Germany: The Federal Supreme Court And “The Sword Of Damocles Of Termination“

Last Updated: 24 July 2008
Article by Karl Friedrich Dumoulin

New judgement of the Federal Supreme Court with regard to the maximum duration of the right of termination granted to the senior partners vis-à-vis a newly entered partner in joint practice contracts. A comment on the judgement by attorney-at-law (Rechtsanwalt) Dr. Karl Friedrich Dumoulin.

If a partner is newly admitted into a joint practice, often a so called "right of termination clause" is agreed upon in favour of the senior partners. It entitles the senior partners to exclude the new partner from the joint practice without any factual reason.

Pursuant to the standing jurisdiction of the Federal Supreme Court's competent second panel, such clause is principally invalid according to § 138 sec. 1 German Civil Code (Bürgerliches Gesetzbuch) as it is contra bones mores. The main consideration underlying this jurisdiction is to protect the partner threatened by exclusion or termination. The partner may feel the open termination right held by the other contractual party to be a disciplinary remedy with the consequence that, for fear of being at the partner's mercy who is holding an exclusion right, he might not make use of his membership rights nor exercise his duties as a partner, but would rather yield to the other side's perceptions. The mere hovering of such a "sword of Damocles of termination" over the pate of the partner threatened by exclusion puts a successful co-operation within the association at risk.

However, by way of an exception, the Federal Supreme Court has deemed a termination clause effective in case the clause being justified by particular circumstances, yet at the same time pointing out that it may not stay in effect for an indefinite period of time.

In the so called "laboratory doctors case" ("Laborärztefall") (judgement dated 08 March 2004, file no. II ZR 165/02) the Federal Supreme Court presumed such particular circumstances in case of a new partner being admitted into a long-standing professional partnership of freelancers, in particular for a joint practice of physicians. The court argues that considerable risks may arise for the senior partners - having to accept a new partner possibly largely unknown to them - due to the fact that it generally becomes apparent only after a certain period of cooperation whether the necessary confidence amongst the partners does exist and above all whether they do consort in their view on their profession with its specific ethical demands. All the more does this apply, according to the Federal Supreme Court, because usually partners depend on their being accredited as a physician to the Statutory Health Insurance (SHI) and as such are subject to special public law restrictions with regard to the organisation of their professional cooperation. Thus, pursuant to the Federal Supreme Court, it cannot be seen a priori as an act contra bones mores – especially in case the senior partners being the sole holders of the partnership's assets whereupon the new partner is admitted without having to pay any capital contribution – if the senior partner is granted a right of termination. In the "laboratory doctors case" the Federal Supreme Court at that time ruled that such a right of termination may "by far" not reach a period of ten years' time. The Federal Supreme Court did not have to speak out on the exact length of the period for in the circumstances of the case in question the senior partners had made use of their right of termination in a manner infringing the principle of bona fide.

In the recent decision (judgement of 7 May 2007, file no. II ZR 281/05) the Federal Supreme Court now specified the temporal limits of the right of termination.

The opponents in this case were partners of a joint practice for internal medicine / nephrology, which in particular rendered dialysis services. The senior partner had been settled in a one-person-practice for a period of already nine years' time. By admitting a specialist colleague to his one-person-practice who had been working as an assistant medical director in a university hospital before, he had established a joint practice. In particular, the contract governing the joint practice stipulated a combination of a right of dismissal and a right of buyout, which as a result had the effect of a right of termination and entitled the senior partner for a period of ten and a half years to exclude the new partner without any factual reason.

First of all the judges stated that the right of termination is – in no way different from over lengthy non-competition clauses – not entirely void by law, but rather can it be limited by ways of the concept of so-called "validity-retaining reduction" ("geltungserhaltende Reduktion") to the utmost extent legally admitted. Thereafter, the court ruled that for joint group practices established under the previously applicable law (i.e. before the latest reform deregulating the law of SHI-accredited physicians), the maximum time limit admissible for a right of termination is three years.

The considerations brought forward by the Federal Supreme Court to justify this maximum time limit demonstrate that taking a schematic approach on contracts governing medical group practices is improper and the specifics of every single practice and its partners have to be taken into consideration. In detail, it was the following considerations guiding the Federal Supreme Court to determine the maximum time limit of three years:

  • Partners must be granted sufficient time to be able to gain confidence and, as particularly stressed by the Court, in light of the restrictions on admission in the field of SHI-physicians existing at the time the right of termination clause in the case at hand was stipulated, to clear out arising differences and to reach compromises sustainable for both parties.
  • The effort made by the senior partner concerning the building up of a practice (creating a goodwill) which at the moment of the new partner's acceptance already exists for years, must be appreciated for the senior partner's benefit.
  • A validity-retaining reduction of an over lengthy right of termination clause can be taken into consideration only in case the remaining parts of the treaty are not to be objected. Thus, the joint practice contract may not contain further regulations burdening, in addition to a right of termination clause, the new partner. It cannot be objected, however, to a new partner, who does not pay a purchase price for his share in the practice, reaching equal earnings only after a certain time. Neither can it be objectionable if the parties agree upon a valid non-competition clause.

It is to be welcomed for the practice of the drafting joint practice agreements that the Federal Supreme Court has now determined a concrete benchmark concerning the maximum time limit for a right of termination vis-à-vis a newly admitted partner. In the light of the former accreditation regulations for SHI-physicians a "probationary period" of three years seems appropriate and suitable for the parties' interests. The Federal Supreme Court has decided only with regard to such joint practices of physicians which were established under the previously applicable accreditation regulations for SHI-physicians. Whether the maximum time limit also applies to right of termination clauses agreed upon after the coming into force of the new accreditation regulations for SHI-physicians or after a possible abolition of these accreditation restrictions for (human) physicians is not adjudicated upon. Insofar, it remains to be seen whether these developments might perhaps lead to a reduction of the three-years-limit.

It is anyway not to be disregarded that the Federal Supreme Court admits the right of termination only if and to the extent to which it is stipulated with the objective of checking whether the new partner harmonizes with the other partners. Accordingly, the seemingly sharp sword of Damocles of a right of termination can prove to have no edge in case the senior partners obviously employs it with the sole objective of mulcting the new partner of the beneficial use of the legal status promised to him when joining the joint practice, e.g. in order to circumvent his entering into an equity participation in the joint practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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