Meet the Fuggers and their lawyers who masterminded the deal structure of the century

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By William Holmes on


The heirs to the Medici had financial tricks and cunning advocates, writes Legal Cheek’s Will Holmes

Jakob Fugger and his wife, Sibylle — image via: Wikimedia Commons

The death of Melchior von Mechau, Cardinal of Brixen, in 1509 brought to light some curious revelations.

In a subsequent litigation over his estate, it was revealed that the cardinal had a substantial investment in the Fugger bank. This was scandalous, of course, because of the church’s condemnation of usury (the action or practice of lending money at unreasonably high rates of interest) as a sin. And it was the first loose thread that publicly revealed how the Fuggers had been discreetly lending to the Roman Curia, the church’s administrative institutions, since 1474.

So what were the Fuggers up to? They were using what economic historians have called the ‘triple contract’. To fully understand how the triple contract operates, it’s worth considering what a deal-makers playbook looked like before this method was developed in around 1460.

Before 1460, you had two fairly risky options if you were a venture capitalist looking to invest in an individual to travel somewhere (often overseas) in search of profitable goods. The oldest of the two, dating back to Ancient Greek and Roman times was Sea Loans. This was a risky loan because the borrower had no obligation to pay the debt in the event of a shipwreck.

In medieval times, however, Sea Loans fell foul of the ban on usury (such loans were made illegal by Pope Gregory IX in 1234). Parties tried to hide behind the façade of a Societas (a partnership), but these were condemned by the church when used improperly.

The other option was an equity-based technique called the Commenda. Here the venture capitalist would provide the money for the trip that was expected to return a profit. If the expedition was profitable, then the money that was originally invested would be returned to the venture capitalist along with the majority of the profits. The rest would go to the merchant who had made the trip. However, if there was a loss, no claim could be made against the daring merchant who had undergone the expedition. Sometimes rich merchants could put up a percentage of the initial investment which saw them reap a larger share of the profits.

Interestingly, the Commenda is still used by some private equity firms today. Javier Vicente García, senior associate at the law firm Pavia e Ansaldo, has pointed this out in CVC’s deal with La Liga using a cuentas en participación.

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However, in a time when third party insurance was carried out under the guise of a ‘fake’ contract for sale (whereby an insurer agreed to buy the goods in question on the understanding that the contract would be set aside if the goods were actually delivered and received their premiums in secret), insurance was hard to come by, making these arrangements risky.

The triple contract was the next evolution in the dealmakers playbook. And the Fuggers were determined to defend it. It consisted of a partnership between the venture capitalist and the merchant and two insurance contracts. In one contract, the merchant agreed to insure against losses in return for a greater share of the profits. In the other, the venture capitalist agreed not to ask for more than a given fixed amount from the merchant.

The effect of this was a way of dressing up a less risky loan as a partnership (or even a Commenda) with insurance. Although this appears to be a web of insurance contracts, Arthur J. Wilson and Geetae Kim view this contractual set-up “in terms of options rather than insurance, from the perspective of the commendator, it would appear as a partnership, plus a long put, plus a short call.” The strike price would be set at around 5% above the initial investment. (If you are confused (yes, it does take a minute to sink in), it’s worth taking a look at Wilson and Kim’s excellent graphs here).

Since theologians had already accepted partnerships, including the Commenda, along with insurance related to these partnerships, they could not find the triple contract was illegal on the grounds of usury without reversing their prior decisions. Though, the effect was clear: the ‘triple contract’ was a loan in disguise.

The scandal of 1509 led the Fuggers to spend much on theologians and political economists to persuade people that all this was acceptable. Cardinal Melchior von Mechau had entered into a ‘triple contract’ with the Fuggers with Mechau estate amounting to 30% percent of the Fugger ‘deposit’. Their most prominent defender was Johann Eck, who passionately defended the Fugger cause in three prominent essays, and through skilled advocacy persuaded the influential law faculties at the Universities of Bologna and Vienna that the ‘triple contract’ was not illegal on the grounds of usury.

The Fuggers and Eck later faced fierce opposition from Martin Luther, but historians underline that the church formed an integral part of their business activities throughout the first half of the sixteenth century that remained even after the Protestant Reformation that offered an opportunity to rewrite the rules. No wonder Eck, Jakob Fugger the Rich and his heirs remained committed Catholics throughout their lives!

Will Holmes is reporter at Legal Cheek and a future trainee solicitor at a magic circle law firm.

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