June 6th, 2011

Continental European Legislative and Judicial Trends: Decision of the Federal Court of Justice of Germany on Liability for Energy Installations

Posted at 1:00 AM ET

David Lewin, Managing Director
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Some utility supply models are more frequently leading to situations where energy is no longer delivered directly by the producer to the ultimate customer. Rather, the supply is delivered by way of intermediate, smaller, and, as a rule, more efficient networks. Energy contracting is gaining importance because of rising energy prices and ever-increasing environmental awareness.

However, this development raises issues in liability law, especially when it results in damage between network operators. The Federal Court of Justice of Germany [Bundesgerichtshof] in Karlsruhe recently ruled on such a case.

The Case (1)

An electric utility company brought an action for damages against its client, particularly from the viewpoint of liability under Section 2 of the German Public Liability Act [Haftpflichtgesetz, HPflG] for damage caused in the delivery of electricity. The client-defendant itself operates an electricity grid controlled through its own switching station.

In March 2006 a short circuit occurred while the switching station was connected because someone had neglected to remove the grounding of the switching station first. The operating error resulted in an extremely heavy draw of electricity from the plaintiff’s grid, leading to a heavy short-circuit current at one of the plaintiff’s transformer substations. The heavy current triggered and destroyed a circuit breaker. The plaintiff demanded compensation from the defendant for the cost of repairing the circuit breaker in the amount of EUR4,511.65.

Legal Background

Because of the special risks to the public associated with operating such a network, each network operator fundamentally bears liability for the effects and condition of its networks, irrespective of fault.

Under Section 2(1) sentence 1 of the Public Liability Act, the owner of an installation is liable for bodily injury or property damage caused by the effects of electricity, gases, vapors or liquids emitted from a system of power lines or pipelines.

In addition to liability for effects, Section 2(1) sentence 2 of the Public Liability Act also indicates strict liability for the condition of the installation irrespective of fault - in other words, for damage caused without the effects of electricity, gases, vapors or liquids, unless the installation was in proper condition (known as “liability for condition”).

The Decision

The local court upheld the plaintiff’s claim, and the appellate court overturned that decision. The Supreme Court appeal, filed by leave of the appellate court, was not successful.

The Federal Court of Justice of Germany fundamentally viewed the defendant’s switching station as an installation within the meaning of Section 2 of the Public Liability Act, finding that it was intended and suitable both to transport and to deliver electricity to the defendant’s grid, which was used for commercial purposes. Nevertheless, taken by itself, the transportation and delivery function does not yet fall within the scope of protection of the law.

The court also found that the defendant would be subject to liability for effects only in the event of damage that was also caused in the performance of the transportation and delivery function. However, the court found this was not the case here. The flow of energy that resulted in damage to the plaintiff’s circuit breaker did not derive from the defendant’s switching station. The defendant’s installation merely demanded an extremely large amount of electricity from the plaintiff’s grid. Although this resulted in damage, it does not yet touch upon the law’s protective intent.

Additionally, liability for condition under Section 2(1) sentence 2 of the Public Liability Act cannot come under consideration. While the court conceded that a device that causes a short circuit due to faulty grounding is not in proper condition, it found that liability for condition also requires a context of imputation adequate to the law’s protective intent. This context exists, the court held, if the damage is caused by the mechanical action of the installation and specifically is not based on the effect of the electricity. In the present case, the court said, the damage occurred precisely because the defendant’s installation could not perform its function in accepting the electricity delivered by the plaintiff because of the short circuit. In the court’s view, a mechanical effect was therefore to be denied.

Moreover, as the court held, it should be noted that liability for an installation under Section 2 of the Public Liability Act is not intended to govern the liability relationship between energy suppliers and their clients.

Liability claims for fault under contract and/or owing to tort were rejected because of lack of fault on the defendant’s part. The installation previously had been accepted by the plaintiff, and the court therefore found that the defendant could not have foreseen that the damage would occur.

Finally, the court also rejected claims based on agency of necessity. First, the parties had an energy supply contract that governed their mutual obligations, particularly the client’s obligation to pay. This compensation covers all ongoing safety measures in the grid that benefit the client. Therefore, to this extent, agency of necessity is subsidiary.  Second, there is no outside transaction because it is solely the plaintiff’s affair to place and maintain itself in a state of ability to perform.

Summary

Even within a system of strict liability, the constituent elements for liability for effects and liability for condition under Section 2 of the Public Liability Act are decidedly strict provisions of liability law, which appear justified because of the elevated danger such installations pose to the public. Thus, for example, for a similar strict liability of a property owner under Section 836 of the German Civil Code (BGB), the claimant must additionally show that the building situated on the property was not in proper condition. By contrast, an absence of proper condition is presumed in the context of liability for condition under Section 2(1) sentence 2 of the Public Liability Act, and an absence of proper condition is not even required at all among the constituent elements of liability for effects.

Despite these strict rules under liability law, it is not surprising that the plaintiff’s action ultimately failed, particularly because the claims would have had to be denied anyway on account of the exceptional situation under Section 2(3)(2) of the Public Liability Act. The fact that the plaintiff nevertheless persisted in the suit may be understandable in light of the fact that the plaintiff itself is an operator of an installation within the meaning of Section 2 of the Public Liability Act. Thus the plaintiff surely would not find the court’s commentary on content and partial restrictions pertaining to the context of functions and the protective intent of Section 2 of the Public Liability Act entirely unwarranted. On some occasion in the very near future, the plaintiff itself might find itself exposed to claims under Section 2 of the Public Liability Act. Moreover, because of the minimal value at issue, the plaintiff was exposed to only a low litigation risk.

By contrast, the court’s comments about the applicability of the rule between a power utility and the customer would be undesirable for the plaintiff. Moreover, in contrast to the court’s examination of content, its rejection of applicability creates misgivings.

The inapplicability of the rule between an energy supplier and a customer is supported in particular by the historical interpretation of the rule. The protective intent of the previous rule - under Section 1a of the Reich Public Liability Act of 1943 - was supposedly to protect the public from the special risks associated with the operation of such installations. In particular, the often awkward position of the injured party in the bringing of proof was supposed to be improved. For that reason, among others, there was fundamentally only a unilateral liability on the part of the energy supplier.

However, the rule was not intended to place the energy supplier at a general disadvantage. The purpose of the rule is only to place the customer in a better position. Moreover, legislators at the time presumably did not take into account the situation of downstream grid operators. For that reason, it is not understandable why the plaintiff - merely because it is itself the operator of an installation within the meaning of Section 2 of the Public Liability Act - should not be entitled to derive claims under Section 2 of the Public Liability Act. This is the case even when the opponent, for its part, is a commercial installation operator within the meaning of Section 2 of the Public Liability Act.

In contrast to the plaintiff, the downstream power supplier defendant will certainly find the rejection of the applicability of Section 2 of the Public Liability Act welcome, and given the ecological and economic importance of such small downstream grid operators, the finding will be appreciated. But it appears rather doubtful that this decision will really have any effects with regard to applicability, given the background of the exceptional situations under Section 2(3) of the Public Liability Act.

Finally, in any case, one must expect that in the future the large power suppliers upstream will attempt to impose similarly strict liability provisions, at least by contract. At that point, it will have to be examined in further detail whether such liability clauses will hold up in a court of law.

Notes:

1. Federal Court of Justice of Germany, June 22, 2010 – VI ZR 226/09.

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