An ipso facto clause is a contractual provision which states that a contract or agreement automatically terminates or may be terminated by a party if bankruptcy proceedings have been instituted over the other party’s assets. For a long time it was not clear whether such ipso facto clauses are valid and enforceable in Germany (see Sec. 119 of the German Insolvency Code).

The German Supreme Court for civil law matters has now issued a decision saying that such ipso facto clauses are invalid and thus not enforceable when the counterparty is subject to German bankruptcy proceedings (BGH IX ZR 169/11 dated 15/11/2012 – ZInsO 2013, 292).

In this court case, a utility provider entered into a long-term contract over the delivery of electricity. The energy contract states that it automatically terminates if bankruptcy proceedings are instituted over the utility provider’s customer or if the customer files a petition for bankruptcy. In its decision, the German Supreme Court held that such termination clause is invalid irrespective of whether the trigger is the institution of bankruptcy proceedings or the filing of a petition for bankruptcy. The court further indicated that a termination which is triggered by illiquidity or over-indebtedness of the debtor could also constitute invalid ipso facto clauses. According to the Court, in all of the above instances the bankruptcy estate would need to be protected from any value-deteriorating terminations which could jeopardize the chances of a successful plan restructuring of the debtor.