Within German contract law, the principle of being bound by a contract (pacta sunt servanda), i.e. the obligation to fulfill agreements, applies. In case of the insolvency of one of the contractual parties, however, exceptions are made. Upon the opening of the insolvency proceedings, the principle of being bound by a contract is modified.
The insolvency provisions concerning the fulfillment of mutual contracts (Sec. 103 et seq. German Insolvency Code (Insolvenzordnung, InsO)) grant the insolvency administrator an option right as to whether agreements which had been concluded prior to the opening of proceedings and which have not yet been fully performed by both parties shall be fulfilled. The opening of an insolvency proceeding does not lead to a substantive transformation of the agreements, however, any outstanding claims arising from the mutually unperformed agreement are no longer enforceable. The purpose of these rules is to allow the insolvency administrator to maintain or to increase the insolvency estate, enable restructuring attempts and to prevent the contractual partner of the debtor from terminating an agreement which was favorable for the insolvency estate due to the insolvency of the latter.
The most important stipulations are explained below.
The Insolvency Administrator's Option Right, Sec. 103 Inso
The prerequisites for exercising the insolvency administrator's option right (Insolvenzverwalterwahlrecht) is the mutuality of the claims which have not or not fully been performed by both parties at the time of the opening of insolvency proceedings. Types of agreements which are often subject to the administrator's option right are purchase agreements, contracts for works and services, license agreements and loan agreements. However, the option right does not apply, for example, in the context of mutual agreements which have been fully performed by one party, agreements with a valid termination clause or shareholder agreements.
The administrator has to declare demand for performance to the contracting party. For this declaration, he is not bound to any time periods. However, the contracting party may ask the administrator to exercise his option right and to issue a corresponding declaration. In this case, the administrator has to issue his declaration "promptly" which means acting without undue delay. Thus, the insolvency administrator is allowed to assess the consequences of exercising his option right within a time period reasonable under the...