Concept and Meaning of Limited Liability
Die limited liability is a central legal principle in civil law, corporate law, and liability law in many legal systems. It describes the contractual or statutory limitation of a person’s or company’s financial obligations to third parties to a certain scope or amount. The aim of limited liability is to make risks calculable for those involved and to enable entrepreneurial activity without endangering a person’s entire private assets.
Limited Liability in Corporate Law
Basic Principle
In corporate law, limited liability plays an outstanding role, especially for corporations. The law prioritizes creditor protection and the promotion of active economic activity.
Limitation of Liability for Corporations
Corporations such as the Gesellschaft mit beschränkter Haftung (GmbH) or the Aktiengesellschaft (AG) are, in principle, liable only with the company’s assets. Shareholders’ liability is limited to their contribution, so that private assets are generally not used to secure insolvency.
Liability in Partnerships
By contrast, in partnerships such as the Offene Handelsgesellschaft (OHG) or the Kommanditgesellschaft (KG), shareholders generally have unlimited liability. A limitation of liability here is significantly more restricted—with the exception of limited partners (Kommanditisten) in the KG.
Company Types with Limited Liability
- Gesellschaft mit beschränkter Haftung (GmbH): The GmbH is liable exclusively with its company assets. The shareholders’ liability is limited to the amount of their capital contribution (§ 13 GmbHG).
- Unternehmergesellschaft (haftungsbeschränkt, UG): This is a special form of the GmbH, in which only the company’s assets are also liable.
- Aktiengesellschaft (AG): The shareholders are not personally liable, only with their contribution.
Protective Mechanisms and Limits of Limited Liability
To ensure creditor protection, there are numerous statutory provisions, such as the obligation to provide and maintain capital, the duty to file for insolvency, and piercing the corporate veil under certain circumstances (e.g., in the event of a destructive intervention, the prerequisites of § 826 BGB, or crossing the boundary into immorality).
Limited Liability under Civil Law and Contract Law
Contractual Liability Limitations
In addition to limitations of liability under corporate law, individual or general liability limitations are also possible under contract law. Contracting parties may, within the scope of private autonomy, limit or exclude liability for certain types of damages, for example through limitation of liability clauses or general terms and conditions (AGB). However, these are subject to the following constraints:
- § 309 no. 7 BGB: In cases of injury to life, limb, or health, a complete exclusion of liability is not permitted.
- § 309 no. 8 BGB: No limitation of liability applies for gross negligence and intentional acts.
- § 307 BGB: In general, limitations of liability may not violate the principle of good faith.
Statutory Limitations of Liability
In certain statutory frameworks, liability is limited from the outset, such as with owner’s liability in road traffic, product liability law, or within the scope of director liability in stock corporation law.
Limited Liability in Insolvency Law
In insolvency cases, the limitation of liability restricts creditors’ access to the company’s assets. Shareholders of a corporation are generally not liable for the company’s debts. However, exceptions exist, including for breaches of obligations regarding capital maintenance or late filing for insolvency.
Special Features and Exceptions to Limitation of Liability
Piercing the Corporate Veil
Under certain conditions, the limitation of liability can be lifted, for example in cases of abuse of legal form. Typical cases for so-called piercing of the corporate veil are:
- Immoral use of legal form
- Commingling of assets
- Destructive interference (existence-destroying intervention)
- Delay in filing for insolvency
Aggravation of Liability by Law or Contract
Often, statutory provisions or individual contracts regulate certain aggravations of liability. For instance, the management of a GmbH may be personally liable with their private assets in the event of insolvency if they violate the obligation to file for insolvency.
Significance and Purpose of Limited Liability
Limited liability serves to limit risk for those involved and encourages entrepreneurial activity. It offers a significant locational advantage for economic regions with secure and calculable liability law. At the same time, restrictions and mechanisms to protect creditors are essential to prevent abuse of liability limitations.
International Perspective on Limited Liability
Limited liability is an internationally recognized legal principle. Many countries have comparable company forms, such as the “Limited” in the United Kingdom, the “Société à responsabilité limitée” (SARL) in France, or the “Limited Liability Company” (LLC) in the USA. Despite similarities, there are differences in the details regarding capital requirements, publication obligations, and veil-piercing rules.
Conclusion
Limited liability is a cornerstone of modern civil and corporate law. It creates a balance between protecting entrepreneurial and private assets and the creditors’ interest in a reliable risk assessment. Responsible application and legal oversight of the boundaries and exceptions are crucial to ensuring the positive effects of liability limitation for the economy and society in the long term.
Frequently Asked Questions
Which legislative provisions determine the prerequisites for limitation of liability in Germany?
Limitation of liability in Germany arises in particular from the German Civil Code (BGB), the Commercial Code (HGB), and the respective special statutory provisions such as the GmbH Act (GmbHG) and the Stock Corporation Act (AktG). These laws regulate when and to what extent limitation of liability is permissible within the company forms. For example, in a GmbH, only the company itself is generally liable with its assets, and not the shareholders personally (§ 13 para. 2 GmbHG). In contrast, in an Offene Handelsgesellschaft (OHG), the partners have unlimited liability. Liability limitations are also generally permissible in contractual contexts, such as in general terms and conditions (AGB), provided they satisfy the requirements of §§ 307 et seq. BGB and do not unreasonably restrict essential contractual obligations (cardinal obligations). Overall, the legal provisions serve the purpose of creating legal certainty for contracting parties and companies, as well as ensuring an appropriate balance of interests.
In which cases is a limitation of liability excluded by law?
Statutory exclusions exist in particular in cases of intent and gross negligence. Any limitation or exclusion of liability agreed by the parties is invalid for damages caused by intent, according to § 276 para. 3 BGB. This means that for damages caused by the intent or gross negligence of a party, no limitation of liability may be agreed. Also, in cases of injury to life, body, or health—for example, under product liability law pursuant to § 309 no. 7a BGB—a contractual limitation of liability is not permitted. Likewise, many special statutory provisions, such as in employment law or tenancy law, provide for certain standards and limits of liability which cannot be changed in favor of limiting liability.
How can the limitation of liability be enforced in corporate law?
The enforcement of a limitation of liability in corporate law is primarily achieved by choosing the appropriate company form with limited liability, such as GmbH, UG (haftungsbeschränkt), or AG. The separation of company and private assets forms the core of the limitation of liability. Outwardly, the company must clearly present itself as such, particularly with the “mbH” suffix in its name. Internally, limitations of liability can also be regulated by shareholder agreements or special arrangements between the shareholders. However, if breaches of duty—such as breaches of due diligence by managing directors—are established, the limitation of liability may be pierced (so-called piercing of the corporate veil). Proper capitalization of the company is also required by law to protect creditors’ interests.
What is the importance of the limitation of liability in general terms and conditions?
In general terms and conditions (AGB), limitation of liability serves to calculate and limit entrepreneurial risks. The permissibility of such clauses, however, is strictly regulated by §§ 305 et seq. BGB. Clauses that, for example, exclude liability for damage resulting from injury to life, limb, or health in cases of simple negligence or unreasonably shift the liability regime to the detriment of the contracting party are invalid. General caps (e.g., liability only up to a certain amount) are permitted as long as they do not violate existing protective provisions and are formulated clearly and comprehensibly in both content and language. Less strict review standards apply to individual agreements.
Under what conditions can personal liability be imposed (the so-called “piercing of the corporate veil”)?
Piercing of the corporate veil is fundamentally exceptional and applies whenever the principle of limited liability is abused. It is legally recognized in cases of commingling of assets, destructive interventions, undercapitalization, or abuse of legal form. It requires that the conduct of the company’s bodies or shareholders directly results in harm to creditors and that the separation between company assets and private assets has been disregarded. The prerequisite is the existence of special circumstances that render a limitation of liability unreasonable in light of the protective purpose. In practice, however, courts resort to piercing the corporate veil only in exceptional cases.
What are the legal consequences of impermissible liability limitations in contracts?
If an impermissible limitation of liability is agreed—especially contrary to mandatory legal provisions—the corresponding contractual clause is generally void under § 307 BGB or more specific provisions (e.g., § 309 no. 7, 8 BGB). As a result, the exclusion of liability is considered not to have been agreed, but the rest of the contract remains (the so-called “severability reduction” is excluded). This means that statutory liability is fully revived. Additionally, the use of unlawful exclusion clauses in business transactions can lead to warnings and injunctive claims—for example, under the law against unfair competition (UWG). Companies are therefore obliged to regularly review their clauses and adjust them if necessary.
Can a limitation of liability be extended to third parties—in particular to vicarious agents or legal representatives?
Extending the limitation of liability to third parties is possible if it is expressly included in the contract and designed transparently. However, according to § 309 no. 7 BGB, certain limitations are excluded, especially in the case of personal injury and gross negligence. The so-called ‘inclusion of third parties’ by protective effects in favor of third parties is also only permitted to a limited extent. Case law and the law often limit such clauses to contractual breaches of duty and distinguish between legal representatives, agents, and vicarious agents (§ 278 BGB). Legal extension of the limitation of liability to third parties does not exist; this requires express contractual provisions that must observe the statutory limitations.
