Agreements within the Group: Caution with Multiple Representations

Section 181 of the German Civil Code (BGB) prohibits so-called self-dealing and multiple representation in order to avoid conflicts of interest, i.e. nobody may represent both parties at the same time when concluding a contract. If in a group of companies the parent company wishes to conclude a contract with a subsidiary, then the same person may not act on both sides, whether as managing director, authorized signatory or authorized agent. However, there is one exception to this rule: Multiple representation is allowed if the representative has previously been granted exemption from restrictions provided in Section 181 BGB - on both sides.

Such cases are not always easy to identify, especially if a larger contract governs different legal relationships. The Frankfurt Higher Regional Court (OLG Frankfurt, file no. 13 U 31/16) recently assumed a violation of Section 181 BGB in a case in which a financing agreement contained both a loan agreement and a guarantee agreement and the borrower and the guarantor - a subsidiary of the borrower - were represented by the same authorized signatories. The authorized signatories were not exempted from the restrictions under Section 181 BGB; the Frankfurt Higher Regional Court therefore regarded the agreement as invalid. In the opinion of the Higher Regional Court, the interests of the represented parties were not coinciding, but contrary.  Particularly in the case of group-internal loan and guarantee agreements, the representation relationships must therefore be carefully examined.