assignment under german law

Assignment / Abtretung

March 17, 2022

What is an assignment?

According to § 398 German Civil Code (BGB), an assignment (also kown as cession, from the Latin cessio) is the contractual transfer of a claim of the creditor to another. The assignment is a transaction of disposal. This means that the person of the creditor changes as a result of the contract of assignment.

The assignment according to § 398 BGB is regulated by law because it is a specific case of "acquisition of ownership", which is essentially different from the acquisition of ownership of movable things. According to the legal construction of § 929 S. 1 BGB, the ownership of movable things is transferred by the delivery of the thing with the intention to transfer the ownership. Essential for the transfer of ownership of things is therefore possession, or its transfer to another. The transfer of ownership according to § 929 p. 1 BGB is not possible if one can not exercise possession of the item to be transferred, i.e. can not hold it in one's hand. This is the case with claims. An example: Anyone who sells an item has a claim to payment of the agreed purchase price. Although the ownership of this claim can be proved by a contract, the claim itself is not physical. Of course, it must be possible for the seller(s) to sell his or her claim to the purchase price - he or she does not have to claim the purchase price himself or herself (for example, in the case of classic debt collection). Therefore, the owner can assign their claim to the purchase price to a third party, with the result that the third party becomes the new owner of the purchase price claim.

What are the requirements for assignment?

According to § 398 BGB, assignment is a contract in which it is agreed that the creditor(s) of a claim will transfer it to a third party. The only requirement under § 398 BGB for assignment is that there is consent between two persons on the transfer of a claim. For the assignment to be effective, the claim must of course actually exist in the person of the assigning creditor, i.e. he/she must be the owner of the claim. Furthermore, there must be no prohibition of assignment; such a ban results either from a contract between the debtor and the creditor, or from the law, for example from § 399 BGB.

What happens after the assignment?

• Identical rights of the new creditor

Through the (successful) assignment, another person becomes a new creditor of the claim. The new creditor has the same rights but also the same obligations as the original creditor.

• Transfer of ancillary and preferential rights

According to § 401 BGB, the accessory security rights are also transferred to the new creditor with the claim. Expressly mentioned are mortgages, ship mortgages or liens as well as the rights from an appointed guarantee. An analogous applicability of this provision is approved for the priority notice according to § 883 BGB, so that in the event of assignment of the claim to transfer of ownership of a property, a priority notice registered for the buyer also passes to the new creditor.

• Protection of the debtor

The person of the debtor has not changed due to the assignment. The debtor may not have been aware of the assignment, but a notification to the debtor that the person of the creditor has changed is not necessary for the assignment to be effective.

Without specific debtor protection rules, the debtor who did not know about the assignment would be in a difficult situation: if he/she paid e.g. to the old creditor(s), there would be no extinction by performance - the debtor would still have to pay to the new creditor. He would be entitled to reclaim from the old creditor what has already been paid. The legislator has recognised these dangers for the debtor in §§ 404 ff BGB.

• Objections against the old creditor remain valid

According to § 404 BGB, the debtor can assert in the new creditor in the objections existing against the old creditor.

• Protection of the debtor in case of ignorance of the assignment

In particular, the debtor who relies in the existence of the old creditor should not be in a worse position than without an assignment. According to § 407 BGB, legal acts against the old creditor also apply to the disadvantage of the new creditor.

• Possibility of set-off against the new creditor

According to § 406 BGB, the debtor may also set off against the new creditor. This provision helps to overcome the lack of reciprocity of claims, which means that a set-off against a claim against the old creditor is now also possible against the new creditor. However, this only applies if the debtor had no knowledge of the assignment at the time of acquisition of the counterclaim. The debtor shall remain entitled to set-off if, at the time when he/she becomes aware of the assignment, there was already an offsetting situation within the meaning of § 389 BGB.

Special types of assignments

Assignments are not only known as a simple sale of a claim, but in practice often occur in certain constellations.

• Assignment by way of security

In the case of assignment by way of security, a claim is assigned to provide a guarantee. The claim is thus used by the assignment to secure another claim.

• Extended title retention

If the parties agree on an extended retention of title, they actually agree on a "simple" reservation of title, so that the buyer of the first instance do not acquire ownership of the item, but the acquisition of ownership is subject to a condition precedent with regard to the payment of the purchase price. "Extended" is the retention of title because the buyer of the goods wants to resell them - in this case, however, the seller would lose the means of securing the retention of title. Therefore the seller allows a resale of "his/her" item, but he/she allow(s) to assign in advance the purchase price claims not yet arisen.

In "real" factoring, revolving receivables are transferred to the factor. Factoring is a mass assignment. The risk of loss of receivables (del credere risk) is carried by the factor, which is why the factor usually does not pay the full value of the receivable, rather only part of it.

Jurisdictions

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Giving and taking guarantees and security

Are there any restrictions on giving and taking guarantees and security.

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Some of the key areas affecting the giving of guarantees and security are as follows.

Under German insolvency laws the fulfilment of a debt, the granting of collateral or enabling a counterparty to obtain such fulfilment or collateral may be contested by the insolvency administrator if the guarantee or security was granted by a company within certain periods of time (suspect periods) prior to the filing of insolvency proceedings against such company. This would be the case if, for example, the granting of collateral was made during the three months prior to the request to open insolvency proceedings, the company was illiquid on the date of the transaction, or the creditor was aware of his insolvency on this date (section 130 of the German Insolvency Act ( Insolvenzordnung ) ). Awareness of circumstances indicating insolvency or to a request to open insolvency proceedings are deemed equivalent to awareness of insolvency or of the request to open insolvency proceedings. Guarantees and security may also be challenged on other grounds relating to insolvency. Outside of insolvency proceedings, transactions and payments of the company may be contested by creditors under the Avoidance of Transactions Act ( Gesetz über die Anfechtung von Rechtshandlungen eines Schuldners außerhalb des Insolvenzverfahrens – AnfG ) which provides rights to creditors similar to those of an insolvency administrator in insolvency proceedings.

Financial assistance/upstream security

Pursuant to German statutory law on capital maintenance requirements, a limited liability company ( Gesellschaft mit beschränkter Haftung – GmbH) may, in general terms, only grant upstream security to its shareholders to the extent it has free reserves in its balance sheet. Free reserves are roughly equal to the total assets minus total liabilities and provisions, minus stated share capital. The principle also applies to the general partner in a partnership in the form of a GmbH and Co. KG. A stock corporation ( Aktiengesellschaft – AG) may not grant upstream security at all. Exemptions apply under domination and profit transfer agreements and to payments which are covered by a full claim to counterperformance or restitution against the shareholder. In order to achieve compliance with the relevant statutory law, so called 'limitation language' has to be introduced in the relevant finance documentation.

Accessory security interests

Accessory security interests that depend on the existence of the underlying secured claim, such as guarantees and pledges must be granted to and held by each secured creditor and are automatically terminated and released by operation of mandatory German law upon satisfaction of the underlying secured claim. This can be an issue in certain cases, for example syndicated loans or, in case of the transfer of a lender's rights and obligations under a loan agreement, by way of novation. For such cases parallel debt structures have been established by the market.

Parallel debt structure

Non-accessory security interests (that exist irrespective of a secured claim, such as security assignment, security transfer or land charge) can be held by a security agent for the benefit of the secured parties as trustee under German law ( Sicherheitentreuhänder ). For more information, see Lending and borrowing . 

With respect to accessory security interests, such as guarantees and pledges, the standard technique used for sharing security between various creditors under syndicated loans is by the use of a parallel debt structure. With this structure, a second claim is created for the benefit of the security agent as an abstract acknowledgment of debt in the amount of the original payment obligations under the loan agreement (Parallel Debt). As the creditor of the Parallel Debt, the security agent can then hold and administer the accessory security. Provisions in an inter-creditor agreement or collateral agency agreement usually stipulate that the security agent acts on the instructions of the other secured parties. Please note that, although the Parallel Debt structure is commonly used in the market and generally accepted in German legal doctrine, its validity has never been tested by the German courts.

Floating charges

The concept of a floating charge is not recognized as a matter of German law.

Are there any restrictions on lending and borrowing?

Lending business is qualified as licensable banking business and subject to prior authorization by the Federal Financial Supervisory Authority ( Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) ).

Borrowing does not constitute a regulated activity in Germany.

Last modified 20 Oct 2017

What are common lending structures?

Lending in Germany can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.

A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).

Syndicated facilities by their nature involve more parties (such as agents and trustees which fulfil certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.

Loans will be structured to achieve specific objectives, eg term loans, working-capital loans, equity bridge facilities, project facilities and letter of credit facilities.

A peculiarity in German law is the Schuldscheindarlehen – a specific financial instrument with a hybrid structure which sits between debt securities and bilateral/syndicated bank loans. Schuldscheindarlehen refers to an underlying loan agreement for which a separate borrower's note (ie Schuldschein ) as documentary evidence of the loan debt is usually issued. Schuldscheindarlehen are exempt from the obligation to publish a prospectus under European prospectus law. They enable borrowers to gain access to institutional capital markets investors that usually cannot be reached via other bank financings. See the LMA Schuldschein Product Guide  published by the Loan Market Association  (LMA) for more information.

Loan durations

The duration of a loan can also vary between:

• a term loan, provided for an agreed period of time but with a short availability period;
• a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
• an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
• a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.

Loan security

A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security .

Loan commitment

A loan can also be:

• committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
• uncommitted, meaning that the lender has discretion whether or not to provide the loan.

Loan repayment

A loan can also be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).

What are the differences between lending to institutional / professional or other borrowers?

Lending to institutional/professional borrowers is subject to less regulatory oversight and so less burdensome from a compliance perspective.

By contrast, lending to consumers is a regulated activity and subject to special requirements for consumer credit agreements pursuant to section 491 et seq. of the German Civil Code ( Bürgerliches Gesetzbuch – BGB ), regarding, for example, the written form, minimum content, information obligations of the lender and right of withdrawal of the borrower.

Do the laws recognize the principles of agency and trusts?

The principle of agency is recognized under German law. For instance, it is possible to appoint an agent to act on behalf of other parties.

The English common law concept of trust is not recognized as a matter of German law. However, the same effect of a trust is achieved through the use of a similar German law legal instrument, namely a Treuhand which creates a contractual fiduciary relationship. Hence, in a finance transaction the security can be held by a security agent for the benefit of the secured parties as trustee under German law ( Sicherheitentreuhänder ) on similar conditions as a English common law trust. Particular provisions are required with respect to accessory security interests. (For more information, see Giving and taking guarantees and security .) Please note that, in order to minimize insolvency risks, the payment streams have to be checked on a case-by-case basis as the German Sicherungstreuhand does not, in contrast to an English common law trust, create a separate legal estate.

Are there any other notable risks or issues around lending?

Loan agreements and other finance documents are subject to general contractual principles, such as:

• the general civil law principle of good faith ( Treu und Glauben );
• the general civil law principle prohibiting violation of good morals ( gute Sitten );
• usury ( Wucher ); and
• the prohibition of compound interest ( Zinseszinsverbot ) under German law.

Standard form documentation

Most German law syndicated finance transactions are governed by documentation based on the German law versions of the recommended forms published by the Loan Market Association  (LMA) in the English language. Bilateral finance transactions are more likely to be documented on bank standard form documentation prepared in-house in German language. Sometimes, the standard documentation developed by the Association of German Banks ( Bundesverband deutscher Banken ) is used.

Are there any other notable risks or issues around borrowing?

Borrowers should be aware of the potential implications of the EU’s Bank Recovery and Resolution Directive  (BRRD), which outlines certain measures for dealing with failing financial institutions.

The BRRD applies to financial institutions incorporated in the European Economic Area (EEA), but does not apply to EEA branches of non-EEA incorporated entities.

Article 55 of the BRRD gives authorities the power to ‘bail in’ obligations of failed EEA financial institutions and also postpone the enforcement of early termination rights against the affected institution. ‘Bail in’ describes a variety of write down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of English or other EEA law contracts, such powers override what the contracts says. In the case of non-EEA law contracts, there are requirements to incorporate such provisions into the contract.

What are common types of guarantees and security?

Common forms of guarantees.

Guarantees may take the form of a performance guarantee or a payment guarantee. The most common form in finance transactions is the payment guarantee.

German law further distinguishes between an accessory guarantee and an independent (non-accessory) guarantee, such as payment guarantees upon first demand. German courts held that, to be valid, a guarantee upon first demand needs to be granted by a guarantor experienced in international transactions and familiar with guarantees upon first demand. This is due to the fact that a guarantor giving a guarantee upon first demand has only limited defenses, for example the objection of abuse of law. In contrast, a guarantor who gives an accessory guarantee may rely on the defenses to which the principal debtor is entitled.

Common forms of security

The security package which is granted for financings mainly depends on the financed asset and the specific transaction. Typically, the following security interests are requested by the lenders:

Share/interest pledge

A pledge of shares in a German limited liability company ( Gesellschaft mit beschränkter Haftung – GmbH) requires notarization whereas a pledge over interests in a limited partnership ( Kommanditgesellschaft – KG) can be entered into in simple written form. A pledge over shares in a stock corporation ( Aktiengesellschaft – AG) may also be completed without observing specific formalities; only the share certificates issued for the relevant shares need to be transferred to the pledgee. The notification of the relevant company/partnership is not required for the perfection of the security. However, the articles of association of a company may provide for the requirement of the company's approval. As an accessory security interest, the share/interest pledge must be granted to and held by each secured creditor. Therefore, a parallel debt structure is usually implemented in syndicated financings. For more information, see  Lending and borrowing .

Bank account pledge

The notification of the account bank is required for the perfection of the security. The account bank usually has a first ranking pledge pursuant to its general business terms; if the lending bank wishes to obtain a first ranking security, the account bank then may be asked to waive/subordinate its rights pursuant to its general business terms. Security must be granted to and held by each secured creditor. Therefore, a parallel debt structure is usually introduced in syndicated financings. For more information, see  Lending and borrowing .

Security assignment of receivables and claims

Unless disclosed to the debtors of the assigned receivables (third party debtors), the debtor may continue to pay with discharging effect to the assignor. The notification of the assignment is no perfection requirement, but common where there are only a small number of third party debtors (eg with respect to claims under insurance agreements).

Security transfer of moveable assets (such as inventory and equipment)

It is very important to describe the assets precisely, for example by using maps or serial numbers, in order to ensure their determinability when acquired (particularly in relation to future assets) or enforced. Typically, the specification of transferred assets is done by a combination of describing the area where the assets are located and by delivery of a list of the relevant assets. If the assets are fixtures (ie they relate to the relevant premises in such a way that they cannot be legally separated from the premises) then land security should be obtained.

Mortgage or land charge over land and buildings

A mortgage or land charge must be created by notarized deed. In addition, the registration of the mortgage or land charge in the relevant land register ( Grundbuch ) is required for its effectiveness. The notary and registration fees depend on the nominal amount and may be significant.

Are there any other notable risks or issues around giving and taking guarantees and security?

Giving or taking guarantees.

In order to be valid, a guarantee upon first demand must be granted by a guarantor experienced in international transactions and familiar with guarantees upon first demand. This is because the guarantor of a guarantee upon first demand has only limited defenses. For more information, see  Giving and taking guarantees and security – common types .

Giving or taking security

Notarization requirements.

The following security interests require notarization under German law:

• a pledge over shares in a German limited liability company; and
• the creation of a mortgage or land charge.

Registration requirements

A mortgage or land charge must be registered in the relevant land register ( Grundbuch ) to become valid.

Initial and subsequent over-collateralization

In case of an initial disproportionate relationship between the value of the granted security and the secured claims (initial over-collateralization), the agreement creating such security may be invalid. If, after the conclusion of the agreement (subsequent over-collateralization), the value of the security exceeds 110% of the secured claims, the grantor may have a claim for release of the excess security.

Wolfram Distler

Partner DLA Piper LLP [email protected] T +49 69 271 33 022 View bio

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Litigation & Dispute Resolution Laws and Regulations Germany 2024

ICLG - Litigation & Dispute Resolution Laws and Regulations - Germany Chapter covers key topics including efficiency and integrity, injunctions, cross-border issues, disclosure and privilege, costs and funding, settlement and mediation, and arbitration and expert determination.

Chapter Content Free Access

1. litigation – preliminaries, 2. before commencing proceedings, 3. commencing proceedings, 4. defending a claim, 5. joinder & consolidation, 6. duties & powers of the courts, 7. disclosure, 8. evidence, 9. judgments & orders, 10. settlement, 11. alternative dispute resolution.

1.1        What type of legal system does your jurisdiction have? Are there any rules that govern civil procedure in your jurisdiction?

Germany is a civil law jurisdiction.  Civil proceedings are primarily governed by the German Code of Civil Procedure ( Zivilprozessordnung – ZPO).  In addition, the German Act on Proceedings in Family Matters and in Matters of Non-Contentious Jurisdiction (FamFG) applies to certain corporate law, family law and other matters.

1.2        How is the civil court system in your jurisdiction structured? What are the various levels of appeal and are there any specialist courts?

Germany has a unified court system; there is no parallel system of state and federal civil courts.  First-instance and appeal proceedings are handled by local courts ( Amtsgericht ), regional courts ( Landgericht ) and higher regional courts ( Oberlandesgericht ).  The regional court is usually the first-instance court in commercial matters.  Local courts have jurisdiction to hear lower-value disputes (up to EUR 5,000) and certain types of cases (e.g., residential landlord–tenant disputes), irrespective of value.  First-instance decisions can be appealed before the next higher court.  Higher regional courts have special first-instance jurisdiction on select matters, e.g., concerning arbitration proceedings.  The highest civil court is the German Federal Court of Justice ( Bundesgerichtshof – BGH) which hears appeals on points of law (see question 9.5).

State law may allocate specific types of disputes, e.g., patent disputes, to one particular civil court in the state.  Regional courts usually have specialised chambers for particular matters, e.g., chambers for financial or construction disputes.

There is a separate three-tier court system for employment law matters.

1.3        What are the main stages in civil proceedings in your jurisdiction? What is their underlying timeframe (please include a brief description of any expedited trial procedures)?

The claimant initiates civil proceedings by submitting a statement of claim to the court, which serves it on the defendant.  The court either directly schedules an early hearing or lets the parties exchange further written pleadings.  If necessary, the court takes evidence during an evidentiary hearing.  The average time to judgment before regional courts is 13 months, but is subject to the court’s workload and complexity of the case.  The first-instance judgment can be appealed to the competent court of appeal, with a similar timeframe for the appeal proceedings.  There is a potential subsequent second appeal to the BGH on points of law (see question 9.5), which usually decides on admissibility in less than a year, whereas proceedings on the merits usually take longer than a year.

A claimant may obtain a judgment faster in a special documents-only proceeding ( Urkundenprozess ) primarily concerning claims for money payments.  A claimant may also apply for a payment order ( Mahnbescheid ) in a formalised, mostly electronic proceeding.  However, the defendant can easily oppose a request for such order, leading to regular court proceedings.

1.4        What is your jurisdiction’s local judiciary’s approach to exclusive jurisdiction clauses?

Merchants are free to agree on exclusive jurisdiction.  Exclusive jurisdiction agreements with non-merchants are generally permissible only after the dispute has arisen.  The court will review the validity of the jurisdiction clause.  In particular, a jurisdiction clause is invalid if statutory provisions assign exclusive jurisdiction to a different court.

1.5        What are the costs of civil court proceedings in your jurisdiction? Who bears these costs? Are there any rules on costs budgeting?

German civil litigations follow the “loser pays” principle.  The court allocates the costs to the parties in its decision.  While a party is free to agree hourly rates with its lawyer, it may only seek compensation by the losing party up to the statutory fee amount.  The statutory court fees and statutory attorney’s fees are, in principle, calculated based on the value in dispute.  The claimant generally needs to advance court fees to trigger service of the statement of claim.  There are no rules on costs budgeting.

1.6        Are there any particular rules about funding litigation in your jurisdiction? Are claimants and defendants permitted to enter into contingency fee arrangements and conditional fee arrangements?

A party may apply to the court for state aid to cover its court and attorney’s fees if it is unable to bear these costs.  Its action or defence must show sufficient prospects of success and must not seem frivolous.  It is also common (primarily for private parties) to have legal expenses insurance, which covers legal costs.  Third-party funding by non-lawyers is generally permissible.  Contingency fees or similar arrangements are generally prohibited, with some narrow exceptions.

1.7        Are there any constraints to assigning a claim or cause of action in your jurisdiction? Is it permissible for a non-party to litigation proceedings to finance those proceedings?

German civil law generally permits assignment of claims.  Party agreement or statutory law may exclude assignment.  Contractual exclusions have only limited effect on assignments of claims among merchants.  Assignments made for purposes of claims collection, including to form a mass claim, are subject to specific requirements on the assignee.  If the assignee conducts collection services as a business, it must register with the competent authority – and is subject to certain rules and duties – or be a law firm.  Failure to comply with these requirements renders the assignment void.  Third-party funding is generally permissible.

1.8        Can a party obtain security for/a guarantee over its legal costs?

A defendant can request that the claimant provide security for costs if the claimant is not resident in an EU or EEA state.  International treaties may exclude security for costs.  Defendants who are counterclaimants do not have to provide security.

2.1        Is there any particular formality with which you must comply before you initiate proceedings?

State law or party agreement may require an attempt to amicably resolve the dispute by a designated conciliation office before initiating proceedings.  Otherwise, there is no particular formality to observe.

2.2        What limitation periods apply to different classes of claim for the bringing of proceedings before your civil courts? How are they calculated? Are time limits treated as a substantive or procedural law issue?

The regular limitation period under German law is three years, commencing at the end of the year in which the claim arose and the claimant obtained or should have obtained knowledge of the facts giving rise to the claim and the identity of the defendant.  Absolute knowledge-independent limitation periods of 10 to 30 years depending on the claim apply, in addition to the regular limitation period.  Statutory law or party agreement may provide for shorter or longer limitation periods of up to 30 years.  The limitation period may be tolled by party agreement, by formal pursuit of the claim or through negotiations between the parties.  German law treats limitation periods as a substantive law issue.

3.1        How are civil proceedings commenced (issued and served) in your jurisdiction? What various means of service are there? What is the deemed date of service? How is service effected outside your jurisdiction? Is there a preferred method of service of foreign proceedings in your jurisdiction?

Civil proceedings are formally commenced by service of the statement of claim on the defendant.  The claimant submits the statement of claim to the court and pays the court fee.  Attorneys are required to file electronically.  The court will serve the document on the defendant or another person, as specified by statutory law, at the defendant’s designated residential or business address, or if not possible place it in the mailbox and issue a certificate of service.  Service is deemed effected on the date when the document is served as recorded in the certificate.  For purposes of observing a limitation period, the date when the court receives the statement of claim is considered decisive if the document is served on the defendant without undue delay.

Intra-EU service (incoming and outgoing) is done in compliance with Regulation (EU) 2020/1784, which allows serving judicial documents by postal service, among other options.  Incoming requests for service from non-EU countries that are members of the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters are generally processed through a central authority in each of the 16 German States, which will effect service or refer the matter to a local court for service.  Outgoing service by postal service is preferred where permitted, and otherwise service by the foreign state’s authorities.

3.2        Are any pre-action interim remedies available in your jurisdiction? How do you apply for them? What are the main criteria for obtaining these?

Yes, in the form of asset freezes and interim injunctions.  Freezing movable or immovable assets serves to secure monetary claims and is available when there are indications that a debtor is moving assets to hide them.  Interim injunctions serve to prevent a status change that would prejudice the applicant’s claim.  For either measure, the applicant must file an application with the court that has jurisdiction over the main proceedings, or with the local court at the location of the asset to be seized.  The applicant must credibly demonstrate (preponderance of probability) the existence of the underlying claim and a justification for the interim remedy, including urgency.  For this purpose, the applicant may rely inter alia on affidavits.

3.3        What are the main elements of the claimant’s pleadings?

At a minimum, the statement of claim must designate the parties and the court, describe the relevant facts underlying the claim and state a request for relief.  Legal arguments are not required, but generally expected.

3.4        Can the pleadings be amended? If so, are there any restrictions?

After the pleadings have been served on the defendant, amendments require the defendant’s or the court’s permission.  The request for relief may be limited or extended without such restrictions.  Factual and legal assertions may be amended subject to the rules on preclusion.

3.5        Can the pleadings be withdrawn? If so, at what stage and are there any consequences?

The claimant may withdraw the entire action prior to the merits phase at a hearing.  Subsequently, withdrawal requires the defendant’s consent.  Generally, a claimant who withdraws the action must bear all costs.  If the asserted claim ceases to exist before service on the defendant (e.g., because the defendant paid), the claimant may withdraw the action and the court will allocate the costs as it finds appropriate.  The claimant may also declare that the pleadings became moot after service on the defendant ( Erledigung ).  If the defendant agrees or fails to timely object, the proceedings are terminated and the court renders a discretionary decision on costs only.  If the defendant objects, e.g., because it believes that the claim never existed, the court renders a decision on the merits and allocates costs accordingly.

4.1        What are the main elements of a statement of defence? Can the defendant bring a counterclaim(s) or defence of set-off?

The statement of defence usually contains a counterstatement of facts and any defences (e.g., time bar, satisfaction of claim, etc.).  A discussion of the law is common practice, but not required.  The defendant can bring counterclaims if there is a nexus to the primary claim and no exclusive jurisdiction of a different court.  The defendant can also raise a set-off defence.

4.2        What is the time limit within which the statement of defence has to be served?

The court sets a time limit for the filing of the statement of defence.  The statutory minimum is two weeks.  The court has discretion to set a longer time limit and grant extensions.  As a rule of thumb in standard cases, the court will set a time limit of two weeks for the defendant to indicate whether it intends to defend the claim, and an additional four weeks to submit the statement of defence.

4.3        Is there a mechanism in your civil justice system whereby a defendant can pass on or share liability by bringing an action against a third party?

A litigant may file a third-party notice ( Streitverkündung ) against a third party with the court.  Such third-party notice must describe the litigant’s potential claims in relation to the third party and the status of the pending court proceeding.  The court serves the notice on the third party, which is free to join the proceedings or abstain.  In either scenario, the decisive factual and legal findings of the court are binding on the third party in a subsequent court proceeding with the litigant.

4.4        What happens if the defendant does not defend the claim?

The claimant may request a default judgment, which is granted if the court finds that (i) the claimant’s factual allegations, if conceded, support the claim, and (ii) the defendant was in default.  The defendant has two weeks to file an objection against the default judgment.  Otherwise, the judgment becomes legally binding.  If the objection is admissible, the court proceeding is reinstated to the status before the default occurred.

4.5        Can the defendant dispute the court’s jurisdiction?

Yes.  The defendant usually submits objections to the court’s jurisdiction at the outset of the proceeding due to the risk of waiver.  If the defendant does not object to jurisdiction, jurisdiction of the court is established, except if exclusive jurisdiction lies with a different court.

5.1        Is there a mechanism in your civil justice system whereby a third party can be joined into ongoing proceedings in appropriate circumstances? If so, what are those circumstances?

The claimant can add further defendants to a proceeding by submitting a statement of claim against them.  The defendant can direct a counterclaim against a third party, who then becomes party to the proceedings.  Such third-party counterclaim must typically be directed jointly against the claimant and the third party, have a legal nexus to the case and either the third-party consent or the court consider the addition expedient.  An isolated counterclaim against the third party is only permissible in exceptional circumstances.

A third party may join a proceeding as an intervener in support of a party (without becoming a party itself) if it has a legal interest in the outcome of the case.  The parties can actively join a third party with essentially the same effect by serving a third-party notice (see question 4.3).

5.2        Does your civil justice system allow for the consolidation of two sets of proceedings in appropriate circumstances? If so, what are those circumstances?

Yes.  The court may combine separate proceedings if there is a legal nexus between the underlying claims, or they could have been brought in the same action.  In practice, courts frequently schedule joint hearings for related litigations among the same parties, without formally joining them.

5.3        Do you have split trials/bifurcation of proceedings?

Yes.  A court may split a litigation, which asserts several claims, into separate proceedings for the sake of expediency.  It can bifurcate proceedings and rule on isolated legal issues (e.g., on its jurisdiction) or issue separate rulings on liability and the amount of damages.  A claimant can initiate multi-tiered proceedings ( Stufenklage ), starting with a claim for disclosure of relevant information followed by a claim for payment based on said information.

6.1        Is there any particular case allocation system before the civil courts in your jurisdiction? How are cases allocated?

Each civil court has an internal allocation schedule.  Cases are allocated to a panel or sole judge based on abstract, neutral criteria (e.g., type of dispute, alphabetical distribution, number of matters handled by a panel or sole judge).

6.2        Do the courts in your jurisdiction have any particular case management powers? What interim applications can the parties make? What are the cost consequences?

The courts have some discretion and procedural tools to structure civil litigations, although in practice these tools are not used frequently.  Courts set time limits for written pleadings and may issue preliminary views on all or certain matters to be decided.  The parties can make various procedural applications, e.g., for extension of time limits, moving a hearing, suspension or stay of proceedings (see question 6.7), security for costs (see question 1.8) regarding the taking of evidence and challenging a judge or court-appointed expert.  Such procedural applications typically do not have cost consequences.  The parties can also apply for substantive interim measures (see question 3.2).

6.3        In what circumstances (if any) do the civil courts in your jurisdiction allow hearings or trials to be conducted fully or partially remotely by telephone or video conferencing, and what protocols apply? For example, does the court – and/or may parties – record and/or live-stream the hearings and may transcriptions be taken? May participants attend hearings remotely when they are physically located outside of the jurisdiction? Are electronic or hard-copy bundles used for remote hearings?

The court may permit participation at an oral hearing via image and sound transmission upon request or ex officio .  Witnesses and experts may also participate remotely upon request.  This may lead to hybrid hearings.  The judges are always in the courtroom.  The decision to offer a hearing via video conference is subject to the court’s discretion and technical capabilities.  The judges must be visible in the video feed at all times.  Recordings of the broadcast are not permitted.  The public may attend in the courtroom; there is no broadcasting of the hearing to the general public.  The currently prevailing view is that remote participants need to be physically located in Germany.  Hearing bundles are uncommon.  Attorneys are generally required to submit all documents to the court electronically.  The court handles its own files.

6.4        What sanctions are the courts in your jurisdiction empowered to impose on a party that disobeys the court’s orders or directions?

At a hearing, the court has the power to order a fine, removal from the courtroom or detention against a disruptive party.  The court can also fine a party who disobeys certain orders, e.g., to personally appear at a hearing.

6.5        Do the courts in your jurisdiction have the power to strike out part of a statement of case or dismiss a case entirely? If so, at what stage and in what circumstances?

Subject to the rules of preclusion, the court has the power to reject belated pleadings and thus not consider them in its decision.  If a party submits pleadings past a set time limit, the court admits them only if doing so will not cause delay to the proceedings or the party provides a sufficient excuse.  Absent a time limit, a party is nonetheless obligated to submit pleadings in due time in preparation of or at the hearing.  If it fails to do so, the court has discretion to reject such pleadings if admitting them would cause delay and their delayed submission is the result of gross negligence.

6.6        Can the civil courts in your jurisdiction enter summary judgment?

There is no summary judgment procedure.  A court can dismiss an action by regular judgment without taking evidence if it concludes that the action is unfounded, even if the claimant’s allegations were true.

6.7        Do the courts in your jurisdiction have any powers to discontinue or stay the proceedings? If so, in what circumstances?

Court proceedings are interrupted by operation of statutory law in certain situations, including the opening of insolvency proceedings over a party’s assets.  The court may, or in some cases must, order suspension of the proceedings at a party’s request or ex officio , e.g., if the dispute depends on a legal relationship at issue in a separate proceeding, or to await a preliminary ruling by the Court of Justice of the European Union (CJEU) on a decisive issue.  The court has to order a stay of proceedings at the request of both parties if a stay is expedient due to pending settlement negotiations or other sound reasons.

7.1        What are the basic rules of disclosure in civil proceedings in your jurisdiction? Is it possible to obtain disclosure pre-action? Are there any classes of documents that do not require disclosure? Are there any special rules concerning the disclosure of electronic documents or acceptable practices for conducting e-disclosure, such as predictive coding?

Disclosure is generally not available in German civil litigation.  As a general rule, each side has to adduce the evidence to support its case.  The court may order a party or a third party to produce a specific document that a party relied on, taking into account the interests of all persons involved.  A production order is not enforceable against a party to the proceeding (unlike against a third party).  Instead, if a party disobeys the order, the court may freely consider the refusal, e.g., draw negative inferences, treat it as an admission of the counterparty’s allegation or conclude that the party failed to meet its burden of proof.

In specific areas of intellectual property and competition law, parties have broader enforceable substantive rights to obtain documents or information from counterparties and third parties.

7.2        What are the rules on privilege in civil proceedings in your jurisdiction?

German privilege-like rules are narrow.  There is no privilege attached to a document; instead, Germany follows the rules of professional secrecy.  Certain groups of persons (e.g., attorneys, physicians, clergy) may refuse to testify or produce documents.  Professionals with a duty of confidentiality must exercise this right unless their client waived confidentiality.

7.3        What are the rules in your jurisdiction with respect to disclosure by third parties?

A court may order a third party to produce specific documents.  The third party may refuse production if it is unreasonable, and to the extent the party is permitted to refuse testimony.  There are broader disclosure rules in competition law.

7.4        What is the court’s role in disclosure in civil proceedings in your jurisdiction?

Regarding the court’s role in disclosure in German civil proceedings, see question 7.1.

7.5        Are there any restrictions on the use of documents obtained by disclosure in your jurisdiction?

The use of documents obtained by court order is generally not restricted (with only narrow exceptions).  Disclosure in competition law disputes may be subject to the parties agreeing on a confidentiality regime.

8.1        What are the basic rules of evidence in your jurisdiction?

As a rule, a party bears the burden of proof for the factual elements of its claim or defence.  If a fact is disputed, each party has to offer evidence in support of its factual allegations.  The court decides which of the offered evidence is relevant to deciding the case, and orders the taking of evidence accordingly.

8.2        What types of evidence are admissible, and which ones are not? What about expert evidence in particular?

Evidence admissible under the ZPO includes visual inspection, witnesses, court-appointed experts, documents and examination of a party.  A party cannot be a witness.  It can be formally examined if the other party consents, or informally at the discretion of the court.  In proceedings regarding interim relief, additional means of proving factual allegations are admissible (see question 3.2).

8.3        Are there any particular rules regarding the calling of witnesses of fact, and the making of witness statements or depositions?

A party offers witness evidence by identifying the witness and – in broad terms – the facts supported by such witness’ testimony.  Written witness statements are not common outside of interim relief proceedings and are not witness evidence.  If the court decides that the offered witness testimony is relevant to deciding the case, the court summons the witness for examination at a hearing.  Typically, the court questions the witness.  The parties and counsel may also pose questions and, with the court’s permission, directly address the witness.  There are no depositions.

8.4        Are there any particular rules regarding instructing expert witnesses, preparing expert reports and giving expert evidence in court? Are there any particular rules regarding concurrent expert evidence? Does the expert owe his/her duties to the client or to the court? 

Only a court-appointed expert provides expert evidence.  Reports by party-appointed experts are considered pleadings of the submitting party.  If it believes the expert evidence is relevant to resolving the case, the court appoints and instructs the expert, who owes his/her duties to the court.  One or both parties are typically requested to pay an advance of the expert’s costs prior to its retention.  Court-appointed experts are subject to similar rules relating to challenges for lack of independence and impartiality as judges.

9.1        What different types of judgments and orders are the civil courts in your jurisdiction empowered to issue and in what circumstances?

German courts can issue a variety of judgments and orders, including:

• Final judgments, granting and/or dismissing a claim fully or partially.
• Partial judgments concerning a claim or a separable part thereof.
• Judgments subject to a reservation, e.g., if the court has yet to rule on a defendant’s set-off claim.
• Interim judgments in bifurcated proceedings, e.g., on procedural issues or liability.
• Non-contentious judgments in cases of waiver or acknowledgment of claims or default judgments.

Judgments can also be distinguished by the type of relief granted:

• Judgments ordering performance (specific performance, damages, injunctive relief).
• Declaratory judgments (ruling on a legal relationship).
• Reform judgments (changing a legal status, e.g., divorce judgment).

Courts may also issue judgments and orders on interim measures (see question 3.2).

9.2        Are the civil courts in your jurisdiction empowered to issue binding declarations as to (i) parties’ contractual or other civil law rights or obligations, (ii) the proper interpretation of wording in contracts, statutes or other documents, (iii) the existence of facts, or (iv) a principle of law? If so, when may such relief be sought and what factors are relevant to whether such relief is granted? In particular, may such relief be granted where the party seeking the declaration has no subsisting cause of action, and/or no party has suffered loss, and/or there has been no breach of contract/duty?

Courts may issue declaratory judgments concerning a legal relationship, which are binding among the parties, including on the (non-)existence and nature of civil law relationships, rights and obligations.  A declaratory judgment cannot be issued on abstract questions of law or the (non-)existence of facts, with the exception of declaring the authenticity of a document.  As a prerequisite for a declaratory judgment, the claimant must show a legal interest in the declaration, i.e., it must be suitable to remove a current threat or uncertainty.  The legal interest is lacking if the claimant has a more effective procedural alternative available, including seeking a judgment ordering performance.

9.3        What powers do your local courts have to make rulings on damages/interests/costs of the litigation?

As a matter of principle, German law only awards compensatory damages, not punitive damages.  Courts must not grant damages exceeding the requested amount.  The court may order payment of post-litigation interest and, if the law or contract stipulates interest, pre-litigation or default interest.  The court rules ex officio on the allocation of costs, usually guided by the “loser pays” principle (see question 1.5).

9.4        How can a domestic/foreign judgment be recognised and enforced?

Domestic judgments and foreign judgments that fall within the scope of the Brussels I Regulation (recast) or certain other European legislation can be enforced in Germany without requiring recognition or a declaration of enforceability.  Other foreign judgments within the scope of certain international treaties, e.g., the Lugano Convention or the Hague Judgments Convention, are subject to simplified recognition and enforcement proceedings.  Holders of foreign judgments that are outside special enforcement regimes need to obtain a declaration of enforceability in regular German court proceedings.

9.5        What are the rules of appeal against a judgment of a civil court of your jurisdiction?

The time limits for an appeal are one month (not extendable) for the notice of appeal and two months for the grounds of appeal (extendable under limited circumstances), each counted from the day of service of the first-instance judgment.  Grounds for appeal can be legal error and/or a new finding of facts if there are doubts that the first-instance court correctly and completely established the facts relevant for its decision, or if there are new admissible facts to be considered.  A party can file a second appeal on points of law against the appellate court judgment with the BGH.  The second appeal is admissible only if the legal matter has fundamental significance, or a decision is necessary to further develop the law or ascertain uniform adjudication by the courts.

10.1      Are there any formal mechanisms in your jurisdiction by which parties are encouraged to settle claims or which facilitate the settlement process?

German civil courts are required to consider an amicable settlement at all stages of the proceeding.  Hearings are generally commenced by a conciliatory phase in which the court discusses the case with the parties and shares preliminary views, and sometimes also suggestions for settlement.  The court may refer the parties to a conciliation judge or suggest that the parties pursue mediation or other alternative dispute resolution procedures.  Court fees are lowered if the proceeding is terminated by settlement.

11.1      What methods of alternative dispute resolution are available and frequently used in your jurisdiction? Arbitration/Mediation/Expert Determination/Tribunals (or other specialist courts)/Ombudsman? (Please provide a brief overview of each available method.)

• Arbitration, either institutional or ad hoc .  Germany is an arbitration-friendly jurisdiction.
• Conciliation, with the aid of a designated conciliation office or industry-specific consumer conciliation body.
• Mediation, either before a trained mediator or a conciliation judge.
• Expert determination, including technical expertise and/or accounting expertise, e.g., an independent auditor to resolve disputes over purchase price adjustments.
• Dispute adjudication boards, particularly used for construction projects.

11.2      What are the laws or rules governing the different methods of alternative dispute resolution?

As alternative dispute resolution is (mostly) at the disposition of the parties, party agreements usually take precedence to the extent they are legally permissible.  The parties can choose institutional rules, for example of the German Arbitration Institute ( Deutsche Institution für Schiedsgerichtsbarkeit – DIS) (see question 11.6) or the International Chamber of Commerce (ICC), which address different methods of alternative dispute resolution.  Different German statutory laws contain relevant provisions:

• Arbitration: The 10 th Book of the ZPO (in large part based on the 1985 UNCITRAL Model Law on International Commercial Arbitration).
• Meditation: The Mediation Act sets forth rudimentary provisions.
• Conciliation: The Act on Alternative Dispute Resolution in Consumer Matters and certain speciality laws.  State law may provide rules concerning conciliation before designated conciliation offices.
• Expert determination and dispute adjudication boards: Basic conditions are derived from an analogous application of substantive law provisions governing the specification of performance by a third party.

11.3      Are there any areas of law in your jurisdiction that cannot use Arbitration/Mediation/Expert Determination/Tribunals/Ombudsman as a means of alternative dispute resolution?

Disputes that do not concern rights over assets and are outside the parties’ disposition to settle (in particular family law matters) are not arbitrable.  Likewise excluded from arbitration are most employment law disputes and certain disputes over the existence of a tenancy relationship concerning residential spaces in Germany.  Arbitration agreements with consumers are subject to stricter formal requirements.

11.4      Can local courts provide any assistance to parties that wish to invoke the available methods of alternative dispute resolution? For example, will a court – pre or post the constitution of an arbitral tribunal – issue interim or provisional measures of protection (i.e. holding orders pending the final outcome) in support of arbitration proceedings, force parties to arbitrate when they have so agreed, or order parties to mediate or seek expert determination? Is there anything that is particular to your jurisdiction in this context?

German courts are generally arbitration-friendly and support arbitration proceedings at all stages.  Courts must dismiss a case as inadmissible if the defendant invokes a valid arbitration agreement.  If the parties have agreed that a certain method of alternative dispute resolution, e.g., mediation, needs to be attempted before a court action may be initiated, the court must reject a case as inadmissible if the condition has not been met.  If an agreed-on expert determination has not been completed, the court must either set a time limit for obtaining the expert determination or dismiss the case as unfounded at the time.

There are numerous proceedings by which German courts support arbitration, including:

• Before an arbitral tribunal is constituted, a party can call on the court to declare that an arbitration proceeding is (in)admissible. 
• In ad hoc proceedings, a court can appoint arbitrators if the parties cannot agree on a candidate or fail to make an appointment. 
• A court can permit enforcement of interim measures that an arbitral tribunal ordered.  Most courts will also order interim measures before and after the arbitral tribunal’s constitution.
• A court can assist an arbitral tribunal in the taking of evidence or other judicial acts, e.g., formal service abroad.

11.5      How binding are the available methods of alternative dispute resolution in nature? For example, are there any rights of appeal from arbitration awards and expert determination decisions, are there any sanctions for refusing to mediate, and do settlement agreements reached at mediation need to be sanctioned by the court? Is there anything that is particular to your jurisdiction in this context?

An arbitral award issued in Germany has the effect of a final and binding court judgment among the parties.  A court can set aside an arbitral award based only on limited statutory grounds.  With certain exceptions (e.g., EU and German competition law, which is deemed part of German public policy), there is no révision au fond .  An expert determination is binding on the parties unless it is obviously incorrect or inequitable, which a court or arbitral tribunal can review.

A settlement concluded before the court or a conciliation office pursuant to state law constitutes an enforceable legal title.  In contrast, a settlement reached in out-of-court mediation is merely a substantive law agreement unless notarised.  If a party refuses to comply with the settlement, the other party must seek its enforcement by initiating litigation.  Settlements concluded between attorneys representing their respective clients or in the form of arbitral awards on agreed terms are declared enforceable by a court or – if the parties agree – by a notary in a streamlined fashion.

11.6      What are the major alternative dispute resolution institutions in your jurisdiction?

The leading dispute resolution institution in Germany is the DIS.  It offers rules for various types of alternative dispute resolution, including arbitration, mediation, expert determination and adjudication, as well as services to administer dispute resolution.

Production Editor's Note

This chapter has been written by a member of ICLG's international panel of experts, who has been exclusively appointed for this task as a leading professional in their field by Global Legal Group , ICLG's publisher. ICLG's in-house editorial team carefully reviews and edits each chapter, updated annually, and audits each one for originality, relevance and style, including anti-plagiarism and AI-detection tools. This chapter was copy-edited by Helena Webb , our in-house editor.

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Contributors

Matthias Schrader Willkie Farr & Gallagher

Dr. Johannes Schmidt Willkie Farr & Gallagher

Dr. Harry Nettlau Willkie Farr & Gallagher

Svenja Wachtel Willkie Farr & Gallagher

Willkie Farr & Gallagher

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162611 Assignment of Claims

• Published: August 2018
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‘Contractual claims represent a major tradable asset. They can be sold outright, as in the typical factoring transaction, or assigned by way of security for a loan or other obligation. The purpose of this Chapter is to set out principles and rules which are designed to facilitate the assignment of claims, whether individually or in bulk, whilst at the same time ensuring that the debtor’s rights are not prejudiced by the assignment.

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The validity of an assignment of receivables cross-border depends on the law that applies to the assignment.

What might amount to a valid assignment in one jurisdiction does not mean that it is valid in another, and where there are competing claims to the receivables and competing jurisdictions, the question of which law applies - and therefore whether there has been a valid assignment - significantly affects the ability of the assignee to rely on the assignment.

This question arose in the context of a German bankruptcy where the issue was referred to the European Court of Justice (“ECJ “) for a preliminary ruling. The recent decision of the ECJ of 9 October 2019 surprised many because it went against the commonly held view that in determining jurisdictional questions Article 14 of the European Union Rome I Regulation applied.

In this blog we consider the implications of the ECJ judgment in Case C-548/18 BGL BNP Paribas SA vs. TeamBank AG Nürnberg and how this affects assignees and the priority of competing claims. We also consider the proposed EU Assignment Regulation and how that might assist in determining the question of jurisdiction in the future.

A national of Luxembourg (the “employee”) but resident of Germany was employed by a Luxembourg employer under Luxembourg law. A German bank granted a German law governed loan to the employee and the employee assigned to the German bank all its claims to receive remuneration from the Luxembourg employer.

Three months later the employee obtained another loan, this time from a Luxembourg bank and assigned the same remuneration claims as security for that second loan to the Luxembourg bank under a Luxembourg law governed assignment contract. The Luxembourg bank notified the assignment to the Luxembourg employer, the German bank did not do so.

The employee became insolvent and German insolvency proceedings were commenced.

Under German law notification of an assignment is not required to perfect the assignment, but under Luxembourg law it is. Accordingly, in this case if German law applied the assignment to the German bank would have had priority over the assignment to the Luxembourg bank but if Luxembourg law the priority position would have been reversed.

Which law therefore took precedence? The German court requested the ECJ give a preliminary ruling on the question.  Contrary to the commonly held view, the ECJ concluded that Article 14 of the Rome I Regulation did not assist and was therefore unable to provide for an answer to the question leaving the German court in a challenging situation particularly so, because the relevant rules for determining the conflict of law were actually deleted from German law in 2009.

So which law do the courts apply when determining whether there has been a valid cross-border assignment of receivables? Currently the answer depends on which country is being asked to consider the question:

(i)             It could be the law which is expressed to govern the contract from which the assigned receivable arises. This is the approach normally adopted in Germany.

(ii)            In England, the Netherlands and Spain it is in principle the law chosen by the assignor and the assignee to govern the contract under which the receivable is assigned;

(iii)           Whereas in the U.S., for example it is in principle the law of the jurisdiction in which the assignor is situated.

The position is far from clear meaning that an assignees of receivables cannot always be certain whether the assignment is valid and enforceable.

Hope for the future? -The proposed EU Assignment Regulation

Thankfully the European Union intends to introduce new legislation that will help clarify the position. The Assignment Regulation proposed in March 2018 is currently being discussed in the Council of the European Union. However it is likely to be subject to extensive negotiation before adoption.

The principles set out in Article 4 of the Assignment Regulation are that the law of the habitual residence of the assignor will apply (Article 4 (1)) unless:

the claim is cash credited to a bank account or claims arising from financial instruments, in which case the law governing the account or the financial instrument will apply (Article 4 (2)), or

there is a securitization, in which case the assignee and the assignor can chose the law applicable to the assignment (Article 4 (3)).

Once adopted (subject to a 18 month waiting period) the Assignment Regulation will be directly applicable. This means that whilst EU Member States do not need to implement it into their domestic laws the courts of the Member States are bound to apply it in respect of all assignments which are concluded on or after the date it comes into effect.

However, the Assignment Regulation will not apply in Denmark, it will only apply in Ireland if Ireland opts into the Assignment Regulation and will not apply to the UK since it is expected that the UK will no longer be a EU Member State at the time the regulation is adopted and becomes effective.

The Assignment Regulation does not allow parties to contract out of it or to agree the applicable law which shall regulate the assignment of claims.

Major impact on international trade finance

The Assignment Regulation is expressed to have Universal Application, which means that it will apply the law designated by the assignment, even if this is not the law of any Member State.

For example, if a US exporting company assigns an invoice or other claim arising from a contract governed by German law to an EU assignee, then US law will apply in determining whether the assignment was effective vis-à-vis third parties, and not German law.

Because of this rule the Assignment Regulation will have a major impact on international trade finance involving the assignment of receivables. It could also create uncertainty over which law is applicable if the relevant third country’s law does not recognize the rule contained in Article 4(1).

What is the effect of the Assignment Regulation on Bank Accounts?

Bank accounts and account pledges will continue to be governed by the law of the country where the relevant bank is situated, provided that the account mandate prescribes that the law of that country shall govern the banking relationship.

However, this will only apply to bank accounts held with banks where the head office is situated within the European Union and to branches of third country banks which are located within the European Union.

In respect of banks situated outside of the European Union Article 4 (1) applies and the relevant account security will be governed by the law of the country where the bank has its place of central administration. .

What is the effect of the Assignment Regulation on Financial Instruments?

The law that applies to Financial Instruments will be the law governing the instrument. Article 2 (i) of the Assignment Regulation defines “Financial Instrument” as the instruments specified as such in the MIFID II Directive (Section C of Annex I of Directive 2014/65/EU of 15 May 2014).

It is unclear how this will affect the German Schuldschein -Market, since Schuldscheine with a term of more than 397 days may not qualify as a Financial Instrument. This could mean that secondary trading in such Schuldscheine becomes quite complex since the assignment of the relevant Schuldscheine will not be governed by German law, but by the law of the jurisdiction where the previous holders of the Schuldscheine is situated – and this could be any number of jurisdictions

What is the effect of the Assignment Regulation on securitization?

Presently the Assignment Regulation provides that the assignor and the assignee of a receivable/claim may choose the law applicable to the assignment of the securitization. However, the European Parliament propose to delete this exemption. This is disappointing because the proposal made by the European Commission could make securitization much easier and less complex than is currently the case.

What is the position in respect of Factoring, Asset Based Lending and Invoice Discounting?

Article 4(1) will apply to all other forms of receivable finance such as factoring, asset based lending, invoice discounting or other forms of supply chain finance. Accordingly the law of the central place of administration of the assignor determines the effectiveness and perfection of the assignment vis-à-vis third parties.

In practice that rule will make the financing of portfolios of receivables (which could be subject to a multitude of jurisdictions) much easier, where they are owned by one assignor situated in one jurisdiction. In that case it will be much easier to identify the one relevant law applicable.

Conversely, it will make it more difficult to finance portfolios of those receivables where assignors are situated in various jurisdictions but the receivables themselves are governed by the same law.

How does the Assignment Regulation apply to cross-border assignments in insolvency?

The difficulty here, is that the relevant test for the purposes of Article 4(1) of the Assignment Regulation in determining the “habitual residence” of the assignor is the “ place of central administration ” whereas the test under the EU Insolvency Regulation is the “centre of main interests” (COMI) and the presumption that the COMI is the company’s registered office. There is no such assumption under the Assignment Regulation.

Applying either of those tests may result in the same answer but it cannot be excluded that the location of the assignor could be different in some circumstances, resulting in uncertainty as to which law might apply to cross-border assignments in insolvencies.

Further, unlike under the EU Insolvency Regulation where the definition of COMI requires the company to have held its centre of main interests for 3 months, the same does not apply under the Assignment Regulation. Therefore, it could make it difficult to identify the “place of central administration” if the assignor has recently changed location, and again, the ability to identify the relevant applicable law.

The principles set out in the Assignment Regulation are welcome because they provide much needed clarity on which law applies when determining the validity of an assignment of receivables cross-border. It will provide more certainty to assignees, and hopefully lead to less litigation as a consequence.

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Transfer of contract, page actions.

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by Marcus Baum

• 1 1. Subject matter and purpose
• 2 2. Tendencies of legal development
• 3 3. Uniform law: Possibilities of and requirements for a transfer of contract
• 4 4. Uniform Law: legal consequences of a transfer of contract
• 5 5. Provisions in the CISG
• 6 Literature

1. Subject matter and purpose

By way of a transfer of contract one side of a contractual relationship is transferred as a whole. The consequence is that a new party takes on all rights and obligations of one of the original parties to the contract. Technically, a transfer of contract can be effected either by way of a number of individual successions, ie by the assignment of all rights and the assumption of all obligations under the contractual agreement, or uno actu , ie by a contractual form of universal succession . The legal act of transferring a contract therefore allows for the transfer of the entirety of rights and obligations constituting the contractual relationship in question by means of a single legal transaction ( juridical act ). The concept of transfer of contract is very important in practice, especially in the case of long-term contracts such as leases , loans and employment agreements as well as in acquisitions of enterprises effected by way of an asset deal. In an asset deal an enterprise is not transferred by selling the shares held in it but by the transfer of the individual assets—including the contracts—which in their entirety make up the enterprise.

Transfer of contract is doctrinally understood either as a separate legal institution constituting a contractual form of universal succession, or as a case of novation. According to the former view an existing contract is transferred but apart from the change in the person of one of the parties the contract remains the same. By contrast, according to the latter view the original contract is replaced by a new contract. Irrespective of its doctrinal classification, the transfer of contract requires the participation of all three parties involved, ie the original parties to the contract and the new party entering into the contract and replacing one of the original parties.

Transfer of contract needs to be distinguished from the accession to an existing contract. Here, the new party joining a contract does not replace one of the original parties. Rather, the new party enters into the contractual relationship in addition to one of the original parties. As a consequence, the new party is liable for the obligations under the contract of the original party on whose side he has joined. The specific form of such liability depends on the actual agreement. Thus, the new party and the original party can be jointly and severally liable for the obligations arising from the contractual relationship with the consequence that both are bound to render one and the same performance ( performance and its modalities ) and the creditor may require it from either of them until full performance has been received ( solidary obligations ). It is also possible that the new party and the original party are only required to render part of the performance. Their obligations are then separate or divided. But it may also be the case that the new party and the original party are required to render performance jointly, ie that their obligations are communal or joint, and that the creditor can only demand performance collectively from both of them and not from each one of them alone.

Like the transfer of a contract, accession to a contract requires the participation of all three parties involved because as a result of another party joining the contract the position of the party on the other side of the contractual relationship is not only improved: he also has to face another creditor.

Transfer of contract can also be distinguished from the assumption of debt ( transfer of obligation ). In case of the latter it is only an obligation arising from a legal relationship (not necessarily a contractual one) which is taken over by a new debtor, while the original debtor is released from that obligation. Consequently, and in contrast to the transfer of a contract, if the transfer of an obligation relates to a contractual debt, the original debtor continues to be a party to the contract; it is just an isolated obligation that is transferred. Therefore all rights to affect, ie to alter or terminate the contractual relationship, remain with him.

Transfer of contract also needs to be distinguished from what is referred to as a contractual undertaking by a third party to perform the obligation of another. Such an undertaking does not result in a change of the existing contractual relationship. It does not even change the position of the original debtor. Rather, the third party only undertakes towards the debtor to perform the obligation in question on behalf of the latter.

2. Tendencies of legal development

Today, transfer of contract is universally recognized as a legal concept. But it is a fairly recent concept, not least because it is completely at cross-purposes with the Roman law understanding of contract as a ‘juris vinculum inter personas’, in other words a strictly personal bond between the parties to the contract. According to this view a transfer of a contract would be impossible.

Nowadays, at least in more recent codifications such as the Italian, Portuguese and Dutch ones, one can even find explicit rules on transfer of contract. The majority of jurisdictions, irrespective of whether transfer of contract is codified as such or not, view it as a single legal act and not as the sum total of several assumptions of debts and assignments of claims. The development of German law provides a good example. The German Civil Code ( Bürgerliches Gesetzbuch (BGB) ) does not contain explicit rules on transfer of contract. That is due to the fact that the draftsmen of the code did not view contractual relationships as a legal entity but rather as the sum total of each party’s rights and obligations. Thus, it was thought that the rules on the assignment of claims and assumption of debts would be sufficient for a transfer of such rights and obligations. Today also under German law it is well understood that a transfer of contract can be effected by way of a single legal act which requires the participation of all parties. The concept of transfer of contract is in principle also known to the common law jurisdictions. English law considers the transfer of a contract as a case of novation requiring the consent of all parties involved. Scots law sees the transfer of a contract as a separate legal institution which also requires the consent of all parties.

Thus, all jurisdictions require the participation and consent of all parties involved. It is generally understood that this may be effected by way of a tripartite agreement or by means of an agreement between the party withdrawing from the contract and the new party with the consent of the party on the other side of the contractual relationship. That consent may also be given implicitly or in standard contract terms as long as the general validity requirements are fulfilled. It may also be given in advance. Transfer of contract does not require a specific form but the transfer agreement must satisfy the formal requirements of the contract that is being transferred.

In addition to the transfer of contract by way of an agreement between the parties involved, a contract may also be transferred by operation of law. Examples include the practically important cases of (1) where as part of the transfer of ownership of an enterprise the employment agreements automatically pass on to the acquirer of the enterprise, or (2) where real property is sold and the leases entered into by the seller automatically pass on to the buyer, or (3) where contracts are transferred as a result of corporate restructuring such as the merger or splitting off of corporations.

The majority of jurisdictions also agree on which rights and defences may be invoked between the new party and the other party to the contractual relationship. As a general rule, both of them may reciprocally invoke all defences (inter alia, defect of form, voidability on grounds of error, termination, performance) arising under the contract. Obviously, the new party and the other party to the contractual relationship may also invoke all defences arising under their legal relationship, eg an additional time for payment agreed upon between them. Although under English law a transfer of contract is considered to be a novation, the other party to the contractual relationship may nevertheless, in principle, invoke all defences against the new contract party which it could have invoked against the original contract party.

3. Uniform law: Possibilities of and requirements for a transfer of contract

Of the uniform law projects the PECL (Art 12:201) ( Principles of European Contract Law (PECL) ) and the DCFR (Arts III.-5:301 and III.-5:302) ( Common Frame of Reference (CFR) ) deal with the transfer of contracts in an almost identical way. The UNIDROIT PICC (Arts 9.3.1 ff) ( UNIDROIT Principles of International Commercial Contracts (PICC) ) and the Avant-projet (Arts 118 ff) ( Code Européen des Contrats ( Avant-Projet ) ) also each contain a set of rules. The Acquis Principles , however, do not deal with the transfer of contracts.

All uniform law projects understand the transfer of contracts as a single legal transaction rather than a mere combination of an assignment of claims and a transfer of obligations. PECL, DCFR and UNIDROIT PICC merely refer to the provisions on the assignment of claims and transfer of obligations for the legal consequences of a transfer of contract.

While none of the model rules deal explicitly with the legal classification of a transfer of contract, the PECL as well as the DCFR, for example, state in their commentaries that transfer of contract is to be distinguished from novation. While novation implies the extinction of the old contractual relationship and the constitution of a new one (often between the same parties) the essence of a transfer of contract, according to the PECL and the DCFR, is that the contract remains the same but is transferred from the party withdrawing from the contract to the new party. The Avant-projet recognizes the transfer of contract both as an individual legal institution and as a case of novation.

All model rules allow for the transfer of contracts by way of a tripartite agreement or by way of an agreement between the withdrawing party and the new party with the consent of the other party to the contractual relationship.

All model rules allow for consent to be given in advance. Where consent is given in advance, the transfer only becomes effective once the consenting party receives notice of the agreement between the withdrawing party and the new party.

If the other party does give his consent to the transfer of contract, according to the PECL and the DCFR the withdrawing party is released from the contractual relationship. All rights and obligations are then transferred to the new party.

A different regulation can be found in the UNIDROIT PICC. They distinguish between the consent to the transfer of contract and the discharge of the original party. Such discharge has to take place in addition to the giving of consent. If the other party to the contractual relationship refuses to grant such a discharge, the original party and the new party are to be jointly and severally liable for the obligations of the original party. The UNIDROIT PICC also explicitly provide that the other party may retain the original party as a kind of subsidiary debtor, in case the new party does not perform properly. In cases where discharge is not granted, it is not clear whether the original party remains a creditor or withdraws from the contractual relationship at least in this respect. The UNIDROIT PICC, therefore, cover both the actual transfer of contract, whereby one of the original contract parties is replaced by a new one, as well as the accession to a contract.

The Avant-projet offers yet another set of rules. In principle, the original party is released from the contract and its obligations once the transfer of contract becomes effective. However, the other party to the contractual relationship may, when giving his consent, declare that he does not want to discharge the original party. The original party then remains liable as a subsidiary debtor in case of non-performance by the new party.

4. Uniform Law: legal consequences of a transfer of contract

PECL, DCFR and UNIDROT PICC refer to the provisions on the assignment of claims for the legal consequences of a transfer of contract as far as the latter includes the transfer of rights, and to the provisions on the transfer of obligations as far as they contain a transfer of obligations. This reference is especially important for the questions (1) to what extent defences can be invoked, (2) to what extent the parties can give notice of set-off and (3) what effect a transfer of contract has on securities granted for the performance of obligations under the original contract.

In the case of transfer of an obligation, the new debtor can invoke all defences against the creditor which the original debtor could have invoked against him. In principle, in case of a transfer of contract it must be possible to invoke defences to an even larger extent than in the case of a ‘mere’ transfer of an obligation, because the whole contractual relationship is transferred and, therefore, the new party must also be able to invoke defences based on the fact that he is, at the same time, the creditor of the counter-performance. However, the new party cannot declare a set-off with claims which the withdrawing party had under legal relationships other than the one transferred. The other party to the contractual relationship may again invoke all defences against the new party which it could have invoked against the withdrawing party. He can also make use of any right of set-off which he could have used against the withdrawing party until he had received notice of the transfer of contract.

The provisions on the transfer of obligations also determine the fate of securities granted by the withdrawing party or a third party for the performance of the contractual obligation of the withdrawing party. Such securities, according to the PECL and the DCFR, expire unless the withdrawing party or the third party agrees that they should continue to exist. It has been seen above that the UNIDROIT PICC require the granting of both consent and discharge by the other party to the contractual relationship for the original party to be released from its obligations. Only when both consent and discharge are granted will the securities expire. According to the PECL, the DCFR and the UNIDROIT PICC securities do not, however, expire if they relate to assets which are transferred to the new party as part of the contract between the withdrawing party and the new party.

The Avant-projet does not refer to the provisions on assignment of claims and transfer of obligations. Rather, the Avant-projet explicitly states that the other party to the contractual relationship may invoke against the new party all defences arising from the contract but not defences arising from other relationships with the withdrawing party unless the other party has reserved this right when giving its consent to the transfer of contract. There are no explicit rules as far as the defences available to the new party, or his right to declare set-off, or the fate of securities are concerned. It seems, however, fair to assume that the principles of the other model rules apply analogously. The Avant-projet does, in turn, contain elaborate provisions on the question as to the extent to which the withdrawing party is liable to the new party for the validity and enforceability of the transferred claims against the other party to the contractual relationship.

The PECL, the DCFR and the UNIDROIT PICC therefore deal with the essential issues concerning a transfer of contract in a very similar way. This appears to be true also for the Avant-projet , even if it pursues a different approach, especially as its systematic exposition is concerned.

5. Provisions in the CISG

The CISG does not contain provisions on the transfer of contract. The validity and legal consequences of an intended transfer of contract therefore need to be derived from the national law applicable under the conflict of laws rules.

Helmut Pieper, Vertragsübernahme und Vertragsbeitritt (1963); Fritz Fabricius, ‘Vertragsübernahme und Vertragsbeitritt’ (1967) JZ 144; Heinrich Dörner, ‘Anfechtung und Vertragsübernahme’ (1986) NJW 2916; Knut Wolfgang Nörr, Robert Scheyhing and Wolfgang Pöggeler, Sukzessionen , Handbuch des Schuldrechts , vol 2 (1999) 180 ff; Carel Asser and Arthur S Hartkamp, Handleiding Tot de Beoefening van het Nederlands Burgerlijk Recht , Verbintenissenrecht (2000) Part 1, 11 ff; Joseph Chitty, Chitty On Contracts , General Principles (2008) 1367 ff; Francesca Mazza, ‘Assignment of Contracts’ in Stefan Vogenauer and Jan Kleinheisterkamp (eds), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2009) Art 9.3.1 ff; François Terré, Philippe Simler and Yves Lequette, Droit Civil , Les Obligations (2009) 1293 ff; Yvonne Flour, Jean-Luc Aubert and Eric Savaux, Droit Civil , Les Obligations , Le Rapport d'Obligation (2009); Hans-Joachim Holzapfel and Reinhard Pöllath, Unternehmenskauf in Recht und Praxis (2010) 514 f.

Retrieved from Transfer of Contract – Max-EuP 2012 on 10 September 2024.

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Guarantees and collateral for acquisition financings in Germany

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

German corporate law sets out, inter alia, share capital maintenance rules and prohibits an interference which jeopardises a subsidiary’s existence. Such rules primarily apply to payments to direct shareholders. However, they also apply to guarantees provided by an entity for the benefit of its (direct or indirect) shareholder(s) (upstream guarantee) and other subsidiaries of its (direct or indirect) shareholders (which are not simultaneously shareholders of the entity providing the relevant guarantee) (cross-stream guarantees). The relevant limitations apply, inter alia, to German limited liability companies (GmbH), German stock corporations (AGs) and German limited partnerships where a German limited liability company is the sole general partner (GmbH & Co KG).

The relevant limitations do not render the relevant guarantee void, or automatically limit the relevant entities’ capacity to make payments under the guarantee. However, the granting of or the payment under an upstream or cross-stream guarantee in violation of the applicable capital maintenance rules can result in a civil (and potentially criminal) liability of the managing directors of the relevant German entity. In practice, these German entities do grant upstream and cross-stream security and guarantees by relying on heavily negotiated limitation language.

The purpose of the limitation language is primarily to protect the guarantor’s or security provider’s registered capital (based on a balance sheet test), thereby shielding the management from incurring potential personal liability.

In contrast to the above, German law generally imposes no limitations on foreign companies providing guarantees for the benefit of their German affiliates or parents (however, the laws of the relevant foreign jurisdictions usually do).

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

In addition to the restrictions under the capital maintenance rules described in question 14, the provisions on providing financial assistance set out in the German Stock Corporation Act apply if the target is a German stock corporation. Pursuant to these provisions, a stock corporation must not provide any direct or indirect support to the acquisition of its shares. This prohibition also applies to subsidiaries of stock corporations. If the providing of collateral conflicts with such provisions, the relevant agreements may be void. However, there are several recognised ways to circumvent such issues. For example, if a control and profit and loss transfer agreement between the stock corporation and its parent is in force, acts of assistance provided by the stock corporation can be exempt from the aforementioned rules.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

German civil law provides for several types of collateral instruments. These include accessory security interests (ie, security interests that are legally linked to and determined by the secured claims), such as:

• pledges over shares and partnership interests;
• pledges over claims (eg, arising under bank accounts), rights (eg, intellectual property) and goods; and
• mortgages on real estate, ships and aircraft.

In addition, there are non-accessory security interests (ie, security interests that are independent of the existence of the secured claims and which can be transferred without the secured claim) such as:

• assignment of receivables (eg, against customers or intra-group debtors);
• security transfer of title to movable assets;
• guarantees, sureties and letters of comfort; and
• land charges on real estate.

German law does not provide for the possibility of an all asset type security (like a debenture in the UK or an all asset security in the US). Security needs to be granted over each asset type. However, pledges and assignments may also cover future shares, partnership interests or claims, and assignments may also cover future receivables and goods, as long as the future encumbered assets are already identifiable at the time the relevant security agreement is entered into.

Although German law does not generally provide for the concept of floating charges, in certain respects it is possible to agree to security arrangements pursuant to which collateral may float. For example, it is possible to grant blanket assignments of certain assets. Such assignments would have to comply with the principle of certainty, which means that it must be determined, or at least it must be determinable at all times, which exact assets are subject to such assignments.

Under German insolvency laws, the authority to dispose of an asset ends with the opening of insolvency proceedings, so that from that time on no future assets or receivables will become part of the security.

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

This generally depends on the specific type of security and must be assessed on a case-by-case basis.

For example, an agreement pursuant to which a pledge over the shares in a German limited liability company is created needs to be notarised. In contrast, the notarisation requirement does not apply in relation to pledges over, inter alia, the shares in a German stock corporation. The creation of a pledge over receivables requires the relevant debtor (eg, the account bank) to be notified, whereas the assignment of receivables requires no such notification. However, notifying the debtor may be advisable to ensure that payment is made to the assignee (and not the assignor).

Further, real estate security (eg, land charges) must be registered with the competent land registry.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

Under German law there are generally no requirements for renewal procedures. However, certain banks require lists itemising the assigned claims to be delivered to them periodically (eg, monthly or quarterly). Such lists are generally not required for the validity of the security, provided that the description of the assigned receivables is sufficiently specific to identify which receivables are being assigned. The lists can, however, help to accelerate a potential enforcement of the security.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

Generally, no explicit legal provisions exist stating that approval of a works council or other similar consent is necessary before granting a guarantee or security. However, if an economic committee within the meaning of section 106 of the German Works Constitution Act exists (which is required if the relevant entity has more than 100 full-time employees), it might be appropriate to keep that economic committee informed of any relevant borrowing and granting of security, because the company is obliged to inform the committee about economic affairs, in particular the company’s economic and financial situation.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

Security can be granted to an agent for the benefit of all lenders. However, in the case of accessory security, this requires the creation of a parallel debt obligation. This is due to the fact that accessory securities may only be granted to the holder of the secured claim and only be enforced in an amount equal to the security holders’ secured claims. A parallel debt obligation creates a claim for the security trustee equal to the aggregate amount of all claims outstanding in connection with the secured documents from time to time. This structure is widely used and generally accepted in the German market, even though there is no definitive case law confirming its validity.

As a result, assignments and transfers can be effected by lenders under a facility agreement or the holders of bonds without taking any steps to ensure that the new lender(s) or holder(s) benefit from the underlying German law security interests. However, transfers between lenders by way of novation may extinguish the secured claim under German law and arguably restart the hardening periods. Therefore, transfers by way of novation are typically avoided where German security was granted.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

German statutory law does not explicitly deal with creditors’ protection before the release of collateral.

Non-accessory security rights, such as a security assignment or transfer, need to be released and the assigned or transferred claims or assets need to be reassigned or re-transferred, as relevant, by way of an agreement between the security grantor and the security holder.

Accessory security, such as pledges, automatically extinguishes if all secured obligations have been discharged in full. Further, a portion of the encumbered assets may automatically be released as a result of overcollateralisation (ie, if the realisable value of the encumbered assets significantly exceeds the value of the secured claims). However, there are certain exceptions, and it is customary that accessory security interests are also explicitly released by means of a release agreement.

Describe the fraudulent transfer laws in your jurisdiction.

Depending on the circumstances of the individual case, German law provides for several provisions dealing with fraudulent transfers. For example, if a debtor has transferred assets, despite creditors of that debtor being entitled to those assets, owing to an enforceable judgment, these creditors may under certain conditions challenge that transfer in accordance with the provisions of the German Creditors’ Avoidance of Transfers Act. Further, in circumstances involving insolvency, the insolvency administrator may contest transactions which were entered into with the intention to disadvantage the debtor’s creditors if the other party was aware of such intention and the transaction was entered into during the 10 years prior to the request to open insolvency proceedings. In addition, fraudulent transfers may be deemed criminal offences.

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Guideline - Liabilities and Indemnities under German Law

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Under German law limitation/exclusion of liability clauses respectively indemnity clauses require an individual agreement (no general terms and conditions (“GTC”) or standard agreements with contract terms pre-formulated for more than two contracts).  There is more freedom of contract in CISG (UN Convention on International Sale of Goods) or Common law or Swiss law . Therefore, for cross-border businesses respectively international agreements it might be considered to choose another law than German law. But even in national agreements it might be worth considering an escape from German law in standard agreements and GTC. See Martin Rothermel’s  very helpful 2 nd Edition of the publication on International Purchases, Deliveries and Distribution : It contains compact information and considerations on international purchase, supply and distribution contracts (choice of law and jurisdiction or arbitration, German law - CISG - Swiss law - Common law in comparison (with a very helpful spreadsheet table on similarities and differences in contract structure comprising over 80 topics), internationally mandatory provisions in distribution in more than 50 regions and countries, retention of title provisions and validity of consignment agreements in more than 75 countries, basics of antitrust law for vertical agreements in the EU and more than 10 other countries, comments on Incoterms®2020). The book also contains a spreadsheet overview of content, similarities and differences in 12 well known arbitration rules of international arbitration institutions as alternatives for state courts. Moreover the Book provides an update on the Brexit consequences and other international free trade agreements that were signed in 2020 in large scale (creating the two biggest free trade zones in the world).

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Trade secret laws and regulations in Germany

Explore reliable legal information about trade secrets in germany, 1. has the directive (eu) 2016/943 of the european parliament and of the council of 8 june 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (“trade secrets directive”) been implemented, 2. are there any other applicable sources of law related to trade secrets, 3. how are trade secrets defined , 4. do specific measures or protections need to be put in place for information to benefit from protection as a trade secret, 1. are trade secrets transferable and/or licensable, 2. are there specific consequences arising from transfer or licensing of trade secrets by a party other than the trade secrets owner, 3. is co-ownership of trade secrets permitted, 1. what actions constitute infringement of trade secrets, 2. are there any measures allowing the trade secrets' owner to gather and/or preserve evidence of infringement of trade secrets, 3. what specific interim and final measures and remedies are available in the event of infringement of trade secrets, 4. is there a specific period after obtaining interim measures by which the applicant must bring proceedings for a substantive decision on the merits of the claim, 5. are there circumstances in which damages or other financial compensation may be available in place of an injunction and other measures, 6. are any interim or final measures and remedies available through ex parte hearings, 7. how is financial compensation to the trade secrets holder calculated, 8. what is the limitation period for claims relating to misappropriation of trade secrets, 9. when does the limitation period begin to run, 10. are there any circumstances that interrupt or suspend the limitation period, 11. are mechanisms available to preserve confidentiality of trade secrets in the course of legal proceedings, 12. are there any particular legitimate interests which may be invoked as an exception to the measures, procedures and remedies for trade secrets protection, 13. are any measures available where proceedings concerning trade secrets are manifestly unfounded and / or found to have been initiated abusively or in bad faith, 14. are separate legal proceedings required for such measures, 1. in addition to any statutory protection of trade secrets, what protections can employers put in place to avoid misuse of trade secrets by its workforce, 2. are there implied rights of protection for employers regarding misuse of trade secrets by its workforce, 3. what other means can employers use to protect misuse of trade secrets by the workforce, particularly when staff leave, 4. are there any protections for “whistleblowers” or similar rights for employees in relation to infringement of trade secrets, 5. can an employer be liable for their employee’s infringement of a third party’s trade secrets, 1. what kind of protection/provisions are to be included in supply or similar contracts with respect to trade secrets, 2. what are typical pitfalls in contracts regarding protecting trade secrets, 3. are there any important aspects regarding protecting trade secrets cross border, 4. are there any penalty clauses in contracts with regards to trade secrets.

Yes, the Directive is implemented through the new law for the protection of business secrets (Gesetz zum Schutz von Geschäftsgeheimnissen/ GeschGehG ) of 18 April 2019 (BGBl. I p. 466). The protection of trade secrets was previously regulated in the now repealed Sections 17-19 of the Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb/ UWG ).

As a consequence of the fragmentary framework before the implementation, protection can also be derived from Sections 280 (1), 241 (2) for contractual claims for damages as well as tortious claims according to 823 and 826 of the German Civil Code ( BGB ). Regarding criminal law, Sections 201 to 206 of the German Criminal Code ( StGB ) make the violation of the personal sphere of life and secrecy punishable.

According to Section 2 no. 2 GeschGehG, a ‘trade secret’ is an information which:

• is not, either as a whole or in the precise configuration and assembly of its constituent parts, generally known or readily accessible to persons in the circles that normally handle this type of information and therefore has commercial value;
• is subject to, in view of the circumstances, reasonable confidentiality measures by its rightful owner; and
• there is a legitimate interest in confidentiality.

The legitimate interest as a prerequisite for a trade secret is a special German approach, as the definition of a trade secret in Directive (EU) 2016/943 does not contain this requirement.

There are no further requirements apart from those listed above. The relevant national legal provision corresponds almost literally to the text in Article 2 (1) sub c of the Directive, which stipulates that only information ”subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret “ suffice to qualify as a trade secret. Therefore, reasonable steps must be taken to identify and protect trade secrets. The GeschGehG, however, does not specify the relevant measures, which may include:

• Organisational measures (e.g. access and entry restrictions for employees, access and exit controls at the company premises, etc.);
• technical measures (e.g. encryption, password protection, etc.);
• legal measures (e.g. conclusion of NDAs).

Dealings in and ownership of Trade Secrets

Yes. Against the background of the definition in Section 2 no. 2, a licensee may also be the holder, meaning a natural or legal person who exercises legal control over the trade secret. Needless to say, the licensing of the secret should be contractually regulated in a licence agreement. The agreement must contain an obligation of the other contracting party to keep secret the knowledge and information that has become known as a result of this cooperation. 

Yes, several persons can be classified as owners. The person concerned must have legitimate control over the trade secret. A person who acquires a license to a trade secret and thereby has the right to learn, use or disclose it also has legal control over the trade secret.

Enforcement of Trade Secrets

According to Section 4 GeschGehG, the following actions constitute an infringement of trade secrets:

• unauthorised access to, unauthorised appropriation or unauthorised copying of documents, objects, materials, substances or electronic files that are under the lawful control of the holder of the trade secret and contain the trade secret or from which the trade secret can be derived, or
• any other conduct that, in the circumstances, does not comply with the principle of good faith, having regard to honest market practice.
• number 1; or
• violates an obligation to limit the use of the trade secret; or
• violates an obligation not to disclose the trade secret.
• A trade secret may not be obtained, used or disclosed by anyone who has obtained the trade secret through another person and who, at the time of obtaining, using or disclosing it, knows or ought to know that the other person has used or disclosed the trade secret contrary to paragraph 2. This applies in particular if the use consists of the production, offering, placing on the market or import, export or storage for these purposes of infringing products.

Acc. to Sec. 8 GeschGehG, the holder of a trade secret may request from the infringer information on the following:

• the name and address of the producers, suppliers and other previous owners of the infringing products, as well as of the commercial customers and sales outlets for which they were intended;
• the quantity of infringing products manufactured, ordered, delivered or received and the purchase prices;
• the documents, items, materials, substances or electronic files in the possession or property of the infringer, which contain or embody the trade secret; and
• the person from whom they have obtained the trade secret and to whom they have disclosed it.

The trade secret holder is entitled to claim for cease and desist (Sec. 6 GeschGehG), for special measures, such as destruction, recall, etc. (Sec. 7 GeschGehG) and for information and compensation (Sec. 8 GeschGehG).

At the request of the trade secret holder, the court can order by way of an interim injunction a cease and desist of the use or disclosure of the trade secret as well as a seizure of the documents, items, materials, substances or electronic files in the possession or property of the infringer that contain or embody the trade secret. The aim of the injunctive relief is to prevent a renewed (injunctive relief) or a first-time (preventive injunctive relief) infringement.

In addition, a court decision taken on the merits (main proceedings) can order the following:

• destruction or release of the documents, items, materials, substances or electronic files in the possession or property of the infringer that contain or embody the trade secret;
• recall of the infringing product;
• permanent removal of the infringing products from the distribution channels;
• destruction of the infringing products; or
• withdrawal of the infringing products from the market, if the protection of a trade secret is not affected.

Finally, the holder of the trade secret is entitled to information claims in accordance with Section 8 GeschGehG.

The preliminary injunction is only a temporary measure, so that the holder of a trade secret is in principle obliged to bring the action on the merits of the case in order to definitively protect his rights. There is no need for legal recourse in this regard if the defendant recognises the preliminary injunction as a final provision equivalent to a legally binding main action title in terms of validity and effect (i.e. if he submits the final declaration).

Following Sec. 926 Code of Civil Procedure (ZPO), if the main action is not pending, the court responsible for the seizure is to order, upon corresponding application being made and without holding a hearing for oral argument, that the party having obtained the interim injunction is to bring main proceedings in the courts within a period to be determined (i.e. at least two weeks).

Should this order not be complied with and a corresponding application be made, the seizure is to be set aside in a final judgment.

Yes, the infringer must then invoke the right to compensation under Section 11 GeschGehG, which provides that an infringer who has acted neither intentionally nor negligently may, in order to avert the claims under Sections 6 or 7, compensate the owner of the trade secret in money if the infringer would suffer a disproportionately large disadvantage by the fulfilment of the claims and if the compensation in money appears to be appropriate.

(2) The amount of the monetary compensation will be based on the sum that would be appropriate in the event of a contractual grant of the right of use. It may not exceed the amount corresponding to compensation within the meaning of sentence 1 above for the length of time during which the holder of the trade secret is entitled to injunctive relief.

In light of the character of Sec. 11 as an exception, it must be assumed that in case of doubt there is a lack of appropriateness.

The court may, at its discretion, decide without an oral hearing, entirely without a hearing or after an oral procedure.

As a rule, an oral hearing as well as a hearing of the infringer will be out of the question if the application for cease and desist is combined with an application for seizure. Otherwise, the warning risks the infringement being obscured. If such a case is credibly demonstrated and legally clear, there is usually no reason to hear the defendant beforehand, particularly in view of the possibility of a claim for damages under Sec. 945 ZPO.

With the triple damage calculation, according to Section 10 (2) GeschGehG, the injured party can choose between three variants of how to quantify the compensable damage: he can demand compensation for the actual damage incurred, demand the return of the profit made by the infringer or calculate the damage on the basis of an appropriate remuneration, which the infringer would have had to pay if he had obtained consent to obtain, use or disclose the trade secret. In contrast to concrete damages, the licence analogy and the publication of the infringer's profit are manifestations of the objective calculation of damages.

According to Section 10 (3) GeschGehG, the owner of the trade secret may also claim monetary compensation from the infringer for non-material damages, to the extent that this is equitable.

The GeschGehG does not contain any special regulation on the statute of limitations. The shortened limitation period of Sec. 11 of the Unfair Competition Act is not applicable. Rather, the claims are subject to the regular limitation period of three years pursuant Sec. 195, 199 BGB. However, a special statute of limitations in Sec. 13 provides that the infringer is under special circumstances obliged to surrender acquired goods even after the limitation of the claim for damages. This claim becomes statute-barred six years after it arises.

The standard limitation period commences at the end of the year in which the claim arose and the obligee obtains knowledge of the circumstances giving rise to the claim and of the identity of the obligor or would have obtained such knowledge if he had not shown gross negligence.

Yes, the general rules of the BGB (Sec. 203-209) apply.

Yes. In Sec. 16-20, which are based on Article 9 of the Directive, the law regulates the secrecy of trade secrets as far as they are introduced into the legal proceedings.

One consequence is that all persons involved, including those in the administration of justice and those who have access to the documents, must keep the information classified as confidential and may not use or disclose it outside of judicial proceedings. The trade secrets requiring secrecy must be rendered unrecognisable in the event of inspection of the files by third parties. The need for secrecy does not prevent the exploitation in other judicial proceedings.

The owner of a trade secret himself is not restricted in its use and disclosure by the order.

Yes, in particular, the laws lists in Sec. 5 GeschGehG

• the exercise of freedom of expression and information, including respect for the freedom and plurality of the media;
• to disclose any illegal activity or professional or other misconduct, where the obtaining, use or disclosure would be likely to protect the general public interest;
• in the context of disclosure by employees to the employees' representatives, if this is necessary to enable the employees' representatives to carry out their duties.

As shown by the formulation “in particular” in Sec. 5 GeschGehG, this list is not exhaustive. Other legitimate interests may include fundamental rights positions that conflict with the protection of business secrets.

This legal regulation is aimed at protecting the activity of whistleblowers.

Yes, according to Sec. 14 GeschGehG, the assertion of claims under this Act will be inadmissible if it is abusive in the light of all the circumstances. In the event of an abusive assertion, the defendant may demand compensation for the expenses necessary for his legal defence. Further claims for compensation remain unaffected.

In this case, the infringer may demand the expenses necessary for his legal defence from the holder of the trade secret. The further claims include, for example, claims under unfair competition law due to a deliberate obstruction (Section 3 I UWG, Section 4 No. 4 UWG, Section 9 UWG) or claims in tort (Sections 823 et seq. BGB).

Employee / employer liability

In addition to technical and organizational precautions, employers can and should enter into a contractual confidentiality agreement with their employees for the duration of the employment relationship. These can either be part of the employment contract or be drafted as a separate confidentiality agreement. In any case, confidentiality clauses must meet the general requirements of German law, especially regarding transparency. In this respect, they should at least specify categories of information requiring confidentiality (e.g., construction plans, client lists etc.) and ideally also define actions that will be particularly considered a breach of the confidentiality agreement. It is also advisable to agree on a contractual penalty. 

In addition, post-contractual confidentiality obligations can be agreed. However, these are subject to particularly high requirements if they are formulated extensively. Like other post-contractual non-compete covenants, the extensive prohibition of use of memorized confidential information can only be effectively agreed for a maximum period of two years and only in return for appropriate compensation. In addition, the scope of the prohibition must be sufficiently defined and clearly formulated. 

Furthermore, company directives on the classification and handling of confidential information can also be established, taking into account possible co-determination rights of the works council. Confidentiality obligations can also be the subject of works agreements (Betriebsvereinbarungen).

Yes, this results from the employee's side obligation not to harm the employer. Accordingly, employees are obliged to show reasonable consideration for the employer's business interests and to protect trade and business secrets. This also includes that employees may not disclose or otherwise use for external purposes any company documents or data in the confidentiality of which the employer has a legitimate economic interest without the employer's consent. These obligations also apply to agency workers in relation to the lender.

In addition to any (post-contractual) confidentiality obligations and contractual penalty clauses, employer may consider the following:

• Issuing explicit instructions about the obligation to keep trade secrets confidential,
• Using protective provisions to prohibit the private use of e-mails and internet,
• Prohibition of storing data on private end devices or sending company data to private email inboxes, 
• Instruction on compliance with IT security requirements and the use of company communication tools,
• Implementing rules of conduct, particularly in sensitive areas (no photography/filming) or on entering certain areas.
• In addition, regular trainings should raise awareness in the workforce about the importance of protecting trade secrets and confidential information.

Yes, the Directive (EU) 2019/1937 of the European Parliament and of the Council of 23 October 2019 on the protection of persons who report breaches of Union law (Whistleblower Protection Directive) provides for a minimum level of protection for whistleblowers who report infringements of Union law. The implementation deadline expired on 17 December 2021. In Germany, unlike in other Member States of the European Union, the Directive has not been implemented yet. The draft legislation for a Whistleblower Protection Act (Hinweisgeberschutzgesetz – HinSchG) was not adopted in 2021. However, the implementation of the Whistleblower Protection Directive will probably is expected for 2022. 

The coalition agreement of the Federal Government provides for a "legally secure and practicable" implementation of the Directive into national law. In addition, the coalition agreement already indicates the possible shape of the future protection of whistleblowers in Germany. whistleblowers are to be protected from legal disadvantages not only when reporting violations of EU law, but also when reporting other significant misconduct under national law that is in the particular public interest. In addition, whistleblowers' claims will likely be protected against retaliation because of a report.

Although the Directive has no direct effect in relations between private individuals (i.e. a private individual cannot invoke the text against another private individual in court), labour courts are obliged to interpret the general clauses of national law in the sense of the Directive.

Yes, an employer can be liable under the Trade Secret Protection Act (Geschäftsgeheimnisschutzgesetz – GeschGehG) if he/she knows or should have known of the unauthorised obtaining of the trade secret by his/her employee. The Act extends liability to the owner of the company whose "employee or representative" is the actual person infringing the trade secret. Any claims under the Act are then also directed against the owner of the business.

Commercial contracts aspects

Contracts should include confidentiality clauses with direct reference to the mutual protection of trade secrets. If a separate NDA has been concluded, it should be ensured that this NDA also explicitly refers to trade secrets. Contractual partners should be required to obligate their employees to maintain confidentiality as well and to make confidential information required for the execution of the contract available only to those employees who absolutely need it.

The GeschGehG permits reverse engineering (i.e. the dismantling of products to gain further insights). Reverse engineering can be contractually excluded for previously unpublished products that are made available to a contractual partner.

Clauses that are too vague do not constitute appropriate confidentiality measures. This applies in particular to so-called "catch-all" clauses in employment contracts. This means far-reaching clauses, which declare all information without further differentiation that employees obtain in the context of their employment relationship to be confidential. Such clauses have already been dismissed as inappropriate by German courts.

In addition, care should be taken not to use old NDA templates or model clauses. Outdated templates often do not meet the requirements of the GeschGehG.

The GeschGehG is modeled on the EU Directive on the protection of trade secrets (2016/943). In this respect, trade-secret protection is mostly harmonised within the EU. For detailed questions, it is nevertheless advisable to review the respective national law since the directive also contains opening clauses.

For the protection of trade secrets outside the EU, the respective national laws must be considered. It is therefore advisable to gather information at least on one's own main markets and, if necessary, to obtain legal advice.

Under German law, penalty clauses do not constitute a mandatory confidentiality measure. It can therefore be dropped from contracts. However, a contractual penalty may be appropriate to ensure more effective enforceability of agreements on trade-secret protection. This particularly applies since damages caused by the infringement of trade secrets are often difficult to quantify.

Lump-sum penalty clauses in pre-formulated contracts may be unreasonable under German law, especially in the case of unequal contracting parties. It is therefore preferable to negotiate jointly and/or to stipulate a contractual penalty, the amount of which is determined at reasonable discretion and can be reviewed by a court.

For more information about your key contacts in Germany and our advisory product CMS PROTECT, please visit our Insight page . 

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