All questions

Franchise law

i Legislation

There is no franchise law as such in Germany; provisions concerning franchising can instead be found in the general codes of law such as the Civil and Commercial Codes. These provisions, inter alia, impose pre-contractual disclosure obligations and a heavy expectation of good faith on all parties, making claims of profit to potential franchisees particularly risky.

ii Pre-contractual disclosure

Pre-contractual disclosure obligations are imposed on the principle of culpa in contrahendo, which is codified in Section 311(2) of the Civil Code. In addition, the law concerning misrepresentation is also relevant.

During the negotiations, both parties – not just the franchisor – must tell the truth, make no false promises and disclose all material facts to each other. This is especially true as regards those facts that will have a material impact on the success of the franchise and that may induce the potential franchisee to become part of the network. Earnings claims are particularly difficult and must be based on reliable and relevant empirical data – estimates must be clearly labelled as such. It is even possible that should the franchisor's directors or agents make dishonest or misleading statements to potential franchisees, they could be held personally liable according to Section 311(3) of the Civil Code.

Franchisors should therefore be very cautious in marketing their franchises in Germany. Any failure to comply with the principle of culpa in contrahendo will mean that a contract could be set aside, and any fees paid may have to be repaid in full. There is a statutory period of limitation of three years for claims that a contract failed to comply with this principle, which commences at the end of the year in which the claim arose and the franchisee obtained knowledge of the circumstances giving rise to the claim.

iii Registration

Germany does not require franchises to be registered.

iv Mandatory clauses

The ongoing relationship between franchisor and franchisee is especially affected by agency laws if the franchisee commits to the ongoing purchase of products and equipment. Antitrust law, based upon Article 101 of the Treaty on the Functioning of the European Union (TFEU), also has an impact on issues such as the grant of exclusivity, tying and price control.

A test of fairness by the rules on unfair contract terms will be imposed on any provision in a standard form agreement that has not been negotiated by the rules on unfair contract terms. The threshold for qualifying as 'negotiated' is rather high in Germany, so it is very likely that a standard form agreement will fall within the scope of the rules on unfair contract terms. Special justification is generally needed if a provision deviates from the fallback position as set out in the Civil Code to the detriment of the franchisee. Franchisees can be treated as if they were consumers in domestic agreements.

Several statutory provisions will be implicit in the agreement, such as a right of the franchisee to terminate and the franchisor's obligation to provide certain services. There is a great deal of case law on the question of what constitutes sufficient grounds for termination, so franchisors must be cautious when exercising or contesting this right.

v Guarantees and protection

The principle of contra bonos mores has a limiting effect on securities, especially if the value of the surety clearly exceeds the debt; where this is the case, the suretyship agreement might be declared void or the debtor can demand a partial release of the security.