Liability of the apparent owner of a business

The German Federal Court of Justice (BGH) recently held that a third party may be liable for the performance of a contract within the framework of a business-related transaction if such third party is responsible for appearing to be the co-owner of the respective business.

The decision of the court underlined the risk of liability connected with the incorrect differentiation on business letters and other business documents between (i) the actual owner of a business on the one hand and (ii) employees of a business on the other.

In the present case, the claimant had filed a claim against a travel operator for repayment under a travel contract. The first defendant was the owner of the travel operator business and the second defendant was an employee of the travel operator business.

The first defendant had declared insolvency during the legal proceedings. The court had to determine whether the second defendant was liable to the plaintiff for the travel operator’s contractual obligations.

The travel contract had been entered into by the claimant and the travel operator. Under the principle of business-related transactions, the first defendant, as owner of the travel operator business, became a contractual party, but not the second defendant, being an employee of the travel operator business.

However, the court held that the second defendant could nevertheless be held liable for contractual repayment obligations under the principle of liability for “apparent authority” (Rechtsscheinshaftung). Here, the second defendant had appeared to be a co-owner of the business. An invoice and confirmation letter previously sent to the claimant by the travel operator had displayed pre-printed signatures of both defendants.

The decision of the BGH dealt with the relationship between two German legal principles, (i) the rule of “business-related transactions” (unternehmensbezogene Geschäfte) and (ii) the principle of “liability for apparent authority” (Rechtsscheinshaftung).

The principle of “business-related transactions” is a rule of interpretation under German agency law (Stellvertretungsrecht) (sections 164 - 181 of the German Civil Code (BGB)).

Under German agency law, an effective agency requires (i) a declaration made by the agent, (ii) in the name of the principal and (iii) the authority of the agent to act in the name of the principal (section 164 (1) BGB).

As regards the second requirement, for reasons of legal certainty, the agent must clearly act in the name of the principal (Offenkundigkeitsprinzip). This requires the agent to declare expressly its intention to act in the name of the principal. Alternatively, such intention must be clear from the circumstances (section 164 (1) BGB).

Where it is doubtful as to whether the agent wanted to act in its own name or in the name of the principal, an agreement is regularly deemed to have been concluded with the agent personally, but not with the principal (section 164 (2) BGB). However, in cases of doubt within the framework of a business-related transaction, the agreement is regularly deemed to have been concluded with the business owner, not with the agent.

The principle of “liability for apparent authority” stems from the so-called rule on prohibition of contradictory behavior (venire contra factum proprium) which is in turn an application of the good faith principle (section 242 BGB).

In order for apparent authority to arise, (i) the agent must have apparent authority to act, (ii) the debtor must be responsible for such apparent authority to arise and (iii) the third party involved must be acting in good faith.

Under German law, apparent authority usually arises within the framework of the so-called (i) “apparent entrepreneur” (Rechtsscheinskaufmann) (ii) “apparent company” (Scheingesellschaft) and (iii) “apparent power of authority” (Rechtsscheinsvollmacht).

An “apparent” company may arise by creating the false impression that what is a non-existing company is in fact an existing company. If the “apparent” shareholders are responsible for creating this illusion, the “apparent” shareholders may be held jointly and severally liable to good faith third parties for any contractual obligations entered into by the “apparent” company (cf. section 128 of the German Commercial Code).

The BGH in this case underlined “that the general interpretation rule on business-related transactions does not prevent a contractual liability from arising under the ‘apparent authority’ principle”.

German Federal Court of Justice, decision dated 31 July 2012 (II ZR 177/11)

Daniel Jamin, LL.M. (Sydney)