The plaintiff became a director of the defendant company in 1926. By a contract of employment dated 18 February 1935 he received a fixed salary of 50,000 Reichsmark and a percentage of the profits. The contract provided further that his pension was to be calculated as follows: after ten years' service 25% of 40,000 DM with annual increase of 1% with a maximum of 60% after 35 years. After 20 years' service the basic standard was to be increased to 50,000 REM.

The plaintiff retired in 1951 and received from then onwards an annual pension of 15,000 DM equal to monthly payments of 3,083.33 DM. In 1969 plaintiff asked for an increase, which was refused. He claimed an additional pension at the monthly rate of 804.17 DM on the ground that wages and salaries and the general cost of living had increased considerably.

The District Court of Hanover dismissed the claim. The Court of Appeal of Celle allowed it. The defendant's second appeal was dismissed for the following

Reasons

I. The Court of Appeal regards the claim as justified because para. 242 BGB requires the adjustment of the pension to the changed condition, especially because the cost of living rose by 45.2 points between 1950 and 1970 [references]. This division agrees as to the result.

II. It is true that in its previous practice this Division has refused to increase a pension on the grounds of the depreciation of money in the absence of a contractual adaptation clause, at least in cases in which the agreed pension could still be regarded as a performance in accordance with the contract [references]. This practice was identical with that of the Federal Supreme Labour Court which held on 12 March 1965 [reference] that, while contrary to earlier decision [references] the adjustment of contractual pension payments to the increased cost of living was no longer excluded in principle, it could only be considered if, as a result of the rise in prices, the agreed payments can no longer be regarded as a performance which provides a living in accordance with the purpose of the contract [reference].

III. Meanwhile the development has continued. The constant increase in the cost of living in the Federal Republic which ... up to 1960 amounted on average to little more than 1% per year, has since gained momentum ... All in all the cost of living has increased between 1958 ... and 1971 ... by approximately 53.6%. This corresponds to an internal devaluation of approximately 34.9%.

IV. In the light of this recent development the Federal Supreme Labour Court in two decisions of 30 March 1973 [references] abandoned the practice of restricting the adjustment of pensions to cases in which as a result of increase prices the purpose of the agreed performance to provide a living has been frustrated altogether. The Federal Supreme Labour Court now holds that, at least when the cost of living has risen by more than 40%, the value of a pension no longer corresponds to what was promised originally to such an extent that the limit has been reached where the pensioner can be expected according to good faith to observe a standstill and where to deny any adjustment would offend the sense of justice intolerably. In so holding the Federal Supreme Labour Court distinguished between other contractual obligations and promises of maintenance, the special characteristic of which are to assure the livelihood of the beneficiary, or at least to make a contribution thereto. The payments are made out of the profits of the enterprise, the foundations of which the pensioner has helped to create during his activity on behalf of the enterprise. The Federal Supreme Labour Court takes into account, in addition, that the provision of maintenance by the enterprise is also a remuneration for the pensioner's loyalty towards it and for the sum total of his services. These services had been rendered by the pensioner in advance, trusting that he could plan the later stages of his life on the basis of a maintenance promised to him. If this expectation should be disappointed as a result of the depreciation of the currency, a pensioner would have no longer the means of bargaining for an adjustment, contrary to other sections of the population whose income would have kept up with the increase in prices.

The Federal Supreme Court observes that in these circumstances it was first of all a matter for the enterprise to examine the question of such a compensation by adjusting the maintenance payments to the economic development, and to offer an equitable and legal settlement, having regard to the existing situation. Many enterprises had done so already and were doing so continuously. In the case of provision for old age by enterprises, considerable differences existed in the size of the payments, in the gradations among the individual groups of employees and in the conditions for payment as well as in the ability of enterprises to afford payments. Moreover, the reflex effect upon other duties of support owed by the enterprise and the total cost arising from each of these could not be established easily. Consequently, the courts could not prescribe in advance the measure and the form of any adjustment. No automatic increase of pension payments without a contractual promise to this effect could be based on para. 242 BGB.

If the party owing the pension had not yet met the creeping inflation by an adequate increase of the pension, he should first of all negotiate with the pensioner or pensioners. If no agreement could be reached, the debtor would have to decide on his own in his reasonable discretion in accordance with para. 315 BGB. If he failed to do so, or if his decision was not reasonable, the courts would have to determine the performance due in accordance with para. 315 (3). In this connection the facts put forward by the parties for and against an adjustment of a retirement pension were particularly relevant. The extent of the rise in prices must be the standard for fixing the extent of the adjustment. No attention should be given in principle to any other aspects of the pensioner's assets or income, except possibly any increase in income arising from any statutory insurance. Equally, the question of need should not be taken into account as a rule. On the other hand, the profitability of the enterprise and the principle of equality of treatment might be relevant.

V. This Division agrees in all matters of principle. In so far the special circumstances of cases coming before it should make it necessary to deviate in certain respects, each individual case will have to be decided on its own.

1. The fact that this Division is not concerned with pension claims by employees in the meaning of labour law, but only by organs of enterprises - namely directors and managers - does not in principle call for a different decision from that of the Federal Supreme Labour Court. Normally both contracting parties envisage that the pension provided to a director or manager will serve, either alone or with other revenues, to assure for the beneficiary a standard of living commensurate to his position hitherto in case of old age, premature incapacity to work or of dismissal without any expectation of an equivalent means of livelihood of another kind. Here, too, the pension can be regarded as part of the remuneration for services which the beneficiary has given before he retired and which contributes to the prosperity of the enterprise, the profits of which now feed the pension. This balance, assumed to exist when the obligation to pay a pension is incurred, is seriously disturbed if, as a result of a fall in the purchasing power as compared with that outlined previously, the pension can no longer fulfil by its agreed amount its intended function which is to guarantee the previous standard of living completely or in part. The enterprise, on the other hand, is not affected in the result by the depreciation of money, for generally the revenues have at least kept up with the increase in prices or they have even overtaken it as a result of economic growth. It is true that costs, especially wages and salaries, have increased as well. The proportion of the individual pension obligations, however, the nominal value of which has remained the same, has decreased correspondingly.

The special features set out here preclude a comparison with other obligations of long duration which are not concerned with maintenance (e.g. for the production of potash) as the practice of this court cited by the appellant has underlined expressly [references].

2. The pensions for directors and managers which have been in issue before this Division exceed in most instances the average amount paid by enterprises. This Division, agreeing with the Federal Supreme Labour Court and rejecting the opinion of the appellant, does not, however, regard this fact as decisive, at least given the extent of the increase in costs as it has occurred at present. A pension is intended as a rule not only to guarantee a minimum of subsistence in old age, but to enable the beneficiary to maintain the standard of living reached in his professional life, either completely or in part.

Different considerations may apply, however, if the promise of a pension is made, not in order to provide for the future but for other reasons (for instance as a cloak for a payment of profits to a managing partner).

3. ...

4. This Division, like the Federal Constitutional Court [reference], The Federal Supreme Court [reference], and the Federal Supreme Labour Court [reference] regards the principle of nominalism (Mark equals Mark) as one of the fundamental bases of our legal and economic organisation. In the light of the facts before it, this Division does not, however, attribute decisive importance to the objection that this principle would be undermined or lead to a further devaluation by an adjustment of contractual claims, in accordance with the prerequisites of para. 242 BGB, with reference to the greatly increased cost of living, even if limited to pensions arising out of contracts of employment [references]. The pensions provided by the Statutory Insurance Scheme have been increased about two and a half times ... between 1957 and 1970 [references]. The salaries of employees in commerce and in the service of public authorities; based on collective agreements, rose ... by 120 4% between 1958 and 1971, that is to say by more than doubt. The increase in the wages of industrial workers is even higher ... old age pensioners paid by enterprises which do not contain an index clause are frequently adjusted from time to time on a voluntary basis [reference].

Considering, finally, that ordinary contracts for the exchange of goods, not involving any personal element also contain not infrequently clauses about the price, whereby the debtor of the industrial or commercial product safeguards himself against any increase in the cost of materials and wages, the argument does not convince that the protection of the currency requires strict adherence to an amount of a pension which no longer suffices to provide maintenance as envisaged by the contract owing to the increase in prices. Instead, the adjustment of such pensions intended to provide a living is to be regarded only as a late and inevitable consequence of a development which the State and the economy have taken in to account long ago, but to which pensioners of enterprises as distinct from other sectors of the population, were exposed without protection, unless they had been astute enough to safeguard themselves by index clauses.

VI.

1.

2. The appellant's view cannot be accepted that the plaintiff, while working for the defendants, had received a very high salary and that such a salary was also intended to enable the recipient to a accumulate capital or to provide otherwise for his retirement. Although the plaintiff received a salary and a share of the profits which were high in the circumstances, the parties agreed in 1935 on a pension which was appropriate at that time in order to assure the plaintiff in any event of maintenance corresponding to his standard of living at that time. The parties assumed that in his old age the plaintiff should not have to rely on his savings alone. Conversely nothing suggests that they regarded the pension as the sole resource of maintenance for the plaintiff.

It follows that the present economic situation of the plaintiff is irrelevant. Clearly the holder must not suffer disadvantage because by his own effort he has built up a multiple and particularly good nest egg for his old age. All the more it is not the intention of a promise of a pension that in his old age the beneficiary must have recourse for his maintenance to the substance of any capital he may have saved.

VII. ...

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