Most important points

Compensation means that someone who has caused damage to another person must pay compensation. In German civil law, this applies if certain conditions are met: Infringement of legal interests, responsibility (fault) and a quantifiable loss.
There are contractual claims for damages (if someone breaches a contractual obligation, e.g. delays in delivery, and the other party suffers damage as a result) and tortious claims (in tort, e.g. someone damages someone else’s property or injures a person).
The central provision is Section 249 BGB: The injuring party must restore the condition that would exist if the damaging circumstance had not occurred. This can be done through in rem restitution (repair, replacement) or monetary payment, depending on what is possible/appropriate.
Types of damage: There is material damage (e.g. broken property, loss of profit, treatment costs) and immaterial damage (compensation for bodily injury/personal injury). Intangible damages are only compensated if the law provides for this (classic: compensation for pain and suffering after bodily injury or compensation for serious violations of personal rights).
Fault: As a rule, compensation for damages requires that the injuring party has acted intentionally or negligently. In cases of slight negligence, liability may be limited by contract (see exclusions of liability above). There are also cases of strict liability (no fault necessary, e.g. owner liability in the event of a motor vehicle accident – anyone who operates a car is liable up to certain limits even if they are not at fault).
Contractual claims for damages are particularly relevant for start-ups: If you do not provide a service correctly yourself and the customer suffers damage as a result – then claims are imminent. It is therefore important to fulfill contracts carefully and, if necessary, limit liability (as explained above in the exclusion of liability).
Burden of proof: The injured party must generally prove the damage and the breach of duty. However, there are constellations such as product liability or special warranty promises where the burden of proof is eased. The damage must also be specifically proven (e.g. invoice for repair costs, expert opinion on reduction in value, etc.).
Calculation: An attempt is made to financially compensate for the total damage. In the case of property damage, this is the repair costs or replacement value. In the case of financial losses (e.g. loss of profit due to delayed delivery), it becomes more complicated: you have to hypothetically determine what profit would have been made without the delay.

Requirements for compensation at a glance

In general, it needs:

Breach of duty or breach of legal interest – either a contractual duty has been breached or a protected legal interest (property, health, freedom, etc.) in the offense.
Fault – the tortfeasor has acted intentionally (deliberately) or negligently (disregarding the necessary care). Anyone who disregards the care required in traffic is negligent (§ 276 II BGB).
Damage to the injured party – an adverse change in his goods/situation that is measurable.
Causality – The tortfeasor’s action must be the cause of the damage (including adequacy, i.e. not completely unforeseeable).
Unlawfulness – generally given if there is a breach of duty (except in the case of justification).

Contractual example: A construction company delays the completion of an office building by 3 months, so that the client has to pay rent for replacement offices. This is a breach of duty (delay), fault if the construction company is responsible (e.g. poor planning), damage = additional rent, causality obvious. The client can demand compensation for these costs.

Example in tort: A courier driver drives carelessly and damages a parked car. Breach of duty: Traffic rule disregarded -> Infringement of legal interests (property of the car). Fault: Negligent. Damage: Repair costs, possible reduction in value, loss of use. Causality given, unlawful (no justification). The owner of the car can claim compensation from the driver (or the driver’s insurance company).

In rem restitution and monetary compensation

The law prefers that the damage is made good directly (in rem restitution). FOR EXAMPLE: Someone has soiled the neighbor’s wall, so he should repaint it (instead of paying money). However, monetary compensation is often more practical – you pay the amount so that the injured party can have it repaired themselves.

In many cases, such as bodily injury, it is not possible to restore the old condition -> this is where compensation for pain and suffering comes into play (money as compensation for non-material damage, Section 253 BGB).

Lost profit (Section 252 BGB) is also compensated if it would probably have been incurred. This is often a point of contention because it is hypothetical. But if, for example, someone destroys your goods that you could have sold, you can demand compensation for lost profit.

Typical damage items

In the event of material damage: Repair costs, if repair is possible and economical (up to approx. 130% of the replacement value is said). If total loss, then replacement value minus residual value. Reduction in value if the market value falls despite repair (e.g. accident vehicle). Car rental costs or loss of use because the car could not be used.
In the event of personal injury: Medical treatment costs, loss of earnings, compensation for pain and suffering. Possible damage to housekeeping (if you are unable to run the household due to injury and need help).
In the event of default in the transaction: e.g. costs for replacement procurement, contractual penalties that had to be paid to third parties, loss of profit, additional costs due to price increases in the meantime.
In the event of data loss: Case in IT: If data is lost due to an error on the part of the service provider, damages may include, for example, restoration costs or the work required to recreate the data. Problematic here: ideal values can hardly be quantified, usually only the financial expenditure is eligible for compensation.
Legal costs: Anyone who becomes involved in a legal dispute or warning due to the fault of another party can generally claim the necessary legal costs as damages (e.g. an accident victim may hire a lawyer and the injuring party must pay).

Limitation of liability

As mentioned in the exclusion of liability section, companies often try to limit their potential liability for damages. After all, if liability is unlimited, a single error could threaten the company’s existence.

For example, you can say in the contract: “Liability for slight negligence is limited to €100,000 and no indirect damages will be compensated.” The contractual partner has then agreed to claim compensation only up to this amount (if effectively agreed).

In the B2C area, such limitations are only possible to a limited extent (no limitation for personal injury, and also ineffective for cardinal obligations if set too low).

In practice: Startups should pay attention to potential damage risks. For example: You operate a cloud service that could cause data loss and production downtime for customers in the event of a failure => You want to limit the liability for this in your general terms and conditions, for example “to a maximum of one month’s fee” or something similar. Whether this holds depends on the customer base (B2B can be agreed more, B2C more difficult), but it’s better than nothing.

Enforcement and statute of limitations

An injured party must enforce his claim for damages, if necessary in court. There he must also prove the damage (expert opinion, evidence, witness statements, etc.).

Claims for damages are generally time-barred after 3 years from the end of the year in which you had knowledge of the damage and the person liable to pay compensation (or no knowledge due to gross negligence). There are special time limits: In sales law, warranty = 2 years, which also applies to consequential harm caused by a defect, and in the case of tortious acts affecting life/body/health: 30 years (absolute time limit). Also in the case of intentional injury: 30 years.

Excursus: Contractual penalty vs damages

Sometimes a contractual penalty is agreed instead of uncertain damages, e.g. in cease-and-desist declarations (“€ 5,000 contractual penalty for each infringement”). This penalty must then be paid without the actual damage being proven. However, this is an independent claim, not identical to damages, but it serves as a lump sum sanction.

Conclusion

Compensation is omnipresent in business life in the sense that you always have to bear in mind: “If I mess up, I have to answer for it.” In legal terms, this means compensating the financial disadvantage of the other party. For private individuals, liability insurance is often a helper in times of need (e.g. in the event of accidents). Companies have public liability or product liability insurance to protect themselves against ruinous claims. And as a preventive measure, it helps to fulfil contracts properly, minimize risks and limit liability where possible.

An injured party, on the other hand, should know that he will not be compensated for every displeasure – it must be a quantifiable loss and someone to whom it can be legally attributed. Then, however, they have the right to be treated as if nothing had happened – which is ultimately the aim of compensation: justice through compensation for the loss suffered.