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The Munich Regional Court (Landgericht) has handed down a decision regarding a so-called "hard" letter of support (Patronatserklärung) which appears to be at variance with the predominant case law in the area. The court dismissed a suit brought by a bank to enforce the letter of support, which it had received from the 75 % shareholder of a company to which the bank had extended credit. The judgement has been appealed.
The undertakings of the defendant on the suit in the letter of credit were as follows:
- "... during the period in which the aforementioned loan has not yet been completely repaid, to see to it that Company X remains managed and provided with financing so as to enable it at all times to fulfil all present and future obligations under the aforementioned loan agreement ... in a timely manner" and
- "to supervise Company X in the fulfilment of its contractual obligations to the lender and to work towards their satisfaction in due course."
The Munich Regional Court held that the bank derived no rights enforceable at law from the above letter of support.
The undertaking to provide financing was regarded as too indefinite to create an enforceable obligation. It was unreasonable, in the court's view, to expect the issuer of the letter to provide financing sufficient for the company to satisfy all of its obligations and to repay the loan in addition, as this might entail payments many times the amount of the loan. Short of this, the court saw no way to define the extent of the issuer's obligation.
The court furthermore held that the letter of support was a form contract used by the bank within the meaning of the German law on general terms and conditions. As such, the letter of support was held to be void under the general clause of this law (sec. 9 AGBG), which prohibits the imposition of unreasonably disadvantageous terms by means of form contracts.
Finally, the letter of support was held void as well under the stiffer standard of sec. 138 BGB, a section of the civil code pertaining to contractual terms which are unethical or unconscionable.
The judgement of the Regional Court is at odds with the prevailing scholarly opinion and case law in this field, which has generally enforced similarly drafted letters of support. Whether the judgement will stand up on appeal remains to be seen.
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