Consumer protection law: terms and conditions in Germany and Europe

By Julia Schürmann, Sebastian Böhme
Google

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You think nobody reads your terms and conditions? You could be wrong. You might have heard of “Terms of Service: Didn’t read,” an initiative dedicated to doing what many people often fail to do: reading the terms and conditions that companies ask their users to agree to. The group studies terms and conditions of online service providers in great detail, and labels them as class A (best) to E (worst), giving certain clauses a thumbs-up or thumbs-down—an evaluation that may have a strong impact on the public perception of a company.

Background

On the legal side, public authorities are increasingly setting their sights on the proper use of terms and conditions, and one country to particularly watch out for in this regard is Germany. Here, the main (but not the sole) actor is the federation of German consumer organizations (Verbraucherzentrale Bundesverband, or the VZBV). This association is made up of 41 organizations that specialize in consumer-protection issues and has recently broadened its focus to include consumer rights on the Internet. As opposed to user initiatives, the VZBV has an official legal mandate to approach companies and, in the name of all consumers, take the company to court if their terms and conditions are considered unfair. According to their own records, over the past four decades, the VZBV (and its predecessor) has obtained more than 1,500 judgments regarding the use of terms and conditions in just about every industry, particularly such traditional service providers as banks and insurance companies. In a recent campaign, the VZBV focused on providers of online consumer services and sued such well-known players as Apple, Facebook, Google and PayPal either over their terms and conditions or their privacy policies (or both), and forced many others—including Skype—to amend their terms. The latest approach by the consumer-protection agencies to review not only terms and conditions but also privacy policies has sparked a lot of discussion on whether or not privacy policies should be enforced by private consumer-protection agencies when this work is generally considered to fall under the remit of public data-protection authorities. German consumer-protection agencies are currently lobbying for a formal extension of their legal mandate to take legal action on topics related to both consumer protection and data protection. This initiative is a source of concern for companies in Germany, since they are already confronted with more enforcement bodies than in other countries. A total of 18 data-protection agencies are currently active in Germany, many of which often claim parallel authority. Increasing the number of competent enforcement authorities will open up the potential for conflict in the interpretation of the rules. This contradicts the recently proposed European data-protection regulation, which aims to limit the number of competent authorities a company has to deal with. In addition, “outsourcing” the enforcement of public data-protection laws to private associations engenders constitutional concerns, given that it limits the legal defenses otherwise available to companies. But what can be so problematic with terms and conditions? Unfortunately, a lot—at least under the strict legal regime in Germany.

German Civil Code

Traditionally, German courts have reviewed general terms and conditions and their fairness by applying the general principle of “good faith” (Treu und Glauben) laid down in the German Civil Code, a body of law that dates back to 1900. This consolidated case law formed the basis for a specific codification that focuses exclusively on terms and conditions: the General Terms and Conditions Act (AGB-Gesetz), which came into force in 1976/77. As part of a large overhaul of the German Civil Code, these provisions were moved into the German Civil Code in 2002, remaining substantially unchanged. >> The dispute surrounding terms and conditions is not likely to end any time soon << As the German courts applied the General Terms and Conditions Act in Germany, legislators in Brussels considered terms and conditions to be a topic of wider European importance and, in 1993, issued the Unfair Terms Directive (Directive 93/13/EEC). This directive is still alive, despite the latest significant revamp of the body of consumer-protection legislation in Europe stemming from the Consumer Rights Directive (Directive 2011/83/EU). The Unfair Terms Directive was transposed into the national legislation of each individual EU member state in many variations. This was because the directive only defined minimum standards and member states jumped at the opportunity to impose further requirements of their own. The General Terms and Conditions Act in Germany only needed slight changes as it already contained most of the restrictions under the Unfair Terms Directive—and more. As a result, the German Civil Code forms a much stricter regime than the Unfair Terms Directive as implemented in other member states.

The devil is in the details

What, then, is so special about the German provisions on general terms and conditions? First and foremost, the European Unfair Terms Directive is only applicable to contracts with consumers (“businessto-consumer” contracts). However, many of the German restrictions regarding general terms and conditions also apply to business-to-business situations. This makes German law fairly unique and often comes as a surprise to foreign companies doing business in Germany. Secondly, German courts have developed the practice of generally striking down an entire clause if part of that clause is considered unfair and, hence, invalid. In consequence, there is a real risk that an invalid part of a clause contaminates the rest of the clause, thereby rendering the entire clause invalid. Thirdly, as in many European jurisdictions where the contra proferentem principle of Roman law has survived, the German Civil Code requires that any doubts about the interpretation of a party’s standard terms be resolved against the party to whom the terms belong. Accordingly, the Federal Court of Justice (Bundesgerichtshof), the highest court in civil matters in Germany, holds that if a clause can be read in different ways, the interpretation to be assumed by the court is the interpretation least favorable to the consumer (and therefore the most likely to be found invalid). In this context, the court will not usually uphold the argument that a clause was not intended to harm consumers if harm at least seems possible for the court.

Finally, it is important to note that if a clause is found to be invalid, the party asserting it will instead have to apply the provisions stipulated by statutory law. This can be painful, especially in situations where a party has attempted to restrict the limitation period to six months and ends up having to apply the statutory limitation period of three years or when liability caps prove to be unenforceable. On the other hand, if a clause turns out to be invalid, the other party may nonetheless invoke it to its own advantage against the party using the terms and conditions: For example, a statutory termination period is only three months, but the user of the terms tried to extend it to one year in the terms and conditions. If the clause containing the extension is considered invalid, the party using the terms is held to the one-year termination period (given that the party came up with this clause in the first place). At the same time, the other party may choose to either insist on the application of the contract for one year or to rely on statutory law instead and terminate with only three months notice. Clearly, preparing terms and conditions for use with consumers presents something of a minefield in Germany. So what is the solution? One approach is not to have any terms at all and to instead rely entirely on statutory law. But this is usually not an option for online service providers, whose services are often more complex than the simple “sale of goods” transactions the legislation was designed to address. Many aspects of the provision of online services are not laid down in statutory law and even touch on unsettled legal questions. For these reasons, it does make sense to have terms and conditions that define the rules of the relationship between parties.

Ongoing discussions about terms and conditions

If you decide to use terms of service or standard contracts, make sure to ask a lawyer on the ground to localize them as much as possible—especially if they have been drafted by someone not fully familiar with European consumerprotection provisions (and even less with the German additions to them). Frequently, it’s the little things that count most: For example, it is always advisable to separate out clauses into different paragraphs rather than gluing them all together in one long paragraph. This will raise the chance that certain parts of the clause may be considered independent and not be struck down altogether. A review by a local lawyer, however, can be costly and often frustrating because of the inherent limitations set by the existing legal framework. This framework was initially designed to protect consumers of static, offline paid goods and services from being ripped off by their contractual counterpart (for example, by unilaterally raising the price). For online services, however, which are often provided for free and usually develop very quickly, many of these rules simply do not work. This has led to quite a lot of friction, ensuring that the dispute surrounding terms and conditions is not likely to end any time soon.

jschuermann@google.com

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