In a recently published judgment of 3 June 2014 (file number XI ZR 147/12), the chamber of the German Federal Supreme Court (Bundesgerichtshof, the "Court") specializing in banking law rendered a landmark decision in respect of duties of disclosure in relation to capital investments.


The Claimant, a wealthy individual, purchased several properties from a trading company (the "Seller") in 1996 at a price of DM 52 million. In doing so, the Claimant had been advised by the Defendant, a bank. Under the sales contract, the Seller undertook to build a shopping and event centre on the properties. The Defendant financed the acquisitions with a loan of DM 24 million. In consideration for referring the Claimant to the Seller in respect of the sale of the properties, the Defendant received a commission payment of DM 1.35 million from the shareholders of the Seller. Neither the Seller nor the Defendant disclosed the commission payment to the Claimant. Insolvency proceedings over the assets of the Seller were initiated in 2005. The Claimant argued that the sales contract was invalid based on, inter alia, the fact that the Defendant had not disclosed the commission payment, and sought damages from the Defendant.

On the basis of long standing case law, banks have long been under an obligation to disclose kickbacks (Rückvergütungen) received in connection with advising clients on making investments in financial instruments. The Court defines kickbacks as payments by third persons which are paid out of openly disclosed issue surcharges, agios or administrative fees and other openly disclosed commissions levied by the relevant issuer, where the customer is unaware and unable to recognise that certain proportions of its payments are in fact being forwarded to the bank. In such a scenario, the customer is unable to identify the conflict of interest faced by the bank: the bank on the one hand owed duties to the customer under their contractual advisory relationship while on the other hand it has a business relationship with the relevant issuer who will make such kickback payments.

The legal situation has been less clear around so-called internal commissions (Innenprovisionen). An internal commission is an undisclosed payment received by a bank from a third party with regard to advice on financial instruments provided by the bank to its customer where no commission to any person is referred to in the financial instrument documentation. There has been a debate in the legal community as to whether such internal commissions must be disclosed. Some commentators have argued that internal commissions must be disclosed as the underlying conflict of interest faced by the bank is the same as that arising in the kickback scenario. Other commentators have countered that, according to the jurisprudence of the Court in relation to kickbacks, the disclosure of commissions received from third parties is only required where an issuer has openly disclosed to the customer the fact of commissions being paid, but not the identity of the party to which they are paid. According to these commentators, internal commissions only have to be disclosed where the total commission amount is 15 per cent or more of the invested amount. The Court had not needed, until now, to decide whether there is also a duty to disclose internal commissions where this threshold has not been reached.

In the present case, the Court firstly found that the commission paid to the Defendant was an internal commission. The Court stated that it did not have to decide whether the payment of such internal commission needed to be disclosed. Even if the bank had been under an obligation to disclose such internal commission, the Court reasoned, it would have been excused for not disclosing it during the time period up until 1 August 2014. As the legal position has been unclear until the date of the judgment, banks would therefore have been making an excusable error of law (entschuldbarer Rechtsirrtum), if they had assumed that they were under no obligation to disclose internal commissions.

However, the Court did not leave it at these findings and simply decided the case in favour of the Defendant.

Instead, the Court remarked that internal commissions – as much as kickbacks – need to be disclosed from 1 August 2014 onwards, irrespective of their amount.

The Court developed this legal concept from recent German legislation passed in relation to investments in financial instruments, including legislation based on MiFID. The Court explained that, since 2007, a number of laws in the field of financial supervisory law have been enacted in Germany evidencing the legislature's will to establish a comprehensive and almost all-embracing concept of transparency in relation to the commission based sale of financial instruments. The latest of these laws provides for changes which will enter into force on 1 August 2014.

The Court conceded that this concept of transparency is of a supervisory law nature and therefore does not directly apply to the implied advisory contract between a customer and a bank, which under German law is the basis of all duties of disclosure and any damage claims arising out of their breach (rather than a statutory duty, such as that under section 150 of the UK Financial Services and Markets Act). The Court however held that, from 1 August 2014 onwards, a customer advised by a bank may expect the bank to respect the rules of supervisory law and the concept of transparency stemming from such law: "In light of this concept of transparency in the supervisory law, from 1 August 2014 onwards, an investor does not have to take into account the possibility of a third person granting covered benefits to the bank advising such investor" [unofficial translation]. For this reason, the Court held, the concept of transparency is one expression of a general principle of law which needs to be taken into account when construing the advisory contract between the bank and an investor.

According to the Court, this concept of transparency is of such a fundamental nature that it does not matter whether the financial instrument in question falls under the relevant provisions of supervisory law in relation to capital investments. Rather, from 1 August 2014 onwards, an advising bank is under a general obligation to disclose internal commissions to the investor. To illustrate this, the Court explained that in the present case, the Claimant would have successfully sued the bank for not disclosing the payment of internal commissions if the sales contract had been entered into on or after 1 August 2014, even though the transaction at hand was not an investment in a financial instrument in the sense of the German supervisory law, but a real estate investment.


The judgment has strong repercussions. Not only does the judgment conclude the debate regarding whether banks need to disclose internal commissions but it also gives enormous effect to the provisions of supervisory law on the contractual relationship between banks and their customers. Furthermore, and equally importantly, the Court has, for the first time, acknowledged in practice the existence in German law of the legal concept of an excusable error of law. The Court permits grandfathering and excludes liability for past cases. There will not, therefore, be an upcoming wave of litigation on internal commissions. Moreover, because the Court has not limited the applicability of an excusable error of law to the factual scenario of the present case, it has opened ways to use the same argument as regards other alleged breaches of duties to disclose.


Still, the judgement raises a number of new questions:

What types of financial instruments are affected?

The central passage in the Court's reasoning reveals that the Court includes all capital investments where there is an advisory contract between a bank and its customer. The term "capital investment" (Kapitalanlage) is, however, according to the Court's understanding, broader than the concept of investments as defined in German supervisory law, encompassing transactions which are not financial instruments as defined in section 2 paragraph 2b of the German Securities Trading Code (Wertpapierhandelsgesetz – "WpHG"). The term not only includes real estate financings, but possibly also building savings plans (Bausparverträge), endowment insurances and other external products if they are distributed by a bank on commission, and if the bank advises its customer in relation thereto. This is however unclear.

What types of customers need to be informed? ?

It is also unclear in relation to what types of customers the duty of disclosure applies. Since the Court developed the concept of transparency from supervisory law, restrictions under supervisory law should also apply. On the basis of the MiFiD categories, the German legislature considers professional customers (professionelle Kunden), as defined in section 31a (2) WpHG, to be in no need of any disclosure. The same applies to eligible counterparties (geeignete Gegenparteien, cf. section 31a (4) WpHG). In view of their professional and market experience, these types of investors do not require any protection against an advising bank.  

What types of payments need to be disclosed? 

The Court demands disclosure of internal payments. The Court defines this term as "undeclared distribution commission". Other kinds of advantages such as fees, consideration or other tangible advantages are not caught by this term per se. It remains unclear if and how the term "internal commission" is related to the term "benefit" (Zuwendung), which is used in section 31d (4) WpHG and which comprises inter alia fees and considerations. Should the Court intend that the relevant concepts run in parallel, banks should be allowed to call upon the exceptions listed in sections 31d (1) no. (1), (2) and (5) WpHG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.