In the last two years, I provided legal support for three abroad franchise business systems which wanted to expand their business to the German market. All three cases concerned very different franchise systems- All came from outside the European common market and had no or little experience with doing business in the European Union (with exception of the UK, which is not a member of the EU anymore and therefore does not count). All three maintained a business concept which was based on the sale of food within the scope of direct B2C business concepts. While there were significant differences on business structure, experience on international expansion and foreign market entry and the commitment of the franchisor for establishing the franchise system in a new and potentially unknown market, it turned out that all cases had to deal with the same legal issues. Therefore I like to give a summary on those issues that were most common and that are – in my opinion – interesting for other abroad franchise businesses that consider an expansion to Germany.
Franchisee’s status under German law
The franchisee is a self-employed entrepreneur who runs his business in its own name, for its own account and at its own risk. This has consequences for the design of the franchise agreement. It must be designed in such a way that the franchisee can make essential business decisions himself and on his own initiative. The entrepreneurial freedom of the franchisee on the one hand and the claim of the franchise system to impose system-immanent requirements on the franchisee on the other hand represent an important line of conflict that the franchise agreement must carefully resolve.
Franchise agreements under German law
The German civil law considers any pre-formulated agreement, which is designed or intended for multiple uses, as general terms and conditions. This regularly also applies for the franchise contract, because the franchisor usually intends to conclude a franchise agreement, which was drafted for a country or regain, not only with one but with a number of franchisees. It also does not matter if the franchise agreement is to some extend modified for every franchisee, for example in order to adapt the contract to individual business prospects. A contract on granting a franchise master license is considered an individual contract, as the franchisor usually only offers one master license per country, and therefore not affected by the rules that apply to pre formulated clauses and agreements. Taking this into account, the franchisor and the master franchisee should be careful when drafting the master franchise agreement and abstain from implementing obligations for the master franchisee that cannot be effectively forwarded to the franchisees.
Franchise contracts that are considered as general terms and conditions are subject to various restrictions. The consequences for the design of franchise agreements are too numerous to be dealt with comprehensively here. Although the sections 308 and 309 of the German civil code (BGB) include a list with clauses and rules not accepted in general terms, it is not extensive enough to cover the needs of complex agreements. Therefore there can be high degree of uncertainty for clauses that are not included in the list. Some of the practical consequences resulting from this for the drafting of franchise agreements are shown below.
If a clause does is not in compliance with those restrictions, it is rendered invalid. In that case the statutes of the German civil code (BGB) apply, if there is a statute that can fill the gap. It is obvious, that the BGB statutes will likely lead to different legal and economic solutions compared to those intended by the original clause in the agreement.
Exclusion and reduction of liability
The liability of both the franchisee and the franchisor can only be limited to a very limited extent. In principle, it is possible to limit liability in the case of slight negligence, provided that it does not limit liability for damage to particularly important legal interests. Furthermore, it is not possible to limit the liability for cardinal obligations under the franchise agreement.
Non-compete obligations of the franchisee
The German law does not restrict non-compete obligations for the franchisee during the contract period. A valid non-compete obligations for the franchisee after the contract period has ended requires the franchisor to grant a compensation in return for the franchisee’s restriction of the freedom of occupation and business. Even with such compensation, a non-compete period for more than two years is considered invalid.