Frank Neumark, KPMG Frankfurt

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1. Severance payment clause void

In a decision dated 3 July 2000 (ZIP 2000, 1442) the Federal Court of Justice (FCJ) held that a clause in the employment agreement of the general manager of a limited liability company (GmbH) giving him two years' salary as a severance payment in the event of his discharge during the first 10 years of employment was void under § 134 BGB (German Civil Code).

Under § 134 BGB, legal transactions that violate a statutory prohibition are void unless the violated statute otherwise provides. The court stated that a severance payment that was owing by its terms even in the event of termination of the employment contract by the employer "for important cause" (aus wichtigem Grund – alt. translation "for good reason") pursuant to § 626 BGB impermissibly restricted the right of termination for important cause, which § 626 BGB grants to both parties to an employment contract. The concept of "important cause" in this context is similar to, but not identical with, that of "material breach" in Anglo-American law.

2. Facts of the case

The case involved a general manager who signed a 10 year contract with a GmbH in 1992. The GmbH was represented in this transaction by one of its general managers, who was also a shareholder. In 1996, the general manager was discharged with immediate effect by the other two general managers (both shareholders), who were acting pursuant to authority granted a few days before by a shareholders resolution. Subsequently, the GmbH sued the discharged general manager for repayment of a loan, and he raised the severance payment as a counterclaim.

3. Reaffirmation of consistent case law

The factual situation gave the court occasion to reaffirm other established legal principles regarding the general managers of German GmbHs:

  • Authority to hire general managers of a GmbH is vested in the shareholders as a basic matter. Hence, the employment contract signed on behalf of the GmbH by its general manager was invalid, because the general manager was not acting pursuant to specific authorisation by shareholder resolution.
  • While it is possible for the shareholders to ratify such invalid contracts, the standards for tacit ratification are fairly strict. Even though the parties abided by the invalid contract for over three years in the instant case, the court was not willing to ascribe the required detailed knowledge of the employment agreement to the shareholders. This was so even though there were only two shareholders.
  • Invalid employment contracts of this sort between a GmbH and a general manager bind the parties as long as the general manager continues to exercise his functions. This gives him an enforceable claim for wages in accordance with the invalid contract, for instance. However, the quasi-employment relationship may be terminated at any time by either party.

4. Severance clause: other aspects

In the case here reported on, the shareholders apparently based their termination of the employment relationship on the point last mentioned above. The court stated that even a valid severance payment clause would not be effective under these circumstances because the quasi-contract bound the parties only as long as the general manager continued to exercise his functions as general manager. Once the general manager had been discharged, the binding effect of the quasi-contract lapsed. Hence, the court said the severance payment clause could never come into play because it related to the time after the quasi-contract had ceased to have binding effect.

The court went on to say that the severance clause did not apply for a second reason, namely that it was void under § 134 BGB (see sec. 1 above).

5. Conclusions

Based on the court's decision, all severance clauses that do not state that they do not apply in the event of termination by the employer for important cause run the risk of being void. Severance clauses not limited in this manner are apparently void whether or not the circumstances of the specific case involve termination for important cause.

Editorial cut-off date: 20 March 2002

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