Franchise Update: Key decisions in 2023

Introduction

In Germany, judgments focusing on franchise law are few and far between. However, three franchise-related decisions were made in 2023. Firstly, the Munich Higher Regional Court (Oberlandesgericht München) again dealt with preliminary injunction proceedings involving a well-known fast food chain. The dispute centred on whether the franchisee’s heiress had to allow card payments in fast food restaurants. In the case, the court considered whether system adjustment clauses were valid in franchise agreements. Secondly, the Berlin Higher Regional Court (Kammergericht Berlin) had to decide on the validity of a jurisdiction agreement with a franchisee who was a founder of a new business. And thirdly, a ruling by the Darmstadt Regional Court (Landgericht Darmstadt) concerned an arbitration clause in a franchise agreement.

Judgment by Munich Higher Regional Court dated 8 February 2023 – 7 U 8606/21 on the validity of a system adjustment clause

The franchisor operates a chain of fast food restaurants and applied for an interim injunction against the heiress of the franchisee who operated several fast food restaurants. The parties were in dispute about who was entitled to manage the restaurants. The heiress had taken on the de facto management of the restaurants. To ensure the revenues came directly to her, she had removed the card readers from most cash registers and self-service terminals in the restaurants or prevented their use by blocking the card slot. The franchisor made an application to force the heiress to allow customers to pay by card in the fast food restaurants.

Munich Higher Regional Court ruled in the franchisor’s favour, as follows:

• Firstly, Munich Higher Regional Court clarified the legal relationship between the parties. Despite the franchisee’s death, the franchise agreements were still in place. However, the heiress did not become a franchisee because to enter into the franchise agreements she needed the consent of the franchisor, who refused to give it. The legal relationship was therefore in limbo. Munich Higher Regional Court likened the limbo to a precontractual obligation (section 311 (2) of the German Civil Code (Bürgerliches Gesetzbuch), to which the provisions of franchise agreements were applicable.
• Next, Munich Higher Regional Court pointed out that the heiress was required by the provisions of the franchise agreements to allow non-cash payment in the fast food restaurants without any restrictions, in other words at all cash registers and self-service terminals. It maintained that otherwise the franchisor’s reputation would be damaged. Younger customers in particular counted on being able to pay by card, the court said.
• All franchise agreements contained system adjustment clauses stating that the franchisee’s heiress had to “apply the M system as amended from time to time as laid down and written in the operating manuals, documentation materials, written policies, plans, etc. which are updated from time to time and observe the corresponding principles and policies.” The franchisor had to “take reasonable account of the reasonable interests of the franchisee according to the principles of good faith” in the event of changes.
• The franchisor was entitled, via this system adjustment clause, to define the system standards of the fast food restaurant chain and require cashless payment systems to be available.
• The system adjustment clause was also valid and did not unreasonably disadvantage the franchisee’s heiress (section 307 of the German Civil Code). Binding the franchisee to the system standard is a material element of the franchise system, without which the system could not work. That also included the possibility of system changes. The franchisor’s planning of changes to the standards thus corresponded to the key underlying philosophy of franchise law (section 307 (2 No 1) of the German Civil Code). The fact that the franchisor was only allowed to exercise this unilateral right to specify performance only at its reasonable discretion (section 315 of the German Civil Code) was sufficiently expressed in the contractual clause by reference to the interests of the franchisee and to the principles of good faith, the court said.

Judgment by Berlin Higher Regional Court dated 24 May 2023 – 26 U 78/21 on the validity of a jurisdiction agreement with a business founder

Berlin Higher Regional Court ruled on whether jurisdiction agreements with franchisees who were business founders were valid. The franchise agreement contained the following jurisdiction agreement: “The parties agree that the Regional Court at the location of the franchisor’s head office will have sole jurisdiction for all disputes arising from or in connection with this franchise contract.” Berlin Higher Regional Court affirmed the validity of the above jurisdiction agreement, thus setting aside the decision of the lower court (Berlin Regional Court (LG Berlin), judgment dated 31 May 2021 – 10 O 107/19) and joined the apparently prevailing view in the legal literature.

Berlin Higher Regional Court explained the validity as follows:

• A jurisdiction agreement within the meaning of section 38 of the German Code of Civil Procedure (Zivilprozessordnung) which actually establishes the required status as a merchant can also be entered into effectively in the franchise agreement. It is not necessary for the party to already be a merchant upon entering into the jurisdiction agreement. Section 38 of the German Code of Civil Procedure is also applicable to merchants during the startup phase.
• No other interpretation is possible from the wording of the procedural standard (section 38 of the German Code of Civil Procedure). This mentions “merchants”. As this term is not defined in procedural law, the term “merchant” as defined in commercial law (section 1 of the German Commercial Code (Handelsgesetzbuch)) is to be used. Both uses of the term are to be interpreted identically.
• Section 1 (1) of the German Commercial Code reads: “A merchant within the meaning of this Code is a person who carries on a commercial business.” Entering into the relevant contract establishing the commercial activity, in this case the franchise agreement, is always to be regarded as “carrying on” a commercial business. By doing so, the franchisee expresses to a third party in civil law legal relations that it wishes to start running a commercial business. It would make no sense to view the decisive entrepreneurial act of founding a business as a private-law matter, but then view every subsequent action as unquestionably commercial.
• Consumer protection does not offer any relief either. Those who pick a certain commercial or self-employed occupation and enter into transactions aimed at starting a commercial operation are choosing to face the harsh winds of entrepreneurial commerce. They cannot also rely on consumer protection in their dealings with future business partners and possibly competitors as well. Especially those who buy a company or enter into a commercial agent or franchise agreement in order to start doing business on that basis in the future cannot draw on consumer protection for this startup business.

Judgment by Darmstadt Regional Court dated 25 May 2023 – 7 O 8/22 on an arbitration clause

Darmstadt Regional Court dismissed an action by a franchisor against a franchisee partly for payment of outstanding franchise fees as inadmissible. As grounds, Darmstadt Regional Court referred to the arbitration clause in the franchise agreement, which read:

“Article 22 Arbitration

In the event of disputes, the parties agree to seriously attempt to reach an agreement for two months (arbitration) before referring the matter to a court. This period will begin upon written request by the first party to the second party to conduct the arbitration. The arbitration will be deemed ended if this period has expired without agreement on the relevant disputed issues, if the second party expressly rejects the arbitration or if the second party fails to respond to the written request within 14 days. It is inadmissible to refer the matter to the court before conducting and ending the arbitration. That does not apply to interim relief or to assertion of the franchisor’s contractual payment claims.”

The court reasoned that according to this, arbitration should have been carried out before referring the matter to the court. It believed that the concept and significance of arbitration required the involvement of a neutral third party. Besides this, according to the contract the parties merely holding advance negotiations or talks was not sufficient. An explicit preprocedural request by the franchisor was also required before arbitration, the court said.

It continued that the franchisor cannot invoke the contractual exclusion clause, which states that the arbitration clause does not apply to the assertion of the franchisor’s contractual payment claims. The exclusion clause harms the parties’ equality of arms because only the franchisee is given an additional hurdle to asserting its claims in court. The court stated that it could not see any legitimate interest in this exception on the part of the franchisor and that the clause was therefore invalid under the first sentence of section 307 (1) of the German Civil Code.

Outlook

The judgment by Munich Higher Regional Court confirms the validity of system adjustment clauses in franchise agreements and shows that franchisors can set binding system standards as long as the interests of franchisees remain adequately taken into account.

By contrast, the decisions by Berlin Higher Regional Court and Darmstadt Regional Court show that caution is advisable when agreeing on jurisdiction and arbitration clauses in franchise agreements. The ruling by Berlin Higher Regional Court now creates clarity on jurisdiction agreements with business founders provided that Berlin Regional Court is competent locally. But since we are still waiting for a decision by the Federal Court of Justice (BGH), caution still needs to be exercised in jurisdiction agreements with franchisees who are business founders.

 

This article is part of the "Update Commercial 2024". All insights and the entire report as a PDF can be found here.