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Consequences of ineffective managing director contracts in Germany

Invalid agreements of GmbH managing directors are treated according to the principles of defective employment relationships.

 

When concluding a managing director contract, it may happen that the contract is not effectively concluded. The most common reason for this is probably the representation of the company by a person not entitled to do so. But also violations of a legal prohibition, the immoral nature of the agreement or a challenge, e.g. due to fraudulent deception by the managing director, can lead to the nullity or retroactive cancellation of the employment contract.

The German Federal Supreme Court (BGH) has now also decided that the principles of the "defective employment relationship" are applied analogously to the employment of the managing director with a GmbH. These principles, which have been developed by case law on the employment contract, stipulate that for the duration of the employee's employment the employment relationship is to be treated as if the contract had been validly concluded. In particular, this means that the managing director may retain the remuneration received and does not have to repay the employer, since, mirrored to this, it is usually also impossible for the employer to grant back the managing director's work performance. For the future, however, the contractual relationship can be terminated at any time without good cause. Only in exceptional cases should this right not exist if good faith demands that the employment contract be maintained. However, the requirements for a continuation of the employment contract are very high according to the case law of the Federal Court of Justice.

The invalidity of a managing director's contract therefore in particular entails the risk for both parties that the contract can be terminated with immediate effect for the future if the invalidity is recognised. In addition, liability risks may arise for the acting persons.

Source: Federal Court of Justice (BGH), ruling of 20.08.2019, no.: II ZR 121/16

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