Franchise lawi Legislation
As previously mentioned, Austria has no special law on franchising or a disclosure requirement law. Franchise contracts and even master franchise contracts have to be drafted according to the rules of the ABGB, the Antitrust Law, the Enterprise Law (UGB), the rules of the labour and consumer protection regulations, the Austrian Act on Unfair Competition (UWG) and the rules of the EU block exemption on vertical restraints.
Of interest in relation to the drafting of franchise agreements are two booklets published by the Austrian Federal Competition Authority: the first one covers franchise systems and price policy, and the second deals with compliance regulations. Both booklets are relevant for franchisees, as well as for franchisors, and in relation to the structure of a master franchise agreement and the franchise agreement with local franchisees.ii Pre-contractual disclosure
There are no disclosure requirements with which a master franchisee is obliged to comply by law. The main points are set by the jurisdiction of the OGH. A franchisee or master franchisee has to be informed about all points that are relevant to the decision of the franchisee or master franchisee to close the franchise or master franchise contract. This may refer to information concerning:
- the local market situation;
- the expected turnover of the franchise outlet;
- a business plan for building up the franchise system in Austria (optional);
- the competitors;
- the importance of the franchise system in Austria;
- number of franchisees (local or international);
- franchisees leaving the franchise system, especially for what reason during the final year for closing the franchise contract;
- intellectual property rights of the franchise systems;
- information about the master or local franchisee franchise contract; and
- the know-how of the franchise system.
The type of information that has to be disclosed depends on the franchise contract. Normally, franchisors in Austria have a disclosure requirement document giving the potential franchisee all such relevant information.
Foreign franchisors should look to the guidelines of pre-contractual information by the Austrian Franchise Association (ÖFV), but these guidelines are not binding on the courts in Austria.
Most franchise contracts concluded by a German master franchisor with an Austrian master franchisor, or local franchisees directly with the German franchise headquarters, have a choice of German law. Therefore the most recent decisions of German courts of appeal are also important in relation to pre-contractual disclosure in Austria and the information to be delivered to potential master franchisees when concluding a master franchise agreement, and to local franchisees concluding a direct franchise contract.iii Registration
There are no registration requirements for foreign franchisees or Austrian franchisees, and no rule is expected in the future. Membership of the ÖFV is not mandatory but may be useful for recruiting franchisees in Austria.iv Mandatory clausesFranchise contracts
A franchise agreement is characterised as a sui generis agreement, which incorporates elements of a licence agreement, as well as the types of agreement regulated by national law, such as commercial agency agreements, sales contracts, urban and usufruct leases, loan agreements, and memoranda and articles of association. The main purpose of a franchise agreement is the transfer of expertise developed by the franchisor.
Franchise agreements give rise to ongoing obligations, as they are concluded for a particular period and not just for a one-off performance on the part of the franchisee. This leads to a permanent mutual duty of care, and thus also increased significance is given to good faith.
The conclusion of a franchise agreement is, in principle, not subject to any condition regarding form, and, in certain circumstances, may be assumed through conduct that may imply consent to the terms and conditions suggested. The written form is therefore not a legal prerequisite for the franchise agreement to be considered valid. It is, however, advisable, for reasons relating to evidence, to conclude a franchise agreement in writing.Franchisor
The franchisor is to be introduced in the recitals of the franchise agreement. In particular, a brief outline of the history and development of the franchise must be given, as well as a summary of the key elements characterising the particular franchise.Franchisee
Detailed provisions in regard to the franchisee's legal personality must be included in the franchise agreement. The question of legal personality entails particularly that it has to be checked whether the franchisee is a natural or legal person (partnership or company). A supplementary agreement to the franchise agreement may also be concluded concerning the franchisee's company, if necessary.
The franchisee is not a representative of the franchisor, and also has no authority to transact business on behalf of any third party. For this reason, it should be explicitly regulated in the franchise agreement that the franchisee does not represent the franchisor, and that the franchisor is freed by the franchisee from responsibility for any third-party claims made because of the actions of the franchisee.Recitals
It is always advisable to precede a franchise agreement with recitals, in which the history of the emergence and basis for the franchise system are explained. Recitals are of legal significance for establishing the inherent purpose of the provisions set out in the agreement (the commercial basis). They may therefore also serve the purpose of examining the question of whether it is possible to adjust the franchise agreement, or even terminate it in accordance with the principles of the commercial basis lapsing.Franchise systems fees
Most franchise agreements provide for the payment of an initiation fee, a franchise fee and an advertising fee.
The initiation fee is not a fee for ongoing services provided by the franchisor, but a consideration in return for the expertise developed by the franchisor and passed on to the franchisee. It should therefore be laid down in the franchise agreement that, should the agreement be dissolved for any reason, the latter is not returned to the franchisee.
Franchise fees are paid to the franchisor by the franchisee, usually on a monthly basis. They are, in the vast majority of cases, calculated based on the total net sales generated by the franchisee. Since total net sales are usually taken as a basis, spin-off products that the franchisee sells may also be included in the calculation when establishing the figure, unless anything has been agreed in the franchise agreement to the contrary.
The average fee of this type in Austria in 2006 was 5.37 per cent of the corresponding total net sales achieved. In some systems, however, these may as well be significantly above that figure. It is also possible to agree that a fixed monthly amount be paid. Furthermore, it may be laid down in the franchise agreement that, in the event of certain total net sales not being achieved, the franchisee still has to pay a minimum franchise fee.
The obligation to pay fees should be differentiated from the obligation to contribute towards advertising expenses. This entails franchisees making a certain contribution, usually calculated as a percentage of the total net sales, towards the national or regional advertising to be carried out. Such contributions are earmarked for a specific purpose, and should be used by the franchisor in accordance with the established purpose.Transfer of expertise (know-how)
The transfer of the relevant expertise is an essential component of the franchise agreement, as the franchisor hands over to the franchisee complete instructions for operations.
In accordance with the guidelines of the EU Commission on vertical agreements, Directive (EU) 2016/943 on the protection of undisclosed know-how and, de lege ferenda, the German law of protection of know-how by way of a choice of German law in the franchise contract, or the Austrian know-how protection legislation based on the above-mentioned EU Directive 2016/943, the expertise being imparted to the franchisee is a necessary prerequisite for the agreement to qualify as a franchise agreement. Should no expertise be transferred, it will be considered only a licensing agreement.
The ÖFV Code of Ethics defines 'expertise' as a package of non-patented practical information based on experience of and trials conducted by the franchisor, which is secret, substantial and identifiable. According to the statements contained in the ÖFV Code of Ethics, 'secret' means that the substance, structure or precise composition of the components of the expertise is not generally known or not easily accessible, in regard to which the word 'not' is to be understood in the narrow sense, so that each individual part of the expertise ought to be entirely unknown or unavailable outside the franchisor's business. According to the ÖFV Code of Ethics, the expertise is deemed 'material' if it covers knowledge that is indispensable for the franchisee concerning the use, sale or resale of the contractual goods or the provision of the contractually agreed services. The expertise is in particular indispensable for presenting the goods intended for sale, processing products in the context of the provision of services, the manner in which customers are served, and conducting business from an administrative and financial perspective. The expertise moreover has to be useful to the franchisee. A further prerequisite is that the expertise needs to be identified. This means that the expertise must in any case be described in sufficient detail for it to be possible to check whether the features of secrecy and materiality are being fulfilled.
The description of the expertise may be included in either the franchise agreement, the handbook or the guidelines, which usually form part of the agreement.
The expertise should be documented in the franchise handbook, which accompanies the franchise agreement. Both are connected by means of dynamic references (i.e., it is laid down in the franchise agreement that the franchisee is required to use the applicable version of the franchise handbook).
As regards future law, the know-how of a franchise-system is only protected by EU and national law if it is both documented in written form (or, for example, within the franchise system intranet) and also permanently developed by the franchisor, with the franchisee contractually obliged (whether by the franchise contract or the master franchise contract) to keep the franchise system know-how secret, even after the termination of the franchise contract.Legal succession
In the event of the franchise agreement not containing any provisions on legal succession, it will end upon the death of the franchisee. Just as in the case of an agency agreement or commercial agency agreement, the activity undertaken by the franchisee based on the franchise agreement is personal, and thus relates to an individual. The franchise agreement is concluded based on the personal qualifications of the franchisee, which is why the franchisor has an interest in the franchisee personally fulfilling the obligations arising from the agreement.
Usually a legal succession clause is agreed in franchise agreements, to give the franchisee's heirs the opportunity to continue to carry on the franchise operations. The case may be different, however, if a franchise agreement is concluded with an Austrian private company limited by shares. Should the majority shareholder of the franchisee's company die, the franchise agreement will only lapse if, pursuant to the memorandum and articles of association, the death leads to the dissolution of the franchisee's company, and thus its liquidation. Notwithstanding the latter, the provision that the death of the majority shareholder is a reason for terminating the franchise agreement can, of course, also be included in the franchise agreement.Contractual period
Certain limitations in regard to the contractual period in particular arise from Sections 864a and 879 of the ABGB), Section 6(1)(1) of the Austrian Consumer Protection Act (KSchG), and the Commission Regulation (EU) No. 330/2010.
A long contractual period in conjunction with an exclusive obligation to purchase from the franchisor may, in certain circumstances, be deemed unethical gagging. Drawing upon the case law on the beer supply contracts, a contractual period of 20 years appears to come very close to being the upper limit that can be tolerated. Classing an excessive contractual period as gagging is based on the restriction of the economic independence of the purchaser contained therein. According to the requirements of the ÖFV Code of Ethics, the contractual period should be limited in such a way that the franchisee can amortise his or her initial investments. Depending on the circumstances of the case, a contractual period exceeding 20 years may also be justified in franchising. This is particularly the case with investment franchise agreements or master franchise agreements.Subsidiary provisions
It should be agreed in franchise agreements – in the final or subsidiary provisions – that any amendments and additions or supplementary provisions to the agreement need to be laid down in writing to be legally valid, which is also supposed to apply to setting out a provision dispensing with the requirement for the written form. In addition, there should be no subsidiary verbal agreements supplementing an agreement, to prevent problems to obtain the necessary evidence from occurring should a lawsuit be initiated.
Usually, in the final provisions a severability clause is also agreed upon, which, in the event of any provisions of the agreement being or becoming invalid, should stipulate that the validity of the remaining provisions of the agreement should not be affected, and that the latter will therefore remain valid. It is consequently usually agreed in the agreement that a void or invalid provision be reinterpreted or supplemented in such a way that the economic purpose intended with the void or invalid provision is achieved as precisely as possible, and that the latter is also supposed to apply to any loopholes in the agreement.