Default

Also known as: Debtor's Default, Creditor's Default, Delay in Performance, Temerrüt, TCO Article 117

In short

Failure by the debtor to perform a due obligation despite a demand or on a fixed date (debtor's default), or the creditor's refusal without justification to accept performance (creditor's default).

Default governs the legal consequences of failing to perform on time. In practice the most important form is debtor’s default.

Conditions of Debtor’s Default (TCO Article 117)

The obligation is due, i.e. performance can be demanded
The creditor has made a demand, or the date of performance was jointly fixed; in tort, default arises on the date of the act, and in unjust enrichment on the date of enrichment
Performance is possible

Between merchants, notices of default must be sent through a notary, by registered letter, telegram or KEP with a secure electronic signature (TCC Article 18(3)).

General Consequences

Damages for delay: Unless the debtor proves it was not at fault, it compensates losses caused by late performance (TCO Article 118).
Liability for chance events: A debtor in default is also liable for losses caused by chance events (TCO Article 119).
Default interest: A debtor in default on a money debt pays default interest even if not agreed (TCO Article 120). For commercial matters see Advance Interest Rate.

Options in Bilateral Contracts (TCO Articles 123-126)

The creditor gives the debtor a reasonable period to perform, or asks the court to set one. If performance is not made within that period, the creditor may:

Claim performance and damages for delay,
Waive performance and claim expectation damages,
Rescind the contract and claim reliance damages.

In continuing contracts where performance has begun, termination is used instead of rescission (TCO Article 126). No period need be given where it would clearly be futile, where performance has become useless to the creditor due to the delay, or where performance at a specific time was agreed (TCO Article 124).

Creditor’s Default

A creditor falls into default if, without justification, it refuses duly tendered performance or fails to carry out preparatory acts needed for the debtor to perform (TCO Article 106). The debtor may discharge itself by depositing the performance. For commercial late payments see Late Payment in Commercial Transactions.

Frequently Asked Questions

Is a demand required to put the debtor in default?

As a rule, yes: the debtor of a due obligation falls into default upon the creditor's demand. But if the date of performance was jointly fixed, default occurs without demand when that date passes (TCO Article 117(2)). TCC Article 1530 also provides for default without notice in the supply of goods and services between businesses.

Can the creditor rescind immediately upon default?

In bilateral contracts the creditor generally first gives the debtor a reasonable period to perform. If performance is not made within that period, the creditor may claim performance and damages for delay, or waive performance and claim expectation damages, or rescind (TCO Articles 123-125). In the cases listed by law, no period need be given.

← Glossary A–Z