Chapter 8: Lender Liability Towards Financially Troubled Borrowers in German Law

8.1 A financially troubled borrower who is working to overcome a crisis needs the support of its bank. There is an expectation that the lender will not leave the borrower in times of trouble, that the lender will not call in its loans, and maybe even that the lender will make available additional credit to master the borrower’s problems. The question is whether the banker’s loyalty is merely a matter of morality or whether it is a matter of legal obligation. Under German law, the law does require the lender to stick with its financially troubled borrower under certain circumstances. However, it does acknowledge that it cannot be the consequence of lender liability that entrepreneurial risks are shifted from the borrower to the lender. Once a stage of virtual bankruptcy is reached the main focus is shifted to the lender’s obligations towards third creditors and liability towards them.

8.2 hile a financially troubled borrower’s difficulties may range from a short-term cash flow problem to a major reconstruction situation the issue of liability towards a financially troubled borrower implies that the borrower’s business is economically viable. Often enough economic viability is not easy to determine and may only be the subject of an insecure prognosis. In these instances the burden of proof plays a pivotal role in the outcome of a lawsuit.

8.3 Under German law 1 the term lender liability (Kreditgeberhaftung) does not refer to a specific theory of liability. In fact, even the very concept of a credit contract is not defined by the Civil Code (Bürgerliches Gesetzbuch, BGB) nor by the Commercial Code (Handelsgesetzbuch, HGB). Although sections 607 et seq. of the Civil Code make mention of “loans” (Darlehen), this set of sections only covers a small fraction of the rules applicable to the wide variety of different credit arrangements. The primary basis for defining the parties’ rights and obligations are the general rules of contract law and the terms and conditions of the credit contract itself.

8.4 As a rule, credit contracts with credit institutions are governed by the “General Business Conditions” of the various credit institutions. The General Business Conditions of Banks (AGB-Banken) were first issued in 1937 and substantially revised by the Federal Association of German Banks (Bundesverband deutscher Banken e.V.) in 1992 (version dated 1 January 1993). They are currently in force in the version dated 1 January 2000. The General Business Conditions of Savings Banks (AGB-Sparkassen), currently in force in the version dated 1 January 1993, are similar to the General Business Conditions of Banks. Other credit institutions may use their own sets of rules. The General Business Conditions are designed to facilitate the conduct of the large-scale business of credit institutions and lay down the essential rights of the bank vis-à-vis its customers. They are subject to the Act on Standard Business Conditions (Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen, AGB-Gesetz), which implemented Council Directive 93/13/EEC dated 5 April 1993 on unfair terms in consumer contracts. The General Business Conditions do not form statutory law and thus only apply if agreed between the parties of the credit contract. § 2 of the Act on Standard Business Conditions defines the conditions under which general business conditions are deemed to be agreed between the parties. Due to their character as contract terms it is also possible to modify the provisions of the General Business Conditions by individual agreement. However, any exemptions from or modifications of the General Business Conditions to the benefit of the customer must be approved by the customer. Where the individual terms of the credit contract or the General Business Conditions are silent the statutory provisions apply.

8.5 The theories on which lender liability is based are not contained in a specific section or set of sections of the Civil Code uniquely designed for the liability of banks. What makes lender liability a unique and tangible concept is the application of the general liability theories to the specific instance of a lending case. Since this application, if in dispute between the parties, is made by the courts 2 the authority to shape lender liability law rests with the courts, to a large extent, rather than with the legislator. Thus, like judges in common law jurisdictions, German courts are involved in making the law rather than merely being “la bouche qui prononce la loi”. This is why the analysis of lender liability law also requires a close look at relevant court decisions. 3

8.6 In theory, lender liability claims may be based on both contract and tort. In practice, however, borrowers have not been keen on suing their lenders on the basis of Civil Code tort provisions. The reasons are twofold. On the one hand, under German law, liability in tort does not provide for any remedy which is not available under contract law. In particular, German law does not provide for punitive damages. On the other hand, contract theories offer a number of advantages to the claimant which make them the better choice for a borrower’s lawsuit. Namely, the limitation period for claims based on tort is, usually, shorter than the limitation period for claims based on contract; contract liability extends to negligence on the part of the bank’s staff without the possibility for the bank to claim exoneration; and the prerequisites of a contractual liability are less difficult to prove than a tortuous act. Therefore, this chapter will be restricted to the discussion of contractual issues.

8.7 Contractual liability may be based on section 326 (1) 2 alt. 1 of the Civil Code. This subsection applies where a party to a contract refuses to deliver what it has promised under the contract. In the context of a lender liability case this section would apply if a bank, without justification, refused to make available the funds which it previously agreed to lend. Section 326 of the Civil Code therefore covers a rather particular circumstance. In the majority of cases the complaint is that the bank called in the loan prematurely or refused to grant additional credit. In these cases the borrower’s claim for monetary compensation is based on the general doctrine of breach of contract (positive Vertragsverletzung). 4 Therefore, the first element of a lender liability claim is that the borrower must establish that the bank breached its contractual obligations by prematurely calling in the loan or by refusing to extend additional credit. It is obvious that a bank is entitled to terminate a lending relationship under certain conditions. Hence, the question to be answered in each individual case is whether the bank by calling in the loan or refusing to grant additional credit acted in accordance with the terms and conditions of the particular credit contract.

8.8 In principle, a bank may terminate a lending relationship either subject to a notice period or without notice for cause. The majority of the court decisions concerning the termination of lending relationships with financially troubled borrowers so far have dealt with the right to terminate a lending contract for cause. The following paragraphs will, therefore, focus on the grounds for terminating a lending relationship for cause, then briefly touch issues concerning the bank’s right to terminate banking relationships by giving notice and, finally, address the view taken by case law and academic writers with regard to a bank’s obligation to grant additional credit to its financially troubled borrower.