KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website
For disclaimer and copyright see end of this article.

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.

Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.