submission according to the "new Hamburg custom" (neuem Hamburger Brauch), whereby it is agreed that the amount of the contractual penalty is determined by the creditor or a third party according to fair discretion and this determination can be reviewed by a court in the individual case. In this connection, however, the BGH also made expressly clear that § 307 Abs. 1 BGB does not give rise to an obligation in commercial dealings to conclude contractual penalty agreements exclusively according to the "new Hamburg custom". Rather, it is within the discretion of the issuer of the cease-and-desist letter, given the margin of appreciation granted to him/her, to choose a clear and therefore particularly deterrent contractual structure, which moreover has the advantage that, in the event of forfeiture of the contractual penalty, the risk of judicial proceedings concerning its amount is limited.

In the present case – according to the BGH – the agreed contractual penalty of EUR 25,000 per breach was, having regard to the size of the business of the recipient of the cease-and-desist letter and its regionally limited scope of activity, comparatively high; however, the findings made do not indicate that it was manifestly excessive in light of the severity of the intellectual property rights violation.

Conclusion

When agreeing upon a contractual penalty determined in amount and fixed in nature, care must always be taken, both from the perspective of the issuer of the cease-and-desist letter and from the perspective of the recipient thereof, that the amount is appropriate. This means that, on the one hand, the amount must be high enough not to raise any doubts about the seriousness of the intention to cease and desist, but on the other hand, it must not be completely "excessive". The question of how high a contractual penalty must or may be set cannot therefore be answered in general terms, but always only taking into account the special circumstances of the particular individual case.