German Federal Court: Seller Has Increased Duty of Care in Case of a Virtual Provision of Information During Due Diligence Process

Legal Insights Germany

December 18, 2023

In its verdict of September 15, 2023 (case reference V ZR 77/22), the German Federal Court of Justice (BGH) increased the requirements to be placed on a seller in the context of due diligence. The court determines under which circumstances a seller fulfills its duty of disclosure in individual cases, in particular if information relevant to the transaction is provided in a virtual data room.

The seller must ensure that the information provided is correctly named, systematically organized, and made available in good time and that the buyer is explicitly informed about such information if it is subsequently provided in the virtual data room.

Facts of the Case

The BGH was tasked with deciding whether a seller in a real estate transaction had complied with its duty to provide information if certain relevant information (in this case the protocol of the owners’ meeting) was only subsequently uploaded to the data room. The seller uploaded the relevant protocol to the data room shortly before the notary appointment for the transaction. The protocol provided information that could give rise to potential comprehensive liability on the part of the buyer. It was to be assumed that the buyer had not reviewed the virtual data room in that short window before the notary appointment and therefore had no knowledge of these circumstances when the purchase agreement was concluded.

Federal Court’s Decision

The BGH initially stated in general terms that not every circumstance that could be disadvantageous for the other contracting party must be disclosed in the contractual negotiations. However, if the seller provides factual information that could be relevant for the buyer’s purchase decision, such information must nevertheless be correct and complete, even if there is no obligation to disclose it.

According to the BGH, these principles apply in particular if explicit questions are asked by the buyer. In this respect, the corresponding answers must also be correct and complete. The legal consequence is that, in the event of incorrectness or incompleteness, a precontractual breach of duty may arise irrespective of any duty of disclosure. It is therefore irrelevant that the buyer was aware of the factual circumstances (in this case the general need for renovation of the building) as the information provided by the seller in this respect was incomplete.

The seller had breached its duty of disclosure because the need for renovation in the specific case—in particular with regard to the scale and circumstances of the associated costs—was a matter that required disclosure. The BGH stated that there is no general legal obligation to provide information about all details and circumstances of a transaction that may influence the decision-making; in this respect, each party is responsible for obtaining the relevant information for its own decision.

Nevertheless, according to the BGH, each contractual party has a duty to inform the other party of circumstances that could frustrate the purpose of the contract and are therefore of material importance for the party’s decision-making. This is particularly the case if the information is likely to cause considerable economic damage to the contractual partner.

In particular, the fact that the relevant information was uploaded to the data room shortly before the purchase agreement was concluded could not be seen as completing the information provided by the seller during the sales process. In the view of the BGH, the seller can only assume that it has fulfilled its duty to provide information by making the information available in the data room if the specific circumstances allow the justified expectation that the buyer will look through the documents not only for the purpose of general information, but also in regard to specific circumstances.

Particularly, such a case exists if the seller hands over an expert report in the context of possible defects. In this respect, it cannot be assumed that a buyer will generally check all documents for defects.

Based on these principles, the BGH affirmed a breach of the seller’s duty of disclosure and therefore an obligation to pay damages.

Impact on Practice

The principles set out also have an impact on practice in the context of mergers and acquisitions (M&A) transactions and the associated due diligence reviews. In the decision, the BGH states that this case is to be applied analogously to corporate transactions. If, in an individual case, the seller expects that the buyer will take note of certain information provided by the seller in the data room as part of the due diligence and include it in the decision regarding the transaction, a separate disclosure by the seller is not required.

Accordingly, the seller fulfills its duty of disclosure if and to the extent that it may have the reasonable expectation, based on the circumstances, that the buyer will gain knowledge of the facts by viewing the information in the virtual data room.

Whether the seller may have this legitimate expectation depends on the circumstances of the individual case, in particular whether and to what extent the buyer carries out due diligence, how the data room and access to it is structured and organized, and what agreements are made in this regard. Furthermore, the expectation also depends on the type of information and the document in which it is contained.

In actual M&A practice, the performance of comprehensive due diligence on the part of the seller is standard in many cases. This also has an influence on the aspect of the duty of disclosure, in that the seller can expect the buyer that carries out due diligence to review the documents provided or made available in full and check their respective significance for its purchase decision more readily than a buyer who does not carry out due diligence. This is particularly true if the buyer is supported and advised by experts when carrying out the due diligence.

However, the seller must ensure that the virtual data room is clearly structured and the information (especially essential information) is properly organized. In particular, it is vital that the data is correctly named and systematically organized. Depending on the amount of data, the buyer’s perception of the relevant data can also be facilitated by creating a table of contents or adding a search function. In this context, it is also important how much time the buyer has to review the information.

The materiality of the information provided itself is also relevant to the question of whether the seller may have the aforementioned legitimate expectation. If, from the buyer’s point of view, the information can impair the transaction to the extent that considerable economic damage is to be expected ex ante without corresponding knowledge of these circumstances, the buyer can generally expect the seller to provide corresponding information.

In this respect, a failure to provide information would lead to a breach of duty. The seller is not allowed to wait and see whether the buyer identifies the information that is difficult to identify and has been inserted subsequently from the abundance of data provided. Instead, the seller must clearly communicate the essential information.

The buyer has also an obligation to review the relevant information in the context of transactions; this circumstance falls within the sphere of risk of each contracting party. However, this does not justify the exclusion of a duty of disclosure on the part of the seller. Instead, a corresponding breach of obligation on the part of the buyer is at best considered in the context of a reduction of the claim for damages due to contributory negligence.

Key Takeaways

In summary, the following guidelines for sellers in the context of corporate transactions should be noted when providing information in a data room to avoid potential liability risks or a reversal of the transaction:

  • Complete provision of information as early as possible, especially in the case of information that is essential for the purchase decision.
  • Proper organization and clear structure of the data room; depending on the volume of data, also implementation of a table of contents and a search function.
  • Comprehensive disclosure of the relevant information on demand of the buyer.
  • Appropriate notification to the buyer if data is subsequently uploaded to the data room, especially in the case of information that is essential for the purchase decision.

Only under the aforementioned circumstances can the seller justifiably assume that the buyer will view the relevant information in an appropriate manner and become aware of it.


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