If employees make mistakes, to what extent is the managing director liable for the consequences?

Under general principles of Austrian law, if the victim (here: the GmbH) of a culpable act also acted negligently, this will proportionally reduce the damages for which the tortfeasor (here: the managing director) can be held liable.  The fall-back rule is 1:1 (applicable where no more precise indicator of appropriate proportionality is available). This is termed “Mitverschulden” or “contributory negligence”.

If an employee of a GmbH acts negligently and the managing director culpably fails to correct that mistake, will the employee’s mistake be attributed to the company, and thus reduce the director’s liability to the company? The Austrian Supreme Court recently took the opportunity to clarify this issue:

THE FACTS:

A company had commissioned its subsidiary with the evaluation and sale of the parent company’s real estate. The managing director of the subsidiary was accused of selling a property substantially under value. The subsidiary assigned its damages claims against its managing director to the parent company.

THE DIRECTOR’S DEFENCE:

The director defended himself by claiming that the damage had in fact resulted from

• an evaluation mistake made by a member of staff of the GmbH, for whose mistakes the director should not be held liable, and
• the failure of the staff of the parent company to identify and prevent these mistakes.

THE SUPREME COURT:

Upon consideration of the issues on appeal from the lower court, the Austrian Supreme Court rejected both defences.

1. Organisational Fault

It is clear that a managing director will be held liable if he negligently fails to put systems in place to effectively supervise staff.  However, if such systems are in place and there is no reason for the managing director to suspect staff members of failing to properly fulfil their tasks, the managing director will generally not be held personally liable for employees’ mistakes.

In this case however, the managing director – a real estate expert – reviewed the evaluation report himself and should (easily) have spotted the evaluation mistake (rental income was not taken into account). His failure to do so was, at the very least, slight negligence for which he, personally, is held liable.

2. Joint and Several Liability of Managing Directors

Under existing case law, a managing director’s liability is not reduced simply because another managing director also acted negligently. They are jointly and severally liable.

3. Contributory Negligence Defence?

In Austrian legal literature, the argument has been advanced that managing directors should not be held liable for mistakes made by employees; this would effectively shift the company’s entrepreneurial risk – as realized through the actions of the company’s employees – to the directors.  Interestingly, the prevailing opinion in Germany, on the other hand, is that a negligent director’s liability is not reduced by contributory negligence of the company, even though the employee’s mistakes are, under general rules, attributed to the company.

4. Joint and Several Liability of Managing Director and Employee

Here, the Austrian Supreme Court followed the prevailing opinion in German literature and held that the director’s liability is not reduced by negligent acts of subordinated employees. The director is determined to be personally liable because he, himself, failed to adequately supervise the employee. Thus, the managing director and the employee are jointly and severally liable to the company (Sec 1302 of the Austrian Civil Code). However, the director may, albeit under the restrictions of the Employee Liability Act (DHG), take recourse against that employee.

5. Defence of Parent’s Failure

The court in this case found no factual basis for adopting the managing director’s second proffered defence.

COMMENT:

Recent rulings of the Austrian Supreme Court have indicated that the court intends to apply the newly introduced business judgment rule quite broadly, to provide managing directors with a safe haven for entrepreneurial decisions.

This ruling, on the other hand, emphasizes that such safe harbour is not available if the director, as an expert in a particular field, makes a clear mistake, where that mistake, in turn, leads to the company being liable for contractual damages.

If both the directors themselves and employees make errors, it will generally be the managing directors who find themselves in the line of fire: not only do they generally have greater assets (or a D&O insurance), their liability will generally be easier to enforce (corporate liability rules place a substantial burden of proof on the directors and grant longer prescription periods). Moreover, under Austrian law, employees’ liability to their employers is significantly reduced, except in case of wilful intent. This last factor will also make it difficult for the director to take recourse against the employee.

This ruling serves to remind us that managing directors would do well to ensure that effective systems of supervision of all staff are in place if they wish to avoid liability for their employee’s mistakes.

Austrian Supreme Court 6 Ob 84/16w, 30 January 2017

Katrin Hanschitz, KNOETZL