Thu, Apr. 07, 2011

Bundled Services and Termination

CK - Washington.   Website bundles involve agreements for the production of works, not for services, the German Supreme Court for civil cases, Bundesgerichtshof, ruled in the matter III ZR 79/09, Internet-System-Vertrag. The difference is significant. In the case of works, the parties may terminate the agreement at any time, not only in the event of a default, and they are not bound to a fixed contractual term.

That matters a lot because a bundling agreement for website services usually requires most of the work at the front end, with revenue and profits following over the term of the agreement, The internet bundling provider registers and sets up a domain and a web site, arranges for payment systems and licenses, provides hosting, generates design and setup of content, and updates the site. Payments are often spread over a long term during which the customer is bound to the contract, Such contracts tend to prohibit an early termination.

On March 3, 2011, the German court held the prohibition unenforceable because of the classification as a contract for works. As a result, customers can terminate early. They are on the hook, however, for the actual cost of the services obtained through the effective date of termination. On that date, they may have to pay in one sum more than the linear aggregate accrued under the contract, i.e the entire performance that has been provided through that point. For providers, the effect of the ruling is significant in that they need to be able to document and prove the cost of their work through any potential termination date.

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