Rights of withdrawal – and what you can achieve with them

It is not only during difficult times, but in fact with every transaction, that the question arises under what circumstances the parties can withdraw from the contract. Frequently, such arrangements are not in the forefront of the parties’ minds during negotiations, when seeking a conclusion under high pressure, but they are often discussed in highly emotional terms. What makes for a “good” right of withdrawal though?

When looking at rights of withdrawal, we basically need to distinguish between two different forms:

1. Withdrawal before completion
2. Withdrawal after completion

Withdrawal after completion

Although it occurs later, the second case should be addressed first. Such withdrawal rights are generally excluded, and for good reason. In the case of complex transactions, it is only theoretically possible to reverse payments and performances already exchanged (years later). Even the most detailed provisions reach their limits. The questions addressed by the law covering the guaranteed return of payments and services exchanged, wear and tear, the compensation for possession expenses, reimbursement of expenses and profits withdrawn are in fact unable to adequately define this. In the case of company acquisitions or real estate transactions, unwinding a contract after closing is no longer that simple. For example, the buyer is to be reimbursed for actual use and the increase in value must be compensated – and what’s more, with the burden of proof. As a result, a withdrawal after completion (even in the case of warranty claims) is usually ruled out.
The only case in which this can occur is fraudulent misrepresentation (the threshold for “fraud” in a civil law context is relatively low). In this case, all limitations of liability by mandatory operation of law become invalid and withdrawal remains possible. However, in times of economic growth, it is usually not advisable to give up a business. This is due to the growth in value, since the aim of withdrawal is to revert the parties to the status they were in prior to the contract. A lucrative deal would have to be reversed – whether this makes sense in a specific case needs very careful consideration. Even for the buyer who was defrauded, this is only be a good outcome in exceptional cases.

In this context, we cannot overemphasize the importance of drafting the contract in such a way to ensure that no “hidden” rights of withdrawal are agreed. Poorly drafted retentions can mean that the purchase price is regarded as not fully paid. A retention is a part of the purchase price and thus part of the primary payment obligation. In the event of disputes concerning the payment of retentions, poorly drafted rights of withdrawal can lead to one party being able to unwind the purchase due to non-fulfilment of a primary payment obligation. Withdrawal must be excluded in the event of disputes about the payment of retentions, otherwise you may experience some unpleasant surprises.

Withdrawal before completion

Rights of withdrawal that may apply prior to completion, usually occur in the form of what are known as long-stop dates (non-completion until a specific point in time), or intervene if significant and disadvantageous changes have occurred since the conclusion of the contract. In this case, the law already provides the option in Sections 323 et seq. of the German Civil Code of withdrawing from a previously concluded purchase contract. This is incorporated into purchase contracts and converted into rights of withdrawal.

For the long-stop date, you need to ensure that it leaves sufficient time after the scheduled completion date. You must in particular take into account that, if relevant, antitrust proceedings or other restructuring measures will take time to complete. Six to twelve months after the planned date is definitely not excessive, since neither party has any interest in allowing a right of withdrawal to arise prior to this date or to have to postpone the date yet again due to unforeseeable delays (e.g. in the event of antitrust proceedings). Ultimately, this right of withdrawal is there to enshrine the case law on “definitive failure of the contract” in rules and to create legal certainty. An open-ended stalemate needs to be avoided. However, when both parties wish to adhere to the contract, they may be setting a trap for themselves with tightly defined long-stop dates.

In the context of withdrawal prior to closing, the task for the lawyers involved is a different one. These cases can occur. In particular, in the event of non-payment of the purchase price when due, the Seller would generally like to (be able to) withdraw from the contract. The arrangements regarding due dates must be defined with total clarity and avoid any unclear legal terms and/or influence from third parties. Otherwise, you are lulled into a false sense of security that is more likely to end in years of litigation than in the unwinding of the transaction.

Conclusion

Withdrawal is a powerful tool and a sharp sword – but only when properly managed and used with care. During its application, skilled legal advice can help to avoid undesirable consequences.