Liability in Defence Contracts: A UK vs. German Law Comparative Perspective

With defence spending accelerating across Europe, the overlap between contractors operating in both the UK and EU markets has never been more pronounced. Companies operating in the defence sector increasingly find themselves navigating procurement frameworks on both sides of the channel, with the commercial terms they encounter being far from uniform. We are therefore seeing a surge in demand for guidance on whether liability provisions in these contracts are fair, proportionate, and commercially sustainable.

Of all the contractual issues defence contractors face, the liability clause is arguably the most pervasive. It determines the financial ceiling of risk a contractor assumes and, if poorly drafted, can expose the company to extensive risk. We set out below how the UK and Germany each approach this critical topic.

The UK Position: MOD's Shift to Proportionate Liability

The UK Ministry of Defence (MOD) made a landmark change in its approach to contractor liability, departing from its previous practice of requiring contractors to accept unlimited liability for a wide variety of risks. The current policy, set out in the MOD's Commercial Policy Statement on Limitation of a Contractor's Liability (LoCL), is built on a central government principle: a contractor must only be asked to take unlimited liability where this is required under legislation or cross-government policy.

The rationale for this shift is expressly commercial. As the MOD itself acknowledges, asking contractors to accept unlimited liability can have a "detrimental effect on the market, including potential contractors being unwilling to accept the resultant balance between risk and reward or being unable to identify any viable mitigation measures, such as insurance." Agreeing an appropriate and proportionate allocation of risk between parties, with effective pricing mechanisms, achieves better value for money and creates better market conditions.

Key Features of the UK Framework

Aggregate liability caps. The MOD now requires the calculation of aggregate caps on the contractor’s liability under defined heads of loss, covering personnel at government establishments (DEFCON 76), material breach (DEFCON 514), issued property (DEFCON 611), loss of or damage to articles (DEFCON 612), and a residual cap on all other liabilities. The cap for each head of loss is determined through a thorough risk assessment, and the liability allocated to the contractor must be proportionate to both the risk and the contract value.

Unlimited liability only in narrow, defined cases. Under the specimen clause, neither party limits liability for matters that cannot be limited or excluded by law, which seeks to ensure the remainder of the provision is enforceable. Any proposal to impose unlimited liability beyond these statutory carve-outs requires approval from the MOD Director General for Commercial and Industry.

Mutual exclusion of consequential loss. The specimen clause provides that neither party shall be liable for indirect, special, or consequential loss, or for loss of profits, loss of turnover, loss of business opportunities, or damage to goodwill. However, the MOD retains the right to recover a defined list of losses that are deemed direct in nature, such as additional operational costs, wasted expenditure, re-procurement costs, and data reconstitution expenses.

Cap replenishment on extension. On the exercise of any option period or agreed extension to the contract, the contractor's aggregate liability cap is fully replenished, which is an important practical feature for long-running defence programmes.

Pre-approved indemnities. The MOD offers a suite of HM Treasury pre-approved indemnities, covering areas such as guided weapons trials, flight liability, war risk, shipbuilding, nuclear risks and IP rights. This acknowledges that certain defence-specific risks should be borne by MOD as it would be impractical or poor value for money for the industry to bear.

The German Position: Civil Law Principles and Statutory Constraints

Germany, as a civil law jurisdiction, approaches the question of liability limitation from a fundamentally different starting point. Rather than relying on bespoke contractual drafting shaped by common law precedent and case-by-case judicial interpretation (as is the case in the UK), the German framework is anchored in codified statutory rules; principally the Bürgerliches Gesetzbuch (BGB, the German Civil Code) and, for commercial contracts, the Handelsgesetzbuch (HGB, the German Commercial Code). By default, these provide for unlimited liability unless otherwise individually negotiated. In the defence sector, you can see customer-driven templates, e.g. from Bundeswehr / BAAINBw (public procurement) or large OEMs, and heavily negotiated master agreements.

Several features of the German civil law system are particularly relevant to defence contractors:

Mandatory statutory limits on exclusion clauses. Under § 276(3) BGB, liability for intentional (vorsätzlich) breaches cannot be excluded or limited in advance. This is a mandatory rule of law and applies regardless of the parties' bargaining power. In addition, there is no general carve-out for defence related contracts from the mandatory product liability.

Strict law on terms and conditions under §§ 305 - 310 BGB. Where a defence contract, or key parts of it, is found to contain "general terms and conditions" (Allgemeine Geschäftsbedingungen), the strict reasonableness controls of the law on terms and conditions applies. These rules can invalidate liability caps even between commercial parties.

No concept of "indirect/consequential loss" as understood in the UK. German law does not draw the same distinction between "direct" and "indirect/consequential" loss which plays a central role in the UK. The interpretation of such terms is unclear under German law. This means that categories of loss which might be excluded as "consequential" under a UK MOD contract may be recoverable under German law.

Public procurement overlay. German defence procurement is subject to a layered legal framework. While these instruments primarily govern the procurement process rather than defence supply chain contract terms, they create an environment in which the contracting authority's template terms, and the liability regime within them, are often presented on a largely take-it-or-leave-it basis, making the reasonableness constraints of the law on terms and conditions all the more significant for contractors.

Comparative Takeaways for Defence Contractors

Feature	United Kingdom	Germany
Legal tradition	Common law; contractual freedom with statutory fairness controls (e.g. Unfair Contract Terms Act 1977)	Civil law; codified mandatory rules (BGB, HGB) with strict law on terms and conditions
Default liability position	MOD policy now requires proportionate caps; unlimited liability only with senior approval	Unless otherwise agreed, unlimited liability for contractor
Liability caps	Aggregate caps per head of loss, determined by risk assessment and proportionate to contract value	Typically individually negotiated; otherwise, subject to the strict law on terms and conditions
Indirect/consequential loss	Mutual exclusion in specimen clause, with defined carve-outs for the MOD	No German law concept; interpretation of terms unclear

Conclusion

For defence contractors operating across both markets, the message is clear: a liability clause that works in London will not necessarily work in Berlin, and vice versa. The UK's MOD has moved decisively toward a structured, capped-liability model that prioritises proportionality and value for money. Germany's civil law framework, by contrast, imposes its own discipline through mandatory statutory rules overriding even freely negotiated terms.

Contractors with a dual-market presence need to ensure that their liability positions are tailored to each jurisdiction, not simply transposed. Understanding the interplay between contractual freedom, statutory constraint, and procurement regulation in each system is essential to achieving a fair and commercially sustainable risk allocation.