assignment of contract under german law

• Practical Law

Executing Contracts in Germany

Practical law uk practice note w-029-7417  (approx. 12 pages).

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.

The Essential of a Contract in German Civil Law

Term paper, 2018, 14 pages, grade: 2, table of contents, bibliography, 1. introduction, 2. the role of contract law.

3. Formation of a Contract 3.1. Offer, Acceptance and Mutual Consent 3.2. Defects of Consent 3.2.1. Mistake 3.2.2. Fraud 3.2.3. Coercion

4. Penalty Clauses

5. Contractual Performance 5.1. Excusable Non-Performance 5.2. Contractual Remedies

6. Discussion and Conclusion

Freund, Ernst, The New German Civil Code, Harvard Law Review Vol. 13, No. 8, 1900, pp. 627-637

Geest, De Gerrit, Contract Law and Economics: Encyclopedia of Law and Economics, Vol. 6, 2nd edition, Edward Elgar, U.K., 2011

Pieck, Manfred , A Study of the Significant Aspects of German Contract Law," Annual Survey of International & Comparative Law Vol. 3, No. 1, Article 7, 1996, pp. 111-176

Wittman, Donald A., Economic Foundations of Law and Organization, Cambridge: Cambridge University Press, USA, 2006

Posner, Richard A. , Economic Analysis of Law, 7th edition, New York: Aspen Publishers, 2007

Markesinis, B. Sir, Unberath, Hannes, Hannes, Angus, The German Law of Contract: A Comparative Treatise, 2nd edition, Oxford and Portland, Oregon, North America, 2006

Lowisch, Manfred, New Law of Obligations in Germany, Ritsumeikan Law Review No. 20, 2003, pp. 141-156

Rowan, Solène, Remedies for Breach of Contract: A Comparative Analysis of the Protection of Performance, Oxford University Press Inc., New York, 2012

Youngs Raymond, Sourcebook on German Law, 2nd edition, Cavendish Publishing Limited, U.K., 2002

An important characteristic of German civil law system which sets it apart from common law system is the codification of core rules received from Roman law. These codes are drafted in order to cover all relationships within the field of law they govern. The provisions of a code are the references for a great many practical legal problems arise within that field over time. The concept of codification was developed in order to form a base where the laws of a given field can be found in one category – the code – instead of creating many judicial decisions. Beside its general part, German civil code contains other four divisions; the law of obligations, the law of property, the law of family or domestic relations, and the law of inheritance. 1 The whole commercial law falls under the law of obligation regulated by the code. This includes e.g. the law of bills, notes, shipping, insurance, patents, copyrights, trademarks, contracts, and business transactions. 2 This way of codification provides all citizens with a collection of laws they must follow. These laws constitute a systematic written collection of interrelated articles arranged by subject of matter.

The following chapters present the essentials of a contract as a part of the German civil law and how it is governed through this law.

The law of contract is almost the same worldwide to a large extent. The German legislation of contract has its roots in the Roman law tradition of the 19th Century and in addition it is influenced by the French Civil Code ("Code Napoléon" of 1804). On an economic view, contract is “an open-ended institution by which individual actors can exchange resources to their mutual advantage, thereby moving them to higher-valued uses”. 3 In this sense and in the German civil law, parties have a freedom right to make a contract ( Vertragsfreiheit ), according to Grundgesetz (GG) Art. 2 (1), for any object ( Inhaltsfreiheit ) and in any form ( Formfreiheit ) they agree upon as well as to conclude or not to conclude a contract ( Abschlussfreiheit ) unless these rights are specifically restricted by law. 4

The role of law in this case is to protect parties from unforeseen circumstances and avoid mishaps occurred by the contracting process or at least reduce its seriousness. In other words, the role of contract law is to reduce the costs of contracting parties, the cost of courts writing the contract and the costs of incompatible behaviour caused by the poor content of a written contract. 5 However, parties themselves ensure a considerable level of precautions as the first line of defence.

In more details, objectives of contract law revolve around preventing opportunism behaviour, setting out suitable terms as well as punishments on avoidable mistakes in the contracting process, attributing a burden to the superior bearer of it and minimizing the costs of resolving a dispute. 6

3. Formation of a Contract

As mentioned before, parties have a freedom to form a contract but some elements must legally be considered in the contracting process in order for the contract to be valid. This chapter explore briefly these elements in more details according to Book One, Section III, Title 3 of the civil Code (§§ 145-157).

3.1. Offer, Acceptance and Mutual Consent

The contract is an agreement between two parties or more about certain legal objectives. These objectives to be set into binding arrangement with preconditions, one party needs to deliver the so-called “declaration of intention” or will to the other who should unreservedly accept it delivering also a declaration of will to enter into a contract. Offer and acceptance are required to form a contract through corresponding declarations of will ( Willenserklärungen ) even they are not sufficient to form a contract. They produce their effect by the time they reach ( Zugang ) the other party’s sphere of influence meaning the offer “reaches” the offeree and acceptance “reaches” the offeror, as not to be revoked before that time. 7 This rule states that revocation is possible if it reaches the addressee prior to or simultaneously with the offer or acceptance. For the offer and acceptance to come into an existing contract and to be binding, it must be communicated to the other party as a declaration of intention (will) to be received by the addressee (§ 130 I 1 BGB) in time at which a declaration of intention may come into existence. 8 In this sense, the actual notification of the content of declaration must be received by the addressee. In some cases, and according to § 151 BGB, acceptance of an offer need not to be communicated to the offeror, rather, the offeree need to externalize his will through an appropriate form of conduct.

Further, agreement from parties on all points is required in order for a contract to come into existence unless they conclude that some disputed points, stipulated in the contract, have not been settled and in this case the contract is valid. 9 Agreement also includes parties to agree on the period of time during which the obligations must be met and the place of performance where the duty of performance should take place.

However, offer and acceptance are one of the basic elements of a contract but are alone not sufficient to form a contract. For the formation of this element or the formation of a contract as a whole, many issues arise such as the key principle “Good Faith” which describe how honestly, fairly and equitably parties to a contract intentionally treat each other as under an obligation not to destroy the other party´s benefits of the contract. 10

3.2. Defects of Consent

To ensure the conception of consensualism of a contract, German civil law provides correctives for many cases where consent can be defected. These cases are represented in obviously not enlightened (Mistake or fraud) or free (Coercion) consent.

3.2.1. Mistake

The expectations from a contract have to be realistic and not mistaken in order to produce the so-called Pareto gain where parties are aware of the essential benefits expected from contracting. 11 Mistake (Error) can be defined as “the result of information having been trafficked by the other party or under its control” where the other party being mistaken has the right to demand nullity of the contract or to go forward with it, since Mistake is contrary to consensualism concept as an essential element of the contract. 12 The meant mistake here is the error occurred by the promisor being not aware of the objective meaning of his declaration of will. The BGB has referred to common error as ‘common mistake’ for specific incident of notion of misconception for entering into a contract that if the mistake affects the foundation of objective meaning or the contract terms, it gives one party the right to have the contract adjusted or to terminate the contract (§ 313 II BGB). 13 However, mistake constitutes misunderstanding and delivers inaccurate information to the other party who will be deprived of its preferred option. If the contract better redone, it is considered as a new contract and needs a new acceptance from obligee.

3.2.2. Fraud

Fraud can be described as the intentionally manipulation of information from one party, by trickery or lies, on which the other party builds its consent; or in the form of giving misleading answers or outright lies to specific questions from the other. 14 In this case, the fraud is considered as an intended error from one party allowing the other being mistaken to call for nullity of the contract. 15 The German court ( Bundesgerichtshof ) argues according to § 123 I BGB that fraud consists not only of active manipulating but also of withholding information that must be revealed and is considered decisive for the other party. 16 The court ensures some exceptions to this rule clarifying that parties have to keep themselves informed about all information relevant to the decision to enter into a contract. Hence, the defect of fraud makes the contract void and the obligee must not perform his duties.

3.2.3. Coercion

As a necessary condition, declaration of will has to be carried out with the intention to act and not to be forced by coercion. As defined in § 123 I second alternative BGB, Coercion is “the presence of (unlawful or) illegitimate threats ( widerrechtliche Drohung )”. 17 A threat refers to opportunistically abuse by the power of one party to force the other to carry out an act and therefor it doesn´t constitute a declaration of will. Obviously, illegitimate threat should constitute harm to the party aggrieved to have the contract set aside. In some cases, it doesn´t constitute a harm and the contract may be valid. In contrast, the contract goes forward when the threat is ceased and the threatened party approve it in one full year that after (§ 124 BGB).

However, the BGB entitles the party under coercion to rescind the contract regardless of the person making the pressure where the coercion is specifically the “reason” for entering into the contract. 18

Penalty clauses are conditions included in contracts, especially in standard terms contracts to govern the dealings between dealer and consumer. The German law gives full effect to penalty clauses. The including of penalty clauses ( Vertragsstrafe ) in a contract ensures alternatives when the debtor doesn´t perform as agreed. These clauses can be applied against non-performance, delayed performance, or non-conforming performance of obligations (BGB §§ 339, 285) where the creditor can claim that debtor may pay monetary penalty, do something equal or at least perform as stipulated or agreed even if creditor suffers no injury. 19 The court also takes the responsibility of balancing the penalty to ensure a reasonable level in case of disproportion with non-performance. On the other side, the court cannot exceed the legitimate interests of creditor and further, the court is not entitled to reduce penalty amount if it was paid (BGB§ 343). 20 Penalty could be enforced by the court when loss is fairly estimated even without being exactly corresponding with the actual loss.

1 Cf. Freund, German Civil Code, 1900, p. 630.

2 Cf. Freund, German Civil Code, 1900, p. 631.

3 Geest, Contract Law and Economics, 2011, p. 425.

4 Cf. Pieck, The Significant Aspects of German Contract Law, 1996, p. 111.

5 Cf. Wittman, Economic Foundations of Law and Organization, 2006, p.194.

6 Cf. Posner, Economic Analysis of Law, 2007, p. 99.

7 Cf. Pieck, The Significant Aspects of German Contract Law, 1996, p. 116.

8 Cf. Markesinis et al., The German Law of Contract, 2006, p. 69.

9 Cf. Pieck, The Significant Aspects of German Contract Law, 1996, p. 117.

10 Cf. Markesinis et al., The German Law of Contract, 2006, p. 58.

11 Cf. Geest, Contract Law and Economics, 2011, p. 435.

12 Cf. Geest, Contract Law and Economics, 2011, p. 435.

13 Cf. Markesinis et al., The German Law of Contract, 2006, p. 301.

14 Cf. Geest, Contract Law and Economics, 2011, p. 436.

15 Cf. Geest, Contract Law and Economics, 2011, p. 436.

16 Cf. Markesinis et al., The German Law of Contract, 2006, p. 305.

17 Markesinis et al., The German Law of Contract, 2006, p. 315.

18 Cf. Markesinis et al., The German Law of Contract, 2006, p. 315.

19 Cf. Pieck, The Significant Aspects of German Contract Law, 1996, p. 128.

20 Cf. Pieck, The Significant Aspects of German Contract Law, 1996, p. 128.

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Understanding Contract Law in Germany: A Comprehensive Guide

Welcome to this informative article on “Understanding Contract Law in Germany: A Comprehensive Guide.” Before we dive into the fascinating world of German contract law, it’s important to note that this article serves as an introduction and should not be considered as professional legal advice. As with any legal topic, it is essential to cross-reference information with other reliable sources or consult a qualified legal advisor.

Now, let’s embark on our journey to unravel the intricacies of contract law in Germany. Contracts are the backbone of any business or personal transaction, providing a framework for parties to define their rights, obligations, and expectations. In Germany, contract law follows a civil law system, which means that it is mainly governed by statutory laws rather than court precedents.

One fundamental principle in German contract law is the concept of “pacta sunt servanda,” which translates to “agreements must be kept.” This principle emphasizes the importance of honoring contractual obligations once parties have freely and voluntarily entered into an agreement. It sets the foundation for trust and stability in contractual relationships.

📋 Content in this article

In Germany, contracts can be verbal or written; however, it is highly recommended to have written agreements for clarity and evidentiary purposes. When drafting a contract, parties should ensure that all terms and conditions are unambiguous, precise, and reflective of their mutual intentions.

To enhance legal certainty, German contract law requires certain types of agreements to be in writing. These include contracts for the sale of land or real estate, long-term lease agreements, contracts with a term exceeding one year, and agreements concerning intellectual property rights. It is crucial to comply with these formal requirements to ensure the validity and enforceability of the contract.

Now, let’s take a closer look at some key elements of German contract law:

1. Offer and Acceptance: The contract formation process begins with an offer made by one party and accepted by another. For an offer to be valid, it must contain essential terms such as the subject matter, price, and quantity.

Understanding the Elements of Contract Law in Germany: A Detailed Explanation

In Germany, contract law is governed by the Civil Code, also known as the Bürgerliches Gesetzbuch (BGB). Understanding the elements of contract law is essential for anyone entering into agreements or dealing with contractual disputes in Germany. The following detailed explanation will provide you with a comprehensive understanding of the key elements of contract law in Germany.

1. Offer and Acceptance: A valid contract in Germany begins with an offer made by one party (the offeror) and accepted by another party (the offeree). The offer must be clear, definite, and communicated to the offeree. The acceptance must be unambiguous and communicated to the offeror.

2. Consideration: Consideration refers to something of value exchanged between the parties involved in a contract. In Germany, consideration can be in the form of money, goods, services, or even a promise to do or refrain from doing something. Consideration is an essential element for the formation of a valid contract.

3. Intent to Create Legal Relations: For a contract to be legally binding in Germany, both parties must have the intention to create legal relations. This means that they must demonstrate a clear intention to be bound by the terms of the contract. It is important to note that certain agreements, such as social or domestic arrangements, may not be considered legally binding.

4. Capacity: In order for a contract to be valid, both parties must have the legal capacity to enter into a contract. This means that they must be of legal age and have the mental capacity to understand the terms and implications of the contract. If a party lacks capacity, the contract may be voidable.

5. Consent: Consent is a crucial element in contract law in Germany.

Understanding the Basics of Contract Law: A Comprehensive Guide

Title: Understanding the Basics of Contract Law: A Comprehensive Guide

Introduction: Contract law serves as the backbone of business transactions and personal agreements in the United States. It provides a framework for defining and enforcing legally binding obligations between parties. To navigate this complex legal landscape, it is crucial to have a solid understanding of the basics of contract law. This comprehensive guide aims to outline key concepts and principles that underpin contract law in the United States.

I. What is a Contract? A contract is a legally enforceable agreement between two or more parties that creates rights and obligations. It can be written or oral, although some types of contracts must be in writing to be enforceable. Contracts typically involve a promise to perform certain actions or refrain from specific behaviors, in exchange for something of value, known as consideration.

II. Essential Elements of a Contract: To be valid and legally enforceable, a contract must have the following essential elements:

1. Offer and Acceptance: An offer is a proposal made by one party to another, indicating an intent to enter into a contract. Acceptance occurs when the other party agrees to the terms of the offer without any modifications or conditions. Both offer and acceptance must be clear, definite, and communicated between the parties involved.

2. Consideration: Consideration refers to something of value exchanged between the parties in a contract. It can be money, goods, services, promises, or even refraining from doing something. Consideration distinguishes contracts from mere gifts or voluntary promises.

3. Legal Capacity: All parties entering into a contract must have the legal capacity to do so. This means that they must be of legal age and mentally competent. Certain individuals, such as minors or those with diminished mental capacity, may lack legal capacity and therefore cannot form a valid contract.

4. Mutual Assent: Mutual assent, also known as a meeting of the minds, occurs when all parties understand and agree on the essential terms of the contract.

Title: Understanding Contract Law in Germany: A Comprehensive Guide

Introduction: Contract law is a fundamental aspect of legal systems around the world, including Germany. Understanding the basics of contract law is crucial for businesses and individuals alike, as contracts form the foundation of most commercial and personal transactions. In this comprehensive guide, we will explore the key concepts of contract law in Germany, emphasizing the importance of staying current on this topic.

1. The Basis of Contract Law in Germany: Contract law in Germany is primarily governed by the German Civil Code (Bürgerliches Gesetzbuch or BGB). The BGB contains provisions that regulate the formation, interpretation, and performance of contracts. It is important to note that contract law in Germany has been influenced by the principles of Roman law, making it distinct from common law systems.

2. Essential Elements of a Contract: In order to form a valid contract in Germany, certain elements must be present: – Offer and Acceptance: A valid contract requires a clear offer from one party and an unambiguous acceptance by the other party. – Mutual Assent: Both parties must freely and consciously agree to the terms of the contract without any undue influence. – Consideration: Contracts in Germany generally require consideration, which refers to something of value exchanged between the parties. – Legality: The subject matter of the contract must be legal and not contrary to public policy or prohibited by law.

3. Terms and Interpretation: Once a contract is formed, it is essential to clearly define its terms and interpret them correctly. Ambiguities in contract language may lead to disputes. It is recommended to seek legal advice when drafting or interpreting contracts to ensure clarity and avoid potential misunderstandings.

4. Breach of Contract: In cases where one party fails to fulfill its obligations under the contract, a breach occurs. German contract law provides remedies for breach of contract, including specific performance, damages, or termination.

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• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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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 29 March 2024.

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Transfer of Contracts under German Law

The paper analyses the historical development of the transfer of contracts under German Law, regarding the principle of succession for the assignment of claims and the assumption of debts and the influence of the German Federal Court of Justice on the transfer of shares in a company. It also provides a dogmatic framing of the subject and shows the prerequisites for a valid transfer of contracts under German Law. Additionally, the paper outlines the protection of succession in contract law and how the Draft Common Frame of Reference codified the transfer of contracts. Finally, the author argues for the statutory addition of a third variant, of private assumption of debt, which is effective without the creditor’s consent.

Author Biography

Prof. Dr. Jan Lieder, LL.M. (Harvard), Freiburg, Germany.

ELTE Law Journal  |  ELTE Eötvös Loránd University, Faculty of Law  |  Egyetem tér 1-3, Budapest, 1053 Hungary  |  [email protected]

Assignment of Contract under German Law

In the business world, contract assignments are common practices used to transfer rights, obligations, and benefits from one party to another. This legal mechanism is particularly useful in situations where one party to a contract can no longer perform its obligations, or where a company is acquired, and the new owner needs to take over existing contractual relationships.

Under German law, the assignment of contractual rights is generally allowed if it is not explicitly forbidden by the contract or legal provisions. However, there are certain legal requirements and restrictions that must be observed to make the transfer valid and enforceable.

Firstly, under German law, any contract under which an assignment is made must be valid. This means that the contract must be properly concluded, comply with the applicable legal requirements, and be free from any vices that could affect its validity.

Secondly, the parties must have agreed on the specific assignment of rights and obligations. The agreement must be clear and unambiguous, indicating the exact rights and duties transferred, the parties involved, and the consideration, if any, for the assignment.

Thirdly, the assignee must have a legitimate interest in the assignment, such as a contractual relationship with the assignor, a commercial interest in the transaction, or a legal obligation to perform the assigned duties.

Fourthly, the assignment must not violate any legal requirements or public policy. This means that it must not be contrary to any mandatory laws or regulations, or undermine the public interest.

Finally, in cases where the assignment involves the transfer of personal data, the assignee must comply with the applicable data protection regulations, such as the General Data Protection Regulation (GDPR) and the German Data Protection Act (BDSG).

In conclusion, the assignment of contracts under German law is a valuable legal instrument that enables parties to transfer their contractual rights and obligations to others. However, there are important legal requirements and restrictions that must be observed to ensure the validity and enforceability of the assignment. As such, it is crucial for businesses and individuals to seek legal advice and guidance before entering into assignment agreements.

Securitisation Laws and Regulations Germany 2023-2024

ICLG - Securitisation Laws and Regulations - Germany Chapter covers common issues in securitisation laws and regulations – including receivables contracts, receivables purchase agreements, asset sales, security issues, insolvency laws, special rules, regulatory issues and taxation.

Chapter Content Free Access

1. receivables contracts, 2. choice of law – receivables contracts, 3. choice of law – receivables purchase agreement, 4. asset sales, 5. security issues, 6. insolvency laws, 7. special rules, 8. regulatory issues, 9. taxation.

1.1        Formalities. In order to create an enforceable debt obligation of the obligor to the seller: (a) is it necessary that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone sufficient; and (c) can a binding contract arise as a result of the behaviour of the parties?

As a matter of German law, a receivable arises from the underlying contract between the seller and the debtor.  Certain types of contract and the conclusion of certain contracts with certain counterparties (such as consumers) are subject to a requirement of form, e.g., the need to be in writing or comply with further requirements.  However, German law does not stipulate a general form requirement on contracts.  More particularly, for the sale of goods or the provision of services between merchants, there are normally no specific form requirements to comply with.  Where no form requirements apply, a contract may be concluded orally or also by conclusive behaviour.  In practice, however, written form is invariably used as evidence for enforcement purposes.  An invoice evidences the payment obligation of the debtor but is neither required, nor sufficient for the receivable to be originated.

1.2        Consumer Protections. Do your jurisdiction’s laws: (a) limit rates of interest on consumer credit, loans or other kinds of receivables; (b) provide a statutory right to interest on late payments; (c) permit consumers to cancel receivables for a specified period of time; or (d) provide other noteworthy rights to consumers with respect to receivables owing by them?

German law does not specifically limit permissible interest rates on loans or other kinds of receivables.  However, as a general principle of German law, transactions contra bonos mores ( sittenwidrig ) are void.  Hence, a contract providing for interest rates that are considered unethically high may be invalidated.  Pursuant to relevant case law, the limit is (as a general rule) twice the market interest rate or about 12% per annum above such market interest rate.  This does also apply to consumer loans, but German courts would particularly take the status of the borrower as a consumer into account.  Further, with respect to consumer loans, the lender must meet certain information and documentation requirements in order for the specification of the interest rate to be effective.

In case of a payment default ( Verzug ), German law provides for a statutory default interest rate on unpaid principal equal to the base rate ( Basiszinssatz ) plus 5% per annum .  The applicable base interest rate is published by the German Central Bank ( Deutsche Bundesbank ).  In case of receivables (not loans) and if the obligor is not a consumer, a base rate of 9% per annum applies.  Under German law, the parties cannot generally agree in advance to pay compound interest ( Zinseszins ).

Consumer loans (and transactions closely connected to consumer loans) are subject to special consumer protection rules.  In particular, the lender is obliged to disclose, in writing, important information about the loan directed to support the consumer to understand its future payment terms.  Additional disclosure obligations apply with regard to consumer real estate loans, i.e., inter alia , a possible assignment of the loan without the borrower’s consent.  In case the lender does not fulfil such disclosure obligations, enforcement issues may arise.  Further, such consumer protection rules entitle the borrowers to revoke the loan within 14 days after entering into the loan (and having been duly informed in line with applicable consumer disclosure obligations). 

Borrowers may generally terminate loans at the end of any fixed interest period, in case such interest period expires prior to the maturity of the loan and no new rate of interest has been agreed by the parties.  In addition, borrowers may terminate loans with six months’ prior notice at the end of the 10 th year of the disbursement date of the loan.  Further, the borrower of a floating rate loan has a statutory termination right entitling it to (generally and depending on the type of floating rate loan) terminate either with one month’s prior notice at the end of each interest period, or with three months’ prior notice.

Additional consumer protection laws apply where loans and related transactions are entered into at the residence of the consumer, by means of long-distance communication or on the basis of general business conditions.

1.3        Government Receivables. Where the receivables contract has been entered into with the government or a government agency, are there different requirements and laws that apply to the sale or collection of those receivables?

There are no special requirements and rules for the sale or collection of receivables under receivables contracts entered into with the government or a government agency.  If the public-sector debtor is a legal person under public law, § 354a of the German Commercial Code ( Handelsgesetzbuch – HGB ( see question 4.4 below) will always apply so that a contractual prohibition on assignments for the benefit of such debtor is always overcome.  Tax credit and similar claims are subject to specific assignment limitations and notice requirements, and the German tax authorities can enforce previously assessed taxes without first obtaining an enforceable court judgment.  Enforcement against public law debtors follows certain special rules and is subject to certain limitations.

2.1        No Law Specified. If the seller and the obligor do not specify a choice of law in their receivables contract, what are the main principles in your jurisdiction that will determine the governing law of the contract?

Unless the parties have made an (explicit or implicit) choice of law in the receivables contract, pursuant to Regulation (EC) No. 593/2008 on the law applicable to contractual obligations (Rome I Regulation), the contract is governed by the laws of the country to which it is most closely connected.  Several presumptions are set out in the Rome I Regulation in order to identify such relevant country.  If these presumptions do not apply or lead to ambiguous results, the contract shall generally be governed by the law of the country where the party required to effect the characteristic performance of the contract has its habitual residence.  However, if the contract is manifestly more closely connected with another country, the law of that other country shall apply.  In case of carriage contracts, consumer contracts, insurance contracts and individual employment contracts, more specific provisions of the Rome I Regulation apply.

2.2        Base Case. If the seller and the obligor are both resident in your jurisdiction, and the transactions giving rise to the receivables and the payment of the receivables take place in your jurisdiction, and the seller and the obligor choose the law of your jurisdiction to govern the receivables contract, is there any reason why a court in your jurisdiction would not give effect to their choice of law?

No, there is no such reason preventing a German court from applying German law in such case.

2.3        Freedom to Choose Foreign Law of Non-Resident Seller or Obligor. If the seller is resident in your jurisdiction but the obligor is not, or if the obligor is resident in your jurisdiction but the seller is not, and the seller and the obligor choose the foreign law of the obligor/seller to govern their receivables contract, will a court in your jurisdiction give effect to the choice of foreign law? Are there any limitations to the recognition of foreign law (such as public policy or mandatory principles of law) that would typically apply in commercial relationships such as that between the seller and the obligor under the receivables contract?

In these circumstances, a German court will, on the basis of Art. 3(1) Rome I Regulation, typically give effect to the choice of the non-German law of the jurisdiction of the obligor or the seller, respectively.

This is subject to certain limitations, such as that the effect of a choice of law under Art. 3(1) Rome I Regulation is limited to contractual rights and obligations and has no effect with respect to other legal issues such as dispositions (e.g., transfers or pledges) of in rem rights ( cf. Art. 43 Introductory Act to the German Civil Code ( EGBGB )) and may not be upheld as a valid choice of law by the courts of Germany if any contractual obligation arising is outside the scope of the Rome I Regulation.  Further, German courts may refuse the application of a provision of the law of the seller/obligor chosen if such application is manifestly incompatible with the public policy ( ordre public ) of Germany (Art. 21 Rome I Regulation) or if the law was chosen intentionally in order to avoid the application of mandatory German law provisions, which is, however, unlikely to be the case if the law of the seller or the obligor is chosen due to the factual connection of the seller and the obligor to such jurisdiction.  Moreover, giving effect to the choice of non-German law will not restrict German courts from applying overriding mandatory provisions of German law (Art. 9(2) Rome I Regulation) and overriding mandatory provisions of the law of the country where the obligations arising out of the receivables contract are to be performed.

3.1        Base Case. Does your jurisdiction’s law generally require the sale of receivables to be governed by the same law as the law governing the receivables themselves? If so, does that general rule apply irrespective of which law governs the receivables (i.e., your jurisdiction’s laws or foreign laws)?

No, German law does not require the sale of receivables to be governed by the same law that governs the receivables.  Rather, the freedom of choice of law under the Rome I Regulation also applies to a contract on the sale of receivables.  Hence, the seller and the purchaser may, subject to the general limitations applying to the choice of law ( see question 2.3 above), freely choose the law governing the sale of receivables.

Moreover, as German law distinguishes between the (contractual) sale of the receivables and the in rem transfer (i.e., the property aspects) of the receivables, it is noteworthy to clarify that such freedom to choose the governing law extends, as explicitly provided for in Art. 14(1) Rome I Regulation (together with recital 38), to the in rem transfer.

However, in order to take into account the interests of the debtor, the choice of law is limited by Art. 14(2) Rome I Regulation, pursuant to which the law governing the receivables shall determine its assignability, the relationship between the assignee and the debtor and the conditions under which the assignment can be invoked against the debtor and whether the debtor’s obligations have been discharged. 

Further, the freedom of choice of law under the Rome I Regulation may arguably not extend to the enforceability of the sale/assignment against third parties, the question of which, as per the prevailing opinion under German law, is not addressed in the Rome I Regulation.  The European Court of Justice (EuGH) has also ruled that Art. 14 Rome I Regulation is not applicable to the question of third-party effects.  Consequently, it is disputed which laws are relevant to this question.  So far, a strong view in literature and jurisprudence points to the law governing the receivables, while other authors favour the law chosen in accordance with the Rome I Regulation or the law of the seller’s jurisdiction.  A minority view points to the law of the debtor jurisdiction in this regard ( see also question 3.4 below).

3.2        Example 1: If (a) the seller and the obligor are located in your jurisdiction, (b) the receivable is governed by the law of your jurisdiction, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of your jurisdiction to govern the receivables purchase agreement, and (e) the sale complies with the requirements of your jurisdiction, will a court in your jurisdiction recognise that sale as being effective against the seller, the obligor and other third parties (such as creditors or insolvency administrators of the seller and the obligor)?

A court in Germany will, as a matter of German law, recognise such sale as being effective against the seller, the obligor and other third parties.

3.3        Example 2: Assuming that the facts are the same as Example 1, but either the obligor or the purchaser or both are located outside your jurisdiction, will a court in your jurisdiction recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller), or must the foreign law requirements of the obligor’s country or the purchaser’s country (or both) be taken into account?

For the sale and transfer by a German seller under German law of a German law-governed receivable, German courts will, as a rule, not have regard to foreign law requirements of the obligor’s country or the purchaser’s country (or both).  Hence, a court in Germany will, as a matter of German law, generally recognise such sale as being effective against the seller, the obligor and other third parties.  One limitation is that, under German conflict of law rules, it is disputed how the third-party effect is to be determined and a minority opinion points to the debtor jurisdiction ( see question 3.1 above).

3.4        Example 3: If (a) the seller is located in your jurisdiction but the obligor is located in another country, (b) the receivable is governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in your jurisdiction recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller) without the need to comply with your jurisdiction’s own sale requirements?

Subject to the limitations applicable to the choice of law ( see question 2.3 above), a German court will generally uphold the choice of law of the obligor’s country to govern the receivables purchase agreement (such choice also extending to the in rem aspects between the seller and the purchaser in accordance with Art. 14(1) Rome I Regulation) and, as the sale complies with the requirements of the law of the obligor’s country, recognise the sale and transfer as being effective between the seller and the purchaser.

On the third-party effect, if a German court applied the requirements of the law of the obligor’s country to also govern this question – either by applying the traditional (i.e., before the enactment of the Rome I Regulation) German law view (which pointed to the law governing the receivable) or by extending the scope of the choice of law under Art. 14(1) Rome I Regulation to this question – there would be no need to comply with German law requirements.  However, if the German court applied the law of the seller’s jurisdiction to this issue (as suggested by certain authors, see question 3.1 above), it would only recognise the sale and transfer as being effective vis-à-vis third parties if German law requirements are also complied with.

However, this may no longer be generally applicable if the legislative resolution of 13 February 2019 on the proposal for a regulation of the European Parliament and of the Council on the law applicable to the third-party effects of assignments of claims comes into action.  Thereunder, unless an exception applies, the third-party effects will be governed by the law of the country in which the seller has his habitual residence at the time of the conclusion of the assignment contract.  One important exception to this rule applies in relation to securitisation transactions where the seller and purchaser can choose the law applicable to the assigned claim as the law governing third-party effects.

3.5        Example 4: If (a) the obligor is located in your jurisdiction but the seller is located in another country, (b) the receivable is governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country to govern the receivables purchase agreement, and (d) the sale complies with the requirements of the seller’s country, will a court in your jurisdiction recognise that sale as being effective against the obligor and other third parties (such as creditors or insolvency administrators of the obligor) without the need to comply with your jurisdiction’s own sale requirements?

A court in Germany would consider such sale as being effective against the seller, the obligor and other third parties, because, as described in question 3.1 above, the law of the seller’s jurisdiction would apply to all such questions only, provided that the minority view pointing to the law of the obligor’s jurisdiction for determining the third-party effect would require German law requirements to be complied with.

3.6        Example 5: If (a) the seller is located in your jurisdiction (irrespective of the obligor’s location), (b) the receivable is governed by the law of your jurisdiction, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of the purchaser’s country to govern the receivables purchase agreement, and (e) the sale complies with the requirements of the purchaser’s country, will a court in your jurisdiction recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller, any obligor located in your jurisdiction and any third party creditor or insolvency administrator of any such obligor)?

Assuming that German law requirements are complied with, a court in Germany will consider such sale as being effective against the seller, the obligor and other third parties.  This is because the German court will, with respect to the relationship between the seller and the purchaser, apply the law chosen by the seller and the purchaser (pursuant to Art. 14(1) Rome I Regulation) and the requirements of such law are complied with.  Further, the German court will, vis-à-vis the obligor, apply German law (in accordance with Art. 14(2) Rome I Regulation) and, with respect to the third-party effect, also apply German law (as the law governing the receivable or of the seller’s jurisdiction) or the law chosen between the seller and the purchaser – all of which are complied with.  With respect to the third-party effect, the minority view pointing to the obligor jurisdiction might again stipulate requirements of such jurisdiction here.

4.1        Sale Methods Generally. In your jurisdiction what are the customary methods for a seller to sell receivables to a purchaser? What is the customary terminology – is it called a sale, transfer, assignment or something else?

German law distinguishes between the law of obligations ( Schuldrecht ) and property law ( Sachenrecht ).  Further, pursuant to the so-called “abstraction principle” ( Abstraktionsprinzip ), which is a fundamental principle of German private law, the obligations of the parties under the law of obligations (such transaction is referred to as the “underlying transaction” – Verpflichtungsgeschäft ) and the title transfer effected by a party in order to fulfil its respective obligation (such transactions are referred to as the “implementing transactions” – Verfügungsgeschäfte ) form separate transactions that are to be considered independently.  The Rome I Regulation describes such a concept in its recital 38, as the “separate treatment of property aspects from the aspects under the law of obligations”.  Consequently, a sale of receivables under German law involves, from a legal standpoint, the following transactions: first of all, the sales contract under which the seller undertakes to sell, and the purchaser undertakes to purchase, the receivables; the transfer of title to the receivables by the seller to the purchaser; and, strictly speaking as a third transaction, the transfer of the purchase price by the purchaser to the seller.  Under German legal terminology, a sales contract constitutes a Kaufvertrag within the meaning of § 433 of the German Civil Code ( Bürgerliches Gesetzbuch – BGB ) and the transfer of title to the receivables is effected by way of an assignment ( Abtretung ) within the meaning of § 398 BGB.  Among many other possibilities, one wording reflecting these separate transactions (which is, however, not necessary in order to create binding obligations), would be: “the seller sells ( verkauft ) and assigns ( tritt ab ) the receivables.”

4.2        Perfection Generally. What formalities are required generally for perfecting a sale of receivables? Are there any additional or other formalities required for the sale of receivables to be perfected against any subsequent good faith purchasers for value of the same receivables from the seller?

Strictly speaking, under German law, no concept of a perfection of a sale exists, the closest equivalent being the effectiveness of the assignment ( see question 4.1 above) and, in order for the assignment to be effective, the mere agreement between the seller and the purchaser on the assignment is generally sufficient.  Giving notice of the assignment to the obligor is not legally required.  However, if the obligor is not notified of the assignment, the obligor may continue to be entitled to raise certain objections ( see question 4.4 below).  German law generally does not recognise a good faith acquisition of receivables.

4.3        Perfection for Promissory Notes, etc. What additional or different requirements for sale and perfection apply to sales of promissory notes, mortgage loans, consumer loans or marketable debt securities?

Promissory notes in other jurisdictions are often compared to German law Schuldscheine (certificates of indebtedness).  A Schuldschein evidences an underlying loan agreement but does not constitute a security (in the sense of a transferable debt instrument) as a matter of German law.  Schuldscheine are transferred by assigning the underlying loan claim and, hence, no additional or different requirements apply to their assignment (unless provided otherwise in the instrument).  As a practical matter, the purchaser requires delivery of the debt certificates with regard to the assignment of the underlying loan.

Security interest on German real property can be granted in the form of either (i) an “accessory” mortgage ( Hypothek ) (mortgage), or (ii) a “non-accessory” land charge ( Grundschuld ) (land charge).  Both kinds of security interest can be granted either in certificated or in non-certificated form.  Mortgages have no practical significance.

A land charge can be transferred by written assignment of the land charge and, as applicable: (i) in the case of a certificated land charge, delivery of the land charge certificate; or (ii) in case of a non-certificated land charge, registration of the transfer with the competent land register.  According to § 1192(1a) BGB, defences to which the owner is entitled with regard to the land charge on the basis of the security purpose agreement with the previous creditor, or which emerge from the security purpose agreement, may also be imposed on any assignee of the land charge.

Most land charges in Germany nowadays are in non-certificated form.  The required registration of the transfer with the land register may trigger significant costs.  Further, a seller may want to avoid a registration with the land register in order to prevent the obligors from obtaining knowledge of the sale.  Therefore, the seller sometimes holds the land charges as a trustee for the purchaser.  However, whether such trust agreement will be recognised, in case of insolvency of the seller, is not clear.  For that reason, the German Banking Act ( Kreditwesengesetz – KWG ) contains special provisions for refinancing register transactions, which allow for the creation of insolvency remote trust arrangements.

Unless a seller continues to exclusively deal with the relevant consumer borrower, such seller is generally obliged to notify the consumer borrower of an assignment (providing certain details).

Bearer securities are transferred by way of an agreement between the seller and the purchaser to transfer ownership and the delivery of the securities to the purchaser.  Registered securities are transferred by way of assignment of the rights evidenced by them.  Instruments made out to order are transferred by an agreement between the seller and the purchaser to transfer ownership, endorsement and delivery of the instrument to the purchaser.  To the extent that debt securities are certificated in global form and deposited with a clearing system, delivery of the securities is evidenced by a corresponding book-entry.

4.4        Obligor Notification or Consent. Must the seller or the purchaser notify obligors of the sale of receivables in order for the sale to be effective against the obligors and/or creditors of the seller? Must the seller or the purchaser obtain the obligors’ consent to the sale of receivables in order for the sale to be an effective sale against the obligors? Whether or not notice is required to perfect a sale, are there any benefits to giving notice – such as cutting off obligor set-off rights and other obligor defences?

In order for the sale/assignment to be effective against the obligor and/or creditors of the seller, it is not legally required that the obligor be notified of the assignment (silent assignment).  However, prior to a notification of the assignment to the debtor (and also, but generally speaking to a lesser degree, where the obligor was previously notified), statutory debtor protection provisions apply, which give the debtor, inter alia , a set-off right in relation to claims it has against the assignor.  In addition, the purchaser will be subject to any amendments of the underlying receivables contract or other transactions relating to the receivable, such as a waiver or deferral of payments entered into by the seller and the obligor.  Furthermore, prior to a notification, the debtor may fully discharge its payment obligation by way of payment to the assignor.  In practice, these risks can be mitigated to a certain extent by introducing mandatory debtor notifications upon the occurrence of certain trigger events (such as an originator rating downgrade) and/or dilution reserves.

However, even where the obligor was previously notified, it may generally raise against the purchaser all the objections it had against the seller at the time of the sale.  Where the sold receivable is a consumer loan, the seller generally has an obligation to notify the consumer of the assignment and to provide certain information about the purchaser; any violation of such obligations does not affect the effectiveness of the sale and assignment of the receivable, but may entitle the consumer to claim damages.

Where the obligor was not notified (and is not otherwise aware) of the assignment it may, in such a scenario, satisfy its obligations vis-à-vis the purchaser by making payment to the seller.  Furthermore, under § 406 BGB, an obligor may set off against the assignee an existing claim that the obligor has against the assignor.  An obligor cannot, however, effect such set-off where: (a) the obligor knew of the assignment at the time of acquiring its claim against the assignor; or (b) where such claim of the obligor (i) did not become due until after the obligor had acquired such knowledge, and (ii) matures after the claims of the assignee.  On this basis, even where the obligor is aware of the assignment where either (a) it acquired its counterclaim against the seller before it obtained such knowledge, or (b) such counterclaim against the seller is due before the receivable owed by the obligor is due, it may continue to offset the assigned receivable against its counter-claim against the seller.

Accordingly, although the notification of the assignment of a receivable to the obligor is not required for an effective assignment of a receivable under German law, such notification has the benefit (from the purchaser’s perspective) of preventing the obligor from being able to raise certain objections and exercising certain rights it may have against the seller vis-à-vis the purchaser.

Receivables governed by German law can generally be sold and assigned without the consent of the obligor, except where the underlying receivables contract contains a prohibition on assignments.  Such a prohibition will usually be explicit, but can also be implied in the underlying receivables contract.  According to a 2007 decision by the German Federal High Court ( Bundesgerichtshof – BGH ), neither German data protection laws nor general bank secrecy obligations constitute an implied prohibition on assignment.  However, according to a 2013 decision of the BGH, an implied prohibition on assignments does exist where the confidentiality of the data to which the receivables in question relate is protected by criminal law (e.g., a doctor’s patient data); accordingly, a valid assignment of any such receivables requires the obligor’s consent.

Under certain circumstances and if the purchaser is prepared to assume a certain amount of additional risk, a securitisation of receivables containing a prohibition of assignment clause is also possible without consent if the requirements of § 354a HGB are satisfied.  Pursuant to § 354a(1) HGB, a receivable can be validly assigned despite any contractual prohibition of assignment if: (i) the underlying agreement between the contracting parties constitutes a commercial transaction ( Handelsgeschäft ) for both parties; or (ii) the debtor is a public law entity ( juristische Person des öffentlichen Rechts ) or a separate estate governed by public law ( öffentlich-rechtliches Sondervermögen ).  Please note that there are exceptions to this rule for (loan) receivables where a credit institution is the creditor, i.e., in such case any assignment without the contractually required consent would be void (§ 354a(2) HGB).  Although an assignment of receivables with prohibition of assignment clauses can be valid pursuant to § 354a(1) HGB, some additional risks exist because the underlying debtor will always be entitled to effect a payment with discharging effect to the assignor, even in cases where the underlying debtor has been notified of the assignment.

4.5        Notice Mechanics. If notice is to be delivered to obligors, whether at the time of sale or later, are there any requirements regarding the form the notice must take or how it must be delivered? Is there any time limit beyond which notice is ineffective – for example, can a notice of sale be delivered after the sale, and can notice be delivered after insolvency proceedings have commenced against the obligor or the seller? Does the notice apply only to specific receivables or can it apply to any and all (including future) receivables? Are there any other limitations or considerations?

Pursuant to German law, as described in question 4.4 above, there is generally no need to notify the obligor of the assignment in order for the assignment to be effective, but a notification may exclude certain defences and counterclaims of the obligor.  There are generally no specific form requirements regarding the notice.  However, specific requirements may be contractually agreed or may apply, in specific circumstances, by statutory law.

4.6        Restrictions on Assignment – General Interpretation. Will a restriction in a receivables contract to the effect that “None of the [seller’s] rights or obligations under this Agreement may be transferred or assigned without the consent of the [obligor]” be interpreted as prohibiting a transfer of receivables by the seller to the purchaser? Is the result the same if the restriction says “This Agreement may not be transferred or assigned by the [seller] without the consent of the [obligor]” (i.e., the restriction does not refer to rights or obligations)? Is the result the same if the restriction says “The obligations of the [seller] under this Agreement may not be transferred or assigned by the [seller] without the consent of the [obligor]” (i.e., the restriction does not refer to rights)?

The first alternative prohibits the transfer of receivables by the seller to the purchaser.  In case of the second alternative, the term “agreement” might well be interpreted to include all “rights and claims under the agreement”, which would, again, result in a prohibition of assignment.  While less likely, the prohibition in the third alternative may also be interpreted (e.g., due to the use of the word “assigned”) to extend to the assignment of rights and claims.

4.7        Restrictions on Assignment; Liability to Obligor. If any of the restrictions in question 4.6 are binding, or if the receivables contract explicitly prohibits an assignment of receivables or “seller’s rights” under the receivables contract, are such restrictions generally enforceable in your jurisdiction? Are there exceptions to this rule (e.g., for contracts between commercial entities)? If your jurisdiction recognises restrictions on sale or assignment of receivables and the seller nevertheless sells receivables to the purchaser, will either the seller or the purchaser be liable to the obligor for breach of contract or tort, or on any other basis?

Contracting parties may enter into binding prohibitions on assignments under German law, with the exception that the parties are merchants in respect of commercial transactions ( see question 4.4 above).  Sellers, in general, will be liable to the obligor for any financial damages in case of any violation of such assignments.

4.8        Identification. Must the sale document specifically identify each of the receivables to be sold? If so, what specific information is required (e.g., obligor name, invoice number, invoice date, payment date, etc.)? Do the receivables being sold have to share objective characteristics? Alternatively, if the seller sells all of its receivables to the purchaser, is this sufficient identification of receivables? Finally, if the seller sells all of its receivables other than receivables owing by one or more specifically identified obligors, is this sufficient identification of receivables?

According to German law, the receivables to be sold and assigned must be sufficiently identifiable ( bestimmbar ).  This can be achieved by referring to each sold/assigned receivable specifically (by way of criteria allowing for an unequivocal identification of the relevant receivables, e.g., invoice number, invoice date, debtor, etc.) in a list or email attachment or other electronic submission.

The sale of “all of the seller’s receivables” or the sale of all of the seller’s receivables other than receivables owing by one or more specifically identified obligors would generally also be possible.  However, referring to “all eligible receivables” will often be problematic due to the complexity (and, hence, uncertainty) involved in case of complex or extended eligibility criteria.

4.9        Recharacterisation Risk. If the parties describe their transaction in the relevant documents as an outright sale and explicitly state their intention that it be treated as an outright sale, will this description and statement of intent automatically be respected or is there a risk that the transaction could be characterised by a court as a loan with (or without) security? If recharacterisation risk exists, what characteristics of the transaction might prevent the transfer from being treated as an outright sale? Among other things, to what extent may the seller retain any of the following without jeopardising treatment as an outright sale: (a) credit risk; (b) interest rate risk; (c) control of collections of receivables; (d) a right of repurchase/redemption; (e) a right to the residual profits within the purchaser; or (f) any other term?

Generally, a sale and assignment will qualify as “true sale” and will not be recharacterised as a “secured loan” if it is a valid sale and does not contain the creation of a security interest in relation to the receivables, which is granted to secure an underlying obligation of the seller vis-à-vis the purchaser.

The “true sale” analysis under German insolvency law requires a more substantive analysis than under English law since, under German law, there exists no specific judicial or statutory authority on the question as to the nature of a “legal true sale”.  The prevailing view is to apply the principles that have been established by German courts for distinguishing true or genuine factoring from untrue or non-genuine factoring.  Pursuant to German case law, true sale factoring requires that the credit risk relating to the debtor of a receivable must be transferred to the purchaser who must not have the right to take recourse to the seller if such credit risk materialises.  For this purpose, it is important that the transaction in substance (substance over form) is structured as a sale and is not recharacterised as a secured loan whereby it is decisive that the purchaser of the receivables can be considered the legal and economic owner of the receivables sold, which requires that the purchaser assumes the risk of the underlying debtors defaulting on their payment obligations (transfer of credit risk/ del credere risk).

A retention of the credit risk that might affect the true sale treatment can result, in particular, from corresponding repurchase obligations, automatic re-assignments, variable purchase price concepts (discounts), liquidity and/or credit enhancements granted by or on behalf of the seller or a first loss tranche position taken by the seller in the securitisation.  However, as a general rule, a seller may retain some part of the credit risk corresponding to historical default rates and enforcement costs without triggering potential recharacterisation risks.

A discount and a deferred purchase price element can be incorporated into the purchase price paid for the relevant receivables without disturbing the true sale nature of the transaction, considering, however, that the discount and/or deferred element must be either reasonable (based on historical default rates plus a certain margin) or (according to a strong view in legal literature) fixed at the time of sale so as not to endanger the removal of the receivables from the transferor’s balance sheet.

It is recognised that a certain limited level of credit enhancement may be provided by the seller but there is no definitive guidance as to what level of retention of credit risk is still acceptable.

4.10      Continuous Sales of Receivables. Can the seller agree in an enforceable manner to continuous sales of receivables (i.e., sales of receivables as and when they arise)? Would such an agreement survive and continue to transfer receivables to the purchaser following the seller’s insolvency?

The seller can agree in an enforceable manner to a continuous sale/assignment of receivables.  However, such agreements will not survive the insolvency of a seller.  Hence, the transfer of receivables will not be continued.

4.11      Future Receivables. Can the seller commit in an enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables purchase agreement (e.g., “future flow” securitisation)? If so, how must the sale of future receivables be structured to be valid and enforceable? Is there a distinction between future receivables that arise prior to versus after the seller’s insolvency?

Under German law it is possible to assign receivables prior to the time they come into existence (future receivables) by way of a corresponding sale and assignment agreement between the seller and the purchaser.  Special care must be taken to ensure that an assignment of future receivables complies with the German principle of specificity ( Bestimmtheitsgrundsatz ).  Pursuant to case-law, this requires for future receivables that, at the time a receivable comes into existence, it is sufficiently identifiable ( bestimmbar ), i.e., it can be ascertained whether such receivable at such time is covered by the assignment or not ( Bestimmbarkeit ).  If a receivable comes into existence after the opening of insolvency proceedings against the seller, the seller is no longer entitled to dispose of its assets, including by way of a transfer of receivables.  In practice, it can be difficult to determine whether or not a receivable actually constitutes a future receivable (e.g., a claim for future rental payments) to which the above rules are applicable, or rather an existing receivable that is not yet due (e.g., a repayment claim under a loan agreement).

4.12      Related Security. Must any additional formalities be fulfilled in order for the related security to be transferred concurrently with the sale of receivables? If not all related security can be enforceably transferred, what methods are customarily adopted to provide the purchaser the benefits of such related security?

To the extent that related security can be transferred by way of mere agreement between the seller and the purchaser, there are generally no additional formalities to be complied with.  However, e.g., insurance claims may require the notification to, and sometimes the prior consent of, the insurer in order to be transferred.  If inventory or other movable objects are transferred as collateral by way of a security transfer ( Sicherungsübereignung ), the purchaser needs to obtain at least indirect possession.  So-called accessory security interests ( akzessorische Sicherheiten ) – which are, as a matter of German statutory law, linked to the existence, extent and enforceability of the secured receivable – such as a pledge ( Pfandrecht ) or a surety ( Bürgschaft ), are automatically transferred together with the sold receivable.

4.13      Set-Off; Liability to Obligor. Assuming that a receivables contract does not contain a provision whereby the obligor waives its right to set-off against amounts it owes to the seller, do the obligor’s set-off rights terminate upon its receipt of notice of a sale? At any other time? If a receivables contract does not waive set-off but the obligor’s set-off rights are terminated due to notice or some other action, will either the seller or the purchaser be liable to the obligor for damages caused by such termination?

With respect to any waiver of set-off rights (and of other defences) by the obligor, the enforceability of such waiver needs to be considered.  In practice, set-off waivers will often qualify as general business conditions ( Allgemeine Gechäftsbedingungen ) within the meaning of § 305 BGB, in which case the waiver will be ineffective (in its entirety) if it does not contain carve-outs for undisputed claims of the obligor against the seller and such claims that have been determined by non-appealable judgment.  The impact of an assignment on the obligor’s defences is subject to protection rules of the BGB ( see question 4.3 above).  Without prejudice to such statutory protections that may entitle the obligor to set-off against the purchaser, the seller or the purchaser would generally not be liable to the obligor for the termination of the obligor’s set-off rights as a result of the assignment.

4.14      Profit Extraction. What methods are typically used in your jurisdiction to extract residual profits from the purchaser?

Similar to other jurisdictions, inter alia , tax and true sale consequences (the latter generally being more problematic than in other jurisdictions – see question 4.9 above) of the profit extraction method need to be considered.  Profit may be extracted, e.g., via equity, subordinated instruments or in the form of certain fees.

5.1        Back-up Security. Is it customary in your jurisdiction to take a “back-up” security interest over the seller’s ownership interest in the receivables and the related security, in the event that an outright sale is deemed by a court (for whatever reason) not to have occurred and have been perfected (see question 4.9 above)?

It is not customary in Germany to create such back-up security.

5.2        Seller Security. If it is customary to take back-up security, what are the formalities for the seller granting a security interest in receivables and related security under the laws of your jurisdiction, and for such security interest to be perfected?

It is not customary in Germany to create such back-up security ( see question 5.1 above).

5.3        Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in favour of the providers of its funding, what formalities must the purchaser comply with in your jurisdiction to grant and perfect a security interest in purchased receivables governed by the laws of your jurisdiction and the related security?

The general rules of the creation of security interests under German law also govern the security interests granted in the purchased receivables by a purchaser.  Such granted security interests must be sufficiently identified or identifiable and can be granted in the form of a pledge or a security assignment.

The pledge of a receivable is created by an agreement between the pledgor and the pledgee.  In addition, the underlying obligor must be notified.  The security assignment is created by an agreement on the transfer of the receivable for security purposes between the assignor and the assignee.  With the effect of such assignment, legal ownership to the receivables is transferred.  Although there is no requirement to notify the obligor, certain objections (such as rights of set-off or counterclaim arising from its relationship with the assignor) may be raised by the obligor prior to notification of the security assignment.

An assignment for security purposes is generally adopted in practice.  This is because the requirement for a notification to the obligor can be avoided.  However, inter-company receivables and bank accounts are the exceptions thereof since the notification to the obligor in this case does not cause any significant issues.

Security interests over inventory and other movable assets are usually granted by means of security transfer (as opposed to a pledge, which is impracticable as it would require the transfer of actual possession of the assets to the secured party).  See also question 4.3 above for additional requirements, as well as question 4.12 above.

5.4        Recognition. If the purchaser grants a security interest in receivables governed by the laws of your jurisdiction, and that security interest is valid and perfected under the laws of the purchaser’s jurisdiction, will the security be treated as valid and perfected in your jurisdiction or must additional steps be taken in your jurisdiction?

The grant of security is generally subject to the same conflict of laws rules as the assignment of receivables ( see question 3.1 above).  According to these rules, vis-à-vis the purchaser and the secured party, a security interest would be treated as valid and perfected in Germany if the requirements under the chosen law were satisfied and the respective receivables are permitted to be assigned pursuant to the law governing such receivables.  Vis-à-vis the obligor, the question of whether a security interest is valid and perfected is determined by the law governing the receivables.  Where the receivables are governed by German law, the purchaser and the secured party need to take any additional steps as may be required under German law to grant a valid and perfected security interest vis-à-vis the obligor.  This also applies to the issue whether such a security interest is valid and perfected vis-à-vis third parties in case a German court, in line with prior case law, applies the law governing the receivables to this issue and not, as suggested by some legal commentators, the law of the seller’s jurisdiction ( see question 3.1 above).

5.5        Additional Formalities. What additional or different requirements apply to security interests in or connected to insurance policies, promissory notes, mortgage loans, consumer loans or marketable debt securities?

Security interests over such assets can also be granted by way of a formal pledge or a security assignment of receivables.  Security interests over debt securities (which are treated as movable assets under German law) booked to a custody account are normally created by way of a pledge.  The additional requirements described in question 4.3 above also apply to the grant of security over these types of assets.  The specific terms of the underlying assets may stipulate additional transfer requirements, which will have to be satisfied regularly for the creation of security interests as well.  For example, the creation of security interests over claims arising from insurance policies will often require the consent or at least the notification of the insurer.

5.6        Trusts. Does your jurisdiction recognise trusts? If not, is there a mechanism whereby collections received by the seller in respect of sold receivables can be held or be deemed to be held separate and apart from the seller’s own assets (so that they are not part of the seller’s insolvency estate) until turned over to the purchaser?

The English and U.S. law concepts of trusts differ substantially from the fiduciary instruments available under German law.  The BGH has held in one instance that (foreign law) trusts over German law assets may not be compatible with German law.  A mere trust agreement would also not be sufficient to separate the assets from the seller’s insolvency estate and would likely not be recognised by German insolvency courts in the seller’s insolvency.  However, depending upon the law applicable to a trust, it is not inconceivable that German courts might recognise trusts over assets that are not governed by German law to segregate the assets from the seller’s insolvency estate.

To achieve a separation of incoming collections from the seller’s insolvency estate, it is accepted practice and the safest route under German law to ensure that collections are paid directly into an account over which a security interest has been created in favour of the purchaser.  Typically, a pledge of the collection account will be used to create such security interest.  Usually, the obligor will not be notified of the assignment and the seller is authorised to continue collecting the receivables.  The seller should be required to ensure that all collections will be directly paid into such collection account pledged in favour of the purchaser.  In cases of payments from such collection accounts being made to the purchaser, clawback rules will apply ( see question 6.3 below).

Where it is not possible to use accounts separately to set up for the transaction, the seller should pledge its “general” collection account to the purchaser.  However, such a pledge will often be junior to other security interests created over such account, as account pledges are customary in Germany.  In such a scenario, a purchaser would need to ensure that cash transfers to the purchaser account occur as frequently as possible and the collection authority of the seller is revoked as early as possible (collections can then be redirected to an account of the purchaser after notification of the assignment and new account details to the underlying obligor).

5.7        Bank Accounts. Does your jurisdiction recognise escrow accounts? Can security be taken over a bank account located in your jurisdiction? If so, what is the typical method? Would courts in your jurisdiction recognise a foreign law grant of security taken over a bank account located in your jurisdiction?

German law recognises escrow accounts.  In order to create a security interest over a bank account located in Germany, the account is typically pledged in favour of the collateral taker.  It is not recommended to establish a foreign law security interest over a German bank account as it is very uncommon and creates unnecessary difficulties from a conflicts of law perspective (especially where the foreign law security does not meet the requirements of a pledge under German law) and German account banks (which need to be notified of a pledge) will likely try to refuse to participate in any cash sweep mechanism in this context.

5.8        Enforcement over Bank Accounts. If security over a bank account is possible and the secured party enforces that security, does the secured party control all cash flowing into the bank account from enforcement forward until the secured party is repaid in full, or are there limitations? If there are limitations, what are they?

German account pledge agreements often contain arrangements pursuant to which a pledgee can take control of the account prior to actual enforcement of the pledge.  Such arrangements are permissible under German law and can take the form of a mere account blockage (i.e., stopping the ability of the pledgor to continue disposing over the account) and/or an agreement pursuant to which the pledgee is granted a unilateral right to dispose over the account (including by way of (daily) cash sweep to a purchaser account).  If insolvency proceedings have been opened with respect to the pledgor, the account agreement between the pledgor as account holder and the account bank will automatically terminate by statutory law.  In order to gain access to the monies standing to the credit of the account, the pledgee will need to enforce the account pledge.  In the insolvency of the pledgor, an account pledge will generally give the pledgee a right of separate satisfaction with respect to the monies standing to the credit of the account at the time of opening of insolvency proceedings.

5.9        Use of Cash Bank Accounts. If security over a bank account is possible, can the owner of the account have access to the funds in the account prior to enforcement without affecting the security?

The account pledge agreement may provide that the pledgor as account holder may continue to dispose over the funds in the account prior to the occurrence of a trigger event without affecting the pledge itself.  However, any funds debited from the account by the pledgor will no longer be available to the pledgee.

6.1        Stay of Action. If, after a sale of receivables that is otherwise perfected, the seller becomes subject to an insolvency proceeding, will your jurisdiction’s insolvency laws automatically prohibit the purchaser from collecting, transferring or otherwise exercising ownership rights over the purchased receivables (a “stay of action”)? If so, what generally is the length of that stay of action? Does the insolvency official have the ability to stay collection and enforcement actions until he determines that the sale is perfected? Would the answer be different if the purchaser is deemed to only be a secured party rather than the owner of the receivables?

There is no general stay of action in relation to receivables effectively sold and transferred to the purchaser.  However, during preliminary insolvency proceedings ( vorläufiges Insolvenzverfahren ) the insolvency court may, as a preliminary measure, order that assets in respect of which a segregation right ( Aussonderungsrecht ) or a right for preferential treatment ( Absonderungsrecht ) would exist if insolvency proceedings were opened, may not be realised or collected and may be utilised to continue the debtor’s business provided that they are of material importance for its continuance.  Although this is not reflected in the wording and there is no case law on this point, it appears to be the prevailing view in legal literature that this provision should not apply in relation to receivables that have been effectively sold and transferred by the seller to the purchaser by means of a proper true sale.

Moreover, upon the opening of (final) insolvency proceedings, the purchaser of the receivables may only collect the receivables if the transaction is not recharacterised as a secured loan transaction.  In case of a recharacterisation, the assignment of the receivables could be treated as a security assignment (secured loan).   In such a case, the purchaser would not have a segregation right ( Aussonderungsrecht ) but only a right for preferential treatment ( Absonderungsrecht ), in which case the insolvency administrator would be entitled to collect the respective receivables and to deduct a certain haircut from the collection proceeds ( see question 4.9 above and question 6.2 below).

6.2        Insolvency Official’s Powers. If there is no stay of action, under what circumstances, if any, does the insolvency official have the power to prohibit the purchaser’s exercise of its ownership rights over the receivables (by means of injunction, stay order or other action)?

In relation to a potential order for a stay of action during preliminary insolvency proceedings, see question 6.1 above.  Moreover, German insolvency courts may have the right to issue an order entitling a preliminary insolvency administrator to collect receivables over which security was granted by way of a security assignment (which might also be relevant in case the transaction was recharacterised as a secured loan).  After the opening of (final) insolvency proceedings, no stay of action is possible if the sale of receivables qualifies as a true sale.  In case of recharacterisation of a transaction as a secured loan transaction, no formal stay of action is required as only the insolvency administrator would have the right to collect the respective receivables ( see question 6.1 above).

6.3        Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or reverse transactions that took place during a “suspect” or “preference” period before the commencement of the seller’s insolvency proceedings? What are the lengths of the “suspect” or “preference” periods in your jurisdiction for (a) transactions between unrelated parties, and (b) transactions between related parties? If the purchaser is majority-owned or controlled by the seller or an affiliate of the seller, does that render sales by the seller to the purchaser “related party transactions” for purposes of determining the length of the suspect period? If a parent company of the seller guarantee’s the performance by the seller of its obligations under contracts with the purchaser, does that render sales by the seller to the purchaser “related party transactions” for purposes of determining the length of the suspect period?

Under the German Insolvency Code ( Insolvenzordnung – InsO ), an insolvency administrator of the seller (the originator) may rescind or reverse transactions (clawback) in relation to the assignment of rights of the receivables during the applicable suspect period – its length can be from one month to 10 years prior to the insolvency filing.  Similar to many other jurisdictions, any clawback under these rules is not at the discretion of the insolvency court, but is governed by statutory rules.

Transactions voidable pursuant to these rules in particular (without limitation) include the following:

• it was effected in the last three months prior to the filing of a petition for the opening of insolvency proceedings, if the debtor was insolvent at the time of the transaction and if at such time the creditor had knowledge of such insolvency or of the relevant facts supporting a compelling conclusion with respect to such insolvency; or
• it was effected after the petition for the opening of insolvency proceedings and the creditor at the time of the transaction had knowledge of the insolvency or of the petition or of the relevant facts supporting a compelling conclusion with respect to such insolvency or petition.
• the transaction was effected in the last month prior to the petition for the opening of the insolvency proceedings or after the filing of such petition;
• the transaction was effected during the second or third month prior to the petition for the opening of the insolvency proceedings and the debtor was insolvent as at the time of such transaction; or
• the transaction was effected during the second or third month prior to the petition for the opening of the insolvency proceedings and the creditor, as at the time of such transaction, had knowledge that it had adverse effects on the insolvency creditors or of the relevant facts supporting a compelling conclusion with respect to those adverse effects.
• the transaction was effected during the last three months prior to the petition for the opening of the insolvency proceedings and, as at the time of such transaction, the debtor was insolvent and the creditor had knowledge of such insolvency or of the relevant facts supporting a compelling conclusion with respect to such insolvency; or
• the transaction was effected after the petition for the opening of the insolvency proceedings and, as at the time of such transaction, the creditor had knowledge of the insolvency or the petition or of the relevant facts supporting a compelling conclusion with respect to such insolvency or petition.
• Pursuant to § 133(1) InsO, a transaction shall be voidable that was effected during the last year, or up to 10 years prior to the petition for the opening of the insolvency proceedings or thereafter, if such transaction was entered into by the insolvent debtor with an intention to damage its (other) creditors, provided that the other party had actual knowledge of such intention, which knowledge is presumed to exist in the case that he/she had knowledge of the imminent insolvency of the debtor and the adverse effects caused thereby to the position of the insolvent debtor’s creditors.  Pursuant to § 133(2) InsO, the suspect period of up to 10 years is reduced to a maximum period of four years in case the transaction gave or made possible to the other party security or satisfaction.  Further, pursuant to § 133(3) InsO, knowledge of the intention to damage is only presumed if the other party had knowledge of the actual inability of the debtor to make payments when due, instead of knowledge of the imminent insolvency of the debtor in case the transaction gave or made possible to the other party security or satisfaction.  In case the other party has agreed to a payment agreement with the debtor or granted any other form of payment facilitation, it will be presumed that it did not have knowledge of imminent insolvency at the time of the transaction.
• Pursuant to § 133(4) InsO, a contract with consideration between the debtor and a related person by which the insolvency creditors are directly harmed shall be voidable.  Voidability is excluded if the contract was concluded more than two years prior to the petition for commencement of the insolvency proceedings or if the other party had no knowledge of the intention of the debtor to harm creditors.
• Pursuant to § 134 InsO, a transaction made without consideration that was effected during the four years prior to the petition for the opening of the insolvency proceedings or thereafter, shall be voidable.

As some of the most relevant statutory provisions on challenging transactions require that the counterparty of the assignor had knowledge of the fact that the assignor was unable to make payments at the time the legal act (e.g., an assignment of receivables) took place, the risks of challenge could to some extent be mitigated by the delivery of a solvency certificate.

With the exception of directly harmful transactions ( cf. § 133(4) InsO), the length of the suspect period, generally, is independent of whether the transaction was entered into with a related party or an unrelated party.  Instead, § 130 InsO and § 131 InsO provide that in case of related parties it will be presumed that the respective related party had knowledge that the transaction has adverse effects (§ 131(2) second sentence InsO) or had knowledge of the insolvency or of the filing of a petition for the opening of insolvency proceedings (§ 130(3) InsO and § 132(3) InsO).

The term “related party” is defined in § 138 InsO.  According to § 138(2) InsO, related parties of legal entities are: general partners; persons holding more than 25% of the insolvent debtor’s capital; members of the insolvent debtor’s management or supervisory bodies; or persons who, on the basis of a comparable corporate or service relationship with the debtor, have the opportunity to inform themselves of the insolvent debtor’s economic circumstances.  Accordingly, in case an entity (directly or indirectly) holds more than 25% of the insolvent debtor’s share capital, such entity would be considered a related party.  A comparable corporate relationship would exist if the insolvent debtor is controlled by the other party.  In case of control, the controlling entity will in practice also be deemed to have had the opportunity to inform itself of the debtor’s economic circumstances and accordingly will be considered a related party.  Whether this is also the case for an affiliate of the other party does have to be determined in each individual case.  As a general rule, the granting of a guarantee by a party that is a related party of the insolvent debtor (seller) should generally not render a true sale transaction between a seller and purchaser of a related party transaction.

6.4        Substantive Consolidation. Under what facts or circumstances, if any, could the insolvency official consolidate the assets and liabilities of the purchaser with those of the seller or its affiliates in the insolvency proceeding? If the purchaser is owned by the seller or by an affiliate of the seller, does that affect the consolidation analysis?

Currently, no consolidation of assets and liabilities of the purchaser, with those of the seller or its affiliates, exists under German insolvency law.  While under general German corporate law there may be exceptional cases where a liability under the “piercing the corporate veil” principles may arise, those are rare in practice due to the stringent requirements under applicable German law and such liability will in any case not result in a consolidation of assets and liabilities.

In 2018, the German Act to Facilitate the Handling of Group Insolvencies ( Gesetz zur Erleichterung der Bewältigung von Konzerninsolvenzen ) entered into force and introduced special provisions for group insolvencies.  These provisions are, however, limited to procedural questions, such as improving and requiring coordination between insolvency officials of the various group companies, and mainly aim at increasing the chances of a successful restructuring of the group companies.  A consolidation of assets and liabilities is not provided for under this or any other applicable German law.

6.5        Effect of Insolvency on Receivables Sales. If insolvency proceedings are commenced against the seller in your jurisdiction, what effect do those proceedings have on (a) sales of receivables that would otherwise occur after the commencement of such proceedings, or (b) on sales of receivables that only come into existence after the commencement of such proceedings?

As a general rule, an insolvency administrator may elect whether to accept or reject the performance of so-called executory contracts, i.e., contracts that have not been fully performed by at least one party.  Where the receivables purchase agreement has not been fully performed by at least one party, it may be subject to the insolvency administrator’s election right.  This may affect transactions involving the sale of future receivables.  However, term deals are generally not subject to the insolvency administrator’s election right as the seller (by assigning the receivables) has fully performed its respective obligations.  In order to prevent such cherry-picking risk for revolving securitisations, each sale under a master agreement should be structured as an independent transaction.

If the insolvency administrator elects performance of the underlying executory contracts between the (insolvent) seller and its debtors (obligors), any future payments by such obligors would fall into the insolvency estate and could not be segregated or collected by the purchaser.  If the insolvency administrator rejects the performance of the underlying executory contract, future receivables would not become due.  In order to exclude such risks, the securitisation transaction would generally have to be structured such that the insolvency administrator would not have an election right in relation to the underlying contracts.

Moreover, any assignment of future receivables coming into existence after the opening of insolvency proceedings ( künftige Forderungen ) (as opposed to an assignment of previously existing receivables, which only become due after the opening of the insolvency proceedings ( betagte Forderungen )) is not enforceable.

Leases and leasing agreements over movable assets entered into by the seller (originator) as lessor are not subject to the election right of the insolvency administrator if the acquisition of the leased movable assets was financed by a third party and that third party has been granted security by way of a security transfer of the leased movable asset.  There is no clear guidance for scenarios in which the lessor is not identical to the owner of the leased movable asset, which is not uncommon in the German leasing market.  Whether or not the receivables under such lease agreements qualify as future receivables depends on the facts and circumstances in the individual case, in particular the terms of the applicable lease agreements.  Instalments due under so-called “financial leasing” contracts are generally considered not to constitute future receivables but to come into existence upon the conclusion of the leasing agreement and are due from time to time.

Leases with regard to real estate are not subject to the insolvency administrator’s election right but may be terminated by the insolvency administrator subject to certain statutory notice periods.  In addition, lease receivables under real estate leases constitute future receivables and cannot be validly assigned vis-à-vis the seller’s/lessor’s insolvency estate in case they fall in the period after the month in which the insolvency proceedings are opened (or, if the opening date is later than the 15 th day of a month, the following month).  However, any such lease receivables can be covered by a land charge over the real estate, which is generally enforceable in the seller’s insolvency.

In relation to fully disbursed loans (advanced by the seller as lender), the insolvency administrator’s election right does not apply.  Moreover, receivables being due from time to time under loans are not considered future receivables, but existing receivables that are not yet due.

6.6        Effect of Limited Recourse Provisions. If a debtor’s contract contains a limited recourse provision (see question 7.4 below), can the debtor nevertheless be declared insolvent on the grounds that it cannot pay its debts as they become due?

In Germany, special purpose entity debtors are generally established in the form of a limited liability company ( Gesellschaft mit beschränkter Haftung – GmbH or Unternehmergesellschaft – UG ).  The managing directors of such companies are required by law to file a petition for the opening of the insolvency proceedings if the debtor has become unable to pay its debts as they are due or it is over-indebted.  Where the creditors have validly agreed to a limited recourse provision ( see questions 7.4 and 7.5 below), such agreement would prevent the debtor from becoming over-indebted or illiquid, as the respective payment obligations would not come into existence to the extent the debtor has insufficient assets.  However, in case the debtor has insufficient funds to pay all of its obligations that are not subject to a limited-recourse provision, it could still become over-indebted or illiquid and would therefore not be insolvency-remote.  In addition, where a limited recourse provision provides for the conditional cancellation of the obligations of the debtor that are not covered by its assets, additional tax considerations need to be taken into account for such contingent payment obligations in order to avoid adverse tax consequences.

7.1        Securitisation Law. Is there a special securitisation law (and/or special provisions in other laws) in your jurisdiction establishing a legal framework for securitisation transactions? If so, what are the basics? Is there a regulatory authority responsible for regulating securitisation transactions in your jurisdiction? Does your jurisdiction define what type of transaction constitutes a securitisation?

There is neither a special securitisation law nor any special provisions in other German laws that would establish a comprehensive legal framework for securitisation transactions in Germany.  German securitisation transactions are subject to the general legal framework in Germany, in particular the German civil law regime under the BGB and the insolvency law regime under the InsO, as well as the relevant banking and financial services regulatory laws, in particular under the KWG.  However, certain aspects specifically relevant to securitisations are addressed in special statutes and regulations.  For example, the German Legal Services Act ( Rechtsdienstleistungsgesetz – RDG ) contains an exemption from licensing requirements for the provision of legal services and debt collection activities for the servicing of securitised receivables by the originator of the receivables.  The KWG contains special provisions for refinancing register transactions (§ 22a et. seqq . KWG ) aimed at facilitating true sale securitisations in Germany.

In addition, several European Regulations provide for special rules for securitisations and parties involved in securitisation transactions, namely originators, sponsors and certain regulated investors.  These rules have been harmonised across different sectors in the Regulation (EU) No. 2017/2402, laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation (Securitisation Regulation) and provide, inter alia , that certain regulated firms are prohibited from investing in securitisation transactions if the originator does not retain on an ongoing basis a net economic interest in the transaction of at least 5% (so-called “skin-in-the-game” requirements; Art. 6 Securitisation Regulation). 

Moreover, such institutions are subject to special investor due diligence requirements: they must have comprehensive and thorough knowledge of the securitisation positions (and the underlying assets) and establish formal due diligence and monitoring procedures (Art. 5 Securitisation Regulation).  The scope of the Securitisation Regulation comprises, inter alia , originators, sponsors and institutional investors, insurance and re-insurance undertakings, certain institutions for occupational retirement provision, alternative investment managers, UCITS funds, and management companies for UCITS funds as well as credit institutions and investment firms (under the Capital Requirements Regulation (CRR)).  Whilst the 5% risk retention requirement has generally been maintained from previous regulatory frameworks, the Securitisation Regulation also imposes risk retention requirements directly on originators, sponsors and original lenders.  The Securitisation Regulation is applicable to securitisations; whose securities are issued on or after 1 January 2019.  For securities issued between the 1 January and 31 December 2019, there are transitional provisions.

The Securitisation Regulation introduced the concept of simple, transparent and standardised (STS) securitisation into European law.  It sets out detailed criteria, which a securitisation transaction must satisfy in order to qualify as STS.  Compliance with these requirements must be proven to ESMA and BaFin using the ESMA STS-Registry.  Moreover, the amended European capital requirements rules (CRR Amendment Regulation) introduced a preferential capital regime for investments in STS securitisations by credit institutions and investment firms. 

Moreover, there are specific tax rules and regulations in Germany dealing with certain tax aspects of securitisations ( see also section 9 below).  In addition, the predecessor of the Federal Financial Services Supervisory Authority ( Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin ) have published regulatory guidelines for securitisations originated by banks in its circular 4/97, which still serve as important regulatory guidelines ( see also question 8.3 below).

In Germany, there is no special authority responsible for regulating securitisations.  Securitisations are supervised as part of the general regulatory supervision regime through BaFin and the European Central Bank (ECB).

7.2        Securitisation Entities. Does your jurisdiction have laws specifically providing for establishment of special purpose entities for securitisation? If so, what does the law provide as to: (a) requirements for establishment and management of such an entity; (b) legal attributes and benefits of the entity; and (c) any specific requirements as to the status of directors or shareholders?

No, there are no laws in Germany that specifically provide for the establishment of special purpose entities for securitisations.

7.3        Location and form of Securitisation Entities. Is it typical to establish the special purpose entity in your jurisdiction or offshore? If in your jurisdiction, what are the advantages to locating the special purpose entity in your jurisdiction? If offshore, where are special purpose entities typically located for securitisations in your jurisdiction? What are the forms that the special purpose entity would normally take in your jurisdiction and how would such entity usually be owned?

From a legal perspective, it is generally possible to use German or foreign special purpose entities for German securitisation transactions.  However, the tax implications have to be analysed depending on the type of securitisation and assets securitised ( see question 9.6 below).  Due to the German taxation system, securitisation entities are usually located abroad in offshore jurisdictions such as Jersey, Guernsey or the Cayman Islands or in other European jurisdictions that provide for a more favourable tax treatment and double taxation treaties such as Luxembourg, the Netherlands and Ireland.  The Securitisation Regulation restricts the establishment of foreign special purpose entities in jurisdictions that are: listed by the EU as jurisdictions that have strategic deficiencies in its regime on anti-money laundering and counter-terrorist financing; or non-cooperative jurisdictions for tax purposes.

German special purpose entities are frequently used for securitisations of bank loans for which an exemption in relation to trade tax applies.

Even for bank loans there are no specific legal or tax reasons for using a German special purpose entity.  From a practical perspective, one advantage of using a German special purpose entity may be the reduction of costs for implementing the transaction given that no foreign corporate services providers or specific foreign law legal advice may be required when structuring a German bank loan securitisation transaction.  On the other hand, foreign jurisdictions such as Luxembourg, which enable compartment structures that can be used for several transactions, may offer more flexibility to originators frequently refinancing through securitisations.

If the special purpose entity shall be a German law entity, it usually takes the form of a GmbH, including in the form of a so-called “small GmbH” or UG ( Unternehmergesellschaft (haftungs- beschränkt) ), which can be established very quickly and with a minimum share capital of one euro.  There is a recognised way for establishing orphan securitisation entities in Germany, which builds on the infrastructure provided by TSI GmbH, a company that has been established to promote (true sale) securitisations in Germany.  The shares of the German special purpose entity established under the TSI platform will be owned by three existing charitable foundations that have obtained the required formal recognition by public authorities (a so-called orphan structure).  Setting up an orphan German securitisation entity outside of this structure may be more costly and time consuming.

7.4        Limited-Recourse Clause. Will a court in your jurisdiction give effect to a contractual provision in an agreement (even if that agreement’s governing law is the law of another country) limiting the recourse of parties to that agreement to the available assets of the relevant debtor, and providing that to the extent of any shortfall the debt of the relevant debtor is extinguished?

See question 7.5 below.

7.5        Non-Petition Clause. Will a court in your jurisdiction give effect to a contractual provision in an agreement (even if that agreement’s governing law is the law of another country) prohibiting the parties from: (a) taking legal action against the purchaser or another person; or (b) commencing an insolvency proceeding against the purchaser or another person?

Although there is no securitisation-specific case law on this point, limited-recourse and non-petition clauses are generally considered valid and enforceable under German law, and German courts would generally give effect to such arrangements notwithstanding the governing law, provided that the parties have validly chosen such law ( see question 2.3 above).  If governed by German law, limited-recourse and non-petition clauses should generally be valid and enforceable unless the underlying claim is based on wilful misconduct or, if the clause is considered under general business conditions ( Allgemeine Geschäftsbedingungen ), gross negligence of the purchaser.

If the special purpose entity does not have enough funds available to meet its obligations that are not subject to effective limited-recourse provisions, it could still become insolvent.  Moreover, see question 7.7 below with respect to the obligation of the management of certain German companies to file for insolvency upon illiquidity or over-indebtedness.

7.6        Priority of Payments “Waterfall”. Will a court in your jurisdiction give effect to a contractual provision in an agreement (even if that agreement’s governing law is the law of another country) distributing payments to parties in a certain order specified in the contract?

Priority of payments (“waterfall”) provisions may generally be validly agreed among creditors and with the debtor, and German courts would generally give effect to these in an agreement notwithstanding the governing law, provided that the parties have validly chosen such law ( see question 2.3 above).  However, in case of insolvency of the purchaser, customary contractual waterfall provisions found in securitisation transactions would generally not alter the statutory order of priority provided for by German insolvency law.  Rather, the creditors would generally be treated as equal ranking for German insolvency law purposes and would only be contractually obligated to distribute any amounts received by them pursuant to the agreed priority of payments.

7.7        Independent Director. Will a court in your jurisdiction give effect to a contractual provision in an agreement (even if that agreement’s governing law is the law of another country) or a provision in a party’s organisational documents prohibiting the directors from taking specified actions (including commencing an insolvency proceeding) without the affirmative vote of an independent director?

A German court would generally give effect to such a contractual provision in an agreement notwithstanding the governing law, provided that the parties have validly agreed to such choice of law ( see question 2.3 above).  However, for German special purpose entities, there is a statutory obligation for the directors to file for the opening of insolvency proceedings in case the company becomes unable to pay its debts as they become due (illiquidity) or over-indebted (over-indebtedness).  Non-compliance with such filing obligation may lead to personal liability for damages and even criminal liability for the company’s management. 

7.8        Location of Purchaser. Is it typical to establish the purchaser in your jurisdiction or offshore? If in your jurisdiction, what are the advantages to locating the purchaser in your jurisdiction? If offshore, where are purchasers typically located for securitisations in your jurisdiction?

See question 7.3 above.

8.1        Required Authorisations, etc. Assuming that the purchaser does no other business in your jurisdiction, will its purchase and ownership or its collection and enforcement of receivables result in its being required to qualify to do business or to obtain any licence or its being subject to regulation as a financial institution in your jurisdiction? Does the answer to the preceding question change if the purchaser does business with more than one seller in your jurisdiction?

As a general rule, the purchase and ownership of receivables by a special purpose entity under a securitisation transaction does not trigger any licence requirements for the purchaser.  As long as the purchase of the receivables is structured as a true sale and, in case of loans, does not encompass the acquisition of any undrawn commitments or other funding obligations, the purchaser generally does not require any licence under the KWG, in particular no licences for lending business or factoring business are required.  Likewise, the collection and enforcement of the receivables do not trigger any licence requirements for the purchaser in Germany ( see question 8.2 below in relation to servicing licences).

8.2        Servicing. Does the seller require any licences, etc., in order to continue to enforce and collect receivables following their sale to the purchaser, including to appear before a court? Does a third-party replacement servicer require any licences, etc., in order to enforce and collect sold receivables?

Loan servicing may, in principle, trigger licence or registration requirements under the RDG as debt collection generally qualifies as legal service under the RDG.  Where a third party services the receivables on behalf of the purchaser, such party generally must be registered under the RDG.  An important exemption applies in relation to the servicing by the seller, i.e., no licence or registration requirement under the RDG will be triggered if the seller (originator) acts as servicer.  If, however, the servicer is different from the seller (originator), the licence/registration requirement under the RDG could be triggered.  In particular, alternative servicing structures such as master servicer structures or replacement servicer features in the transaction documents would have to be analysed in more detail so as to ensure that no licence/registration requirements will be triggered under the RDG.

8.3        Data Protection. Does your jurisdiction have laws restricting the use or dissemination of data about or provided by obligors? If so, do these laws apply only to consumer obligors or also to enterprises?

Yes.  The General Data Protection Regulation (Regulation (EU) 2016/679 – GDPR) and the Federal Data Protection Act ( Bundesdatenschutzgesetz – BDSG ) restrict the use and dissemination of personal data about or provided by obligors.  If (some of) the underlying debtors are natural persons or enterprises operated by a sole trader ( Einzelkaufmann ) or a partnership ( Personengesellschaft ) where a natural person is a partner, data protection legislation needs to be complied with.  If the relevant persons have not expressly consented to the transfer of their personal data in connection with the securitisation transaction, the use of a data trustee structure under which data is only transferred in encrypted form, is normally recommended. 

Further restrictions apply in the case of a securitisation of German bank loans where the originating bank will generally need to comply with German banking secrecy rules ( Bankgeheimnis ), which apply to all types of debtors including natural persons, partnerships and corporations.  There are established procedures, such as the appointment of a data trustee, for ensuring that banking secrecy and data protection issues are complied with.

In a securitisation of bank loans by German banks, specific servicing requirements set out in circular 4/97 ( see also question 7.1) need to be complied with, pursuant to which, inter alia , each replacement servicer generally needs to be a credit institution licensed in the European Economic Area (EEA) or a notary.

8.4        Consumer Protection. If the obligors are consumers, will the purchaser (including a bank acting as purchaser) be required to comply with any consumer protection law of your jurisdiction? Briefly, what is required?

In the first instance, it is the seller as the originator of the receivables who is responsible for compliance with any applicable German consumer protection laws.  A violation of consumer protection laws may affect the validity or enforceability of the receivables and the underlying agreements and may give the obligors rescission rights.  Compliance with applicable consumer protection laws will therefore be checked by the purchaser by conducting legal due diligence.  In addition, it is market practice that the seller (originator) will give representations and warranties as to compliance with applicable consumer protection laws.  Special consumer protection laws apply, for example, in case of consumer loans or receivables agreements entered into at the obligor’s place of residence or by means of long-distance communication and/or if receivables contracts are based on the seller’s general business conditions.

In relation to consumer loans, the lender is generally required to inform the obligor three months before an agreed interest rate expires or the loan matures, stating whether it is willing to agree on a new interest rate or to extend the loan.  Such obligation generally also applies to the purchaser in a securitisation transaction unless the seller and the purchaser have previously agreed that the seller shall exclusively continue to deal with the consumer obligor.  In addition, there are certain restrictions (acceleration trigger levels) for a lender (and the purchaser of a loan) to accelerate an annuity loan in case of payment defaults of the consumer.

8.5        Currency Restrictions. Does your jurisdiction have laws restricting the exchange of your jurisdiction’s currency for other currencies or the making of payments in your jurisdiction’s currency to persons outside the country?

There are no general laws in Germany restricting such exchange of currency or the making of payments other than those implementing United Nations, EU or other international sanctions in respect of transactions with certain countries and persons.  Moreover, if a German resident receives from, or makes payments to, any non-German resident, it will have to notify the German Central Bank ( Deutsche Bundesbank ) in certain circumstances.  Such notification, however, serves for statistical purposes only and non-compliance does not affect the validity of the payment or the underlying obligation.

8.6        Risk Retention. Does your jurisdiction have laws or regulations relating to “risk retention”? How are securitisation transactions in your jurisdiction usually structured to satisfy those risk retention requirements?

See question 7.1 above for the European risk retention rules for credit institutions and investment firms, banks, insurance companies and pension funds and AIFs that apply in Germany.  Securitisation transactions in Germany can be structured in any way that is compliant with the applicable European risk retention requirements, such as the following the Securitisation Regulation risk retention options:

• retention of no less than 5% of the nominal value of each of the tranches sold or transferred to the investors;
• in case of securitisations of revolving exposures, retention of the originator’s interest of no less than 5% of the nominal value of the securitised exposures;
• retention of randomly selected exposures, equivalent to no less than 5% of the nominal value of the securitised exposures;
• retention of the first loss tranche, so that the retention equals in total no less than 5% of the nominal value of the securitised exposures; or
• retention of a first loss exposure not less than 5% of every securitised exposure in the securitisation.

8.7        Regulatory Developments. Have there been any regulatory developments in your jurisdiction which are likely to have a material impact on securitisation transactions in your jurisdiction?

Regulatory change in the field of securitisation is mainly driven by new European legislation, which forms part of the European financial reform agenda.  The Securitisation Regulation and the revised European capital requirements framework have had the greatest impact over the last couple of years (see question 7.1 above). 

The Securitisation Regulation and the securitisation framework of the Capital Requirements Regulation (Regulation (EU) No. 575/2013 – CRR) were amended in 2021 under the “Capital Markets Recovery Package” (CMRP).  In recognition that securitisation can foster economic recovery, the legislation focused in particular on the introduction of a regulatory regime for balance sheet (synthetic) STS securitisation and changes aimed at addressing regulatory obstacles affecting securitisation of non-performing exposures (NPL securitisations).  As a part of its mandate by the CMRP to produce certain regulatory technical standards (RTS), the EBA has released the Final Report on Draft Regulatory Technical Standards (Draft RTS) on the homogeneity of the underlying exposures in STS securitisation under the Securitisation Regulation on 14 February 2023.  In order to ensure a level playing field between on-balance sheet STS securitisations and traditional STS securitisations and to facilitate investor due diligence across formats, the EBA proposed amendments that create a single homogeneity RTS governing all STS transactions.  It is expected, that the Draft RTS will enter into force later in Q4 2023 or early 2024, once the amendments are adopted by the European Commission and complete certain other legislative steps.

On 10 October 2022, the European Commission published its long-awaited Report on the functioning of the Securitisation Regulation as mandated under Art. 46 Securitisation Regulation.  However legislative changes to the prudential treatment of securitisation under the CRR may still be a slow process, as the report required to be delivered by the European Commission by 1 January 2022, under CRR Art. 519a, has been delayed yet again.  One reason for the delay was the pending reply by the Joint Committee of the European Supervisory Authorities (JC of ESAs, i.e., EBA, the ESMA, the European Insurance and Occupational Pensions Authority) to the European Commission’s high-level Call for Advice (CfA) on the review of the securitisation prudential framework.  On 12 December 2022, the JC of ESAs published the joint advice to the European Commission.  However, it is expected that the European Commission’s review will be overtaken by further prudential review, including addressing securitisation treatment at Basel level.  Therefore, small adjustments to CRR3 and further amendments announced later, are expected, before the report will be published.

Within the field of sustainable securitisations, the EBA report of March 2022 on developing a framework for sustainable securitisation pragmatically recommended for securitisations to be treated consistently with other asset-backed products and, instead of proposing that sustainable securitisation has its own dedicated framework, the EBA recommended for certain securitisation-specific adjustments to be made to the draft European Green Bonds Standard Regulation (EU GBS), so that the focus in the context of true sale/traditional securitisation is on the use of proceeds by the originator entity (rather than a requirement for green collateral).  Synthetic securitisations are to be excluded from the EU GBS framework for the time being, but this is subject to a review in a few years’ time.  At the end of February 2023, the political agreement on the draft EU GBS has been reached, but the full details are not yet known.  In terms of timing, it is expected that the EU GBS regime will start applying around Q4 2024, i.e. 12 months after its entry into force.  Therefore, it remains to be seen what impact, if any, the EU GBS will have on the green securitisation market.

9.1        Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser be subject to withholding taxes in your jurisdiction? Does the answer depend on the nature of the receivables, whether they bear interest, their term to maturity, or where the seller or the purchaser is located? In the case of a sale of trade receivables at a discount, is there a risk that the discount will be recharacterised in whole or in part as interest? In the case of a sale of trade receivables where a portion of the purchase price is payable upon collection of the receivable, is there a risk that the deferred purchase price will be recharacterised in whole or in part as interest? If withholding taxes might apply, what are the typical methods for eliminating or reducing withholding taxes?

As a general rule, payments on receivables (including interest payments) are not subject to withholding tax in Germany.  However, certain exceptions may apply, in particular in relation to certain hybrid debt instruments such as profit-participating loans if the debtor is tax resident in Germany or in relation to interest payable on loans that are secured on German real estate or German registered ships (regardless of the debtor’s tax residence).  If Germany is entitled to tax such income from interest payments under an applicable tax treaty, tax withheld may be credited or refunded upon tax assessment on the purchaser, which requires a tax filing of the purchaser.

Interest payments made by a bank or financial services institution as obligor may be subject to withholding tax on interest unless the recipient is itself a bank or financial services institution or is not subject to tax in Germany (subject to certain formal requirements being met).

Interest payments to a creditor that is resident in a non-cooperative tax jurisdiction ( nicht-kooperatives Steuerhoheitsgebiet ) set out in a list that is effectively based on the respective EU list of on-cooperative tax jurisdictions, attract withholding tax regardless of any specific features of the debt relationship.

The sale of trade receivables at a discount generally does not create a risk that the calculated discount may be recharacterised as interest in whole or in part, provided that the sale qualifies as true sale for tax purposes.  Otherwise, the sale may be recharacterised as a secured loan in the form of a profit-participating loan.

9.2        Seller Tax Accounting. Does your jurisdiction require that a specific accounting policy is adopted for tax purposes by the seller or purchaser in the context of a securitisation?

No, there is currently no specific accounting policy for tax purposes in Germany in the context of a securitisation.  As a general rule, German GAAP are also applicable for German tax law.  The key question will be whether the economic ownership ( wirtschaftliches Eigentum ) in the underlying receivables is transferred to the purchaser, which basically requires that the transaction qualifies as a true sale and is not recharacterised as a secured loan.  There is a risk that economic ownership of the receivables stays with the seller and no true sale can be achieved if the seller continues to bear the default risk, which is the case, in particular, if the retained purchase price portion covers or compensates for any credit risk exceeding the expected default rate ( see also question 4.9 above).  The accounting treatment under IFRS or US GAAP, which may differ from German GAAP, is not relevant from a German tax perspective.

9.3        Stamp Duty, etc. Does your jurisdiction impose stamp duty or other transfer or documentary taxes on sales of receivables?

Germany currently does not impose any stamp duty or other documentary taxes on the sale and transfer of receivables.  Whether or not an additional financial transaction tax ( Finanztransaktionsteuer ) will be introduced in Germany in the future remains unclear, as the respective discussions between the few EU Member States willing to participate have been ongoing for years, without any real progress.

9.4        Value Added Taxes. Does your jurisdiction impose value added tax, sales tax or other similar taxes on sales of goods or services, on sales of receivables or on fees for collection agent services?

Germany generally imposes value-added tax (VAT) (at a rate of 19%) on the sale of goods and services.  However, as a general rule, the sale of receivables is not subject to German VAT but the seller can elect to waive this VAT exemption as long as the purchaser is considered an entrepreneur.

Fees for collection agent services would generally be subject to VAT.  However, from the German tax authorities’ perspective, an important exception applies where the seller continues to collect the receivables.  Such servicing of receivables by the seller (originator) is customary for securitisation transactions in Germany.  In these cases, the collection of the receivables by the seller is not considered a separate service but as a mere ancillary service that is VAT-exempt.  If, by contrast, the purchaser itself or a third-party servicer is acting as collection agent, VAT may become payable by the purchaser or the third-party servicer.

9.5        Purchaser Liability. If the seller is required to pay value-added tax, stamp duty or other taxes upon the sale of receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold receivables or collections?

The purchaser can be held secondarily liable for VAT included in the amount of the receivables assigned to it to the extent it collects payment on them and provided further that the seller (originator) does not pay VAT on the underlying sale of goods or services when due.  If the special purpose entity further assigns or transfers the receivables, it will be deemed to have received full payment on the receivables.  This will also hold true for any further assignment or pledge of the receivables to a third party (including a security assignment or pledge of the receivables to a security trustee).

However, the secondary liability does not apply if, and to the extent, the purchaser pays consideration for these to the seller without any particular restrictions.  As a consequence, the risk for secondary liability of the purchaser is generally limited to the VAT included in the difference between the face value of the receivables sold and the purchase price paid by the seller (taking into account discounts and cash reserves).

9.6        Doing Business. Assuming that the purchaser conducts no other business in your jurisdiction, would the purchaser’s purchase of the receivables, its appointment of the seller as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax in your jurisdiction?

As a general rule, the mere purchase of receivables should not give rise to tax liability of the purchaser in Germany.  This may be different if the purchased receivables give rise to income from German sources such as in case of interest payments on hybrid debt instruments or on loans secured by German real estate or German registered ships ( see question 9.1 above).  In most of its tax treaties, Germany has waived the right to tax interest on such loans.

Moreover, the appointment of the seller as the purchaser’s servicer and collection agent, or the purchaser’s enforcement of the receivables against the obligors, should generally not give rise to tax liability of the purchaser in Germany.  However, the German tax authorities indicated that the purchaser may be treated as a German tax resident if it qualifies as a corporate entity without any substantial presence (office space, infrastructure, staff, etc.) outside of Germany.  In this case, the purchaser’s effective place of management could be considered to be in Germany due to the fact that the commercial activities of a servicer and collection agent require decisions relating to the day-to-day management of the purchaser’s business, such as the enforcement of the receivables against the obligors in Germany.  As a consequence, in such a case, the purchaser may be subject to German corporate income tax and trade tax.  By carefully structuring the transaction (e.g., enough substance for the non-German purchaser, main business decisions and functions of the purchaser other than the debt collection only taken in its country of incorporation, no further services performed in Germany other than the servicing, etc.), it should be possible to mitigate the risk that the purchaser is considered to have its effective place of management or permanent establishment in Germany.

Even where the purchaser’s business is effectively managed from outside Germany, the seller (originator) servicing and collecting the sold receivables on behalf of the purchaser could be considered a permanent representative of the purchaser.  This depends mainly on whether the seller is bound by the purchaser’s instructions.  If the purchaser agrees that the seller continues the collection in accordance with pre-agreed servicing principles on basically the same terms as before and the purchaser is not permitted to intervene, there are good arguments to consider that the seller is not a permanent representative of the purchaser.

9.7        Taxable Income. If a purchaser located in your jurisdiction receives debt relief as the result of a limited recourse clause (see question 7.4 above), is that debt relief liable to tax in your jurisdiction?

As a general rule, a debt relief may be subject to German corporate income tax as well as trade tax, as it may be seen as extraordinary profit.  When structuring a securitisation transaction involving a German purchaser, it will be important to discuss the specific wording of the limited recourse clause with the tax advisers in order to reduce related tax risks.

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Q&A: compact configuration in Germany

Contract formation

Is there with obligatorium go use good faith at negotiating a contract?

Sure. Go faith has regulated at section 242 of the German Civil Code (BGB). He is a fundamental basic under German law. It built the obligation on both parties at a contract go accurately and sincerely perform own obligations, taking customary how into consideration. However, unless there is a violence of specific rules for law of to BGB or the German Commercial Code (HGB), it is preferable hard to enforce a party’s right ensure is established only on the general rule of teil 242 of the BGB. This essays examines Magazine 7 of the CISG, the provision on the Convention’s interpretation, through the lenses of and German both German decree in order to shed light up interpretative issues in which there are divergent views in common rights and civil rule systems. The essay more provides possible reasons for the non-ratification of the CISG by aforementioned UK in contrast to seine broad test in Germany. The writer more closely test the issue of good faith as a principle of drafting law, their vagueness being one of the possible reasons for aforementioned reluctance go ratify the CISG in England. The superior will lock to an outlook on running and future efforts to harmonize contract law in Europe, particularly with respects for the brand (Draft) Common Frame of Read. The question raised is whether the Common Frame of Product has adenine coincidence of being accepted per of European middle law countries as well as by England and Wales as common law jurisdictions.

The principle of good faith is designation, for sample, in section 138 of the BGB (no legal transaction perverse to publicity policy; no usury) and in section 307 et seq out the BGB (no outrageous disadavantage to of other party in general condition and conditions).

The basics of good faith including establishes pre-contractual rights and obligations on the parties (sections 311(2) and 241(2), BGB). AMPERE party includes negotiators may demand compensation for the culpable estoppel (abandonment) of constitutional negotiations by to another party if:

• the other party has caused it to have particulars trusting that the future contract bequeath be finished;
• the party claiming compensation has experienced expenses in expectation starting one contract; and
• the others party has stopped the negotiations remarkably unexpectedly and without a material reason for perform so.

Moreover, the principle of good faith requires, for example, that the parties in contract negotiations clarify circumstances in the other party that are of large importance are respect to conclusion of the conclude.

Method are ‘battle of the forms’ disputes resolved in your jurisdiction?

In principle, a valid shrink under Language rights demand two entsprechendes declarations of intent. Offer and acceptance do cannot need to are declared expressly. A contract can also be finish by implicit behaviour (eg, supply concerning the ordered products). This article highlights some of the key considerations surrounding conclusion formation in Germany, including good-faith obligations, 'battle a the forms' clashes and issues with on-line treaty.

If more than couple fetes are involved – which may, for example, be the case when collective groups enter into binding with suppliers – respectively party that wishes to become party to the contract must issue a corresponding declaration of intent.

Pursuant to section 150(2) of the BGB, an acceptance containing expansions, restraints or other alterations is considered to be ampere new offer the therefore does does result in a agreement unless thereto is – without limitation – accepted by the your in turn. The addressee may, however, accept such modification implied otherwise impliedly; for instance, whereas accepting the supplied goods.

Stylish commerce, silent may, in very exceptional circumstances, also result in to conclusion of one contract. Wherever an offer is made into a merchant whose business includes solicitation or conclusion of enterprise transactions for else, and create offer is from jemmy from whom the merchant has one business relationship and concerns solicitation or conclusion of such transactions on behalf the the offeror, the merchant is obliged to reply immediately. Otherwise silence will be deemed to be accept of the get in to section 362(1), sentence 1 of the HGB. Pursuant for section 346 of the HGB, the German court need developed the operating from the commercial letter of confirmation. It only applies in trade interactions real is targets at accelerating the commercial communication. Int cases where the addressee out the commercial letter of confirmation remains silent, it results in a legal presumption that a contract with the index of an confirmation buchstabe has been finalized between the sender press addressee, independently of when or not the parties have finally concluded the contract before. The Notion out Contractual Good Faith: Sights from Comparative Decree

A go are high practical impact for regard to the ‘battle regarding the forms’ is which standard concepts getting where twain parties includes a contract claim the their usual conditions and conditions are part of the contracts. To party making the offer generally attaches seine standard terms and conditions available making the offer. The party accepting the offer often also attaches – or per least makes reference to – its standard terms real conditions whereas either declaring acceptance or delivering the purchasing merchandise alternatively services. In cases where that groups start to performance their contractual obligations despite the conflicting terms, the standard terms and conditions are the parties are valid only to the extent that few perform not confrontation but correspond with every additional. With regard to the rest, there belongs a lack of agreement. Pursuant to section 306 a who BGB, that conflicting clauses are replaced by the legitimate food by the BGB or the HGB. Which Doctrine of Good Religion in German Contract Law

It is important to how such lack of agreement is not necessarily an obstacle to the creation about which contract if the parties start implementing it by mutual consent real, by do so, watch that they do not take the lack of conformity till be substantial.

Remains there a legal requirement to draft which contract in the local language?

No, the parties are free to choose the law governance their contract as well as the language.

The language in German courts, however, is Dutch. Where the contract documents or correspondence has introduced is who court proceedings due one of the parties, to documents must been translated. This has diverse in arbitrator proceedings under Korean law, which may be held in English or any other language agreed until the parties. In Germany, under the German. Civil Coding, contracting parties have in observe good faith in both negotiation the performance of the contract. This is a key ...

In what circumstances are signatures either any other formalities required in execute commerical contracts in your jurisdiction? Is it possible in agree a B2B contract online (eg, exploitation a click-to-accept process)? Does aforementioned law recognise an validity of elektronic and digital contract signatures? Wenn like, how can they treated in comparison to wet-ink signatures?

Yes, the fundamental of freedom of conclude that dominates German law provides that contracts may include core be concluded without observing any entry requirement. Therefore, in general, business-to-business (B2B) contracts can, for demo, be concluded orally, via email or fax, online, via elektronic drawing and e-signing platforms or in written form.

Only in limited specified cases, the law requires that the parties use adenine specific form. This applies, in extra, where real demesne lives sold (contracts on plots of landed, section 311b(1), rate 1, BGB), companies dividend are transferted (section 15(3), Limited Liability Companies Act (GmbH)) or a donation is guaranteed (section 518(1), BGB). If the law requires the write form in specified cases, the written form can also be replaced to aforementioned electronic form int the sense out section 126a, BGB, until the law expressly allows otherwise (section 126 (3), BGB). The electrical print include the purpose of section 126a, BGB, is fulfilled if which issuer adds your press herr name to the return and states the electronic document with adenine qualified electronic signature.

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Q&a: get formation in germany *, contract formal in germany *, commercial contracts in germany *, in brief: limiting contractual liability in germany *, contract termination is germany *.

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