THE AUTHORS:
Sophia Henrich, Counsel at Clyde & Co
Dardan Gashi, Senior Associate at Clyde & Co
Christoph Stöger, Associate at Clyde & Co
Clyde & Co’s Young Arbitration Group provides a unique insight into international arbitration issues through the lens of young international arbitration practitioners working across different jurisdictions. In this series with Daily Jus, Clyde & Co explores the evolving landscape of damages in arbitration, analyzing recent developments, legislative changes, and their impact on dispute resolution worldwide.
This article outlines key considerations when German law is selected as the applicable substantive law in arbitral proceedings.
Damages as an Issue of Substantive Law
Under German law, the determination of damages is generally a question of substantive law. The most straightforward situation for the application of German substantive law in arbitration is when the parties expressly choose German law as the governing substantive law in their agreement, in line with the principle of party autonomy. In the absence of such an agreement or preceding rules for determining the applicable law in the chosen arbitration rules, an arbitral tribunal seated in Germany will apply the law of the state most intricately connected to the subject matter of the dispute.
However, even when German law does not directly govern the substance of the dispute, procedural standards such as damage estimation and the burden of proof, especially in arbitrations seated in Germany, might still reflect German legal principles.
Basic Principles of Damages under German Law
Under German civil law, both heads of damages and quantification of damages must be determined in accordance with the provisions of the German Civil Code (Bürgerliches Gesetzbuch (“BGB”)), with the essential provisions on damages mainly set out in sections 249 et seq. These principles govern nearly all types of damages, irrespective of whether the underlying claim arises in contract, tort, or under statute.
The core principle underlying German statutory law is the principle of full compensation (Grundsatz der Totalreparation), which means that the injured party is entitled to full compensation for all losses incurred. At the same time, enrichment is strictly prohibited, which fundamentally excludes any overcompensation of the claimant. In other words, the claimant should be fully compensated for the damage, but no more.
Once a claim has been recognised as valid, the basic principle governing the determination of damages is the so-called Naturalrestitution pursuant to Section 249 (1) BGB. According to this, the position that would exist if the circumstance obliging a person to pay damages had not occurred is to be restored. This reflects the compensatory nature of German law, emphasising the restoration of the status quo ante.
In practice, however, actual restitution is often impractical or impossible. Consequently, monetary compensation may also be awarded if personal injury or property damage has occurred, a deadline for restoring the original condition has expired, or if such restoration is generally impossible or insufficient. Monetary compensation can, therefore, generally be considered as a more common form of redress.
The quantification of damages involves a comparison between two asset positions (Differenzhypothese) as follows:
- The actual asset situation of the claimant after the damaging event; and
- The hypothetical asset situation that would have existed had the event not occurred.
This approach encompasses both tangible losses and lost profits (section 252 BGB), provided they can be substantiated with a reasonable degree of certainty.
When quantifying damages arising from a contract, a distinction must be made between two different concepts: on the one hand, there is liability for ‘negative interest’ (negatives Interesse), whereby the injured party is to be placed in the position they would have been in if the contract had never been concluded. On the other hand, compensation for ‘positive interest’ (positives Interesse) is possible, whereby the injured party is to be placed in the position they would have been in if the contract had been properly executed.
Heads of Damages Generally Not Recognised under German Law
German law imposes certain limitations on the types of damages that can be claimed, arising mainly from the compensatory nature of damages in this jurisdiction:
- Punitive damages are not foreseen under German law. The purpose of such damages as punishment rather than as compensation is considered contrary to the principles of German legal doctrine on damages. While German courts may award substantial sums, for example, in cases involving defamatory publications for ‘compensation for pain and suffering’, such sums are justified as preventive measures, not as punishment.
- There is no direct equivalent to restitutionary damages under common law in German law. However, comparable outcomes may be achieved through the doctrine of unjust enrichment (sections 812 et seq. BGB), which allows for the recovery of benefits wrongfully obtained by the other party.
- In German law, the concept of nominal damages, which involves awarding a symbolic amount to recognize a breach of law without actual harm, does not apply as a claimant must demonstrate a concrete loss to be entitled to compensation.
Non-Compensatory Damages as an Exception
Although German law is based on the principle that damages serve to compensate for losses actually incurred, certain exceptions allow for non-compensatory damages:
- Liquidated damages aim at simplifying enforcement by pre-determining compensation amounts and are generally permissible under German law. Nevertheless, they are subject to strict scrutiny, especially when included in general terms and conditions. In this case, they are only enforceable if the agreed-upon amount reflects a reasonable estimate of expected loss or does not exceed the usual reductions in value. Additionally, such clauses must allow the breaching party to prove that the actual damage was lower than the specified amount to be valid.
- The agreement of contractual penalties is generally possible in commercial transactions. However, the validity of clauses may be assessed differently in individual cases: for example, clauses providing for contractual penalties that are considered disproportionately high may be reduced.
Non-Monetary Damages
Non-material damages are only permissible to a limited extent under German law and can only be awarded where expressly provided for by statute, as per Section 253 (1) BGB. For example, mere frustration due to the non-performance of a contract does not give rise to a right to compensation. Permissible, however, are damages arising from injury to the body, health, freedom, or sexual self-determination, Section 253 (2) BGB, as well as damages arising from discrimination under Section 15 (2) of the General Equal Treatment Act (“AGG”).
Interest on Damages
Under German law, claims for damages (like other claims) can be subject to interest upon default, Section 288 (1) BGB. Default occurs when the debtor fails to make payment after receiving a dunning letter, following the claim becoming due, as per Section 286 (1) BGB. Under certain circumstances, such a dunning letter may not be necessary, e.g., if a calendar date has been specified for performance or if the debtor refuses performance outright. If default interest is owed, the statutory interest rate is 9 percentage points above a fixed base rate per annum in the B2B sector.
Damages in the Context of Mergers and Acquisitions (M&A) in Germany
The principles of German law outlined above apply not only to statutory provisions but also to contractual remedies commonly used in M&A transactions, which often refer to or closely mirror sections 249 et seq. BGB. Courts and arbitral tribunals regularly apply the difference hypothesis (Differenzhypothese) when assessing damages, reflecting fundamental German principles of damages.
However, this approach does not automatically determine whether the injured party is entitled to the negative or positive interest (see above). For example, liability under culpa in contrahendo (pre-contractual liability) typically compensates only the negative interest.
Where parties agree on warranties in a share purchase agreement (SPA), it is generally assumed they intend to define the scope of liability and the legal consequences of breaches. For instance, in a DIS arbitration, a clause requiring the buyer to be placed “in the position it would have been in if the warranty had been correct” was interpreted as an obligation to compensate the positive interest, with damages assessed by comparing the company’s warranted and actual values. The German Federal Court of Justice (Bundesgerichtshof) confirmed this approach in a balance sheet warranty case in 2006, holding that warranties in SPAs constitute independent guarantees under section 311(1) BGB. The seller promises a specific outcome and must compensate the buyer for the positive interest if the warranty is breached. In contrast, the Higher Regional Court of Frankfurt (Oberlandesgericht Frankfurt) took a different view in 2015. In a balance sheet warranty case, it focused on the excessive purchase price paid, following the principles of culpa in contrahendo. Damages were calculated as the difference between the actual and a hypothetical lower purchase price, thus compensating for the negative interest (see OLG Frankfurt, ruling of 7.5.2015, file reference no. 26 U 35/12, see ZIP 2016, 774).
Which approach applies depends on the parties’ agreement. They are free to define the consequences of warranty breaches, including whether positive or negative interest is to be compensated. Absent explicit terms, courts and tribunals interpret the warranty clause, and if inconclusive, generally award the positive interest. Typically, the buyer does not have the option of choosing between damages based on diminished company value (positive interest) or a price reduction (negative interest) in warranty claims.
Conclusion
Damages in arbitration under German law are governed by a principled, codified framework that emphasizes full compensation without resorting to punitive or speculative remedies. Rooted in the German Civil Code, the legal rules provide predictability and clarity for parties seeking redress through arbitration. Whether arising from breach of contract or tort, damages must be causally linked, foreseeable, and supported by evidence, reflecting the civil law tradition’s focus on legal certainty and fairness.
As arbitration continues to play a key role in international commerce, German law offers a robust and balanced approach to damages that aligns with global standards while preserving its own legal integrity. This makes it an attractive option for parties seeking both legal rigor and procedural efficiency in cross-border dispute resolution.
ABOUT THE AUTHORS
Sophia Henrich is a Counsel in the Dispute Resolution / Litigation & Arbitration practice of Clyde & Co and based in the Munich office. She advises and represents international and domestic clients in a wide array of complex commercial, liability, and corporate disputes as well as in EU administrative proceedings. Her practice focuses in particular on international commercial disputes, product liability, D&O, and W&I insurance disputes. Sophia’s expertise further encompasses EU regulatory frameworks, international law, and challenges in the field of human rights law, the laws of armed conflicts, ESG, and climate change.
Dardan Gashi is a Senior Associate based in the Clyde & Co Munich office, focusing primarily on dispute resolution and corporate insurance. He specializes in litigation, arbitration and all other forms of dispute resolution. His area of expertise includes insurance law, particularly financial and professional lines (D&O, W&I, PI, E&O), as well as general and product liability.
Christoph Stöger is an Associate based in the Clyde & Co Munich office. He specialises in litigation, arbitration, and all other forms of dispute resolution. He has a focus on insurance law, especially on product liability and financial and professional lines (D&O, W&I, PI, E&O). Christoph’s practice also includes regulatory and corporate insurance matters, where he advises insurers, insurance intermediaries, and brokers as well as Insurtech companies.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
