Recent court decision
The location, subject matter and/or international jurisdiction of a given court can be contractually determined in the event of a dispute between the parties to a franchise agreement by means of a jurisdiction agreement. Franchise agreements regularly provide for jurisdiction agreements in favour of the franchisor's registered office. An example of common wording in German franchise agreements is as follows:
The parties agree that the Regional Court of the location of the franchisor's registered office shall have exclusive jurisdiction for any lawsuit related to or arising under this franchise agreement.
The advantage of such a jurisdiction agreement is that any action against the franchisor must be brought at the location of its registered office. Any actions that the franchisor may bring against the franchisee are also brought at the registered office location. Thus, this avoids unnecessary travel expenses and travel time for litigation. However, for the franchisor to enjoy the benefits of the jurisdiction agreement, the agreement must be valid. Otherwise, the franchisor runs the risk of wasting time filing its action first with a court that is not competent and then applying to that court to have the action referred to the competent court, in order to avoid the action being dismissed solely because the first court lacks jurisdiction.
In German cases, the effectiveness of the jurisdiction agreement is generally determined by procedural law, according to which agreements on the place of jurisdiction are permissible "should the parties to the agreement be merchants, legal entities under public law, or public special funds" (section 38 of the Code of Civil Procedure). If the franchisor and the franchisee conclude the franchise agreement – including agreeing on the place of jurisdiction – as a legal entity, the agreement will determine the place of jurisdiction, as the legal entities that typically participate in commercial transactions are merchants by German law.(1)
Until recently, it has been generally acknowledged that jurisdiction agreements can be effectively agreed with a franchisee who is a business founder. Franchisees who enter into a franchise agreement as a natural person, and whose franchise business is already set up as a fully qualified merchant business at the time that the franchise agreement is signed, are already considered merchants at the time of signing the agreement. As such, they can effectively enter into a jurisdiction agreement with the franchisor, according to the wording of section 38 of the Code of Civil Procedure.
The Berlin Regional Court has now argued to the contrary of this generally accepted principle in its 31 May 2021 judgment of Case 10 O 107/19. According to the Court, jurisdiction agreements with "business founders" in franchise agreements are invalid. In this respect, the Court has requested a different interpretation of the "merchant" status in procedural law to that in commercial law. The Court provided the following reasons:
- The wording of the procedural provision (section 38 of the Code of Civil Procedure) is, according to the Court, based on the assumption that the parties are merchants when signing the franchise agreement and they do not need to subsequently become merchants by entering into the franchise agreement.
- The meaning and purpose of the statutory provisions is to provide additional protection to economically weak and commercially inexperienced people from the disadvantageous consequences of a jurisdiction agreement imposed on them by the economically stronger business partner, even beyond the exclusive jurisdiction existing for consumers' protection.
In its judgment, the Court disregarded the prevailing legal opinion and contradicted the judgments of:
- the Munich Regional Court I;(2)
- the Schleswig-Holstein Higher Regional Court;(3) and
- the Düsseldorf Higher Regional Court.(4)
According to the prevailing view in case law and relevant literature, in the context of agreeing on the place of jurisdiction, a party becomes a merchant at the moment the owner of a future commercial enterprise begins performing externally apparent preparatory acts to set up the commercial enterprise.
Contrary to the Berlin Regional Court's opinion, nothing to the contrary follows from the wording of the procedural provision (section 38 of the Code of Civil Procedure). This provision refers to "merchants". As this term is not defined in procedural law, the definition of a "merchant" in German commercial law must be applied (section 1 of the Commercial Code). Both terms must be interpreted in the same way. Section 1 of the Commercial Code states that a "merchant within the meaning of this Code is a person who carries on a commercial business".
The Federal Court of Justice has ruled in several cases that preparatory acts are sufficient to establish the capacity of being a merchant.(5) In its 17 June 1953 judgment, the Federal Court of Justice found that "the preparatory activity is already part of the commercial operation", especially "if the enterprise is designed from the outset to be a registered commercial operation and will soon develop into a large enterprise".
Thus, the phrase "carrying on a commercial business" has been given a broad interpretation. A commercial business does not start simply upon the start of business operations; instead, it starts as early as when preparations are made for the business by making external transactions.
Accordingly, the prevailing opinion is that a jurisdiction agreement can be established as between merchants if the business referred to in the agreement was already set up as a fully commercial business operation at the time that the jurisdiction agreement or franchise agreement was signed.
Contrary to the Berlin Regional Court's opinion, nothing else follows from the meaning and purpose of the procedural provision. In 1974, when procedural law was amended, the legislature did not address the question of whether, according to procedural law, the designation of "merchant" could be attributed to the franchisee if, at the time of signing the franchise agreement, the concerned enterprise was already a fully functioning commercial business operation. The explanatory memorandum simply states that "jurisdiction agreements may only be agreed among fully qualified merchants, legal persons under public law and special assets under public law".(6)
The legislature does not consider this group of individuals as in need of protection from ill-considered clauses regarding forum selection. By contrast, all minor merchants are to be protected from agreements on the place of jurisdiction.(7)
The idea behind this is that those who wish to make greater commercial efforts do not deserve special protection as they will carefully check what they are getting into (which is also the idea behind the cash value threshold on withdrawal, as provided for in section 513 of the Civil Code, according to which a person who is a business founder no longer has a right of withdrawal).
It seems fitting that an individual who is a business founder and whose enterprises are already set up as a fully qualified merchant business at the time that the jurisdiction agreement is signed, are considered to be fully qualified merchants, since such entrepreneurs do not require protection. By founding their enterprise, the entrepreneurs have acknowledged that they are now subject to the special law on merchants and wish to take advantage thereof. The privileges afforded to merchants include the option to enter into arbitration agreements and the right to determine the place of jurisdiction.
It also makes little sense that franchisees whose franchise was already set up as a fully qualified merchant business when the franchise agreement was entered into cannot sign a jurisdiction agreement when the franchise agreement is entered into; yet, immediately after entering into the franchise agreement, they can effectively agree on one. This line of argument is tantamount to insisting on formalities without helping those seeking justice. It must also be taken into account that the agreement on the place of jurisdiction applies only in cases where the defendant (the franchisee) is already considered a merchant – namely, disputes arising from the franchise agreement and due to supplies and services arising from the franchise agreements. However, such disputes arise only when a franchisee is obviously and indisputably a fully qualified merchant, even in the view of the Berlin Regional Court. Once the franchise agreement is signed, the franchisee is considered a merchant and is therefore also treated as one in any disputes arising from the franchise agreement.
Thus, it correctly follows that agreements on the place of jurisdiction can also be effectively concluded with franchisees who are business founders. The counterarguments put forward by the Berlin Regional Court are not convincing and do not align with practice. Due to the prevailing view in case law and relevant literature, almost every franchise agreement provides for a jurisdiction agreement in favour of the franchisor's registered office, even if the franchisee is only a business founder after the franchise agreement or jurisdiction agreement has been signed. It remains to be seen what position the appellate court will take. Until then, affected parties should exercise caution when it comes to jurisdiction agreements with franchisees that are business founders. In using jurisdiction agreements with such individuals, franchisors run the risk that the clause may be considered invalid by the courts.
For further information on this topic please contact Karsten Metzlaff or Jasmin Schulzweida at Noerr LLP's Hamburg office by telephone (+49 40 300 3970) or email ([email protected] or [email protected]). Alternatively, contact Tom Billing at Noerr LLP's Berlin office by telephone (+49 30 20 94 20 00) or email ([email protected]). The Noerr LLP website can be accessed at www.noerr.com.
(1) See section 13(3) of the Limited Companies Act in conjunction with section 6 of the Commercial Code.
(2) Judgment dated 25 February 2016, 5 O 16652/15, ZVertriebsR 2017, 310, 311.
(3) Judgment dated 12 November 2009, 16 U 30/09, BeckRS 2010, 9731.
(4) Judgment dated 30 January 1998, 16 U 182/96, NJW 1998, 2978, 2980 et seq.
(5) Judgment dated 17 June 1953, II ZR 205/52, NJW 1953, 1217, 1218; judgment of 26 April 2004, II ZR 120/02, ZIP 2004, 1208.