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Germany: Settlement negotiations suspend forfeiture clauses in employment contracts

The recent ruling was based on a case in which an employee raised monetary claims after the employment relationship had ended. His employment contract stipulated that all claims arising from the employment relationship have to be asserted within three months after falling due. The clause furthermore held that if the employer then declines such claim, the employee has to sue before the Labour Court within another three months, otherwise the claims shall forfeit.

The employer declined the claims but expressed that it would be open to negotiate a mutual agreement. In the following months the parties entered into negotiations which ultimately failed. Accordingly, the employee sued before the Labour Court which dismissed the claim, arguing that the contractual preclusion period had expired because almost four months had passed since the employer’s rejection.

The employee’s appeal before the Federal Labour Court was successful. The Court ruled that the settlement negotiations had suspended the contractual preclusion period. This notion is in line with the handling of statutory limitation periods. The German Civil Code explicitly provides for those to be suspended during settlement negotiations. In the case at hand the Court applied this principle accordingly to contractual preclusion periods.

Contractual preclusion periods are an important tool in practice. Under statutory law claims will only become time-barred three years after the end of the year in which a claim fell due. Contractual preclusion periods are popular to limit the ability to bring claims to usually three to six months after the due date and therefore are crucial for avoiding long periods of uncertainty for both parties.