German Federal Court rules Election for English Law Violates Public Policy

When you own assets in multiple countries, for example in the UK and Germany, the European Succession Regulation (650/2012) (‘the Succession Regulation’) will be an important regulation in determining what happens to your estate when you die. Like other international laws, the Regulation’s purpose is to resolve the difficulties that can arise where there is a conflict between the laws of different countries.

The Regulation was intended to provide clarity, and to help people organise the succession of their estate, where the estate spans across different countries and to effectively guarantee the rights of the heirs under a person’s Will. Under the Regulation, the default law that governs the succession of a person’s estate is the law of the state in which the deceased was habitually (or normally) resident. Alternatively, the Regulation allows a person to choose the law of their nationality to govern the succession of their estate in their Will.

The Regulation’s effectiveness in resolving a conflict of laws between the UK and Germany can be questioned in light of a recent decision of the German Federal Court of Justice (‘the Bundesgerichtshof’). The Bundesgerichtshof has recently been faced with the question whether it could refuse to apply English law in the succession of a German estate owned by a British National, where the laws of England are at odds with German constitutional principles. The Bundesgerichtshof was asked to adjudicate based on the following facts.

Facts of the Case

A British national (‘the Testator’) lived in Germany for 53 years and had made a Will. The Testator had an adoptive son, who was a German national and who was normally resident in Germany. In his Will, the Testator had made an election for the law of England and Wales to apply to his estate. He included the following provision, which had the effect of disinheriting his son, which was contrary to normal German succession law: ‘The rights to inheritance and the compulsory portion for the child and its future descendants after the one who dies first of the receiving heirs is excluded.’

In this case the Bundesgerichtshof refused to uphold the Testator’s election of English law, and decided that the application of English law in this case would violate German public policy, and claimed that English succession law contradicts German constitutional principles. This case demonstrates the legal friction that may arise in dealings between jurisdictions with different testamentary regimes, namely testamentary freedom and forced heirship regimes.

Decision

The Bundesgerichtshof gave various reasons to explain its decision that English law should not apply in this case, as it does not entitle a child of a Testator to a compulsory share of the estate.

One of these reasons was that Testator’s adoptive son had a ‘strong domestic connection’ to Germany.

Other reasons given by the German Court were based on the fact that there were fundamental differences between English law and German law. The first difference relates to the fact that German law provides a child of a testator with the constitutional guarantee that they will receive a compulsory share of the estate, whilst English law does not provide for a compulsory shares regime.

The Bundesgerichtshof further explained that under German law, a child’s right to a compulsory share of the estate has the function of facilitating the economic connection between the assets in an estate and the family. This entitlement applies notwithstanding the needs of the testator’s child (or adult child). Under English law however, a person only has a claim under the Inheritance (Provision of Family and Dependants) Act 1975, on grounds that the Will did not make ‘reasonable financial provision’. In the Bundesgerichtshof’s view, this was incompatible with German law as the right to a share of the inheritance should not depend on the financial need of a child.

The court further highlighted that under the 1975 Act, there is a requirement that the deceased was domiciled in England and Wales in order to be able to make a claim against the estate. Under German Law domicile does not play any role in a claim.

These were some of the reasons that led the Bundesgerichtshof to conclude that in the interest of German public policy the court should fall back on the compulsory shares, ignoring the EU Succession Regulation.

Implications

In its reasoning, the German court embarked on a critique of English law and refused to apply English law on public policy grounds, given that the absence of compulsory shares under English law was deemed incompatible with German law. The absence of compulsory shares in English law is due to the testamentary freedom enjoyed by a testator. The Bundesgerichtshof’s decision arguably contradicts the provisions in European succession law which only permits a court to refuse to apply the law of another state if that law is ‘manifestly incompatible’ with the public policy of the court. A court can only refuse to apply the law of another member state in exceptional circumstances. Testamentary freedom is not exceptional in itself and exists in various other jurisdictions in the world.

The court emphasised on the fact that the Testator’s son had strong domestic ties to Germany. It is to be seen if the Bundesgerichtshof will limit its decision to cases where child has a strong connection to Germany, and whether the decision will be challenged in the Court of Justice of the European Union at some point in the future.

How we can help

The decision of the Bundesgerichtshof could affect your estate, if you own assets in Germany and would like those assets to pass under English law. It could in some circumstances affect your ability to leave your property to whomsoever you choose, if your wishes are not reconcilable with the principles of German succession law.

The International and Cross-Border team at Stone King LLP is able to draft your Wills, advise you on the EU Succession Regulation, and put structures in place to ensure that your estate can pass in accordance with your final wishes in as far is possible.

To speak to a member of the International and Cross-Border team about your German Will and estate planning, please call +44(0) 1225 337599 or email international@stoneking.co.uk, and we would be delighted to help.