Termination in Insolvency: Allowed, Setoff Against Claims from Another Contract: Prohibited! – A Landmark Decision by the Federal Court (BGH)

In a notable judgment (BGH, decision of 19.10.2023 – IX ZR 249/22), the Federal Court (BGH) ruled that the termination of a construction contract by the client for a significant reason, here the insolvency of the contractor, is permissible, but the setoff against claims from another contract is not allowed for insolvency reasons.

Case Details: The client (B) and the contractor (U) had concluded two contracts. After U declared bankruptcy, B terminated both contracts. Later, B attempted to set off against the claim for work payment from U’s insolvency administrator from one of the contracts with claims for damages from the other contract.

BGH’s Decision: The BGH clearly stated that this setoff is not permissible. Even though the termination of the construction contract was lawful, the resulting setoff situation is contestable under insolvency law. The BGH emphasizes that any action leading to a setoff situation, especially the termination of a contract, is contestable as a legal action. The detriment to creditors lies in the reduction of the insolvency estate due to the setoff.

Practical Implications: This judgment has significant practical implications. It confirms the permissibility of terminating a construction contract in the event of insolvency but significantly restricts the possibility of setoff. In particular, setoff with claims from another contract, even if they include claims for damages, is impermissible in the insolvency situation. This could have far-reaching consequences for the practice of contract drafting and execution in cases of bankruptcy.

The previous legal practice, which allowed a certain freedom of setoff in insolvency, could now change. Particularly, the hints by the BGH suggest that the setoff within the same contract might also be critically viewed in the future.