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Federal Court of Justice: termination clauses in case of insolvency are invalid

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Bussian Wolf
Dr Wolf Bussian

Managing Partner Germany

Frankfurt am Main

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15 July 2013

In a recently published judgment of the German Federal Court of Justice (BGH 1) it held that a clause which provided for the termination of a contract on the opening of, or application for, insolvency proceedings in respect of a contracting party was invalid (judgment dated 15/11/2012, file No IX ZR 169/11).

Prior to this decision, it had been uncertain whether such clauses were valid under German law. This judgment concerned a contract for the supply of electricity. There is now a debate as to whether or not the findings in this judgment also apply to other types of agreements (in particular, finance agreements).

The clause in this case considered by the court provided that, “The agreement terminates automatically without notice if the customer files an application for insolvency or if, based on an application by a creditor, preliminary insolvency proceedings are commenced or opened”. When the preliminary insolvency proceedings over the customer were initiated, the supplier asserted that the contract had ended pursuant to that clause. The BGH confirmed the insolvency administrator’s position, namely, that the clause was invalid and hence the original contract continued.

Under the judgment it is possible that other circumstances could also be found so specific for insolvency that they would make a termination clause invalid. On the other hand, the court emphasised that clauses are valid if they allow termination in circumstances not specific to insolvency, such as default or other breach of contract. However, it is not clear which circumstances are insolvency specific (triggering the invalidity of a termination clause) and which circumstances are sufficiently general to make a termination clause valid.

Contributed by Wolf Bussian and Silke Justen