Background
Decision
Capacity to conclude agreements
Necessity of consultancy costs
Personal liability
Comment


Background

Under German law employers are obliged to bear costs incurred by the works council. These costs include, among other things, fees charged by an adviser consulted by the works council to provide support in the event of planned operational changes (eg, the shutdown, reduction or relocation of an establishment).

According to the case law of the Federal Employment Court, in such cases works councils are entitled to be indemnified by employers with regard to the amount charged by advisers. In practice, works councils generally assign such indemnity claims to their advisers so that they can demand payment of their invoices directly from the employers. However, employers are obligated to bear such costs only if the works councils were justified in considering the consultation costs necessary, based on a due assessment of all the circumstances of the case.

In this context, it has been long disputed whether a works council can conclude contracts with third parties at all, and whether works council members are personally liable for consultancy costs. On October 25 2012 the Federal Court of Justice clarified these issues for the first time.

Decision

A works council consulted a firm specialised in advising works councils, due to several reorganisation measures that were supposed to result in the elimination and relocation of numerous jobs abroad. The consulting firm charged the works council approximately €87,000 in total for services rendered in connection with the negotiations on the reconciliation of interest agreement. The employer, to which the invoice was forwarded by the works council chairperson, did not pay because it held the view, among other things, that the consulting firm did not provide satisfactory documentation and proof of its services. Subsequently, the consulting firm filed a claim for payment of its fees against the works council as a body and also against the works council chairperson and vice chairperson.

After the claim had been denied in both previous instances, the Federal Court of Justice reversed the appeal judgment and referred the matter back to the appellate court for a new trial and a new decision. In the absence of sufficient clarification of the facts, the court was unable to render a decision on the merits of the case, but the principles for the involvement of advisers by works councils established by the court have significance far beyond the case in question.

Capacity to conclude agreements

The Federal Court of Justice held for the first time that a works council can validly enter into agreements with third parties within the scope of the responsibilities assigned to it under the Works Constitution Act. This had previously been disputed. The court assumed that a works council has the capacity to acquire, own, dispose of and enforce claims relating to assets in the external relationship to third parties and the ensuing legal capacity if and to the extent the agreement concluded with the third party is within the statutory scope of the works council's responsibilities. The claim of the works council against the employer to be compensated for the costs necessarily requires that the works council is obliged towards a third party. According to the court, the right of a works council to acquire, own, dispose of and enforce claims relating to assets and its legal capacity exists only if the (consulting) agreement is valid.

Necessity of consultancy costs

Consultancy costs are deemed necessary only if the agreed consultation is required for the works council to perform its duties and if the promised remuneration is market standard. Only under these circumstances is a works council entitled to be reimbursed and compensated for the costs by the employer. It is true that works councils have wide leeway for assessing whether advisory services are needed. However, if these boundaries are overstepped by the works council chairperson, the agreement concluded by him or her is invalid.

Personal liability

With regard to the part of the contract exceeding the boundaries of the necessity of the costs, and thus being invalid, the individual works council member who concludes the contract (as a rule, the works council chairman or deputy) can generally be held personally liable, according to the Federal Court of Justice. Subject to the principles concerning an 'unauthorised agent', liability is excluded if the consulting firm knew or should have known that the advice was unnecessary. Moreover, liability is limited to the unnecessary part of the advisory costs – as the Federal Court of Justice made explicitly clear. If the involvement of the adviser is required, the fact remains that the works council has a claim for indemnification and reimbursement of costs against the employer that the adviser can assert independently after the claim has been assigned. There is thus no need for further-reaching liability of the works council members covering the entire fee claim of the consulting firm. In particular, the works council members are not liable on an accessory basis for the works council's contractual obligation.

Comment

The Federal Court of Justice ruling is of considerable significance. For the first time, the highest court has found that works council members can generally be held liable where the contractual instruction of an adviser was unnecessary. Thus, in the future, works council members must take even more care when deciding whether to instruct advisers and to what extent. The practice, widely spread so far - particularly in major undertakings - of first instructing an adviser and not discussing the incurred costs with the employer until afterwards, has now become much more risky for works council members, owing to the judgment. In this regard, a works council should agree with the employer beforehand whether to involve an adviser and what costs this may trigger.

The ruling enables employers to pass unnecessary consultancy costs (incurred by their works councils) onto the acting works council member. Therefore, it is to be expected that shifting the liability risk will also affect the popular tactics of works councils to delay the implementation of substantial alterations to establishments by way of time-consuming consultancy contracts. Whether this will also reduce the actual costs incurred by the employers is doubtful because, in the opinion of the Federal Court of Justice, the works council may – in cases of doubt – also obtain legal advice on the necessity of the advisory work itself. If the associated costs are customary and the works council members do not have the expert knowledge for these issues, the costs for advisers will be considered necessary as a rule. They must thus be borne by the employer.

For further information on this topic please contact Björn Otto, Patricia Jares, Bjoern Gaul or Bernd Roock at CMS Hasche Sigle by telephone (+49 221 7716 195), fax (+49 221 7716 252) or email (bjoern.otto@cms-hs.com, patricia.jares@cms-hs.com, bjoern.gaul@cms-hs.com or bernd.roock@cms-hs.com).

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