Debtor default

Definition and legal basis:

Debtor default, also known simply as default, is a situation in debt law in which the debtor does not provide a due service or does not provide it on time. The legal basis can be found in Sections 286-288 of the German Civil Code (BGB). Default is of central importance in the law of obligations as it has far-reaching legal consequences and improves the legal position of the creditor.

Prerequisites for debtor default:

The following conditions must be met cumulatively for the debtor to be in default: 1. due date of performance:
The performance owed must be due, i.e. the creditor must be able to demand it. 2. non-performance:
The debtor does not render the due performance or does not render it on time. 3. reminder or dispensable reminder:
In principle, a reminder is required unless it is dispensable pursuant to Section 286 (2) BGB. 4. must be responsible:
The debtor must be responsible for the delay, whereby fault is presumed (Section 286 (4) BGB).

Occurrence of the delay:

Default can occur in various ways: 1. after a reminder (Section 286 (1) BGB):
Standard case in which the creditor requests the debtor to perform. 2. without a reminder (Section 286 (2) BGB):
– In the case of a calendar-based performance period
– After expiry of a reasonable period in the event of termination
– In the event of a serious and final refusal to perform
– For special reasons, taking into account the interests of both parties 3. in the case of claims for payment (Section 286 (3) BGB):
Automatic occurrence of default 30 days after the due date and receipt of an invoice.

Legal consequences of the debtor’s default:

The occurrence of default has various consequences: 1. damage caused by default (Section 286 (1) BGB):
The debtor must compensate the damage caused by the default. 2. default interest (Section 288 BGB):
Default interest must be paid on monetary claims (consumers: 5 percentage points, entrepreneurs: 9 percentage points above the base interest rate). 3. aggravated liability (§ 287 BGB):
The debtor is liable for any negligence and for coincidence during the delay. 4. creditor’s right of withdrawal (§ 323 BGB):
In the case of mutual contracts, the creditor may withdraw from the contract under certain conditions. 5. damages in lieu of performance (§§ 280, 281 BGB):
Under certain conditions, the creditor may claim damages in lieu of performance.

Termination of the default:

The delay ends by: 1. performance of the service
2. Default of acceptance by the creditor
3. Impossibility of performance
4. Withdrawal from the contract

Special features and practical aspects:

1. fixed-date transactions:
In the case of fixed-date transactions, default occurs automatically if performance is not rendered on time. 2. partial performance:
Default may also occur in the case of partial performance if full performance is owed. 3. monetary debts:
Special rules apply to monetary debts, in particular with regard to the occurrence of default and interest. 4. sale of consumer goods:
Special rules apply to the sale of consumer goods, e.g. with regard to default interest.

Differentiation from other legal institutions:

Debtor default must be distinguished from related concepts: 1. impossibility:
In the case of impossibility, performance can no longer be rendered; in the case of default, it is still possible. 2. defective performance:
In the case of defective performance, the performance is defective; in the case of default, it is not performed at all or too late. 3. default of acceptance:
In this case, the creditor is in default by not accepting the performance offered.

Practical significance and design options:

Debtor default plays an important role in practice: 1. contract drafting:
Agreement of due dates, default clauses and lump-sum compensation for damages caused by default. 2. dunning procedure:
Professional dunning procedure to avoid and handle default situations. 3. liquidity management:
Consideration of possible consequences of default in corporate planning. 4. litigation:
Assertion of default damages and interest in court proceedings.

Current developments and case law:

The case law on debtor default is constantly evolving: 1. digitalization:
New issues in the context of electronic payment systems and automated processes. 2. international aspects:
Treatment of default in cross-border contractual relationships. 3. corona pandemic:
Effects of the pandemic on default situations and their legal assessment. 4. consumer protection:
Tendency towards increased protection of consumers in default situations.

Summary and outlook:

Debtor default is a central institution of the law of obligations that strengthens the rights of the creditor and encourages the debtor to perform on time. Its correct handling requires precise knowledge of the legal requirements and possible legal consequences. In an increasingly complex and globalized business world, the effective management of default situations continues to gain in importance. At the same time, questions of appropriateness and the balance of interests between creditor and debtor remain relevant, particularly in times of crisis or in the event of obstacles to performance through no fault of the debtor.