To create a homogeneous franchise system where all franchisees have to comply with the same requirements, franchisors typically use standard form franchise contracts – i.e. contracts pre-formulated drafted and provided by the franchisor for a multiple number of franchisees.
Within Germany, such franchise contracts have to comply with the quite strict German laws on standard form contracts (even in B2B). As a rule of thumb, such standard form contracts must be reasonable in order to be valid. Vice versa, they are void if they unreasonably disadvantage the franchisee, especially if
- they are not compatible with essential principles of law, or
- restrict essential rights or duties arising from the nature of the franchise contract to such an extent that the contractual purpose is endangered.
The same goes for handbooks, guidelines or other manuals: they all qualify as standard form contracts under German law (sec. 305 (1) German Civil Code [“BGB”]).
Moreover, franchise contracts must not excessively restrict the franchisee’s economic freedom. Worst case risk – as recently reconfirmed by the Federal Court –: the entire franchise contract is void!
“A franchise agreement is null and void in its entirety because of infringing sec. 138 BGB if the franchisee’s economic freedom is excessively impaired due to a large number of provisions which advantage the franchisor unilaterally and disadvantage the franchisee, for which no even approximately appropriate compensation is granted to the franchisee (…). This requires an overall assessment of the contractual agreement and the circumstances leading to the conclusion of the contract. Indications of an immoral gagging of the franchisee may be a provision with stipulates the franchisor’s authority to collect debts, thus enabling the franchisor to redirect payments to the franchisor, as well as contractual provisions restricting the franchisee’s economic freedom beyond what is typical for such a distribution system.”
(Decision of 11.10.2018, Case No. VII ZR 298/17, para. 17 [own translation] – regarding a “licensing contract” for realtors).
Practical advice
- This new decision by the Federal Court confirms the rather restrictive, rather franchisee-friendly decisions handed down by German courts in the past (e.g. the Federal Court’s Decision on fast food chains of 12.11.1986, Case No. VIII ZR 280/85, para. 10).
- To minimize the risk of invalidity, franchisors ideally observe the relevant statutory requirements on standard form contracts and the relevant case law on franchise contracts. According to the latest decision above, special care should be taken when the franchise contract provides for the franchisor’s power to collect debts. A way out could be the choice of another law – if the franchisor is based outside Germany (cf. Art. 3 Rome-I-Regulation).
- For guidance on franchisors’ advertising and pricing campaigns and compliance with antitrust law, check out the article “Franchise systems: ad campaigns with low prices can come costly!”.