Negotiation Management: How the Four-Eyes Principle Protects Executives from Unrestricted Liability

The occasion for this informational post is the personal liability of a managing director (the D&O insurance has declined coverage) in the amount of approximately EUR 789,000. The court justified the liability on the grounds that the managing director failed to adequately supervise an employee who exceeded their authority. The company had a total of 13 employees, in addition to the managing director.

The ruling of the Higher Regional Court of Nuremberg (abbreviated as "OLG") dated 30.03.2022 (Case No. 12 U 1520/19) provides a general clarification of the duties of the managing director of a GmbH concerning internal corporate organization. In practice, the verdict is rightfully regarded as groundbreaking. For instance, lawyers Prof. Dr. Leuering (Flick Gocke Schaumburg) and Dr. Daniel Rubner (Görg) aptly describe it as: "A pioneering decision by the Higher Regional Court of Nuremberg, with significant implications for all commercially active companies!" (NJW-Spezial 2022, 367).

The statements of the Higher Regional Court, which pertain to the establishment of compliance structures for monitoring employees, particularly emphasizing the "maintenance of the four-eye principle for activities prone to causing harm" (guiding principle No. 3), are also groundbreaking for negotiations concerning all projects that could be "prone to causing harm" for the company.

Conversely, this means: A negotiation concept that does not meet the requirements of the Higher Regional Court of Nuremberg regarding the four-eye principle could lead to unrestricted personal liability for the managing director.

In this article, the following is outlined:

Firstly: Managing directors must establish a compliance management system.

Secondly: The four-eye principle applies to all "high-risk" projects.

Thirdly: The failure to implement the four-eye principle can result in unlimited liability for the managing director.

Fourthly: The four-eye principle is now becoming the new standard in negotiation management.

Fifthly: Here's how to implement the four-eye principle in your negotiations to minimize your personal liability.

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Firstly: Managing directors must establish a compliance management system.

It corresponds to the "care of a prudent businessman" that the managing director acts "like an independent, fiduciary administrator of third-party assets" (paragraph 75 of the OLG decision). In doing so, the managing director must establish a compliance management system (paragraph 19). A breach of this obligation occurs when "inadequate organization, guidance, or control enables or even just facilitates misconduct by employees of the company" (paragraph 79). The managing director can delegate supervisory duties, but the overall supervision of the managing director remains an "untransferable core duty" (paragraph 82).

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Secondly: The four-eye principle applies to all "high-risk" projects.

The Higher Regional Court of Nuremberg (OLG) states verbatim regarding the four-eye principle: "The four-eye principle (English: two-man rule) is a preventive control in organizational theory, where certain stages, workflows, processes, tasks, decisions, actions, or processes may only be carried out by at least two individuals making identical decisions. The aim of the four-eye principle is to reduce the risk of errors and abuse. The four-eye control is found across industries in a variety of internal company processes considered critical. Processes are deemed critical whenever improper execution could result in personal injury or significant financial impact" (paragraph 104, emphasis added by the author).

The OLG was also not swayed by the fact that the managing director did not find a suitable person for supervision: "To the extent that supervision could not be delegated for this reason, the defendant (meaning the defendant managing director) would have had to carry out the necessary supervisory activities himself" (paragraph 106).

Regardless of whether a "process" (including, for example, a negotiation project) is "critical," according to the above-cited guiding principle No. 3 of the judgment, the necessity of the four-eye principle is based solely on whether the activity (such as negotiating a project) is "prone to causing harm." This "prone to causing harm" criterion alone is the core criterion determining in whether the four-eye principle has to be implemented or not.

Thirdly: The failure to implement the four-eye principle can result in unlimited liability for the managing director.

Finally, the Higher Regional Court (OLG) establishes in the specific case that the failure to establish an effective compliance management system (in this case, the omission of the four-eye principle) leads to personal liability for the managing director amounting to EUR 788,933.31 (paragraph 112). In paragraph 118, the OLG Nuremberg determines that the causality of the managing director's breaches of duty is obvious and adds: "Had the four-eye principle been observed, the actions of employee H would have been noticed and prevented from the outset."

The "actions" in this case involved an employee tolerating the exceeding of credit limits by customers and, for this purpose (undetected for a long time), manipulating the software.

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Fourthly: The four-eye principle is now becoming the new standard in negotiation management.

The decision of the Higher Regional Court (OLG) Nuremberg directly affects the proper organization of your negotiations.

Given that the four-eye principle applies to all "tasks, decisions, actions, or processes" prone to causing harm, every managing director must first determine whether a project to be negotiated might somehow fall into this category. If so, the four-eye principle, must be implemented for those negotiations; otherwise, it is not required to do so.

However, in practice, the criterion of "prone to causing harm" is not clearly defined and therefore, does not offer much guidance for managing directors to determine whether that is the for a given negotiation.

This is because in the present (from an ex ante perspective), it's unforeseeable for managing directors which cases a court might later (from an ex post perspective) classify as "prone to causing harm."

In particular, managing directors have to assume that a court - after any damage has actually occurred - will retroactively consider the project as "prone to causing harm" (i.e., before the damage occurred). This is known as the "hindsight bias," which is particularly significant in the context of managerial liability (see, e.g., Risse, NJW 2018, 2848 ff.), and has a detrimental effect on managers in liability proceedings.

The prudent managing director only has one option when it comes to negotiations if they want to minimize the risk of personal and indefinite liability: they must implement and adhere to the four-eye principle for all negotiations that are not obviously trivial.

Thus, for the cautious managing director, the landmark ruling of the Higher Regional Court (OLG) Nuremberg establishes the four-eye principle as the new standard for all negotiations that a company conducts or commissions concerning projects that are, in the broadest sense, "prone to causing harm."

Fifthly: Here is how to implement the four-eye principle in your negotiations to minimize your personal liability.

If you, as a managing director, have determined that a project to be negotiated might be "prone to causing harm" (or is not obviously trivial), you should implement the four-eye principle to avoid unlimited personal liability. This requires at least the following 3 steps to be fulfilled ("Minimum Standard"):

Step No. 1: Form a team (see, for example, How to Identify a Professional Negotiator)

As a managing director, you are the ultimate decision maker and do not engage in negotiations yourself (an important rule among professionals: "the boss does not negotiate"). Your duty is, to initially decide what kind of person you need as a member of your projects team.

In any case, you require a negotiation leader, someone who has mastered the best practices of negotiation. This role is oftentimes filled by a manager within the company (e.g., project manager).

Step 2: Define your negotiation stance

First, identify all the (contractual) stances you are committed to advocating for in the project, your "goal positions." Then, refine these positions to create room for negotiation. Equipped with these optimized goal positions (now your "initial positions"), the negotiator, such as a Project Manager, is ready to engage.

Step 3: Issue your negotiator a clear mandate

As the CEO, instruct your Project Manager to lead the negotiations with professionalism. Your directive should be concise and clear: "Learn," "Negotiate," and "Report Back."

The negotiator's task is to understand the counterpart's intentions (Learn), advocate for your stances (Negotiate), and provide you with a detailed account post-negotiation (Report Back).

Through this reporting, you can oversee the negotiator in line with your duty to monitor under the four-eyes principle, ensuring no positions or decisions contrary to the company's interests are communicated. Based on the report analysis, you will issue new instructions regarding the positions to be presented at the negotiation table.

This process of demanding reports and issuing new instructions ensures adherence to the four-eyes principle, a key compliance measure.

It prevents the announcement of unapproved decisions at the negotiation table.

This interaction continues until you, as the decision-maker, decide to either finalize a specific negotiation package or to cease negotiations.

Upon signing the contract, you have another opportunity to check if the contract's contents meet your initial directives.

Depending on the size of your organization, delegation of the four-eyes principle's implementation may be another feasible approach; however, it is still imperative that you supervise the individual responsible for this task if that is the case.

Furthermore, it is crucial to meticulously document all issued directives and received reports, utilizing methods such as email correspondence, to ensure transparency and accountability.

"Sixthly: Minimum Standard vs. Driver-Seat-Concept"

The previously outlined three steps (Learn, Bargain, Report Back) constitute the basic standard.

When structuring your negotiations, it's advantageous not to limit yourself to this foundational standard but to implement the best practices.

Aligned with the best practices, the role of the CEO extends beyond the basic trio of responsibilities (Team, Positions, Directive) to master the seven critical roles encapsulated in the Driver-Seat-Concept, the quintessence of best practices. This comprehensive approach is succinctly captured in the acronym TOP LADY, representing Team, Options, Positions, Learn, Adapt, Discuss, Your Instructions. For more details, refer to the following article: Renegotiating Contracts: Seven Pieces of Advice

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