Head Note

If a contracting party is not entitled to appeal to the invalidity of the power of attorney issued by the opposition’s representative due to the principles of good faith, said party is also not entitled to recall its statements according to Section 178 German Civil Code or to request the opposition to approve the contract in accordance with Section 177 para. 2 German Civil Code.

Facts

The buyer (“Defendants”) in 1991 acquired a freehold flat (“Real Estate”) by a notarized purchase contract (“Purchase Contract”) from T-GmbH. The Defendants authorised T-GmbH, free of the limitations of Section 181 German Civil Code (“Power of Attorney”), that is, the prohibitions of engaging in so-called self-dealing and double representation, by way of an agency agreement (“Agreement”), to declare all statements required for the acquisition. The Agreement comprises (among other things) acquisition financing, the conclusion of a tax consulting agreement, a rent guarantee and a rent pooling agreement. Furthermore, the Power of Attorney authorised representation vis-à-vis government authorities and banks. T-GmbH did not have the necessary authorisation in accordance with the (former) Legal Advice Act.

Upon conclusion of the Purchase Contract an attorney represented the two parties, always free of the limitations of Section 181 German Civil Code. This attorney acted on behalf of the Defendants based on a sub-power of attorney issued by T-GmbH as well as on behalf of T-GmbH, based on a power of attorney issued by T-GmbH. After insolvency proceedings had been initiated in 2000 concerning the assets of T-GmbH, the insolvency administrator (“Plaintiff”) notified the Defendants in January 2009 as to the invalidity of the Purchase Contract – due to a violation of the Legal Advice Act – and the corresponding Power of Attorney, requesting a statement on the approval of all concluded contracts. The Defendants gave no approval. In early December 2009, he requested all declarations that were necessary for changes to be made in the Land Register. By the end of December 2009, the Defendants, by way of precaution, declared the approval (“Approval”) of the Purchase Contract and the conveyance. The Plaintiff then requested from the Defendants authorisation to transfer of title in the Real Estate.

CONTENT AND SUBJECT OF THE DECISION

The Federal Court of Justice rejected a claim to the changes to be made in the Land Register according to Section 894 German Civil Code. The acquisition was said to have taken effect by the authorisation given at the end of December 2009. Even though, due to the absence of the necessary authorisation – which was necessary in accordance to the Legal Advice Act – the Purchase Contract and conveyance in principle were provisionally invalid, as this offered the only way of preserving the protective purpose of the Legal Advice Act. The fact that the parties were represented by an attorney could not compensate for the absence of the required authorisation. Nor could the granting of the Power of Attorney be separated from the remaining stipulations of the Agreement, as otherwise the reservation of permission would be to no effect. The Defendants would only be able to attain protection if both the Agreement and the Power of Attorney – and as result of this also the Purchase Contract and the conveyance – were invalid. Even when taking into consideration Sections 171, 172 German Civil Code and the principles of apparent authority, nothing else could apply, as their purpose was to protect third parties. But there was no third-party relationship between the Defendants and T-GmbH.

Ultimately, the Defendants were able to validly declare the Approval. An approval could be barred only if it was not granted or rejected, or rejected under Section 177 para. 2 page 2 German Civil Code due to a plea of limitation (“Plea of Limitation”) following the contracting parties’ request or if a recall (“Recall”) of the declarations was made by the contractual party according to Section 178 German Civil Code. None of these would come into consideration.

The requests of January 2009 and early December 2009 would neither cause a Plea of Limitation nor would the Plaintiff be able to declare a Recall, as T‑GmbH, according to good faith pursuant to Section 242 German Civil Code, had been denied to plead the invalidity of the Power of Attorney. This was to be substantiated in the fact the Defendants’ interest in holding on to the business outweighed T- GmbH’s interest in the invalidity of the Power of Attorney. The reason was that the Agreement had long been processed already and its objective of acquiring the Real Estate had been realised more than 16 years ago, so that both sides had rendered their performances and had benefited from their respective counterperformances.

Moreover, the Legal Advice Act only wanted to protect the Defendants by way of the obligation to obtain permission rather than T-GmbH. But if the Defendants wanted to continue the business, it no longer would have to be protected under the Legal Advice Act. Even from a point of view of insolvency law, there could be no other result, as the assets constituting the insolvency would not be entitled to more than that to which the insolvency debtor is entitled. In this case, the Plaintiff possibly would have the right to learn whether the Defendants would plead invalidity of the Power of Attorney. Failure to respond to such an inquiry might possibly result in the Defendants not being able to plead invalidity – unless in an individual case they also were prohibited from doing so in good faith – so that the legal transaction would continue to exist in that case also. The Plaintiff, however, would be unable to bring about the invalidity of the transaction.

Impact on Day-to-Day Business

The decision deals with an issue that similarly can be reflected in various segments. In fact, with effect of July 1, 2008, the Legal Advice Act has been replaced by the Legal Services Act. However, the Legal Services Act also requires the obligation to obtain permission for specific services, which also may result in invalidating a transaction and related powers of attorney. Furthermore, the Legal Advice Act continues to apply to old cases. One should also be alerted to consciously bringing the situation presented to one’s advantage, so that later one had a free choice. The Federal Court of Justice consciously declared that the other party may also be denied the plea of invalidity of the Power of Attorney and the contracts concluded.