Karsten Metzlaff Karl Rauser August 26 2003 No Right of Withdrawal for Franchisee Where Services are Obtained Noerr PartGmbB | Franchising - Germany Karsten Metzlaff, Karl Rauser Franchising Background Facts Decision Comment BackgroundSection 505(1)(3) of the German Civil Code provides for a right of withdrawal for franchise agreements which contain a recurrent obligation to obtain goods (ie, a purchase obligation). This right is available irrespective of whether the goods are to be obtained from the franchisor or from a third party specified by the franchisor (a system supplier). If the franchisee is entitled to withdraw from the contract, he must be duly informed of this right. A proper explanation as to the right of withdrawal must include the following points: instruction as to the two-week withdrawal period; instruction as to when the withdrawal period commences; reference to the fact that timely dispatch of the withdrawal notice will suffice to comply with the withdrawal period; reference to the required form and content of the withdrawal notice; and the name and address of the recipient of the withdrawal notice.The withdrawal period is two weeks. If the instruction as to withdrawal is provided after conclusion of the contract, the withdrawal period is extended to one month (Section 355(2) of the Civil Code). The withdrawal period does not commence until the day after instruction on the right of withdrawal is provided (Section 187(1) of the Civil Code).It has long been unclear whether a franchisee who undertakes to obtain services on a long-term basis may also invoke a right of withdrawal. This question was recently clarified in a decision handed down by the German Federal Court of Justice on March 13 2003. The court ruled that there is no right of withdrawal where services are concerned.FactsThe defendant operated a pay-television broadcasting company. It entered into subscription contracts with its customers without informing them of their right of withdrawal. The nature of the package offer made by the defendant was the provision of services. The plaintiff, a consumers' association, took the view that Section 505 of the Civil Code (Section 7 of the Act on Consumer Loans, former version) was to apply accordingly. The plaintiff argued that this provision applied not only to the supply of goods, but also to all contracts which impose ties on consumers over a longer period of time. DecisionThe Federal Court of Justice rejected the direct application of Section 505 to the case at hand, since the provision relates solely to the supply of goods. The court also rejected its application by analogy, holding that this is permitted only where there is an unintentional omission in legislative provisions. The exclusion of services from the scope of Section 505 was not considered to be an unintentional omission for the following reasons: The comprehensive list of situations set out in Section 505, in which an instruction as to a right of withdrawal is required, mitigates against an unintentional omission in the provisions. In addition, by specifying the grounds that give rise to a right of withdrawal, Section 505 constitutes an exception from the principle of freedom of contract, and is also out of place within the law on consumer loans. Legislative history also mitigates against an unintentional omission in the provisions. The aim of Section 505 is merely to prevent a deterioration in consumer protection with regard to the former legislation on instalment purchases. However, the former Instalment Purchase Law applied only to contracts for the purchase of movables. At the time, an extension of the scope of application of the law was refused on the grounds that the legislation only protected buyers of movables who were at particular risk. Neither is the corresponding application of Section 505 indicated by its purpose, according to the court. The legislature did not intend to establish a general legal principle according to which a consumer with regular payment obligations would be entitled to a right of withdrawal. Where long-term hire contracts are concerned, the financial ties imposed on the consumer are usually stronger than those involved in a long-term contract for the supply of goods; nevertheless, no right of withdrawal is provided for regarding such contracts.The decision may be applied accordingly to franchise contracts which impose an obligation on the franchisee to obtain services on a long-term basis. In future, such franchisees will be unable to invoke a right of withdrawal, since this right has been rejected by the highest civil court in Germany.CommentWhere a franchisee who assumes a long-term obligation to obtain services nonetheless seeks to secure a right of withdrawal, this right must be expressly agreed by contract. According to the principles of freedom of contract and the contents of an agreement (Section 305 of the Civil Code), on principle the contracting parties are free to include consumer protection clauses in the contract even if the statutory prerequisites for their application are not met. Insofar as a right of withdrawal for the franchisee has been agreed in accordance with Sections 505 and 355 of the Civil Code, the requirements concerning instruction as to that right must be observed. For further information on this topic please contact Karsten Metzlaff or Karl Rauser at Nörr Stiefenhofer Lutz by telephone (+49 30 20 94 20 00) or by fax (+49 30 20 94 20 94) or by email ([email protected] or [email protected]).