Background
Facts
Decision
Comment
The Standard Contracts Act applies to all contractual clauses standardized for a large number of contracts, which one party presents to another for the conclusion of a contract. As of January 2002 the act has been incorporated in the Civil Code. However, as the court decision discussed below refers to the Standard Contacts Act and the legal content of its respective provisions, reference will still be made to the act in this update. The main purpose of the act is to protect consumers against abuses by other parties who are generally in a considerably stronger bargaining position and who have the time and freedom to draft the standard contract or general terms and conditions in advance. The act protects consumers particularly by declaring certain provisions in standard contracts invalid.
Merchants are also protected by the Standard Contracts Act, but to a lesser degree. Merchants are only protected by a blanket rule under which standard provisions are invalid if they unduly burden the merchant under equity principles. As most franchisees are merchants, it is usually only this blanket rule (set out in Section 9 of the Standard Contracts Act, now Section 307 of the Civil Code) which applies to the standard franchise agreement to which they are a party. With regard to the legal distinction between 'consumer' and 'merchant', the issue of whether a party who concludes a franchise contract that marks the beginning of that party's entrepreneurial activity must be regarded as a consumer or as a merchant has been hotly debated. As a result, it was unclear whether the blanket rule or the more comprehensive consumer protection provisions applied to such contracts. In a decision issued on November 12 2001, the Oldenburg Court of Appeals held that a franchisee must be regarded in this respect as a merchant.
The parties concluded a franchise contract in 1999. Prior to concluding the franchise contract, the franchisee had pursued no entrepreneurial activity. The franchise contract was concluded on standardized forms drafted by the franchisor and therefore fell under the Standard Contracts Act's scope of application. A standard clause in the franchise contract provided that in case of disputes the parties should refer the dispute to arbitration. In 2000 a dispute arose between the parties and the franchisor attempted to reach a settlement before an arbitral tribunal. The franchisee contested the validity of the arbitration clause and therefore the competence of the arbitration tribunal by referring to consumer protection principles. His claim as to the invalidity of the agreement was eventually brought before the Oldenburg Court of Appeals.
The Oldenburg Court of Appeals ruled that the arbitration clause was in conformity with the Standard Contracts Act since the clause did not have to be assessed under consumer protection principles. The court found that the franchisee had to be regarded as a merchant, even though he had just commenced entrepreneurial activities with the conclusion of the franchise agreement. As the arbitration clause was valid under the blanket rule, the court rejected the franchisee's claim.
In its reasoning the court acknowledged that the issue of whether a franchisee who commences entrepreneurial activities through the conclusion of a franchise contract should be considered a merchant or a consumer has been widely disputed. However, the court found that at the moment of concluding a franchise contract, such a consumer declares that he considers himself a merchant and that he accepts the respective rules. It would only be consistent if the consumer's decision to become a merchant covered the conclusion of the franchise contract itself. In support of this reasoning, the court referred to the Commercial Code, in which this interpretation is generally accepted. It further argued that it would not be reasonable to distinguish between a merchant and a consumer simply by referring to the moment that a contract is concluded (at which point the party would still be regarded as a consumer) and the moment immediately thereafter (when the party would now be regarded as a merchant). Nor did the court accept the franchisee's argument that, because of his lack of business experience at the moment of the franchise contract's conclusion, he had to be regarded as a consumer. In contrast, the court presumed that a consumer will often examine such contracts with more caution than a businessperson.
The court also rejected the franchisee's argument that the Consumer Credit Act contains a general principle according to which activities that relate to the foundation of a business qualify for consumer protection. The court stated that the Consumer Credit Act provides only that a loan raised in order to found a business falls under the scope of consumer protection; this provision does not set out a general principle. Finally, the court added that even the European Court of Justice is of the view that consumer protection is not necessary in the case of contracts which mark the first step towards entrepreneurial activity.
The Oldenburg Court of Appeals has made an important move to harmonize the legal assessment of contracts which mark the beginning of a franchisee's entrepreneurial activity. Although the court's decision partly limits consumer protection, it facilitates the application of law by giving clear indicators of whom should be regarded as a consumer and whom as a merchant. As a result, it can now be presumed that from now on, each franchise contract must be assessed only under the blanket rule and not under consumer protection principles, irrespective of whether the franchisee conducted business activities prior to concluding the franchise contract.
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]).