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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions