Franchising in Germany

German Franchise Disclosure Requirements

Pre-Contract Disclosure requirements under German law have, in the absence of any franchise specific legislation, been developed and defined by German courts since 1980.  Franchisors must provide complete and accurate information on their system and the underlying business model. System information should not only deal with the franchised concept but also with the franchisor (company) and its representatives, its history, existing trademarks, a competitive review, number of franchisees and information on franchisees that have exited the system (including the reasons therefore).  Information on the business model will have to deal with the key obligations under the franchise agreements (including the financial terms, such as franchise fee, royalty and marketing contribution payments), the investments required and information on the profitability of the franchise business.

Franchise prospects must provide accurate information on their personal skills and their financial capabilities as both with normally be important elements in the decision making process of the franchisor about accepting the franchise prospects as franchisee.

All of the above is inevitably a general overview on (minimum) disclosure requirements only, namely the disclosure requirements on the franchisor’s side are related to the business that is being offered as franchise opportunity.  It is therefore imperative to look on the specific requirements on a case-by-case basis.

German Statutory Rules and Legislation on Franchise Agreements

In Germany, various types of contracts are specifically statutory regulated by German civil law, amongst others as to purchase or service agreements.  Franchise agreements as such are not amongst these types of contracts. Neither exist any other statutory provision that explicitly refer to franchise contracts. Rather, subject to the particular question and the specific legal relationship of the matter, the rules of the various statutory regulated types of contracts are applicable, if no specific conditions are agreed by the parties in the franchise agreement or compelling law is exceptionally applicable.  In addition to these civil law rules, rules from other fields of law, like trademark, copyright, patent, antitrust or labor and social law can be applicable.

It follows that in principle, the parties to the franchise agreement are free in forming the contract construction.  Negotiated franchise contracts may thus differ from legal guiding principles. In some areas, however, the content of the agreement is regulated by compelling law.  For example, the law provides that the franchise agreement has to be concluded in written form, if the franchisee is a business start-up and the franchise agreement includes an obligation for the franchisee to purchase and deliver certain system products in periodic intervals. In this case, the franchisor is obliged to inform the franchisee about the franchisee’s two weeks right of withdrawal from the contract.  In other cases, franchise contracts can also be concluded verbally. However, it is not recommended to conclude the franchise agreement only verbally, especially because of the difficulties of proof and the legal uncertainty.

Provisions of the franchise agreement must not infringe other statutory prohibitions.  Such prohibitions may result from the rules of civil, commercial or the European sales antitrust law. These provisions cannot be set out here in detail due to a lack of space.  A violation of an important legal prohibition exists in any case, if the contract is unconscionable.  The unconscionability for example, can be explained by a gross imbalance of obligation and consideration, by tying clauses or by deception.

Since the multiple uses of franchise agreements is regularly intended, the contract terms must conform to the law of general business terms.  The law of general business terms provides the protection of franchisees from being overreached by the franchisor, ensure a reasonable balance between the parties and prevent that the franchisor enforce his interests one-sided at the expense of the franchisee.  It should be noted that in case of ambiguous contract provisions, the possible advantageous interpretation of the term in question is applicable in favor of the franchisee and that a deviation from the legal principles may be considered void, if the clause has not been individually contracted between the parties.

Based on these requirements and experiences of the franchise industry, meanwhile typical clauses have been developed, which are included in franchise agreements and ensure that the contractual provisions are rather stable even at a judicial review.

The forgoing outline can only give a brief overview. In any case, franchisors should be advised to have created the franchise agreement by a lawyer and to be consulted accordingly with the implementation of a franchise system in Germany.

Applicable Antitrust Law in the German legal environment

Franchise networks are subject to European and German antitrust rules.  The basic antitrust rules which are applicable in Germany are established in Article 101 of the Treaty on the Functioning of the European Union and in Section 1 of the German Law Against Restraints On Competition (GWB). To obtain the necessary exemption from the statutory prohibition of restraints on competition the agreements and the day-to-day practice in the franchise network must comply with rules which are stipulated in the European Vertical Block Exemption.  As an example, like in the other European countries, in Germany franchisor must refrain from resale price fixing.

Characteristics of Master Franchising and Area Development in Germany

In Germany, Master Franchising and Area Development are widespread methods of expanding franchise networks into others countries.  In the German market the expression “Master Franchise Agreement” is mainly used for constructions which permit the master franchisee to act as a sub-franchisor and to establish its own national sub-franchise system.  In contrast an “area developer” is predominantly regarded being a company which is responsible for finding franchisees in and acquiring them for the franchisor’s network.  Companies and investors in the German market are accustomed to become master franchisees or area developers in foreign franchise networks.  There are no specific statutory rules on Master Franchising or Area Development in Germany.  A Master Franchise Agreement and an Area Development Agreement are subject to the freedom of contract. The general legislation on Franchise Agreements as outlined above applies accordingly as far as the agreements are governed by the Laws of Germany.  Some local courts tend to regard an area developer as a commercial agent of franchisor which has some influence of area developer’s rights regardless the choice of law.

A merger of two well-established German law offices, both dating back to the beginning of the 20^th century, Meyer-Köring combines a fresh perspective with more than a century of tradition.

For many years, the firm has been active in the field of Franchising law throughout Germany and other European countries. Today, Meyer-Köring are advisors to more than 150 franchisors in Europe and North America. The firm has particular experience in the development, reorganization and expansion of franchise networks. Its Franchise Practice Group focuses exclusively on advising Franchisors in the expansion and management of franchise networks.  Mr. Giesler can be contacted on +4922872636-32 or by email at giesler@meyer-koering.de