Termination of a management contract

Any doubts regarding the honesty and loyalty of a manager justify the termination of the management contract with immediate effect.

In September 2020, a healthcare entity of the diagnostic imaging industry asked me to analyse the possibility of terminating their collaboration with the Medical Director immediately. The client intended to terminate the management contract with the Medical Director as quickly as possible.

According to the client, due to the director’s position within the company, as well as their access to crucial information concerning its operations and the influence that might be exerted on the medical staff, continuing any collaboration with the director during the notice period was not in the best interest of the company. The client had lost trust in the manager and had no intention of paying them any compensation.

The manager’s lack of engagement in addressing the identified irregularities

At the beginning of 2020, the client’s management made a decision to conduct an audit. As a result of the conducted procedures, it was revealed that the company had been making monetary payments from its bank account based on posted VAT invoices that did not reflect actual business transactions. The invoices were issued for repairs of the company’s medical equipment that had not been carried out. The long-standing medical director employed by the company conducted indirect supervision over the equipment. Immediately after the irregularities had been uncovered, the client’s management requested that the director verify the authenticity of the disputed invoices. The medical director only engaged in conversations with the company’s employees, whose credibility was questionable, as they could have been directly involved in the uncovered misconduct. The manager did not verify the information obtained from the employees with the documents related to equipment servicing. Moreover, the director did not in any way address the allegations made against him by a former company executive who claimed that the medical director had full knowledge of the identified irregularities.

The manager’s lack of engagement in clarifying the irregularities led the company’s management to assign the task of investigating the circumstances concerning the issuance of the invoices to other individuals. As a result, a larger number of received and settled invoices were found to be unreliable, leading to the decision to report the suspicion of criminal activity to the prosecutor’s office.

Justified doubts as to the honesty and loyalty of the manager, resulting in complete loss of trust

Having analysed the information provided by the client, I recommended that a statement terminating the management contract with immediate effect be submitted under Article 746 § 1 of the Civil Code – for important reasons. The principal has the right to terminate the contract with immediate effect at any time; however, they should reimburse the commissioned party for any expenses incurred in the proper performance of the contract. In the case of a paid contract, the principal is obliged to pay the commissioned party a portion of the remuneration corresponding to their completed tasks. If the termination occurs without important reasons, the principal should also compensate for any damage incurred. Having considered the facts of the case, I assessed that the loss of trust in the director could constitute
an important reason for terminating the contract, as the client could have doubts as to
the manager’s honesty and loyalty.

Proper performance of duties arising from the contract does not justify the manager’s passive attitude in the course of addressing the identified irregularities.

The medical director filed a lawsuit against the client, seeking damages in the amount of several tens of thousands. The lawsuit claimed that the reasons for the loss of trust in him have no connection to any alleged irregularities in the performance of his contractual obligations. The director further claimed that the client had never questioned the correctness of the services provided by him. During the court proceedings, I demonstrated to the court that the director’s passive attitude during the investigation of the identified irregularities led to the loss of trust, irrespective of how he performed his contractual obligations.
The court, after conducting evidentiary proceedings, assessed that the director’s overall conduct following the disclosure of the irregularities (even if the he was not directly involved in the misconduct) justified doubts as to his loyalty towards the client and, consequently, the loss of trust. According to the court and according to what I had presented to its satisfaction, the director had not taken all possible steps to thoroughly investigate the circumstances surrounding the issuance of the questionable invoices, despite having an opportunity to do so.

No obligation to pay damages to the manager

The court dismissed the lawsuit filed against the client I represented in court. The court’s decision is final and non-appealable. The effective analysis of the client’s case not only protected them from a claim for substantial damages, but also allowed for the immediate removal of the director from their duties in the company, thus preventing the escalation of the dispute. The client believed that retaining the long-standing director of the company during the notice period would have undoubtedly affected their collaboration with the rest of
the medical staff, who remained under the director’s strong influence. Thanks to the client’s courageous decision, none of the members of the large medical staff resigned from their collaboration with the client despite the director being disqualified from performing their duties in the company.