Terminating mandate agreements with management
Many companies conclude commercial mandate agreements with their directors, which are subject to the Companies Act and are not safeguarded by the labour legislation in case of dismissal. In the case of Joint-Stock Companies, mandate agreements are the only option of employing managers (administrators and directors) as individual labour agreements are incompatible with a management position.
Companies generally favour the introduction of mandate agreements for managers (the concept was introduced in a 2006 amendment to the Companies Act), in particular due to the increased flexibility of employers to terminate mandate agreements compared to termination conditions in individual labour agreements.
But a company terminating a mandate agreement may become a sensitive matter, especially if the termination is decided by companies unilaterally without good cause.
The Companies Act allows managers to sue for damages if their mandate agreement was terminated without cause. Unlike individual labour agreements, where the employee’s claim may also refer to the company’s duty to re-employ the person dismissed, a manager’s claim in case of termination without cause may consist only of damages. In response, companies tend to minimise the risks of having to pay damages to their managers for early termination by developing broad and comprehensive termination clauses encompassing a wide variety of circumstances that may stand as “good cause” in case of early termination.
Recent case: Damages to a manager for early termination
In a relatively recent decision, the High Court of Justice1 challenged the termination conditions of a mandate agreement, ruling that, when a mandate agreement has defined the circumstances that may lead to the termination of the agreement, those circumstances should be exhaustively interpreted, and any other situation leading to the termination should be considered termination “without cause”.
In preparing the defence, the company argued that a management agreement has the legal nature of a mandate agreement, and that mandate agreements are revocable. The company further argued that it would be unreasonable to consider that the termination clause has listed the situations enabling termination for good cause in an exhaustive manner, while the Companies Act generally allows companies to dismiss their managers at any time, subject only to a reasonable notice.
The High of Justice further explained the grounds of its decision: A management agreement may indeed by revoked at any time by the company, but whether the termination was with or without cause lies in how the parties contractually defined the cases of termination. The court concluded that, where termination causes have been defined, they should be interpreted as the limits of termination for “good cause”, and any other circumstance triggering termination should fall under the concept of “without cause” and hence allow managers to claim damages.
The court’s rationale for this conclusion was that there is no legal definition for “good cause”, so it is the parties’ responsibility to fill in the gaps and contractually define when termination of the management agreement may safely occur.
This recent case law has strengthened the importance of a well-drafted management agreement. The terms of the management agreement draw the fine line between a company’s right to terminate its agreement with the manager and the manager’s rightful claim for damages in case of early termination.
Since a manager’s success in the company is related to the trust he enjoys from its shareholders, the terms defining “good cause” termination should not be narrowly drafted
A manager should not be removed from his position only because of incompetence or gross negligence, but also for reasons such as differences with shareholders or other members of the board of directors, insufficient communication with the strategic directions of the company, or inability to adapt to the organisational culture of the company.
As concerns the damages to which a manager is entitled, they would traditionally cover the contractual remuneration of the manager for the period between the date of the unlawful termination of the management agreement and the date when the agreement was scheduled to elapse. Other reputational damages may also be included in the manager’s claim against its former employer.
The recent interpretation given by the High Court of Justice to the terms of a management agreement is expected to change the general perspective of drafting termination clauses and change the approach of having termination cases listed only as examples to having comprehensively defined circumstances allowing companies to dismiss their managers at no or minimum risks.
Due to the pecuniary significance and sensitiveness of this subject in private practice, the parties should align their contracts with the recent case law (eg, by stipulating in their contracts the justified cases of termination of their mandate agreements) in order to avoid other interpretations in the event of litigation or arbitration.
According to a recent ruling of the High Court of Justice, dismissing a manager for causes other than those expressly defined in the management agreement may trigger the manager’s right to claim damages from the company.
1Decision no. 3237 dated 11 October 2013, the 2nd Civil Court of the High Court of Justice