German court extends lawyers’ liability in insolvencies

Quick read

A recent decision of the German Federal Court of Justice (Bundesgerichtshof) has extended the liability of legal advisors in crisis situations.

Background

Under German law, a lawyer may be liable not only to his client, but also to a third party, if the third party has a special interest in the lawyer's performance. The Bundesgerichtshof has clarified that managing directors and even shadow directors may have such a special interest and may claim damages from their company’s legal advisor for breach of duty (Pflichtverletzung).

Decision

It has long been recognised in German case law that lawyers who are engaged to examine whether a company must file for insolvency act not only in the interest of the company, but also in the interest of its directors. The Court has now ruled that any lawyer advising on the assessment or handling of a crisis situation is obliged to warn the managing directors and to inform them of their directors’ duty to file for insolvency as soon as any signs of insolvency occur. If the lawyer fails to do so and the directors, in breach of duty, fail to file for insolvency, the directors have re-course against the legal advisor. Only a very narrowly defined mandate can exclude a lawyer's liability.