Introduction
Facts
Decision
Comment
The topics of the validity of jurisdiction clauses in franchise agreements with business founders, and franchisors' pre-contractual duty to inform, are regularly subject to German court decisions on franchise law (for further details, please see "Court provides further guidance on franchisor`s pre-contractual duty to inform" and "Can franchisors conclude valid agreements on competent jurisdiction with franchisees who are business founders?").
Frankfurt Higher Regional Court recently remarked on these two issues as they relate to cross-border master franchise agreements. Due to the great practical significance of this topic, it is worth examining the decisive considerations of the Frankfurt Higher Regional Court, which provide a good overview of the relevant legal principles.(1)
The judgment was based on the following facts. The master franchisor (plaintiff), whose registered office was in Germany, concluded a master franchise agreement with a master franchisee (defendant), whose registered office was in France. At the time of concluding the master franchise agreement, the defendant was a business founder. In the franchise agreement, the parties chose German law as the governing law and conferred jurisdiction in a jurisdiction agreement on the courts in Frankfurt, Germany. The plaintiff brought an action seeking payment of the contractually agreed entry fee. The defendant filed a defence. At first the defendant thought that the choice of law clause was inadmissible and that French law should be applied. Further, the defendant thought that the jurisdiction agreement was invalid and that it had no obligation to pay the entry fee because the plaintiff had breached its pre-contractual duty to inform. The defendant alleged that the assertion of the claim for payment of the entry fees was therefore an abuse of law.(2)
Choice of law clause
The Frankfurt Higher Regional Court began by making some general statements. In principle, the law applicable to cross-border master franchise agreements is the law of the country in which the master franchisee has its habitual residence at the time of the conclusion of contract (ie, usually the place where its establishment is located).(3) However, the parties are permitted to choose their own governing law.(4) Notwithstanding the existence of a choice of law clause, it is always necessary in an individual case to examine whether the law of a country other than that of the chosen legal system remains applicable.(5) In this case, the Frankfurt Higher Regional Court decided that the parties' choice of German law was a permissible choice of law. It found that French law was also not applicable based on the rules governing consumer contracts,(6) stating that a master franchise agreement was not a consumer contract since the master franchisee had concluded the agreement for a purpose that could be regarded as within its trade or profession.
In addition, the Court held that choice of law clauses in standard terms and conditions of business are permissible. Such clauses are not unreasonable,(7) since the parties both have an interest in the uniform application of the law. The master franchisor has an interest in the uniform application of the law within an international master franchise system. The system-wide uniform application of the law is advantageous for the master franchisee since the equal treatment of all franchisees under private international law rules can prevent distortions of competition and create equal opportunities.
Jurisdiction agreement
The Court upheld the lower instance's interpretation of the law, namely that the agreement was permissible. The plaintiff was a business founder which first engaged in a commercial activity upon concluding the master franchise agreement. Opinions differ in such cases on the question of whether a jurisdiction agreement can be validly concluded under German law.(8) The lower instance held that it was sufficient for the establishment of the defendant's merchant status that its business undertaking was first founded through the conclusion of a master franchise agreement. Consequently, jurisdiction agreements may be validly agreed with business founders. The Frankfurt Higher Regional Court agreed. In the course of its reasoning, it also stated, in relation to consumer contracts,(9) that the purpose for which a contract is concluded is decisive in determining whether a party is to be classified as a consumer. That the defendant would only begin its commercial activities in the future did not alter the fact that its activities were of a commercial nature and that the master franchise agreement had consequently been concluded for a commercial purpose.
Pre-contractual duty to inform
The Frankfurt Higher Regional Court initially stated that the master franchisor must inform the master franchisee completely, unambiguously and correctly in relation to all circumstances that are obviously of substantial importance for its investment decision. This regularly includes the subject matter, services, benefits, development and distribution of the franchise system, as well as information on sales, cost and earnings expectations. The reason for the pre-contractual duty to inform is the usual discrepancy in the amount of information available to each of the parties. As a rule, the master franchisor has a considerable information advantage regarding the opportunities and risks attached to its business plan. It often has information on the investment needs, sales, costs and earnings of the existing system operations, which it can use to draw conclusions about the development of new operations and make forecasts as to future developments. The master franchisee is generally unable to do this. The information discrepancy between them is even more pronounced where the franchisee – as in the present case – is not an experienced businessperson, but rather a business founder.
In the present case, it was undisputed between the parties that the plaintiff had made inaccurate statements prior to the conclusion of the contract. In particular, the defendant was inaccurately informed about the sales opportunities and the prospects of success of the franchise system. Moreover, the defendant only found out after the conclusion of the contract that the marketing opportunities – contrary to the statements in the recitals of the master franchise agreement – were scientifically disputed. As a result, the plaintiff was not entitled to payment of the entry fee. While the entry fee had been validly agreed, due to its breach of the duty to inform, the plaintiff would immediately have had to repay the entry fee to the defendant as damages, which meant that the master franchisor's claim for payment of the entry fee was contrary to good faith.
This judgment sheds light on two issues which are particularly relevant for cross-border franchise agreements.
The issue of a potential choice of law is always of interest to the parties to a cross-border franchise agreement. The Court reaffirmed in this context that a choice of law – including in the case of standard terms and conditions of business – is permissible. In particular, international mandatory consumer protection rules do not prevent the inclusion of a choice of law clause in a franchise agreement if the franchisee is a business founder and not a consumer. Parties would, however, be well advised to always check whether any international mandatory provisions are applicable.
Unlike the Stuttgart Regional Court, the Frankfurt Higher Regional Court recognised that a jurisdiction agreement may be validly concluded with a franchisee who is a business founder. Nonetheless, parties should be aware that there is a risk that German courts will regard jurisdiction agreements with business founders as invalid until the Federal Court of Justice resolves the issue.
For further information on this topic please contact Karsten Metzlaff or Jasmin Schulzweida at Noerr PartGmbB's Hamburg office by telephone (+49 40 300 3970) or email ([email protected] or [email protected]). Alternatively, contact Tom Billing at Noerr PartGmbB's Berlin office by telephone (+49 30 20 94 20 00) or email ([email protected]). The Noerr PartGmbB website can be accessed at www.noerr.com.
Endnotes
(1) Frankfurt Higher Regional Court, judgement dated 8 December 2021, – 4 U 251/20.
(2) Section 242 of the German Civil Code.
(3) Article 1(1) and article 4(1)(e) in conjunction with article 19(1) and (3) of the Rome I Regulation.
(4) Article 3(1) sentences 1 and 2 of the Rome I Regulation.
(5) Cf article 3(3) of the Rome I Regulation.
(6) Article 6(1) and (2) of the Rome I Regulation.
(7) Section 307 of the Civil Code.
(8) Cf section 38 of the German Code of Civil Procedure. The Stuttgart Regional Court recently found that a jurisdiction agreement in a franchise agreement with a business founder was impermissible. It held that what was relevant was the existence of merchant status at the time that the jurisdiction agreement was concluded; a person must already be carrying out a commercial activity at that point in time. Acts that are simply preparatory to commencing an activity, such as negotiations for financing or a lease, the planning or establishment of a trading company or the conclusion of legal transactions that only relate to the planning of the company (eg, the obtaining of business appraisals or the preparation of draft contracts), did not suffice for this purpose (Stuttgart Regional Court, order of 18 October 2021 – 15 O 298/21).