Legal Entities and the Possibility of Denial with Lack of Knowledge in Court

A legal entity is not entitled to deny the conclusion of a contract - as claimed by the other party - by one of its corporate representatives by alleging a lack of knowledge. This applies due to the legal entity's obligation to make inquiries, even if the representative has left the company in the meantime. This was recently clarified by the Dresden Higher Regional Court (“OLG”) (reference decision of 19 March 2020, file no. 4 U 2594/19).

The plaintiff asserts a claim based on a loan agreement against a limited liability company ("GmbH") and that the former managing director was entitled to solely represent the GmbH when the loan agreement was concluded. This managing director has been revoked in the meantime. The plaintiff submitted a copy of such loan agreement.

Now the parties are in dispute whether the loan agreement was actually concluded, whereby the GmbH denies the plaintiff’s allegations in this regard with lack of knowledge.

According to the OLG Dresden the parties entered into the loan agreement. This decision is based on procedural reasons.

There is a possibility to deny facts brought forward by the other party with a lack of knowledge according to Section 138 (4) of the German Code of Civil Procedure (ZPO), if the facts alleged by the other party neither concern own acts nor the subjects of the own perception of the former party. In the present case the GmbH was not admitted to deny the allegations of the plaintiff with a lack of knowledge, because the conclusion of the contract is a matter of own perception. The alleged conclusion of a contract is also an object of own perception of a party within the meaning of Section 138 (4) ZPO if such party is a legal entity whose acting representatives have left the company after the alleged conclusion of the contract. This is because the signing of the contract is deemed to be an own act of the legal entity.

In addition, the GmbH has a duty to investigate with regard to the actions of those persons who have acted under its direction, supervision or responsibility. Furthermore the court did not consider any exceptional case to be given, e.g. that the business documents of the GmbH were destroyed or not accessible to the managing director who had been newly appointed in the meantime. A possible domestic storage of these documents by the former managing director would not change this.

Note

With regard to the information and investigation duties of a legal entity, the decision of the OLG Dresden clarifies the importance of a clear organization regarding the storage and accessibility of business documents and records. This must also be ensured in the event of a change in management. Otherwise, there is a risk of considerable disadvantages with regard to legal disputes.

According to the Federal Court of Justice it will be a case-by-case decision if the objection of unreasonableness applies in connection with the duty of investigation. However, the OLG Dresden has not explicitly considered this in the present case. This seems consistent, because at the time the new managing director assumed the office, not even the six-year minimum storage period for business documents and records according to the German Commercial Code (HGB) and the German Fiscal Code (Abgabenordnung) had expired.