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03 September 2013
Under certain circumstances, in Germany, a franchisee has a statutory right of withdrawal, allowing him or her to withdraw from a franchise agreement. The statutory withdrawal period is two weeks and commences when the franchisee is advised in due form about this right of withdrawal. If the franchisee has not been properly advised, the withdrawal period does not commence and an unlimited withdrawal right applies.
It is sometimes the case that the franchisee is advised of a right of withdrawal without being entitled to a statutory right of withdrawal. In a recent ruling, the Dortmund Regional Court(1) disputed whether the statutory prerequisites regarding proper instructions were applicable for such a right of withdrawal which had been granted only contractually. If so, the withdrawal period would not have commenced if the franchisee had not been properly advised about the contractual right of withdrawal. Consequently, the franchising agreement could still be rescinded even after a couple of years. The court held that the statutory prerequisites regarding proper instructions also apply to a contractually agreed withdrawal right.
German civil law provides for the franchisee's right of withdrawal only if it is subject to a procurement obligation in the meaning of Section 505(1) of the Civil Code (ie, the franchisee is subject to a recurring purchase obligation in connection with the franchise agreement it has entered into). It is irrelevant in this respect whether the merchandise must be purchased from the franchisor or a third party designated by the franchisor (system supplier). An indirect supply agreement (eg, an obligation to purchase training materials or related public relations products) is sufficient in this regard. A further prerequisite is that the franchisee be a business start-up investing an amount not exceeding €75,000 (generally referred to as the 'right of withdrawal threshold' pursuant to Section 512 of the Civil Code). Since the entry fee on conclusion of a franchise agreement does not normally exceed €50,000, it can be assumed that in the case of a start-up franchisee entering into a franchise agreement with a procurement obligation, instructions on the right of withdrawal are usually necessary.
The court had to clarify whether the franchisee was entitled to a right of withdrawal, even though he was not entitled to a right of withdrawal under the relevant statutory provisions. It was also disputed that the advice on the contractually granted right of withdrawal had to comply with the statutory requirements for the provision of such advice.
The franchisor operated a franchise system for fast-food restaurants. It took action against one of its franchisees before the Dortmund Regional Court for unpaid franchise fees and contributions to advertising costs. The franchising agreement stipulated a term of 20 years. The question – left open by the court – was whether a 100% procurement obligation could be derived from the system handbooks. This was irrelevant, since the franchise agreement contained a contractual right of withdrawal. The instructions on the right of withdrawal contained in the agreement did not comply with the statutory prerequisites for valid instructions on the statutory right of withdrawal.
During the proceedings, the franchisee gave notice of withdrawal after four years and claimed repayment of franchise fees paid to the franchisor.
The court upheld the action brought by the franchisor and denied the repayment claim of the franchisee.
It held that the franchisee had validly withdrawn from the franchise agreement in the course of the proceedings. The court therefore considered it irrelevant in this context whether the franchisee had any statutory right of withdrawal. According to the court, by granting the franchisee the possibility to withdraw from the agreement, the franchisor had at any rate granted the franchisee a contractual right of withdrawal. In accordance with the principles of contractual freedom, the parties were free to agree on a right of withdrawal, even if it was not provided for by law.
The court further held that the notice of withdrawal had been given in due time, and that the withdrawal period had not yet commenced. In the court's opinion, the withdrawal period in principle commences only when the franchisee has been advised of the right of withdrawal in line with statutory requirements. However, according to the court, the statutory requirements had not been met in this case. The defendant had, in the court's view, been improperly advised of his rights and duties arising from his right of withdrawal. In fact, the instructions on the right of withdrawal contained remarks only about the franchisee's duties and not his rights in the event of withdrawal from the agreement.
Although the court held that the franchisee had a right of withdrawal, it ultimately upheld the franchisor's payment claim, because, in its opinion, in the event of a valid withdrawal from an agreement only the reversal of the services received and the benefits derived is owed. If the nature of an item does not allow it to be returned, compensation must be paid. The court saw this as the case here. The franchisee was unable to return the services of the franchisor. The court held that the amount of the compensation for the services of the franchisor depended on the consideration under the franchise agreement (ie, the contractually agreed franchise fees). The franchisor could therefore claim the franchise fees and contribution to advertising costs agreed in the franchise agreement.
However, the franchisee was not entitled to repayment, in the court's view. This was due to the peculiarities of the underlying case, in which the franchisee had his wife continue the operation of the restaurant unlawfully. The court therefore held that the franchisee was not worthy of protection with respect to the repayment claim.
It is unclear why the instructions on the right of withdrawal in case of a contractually granted right of withdrawal must comply with the strict statutory requirements. In this case, the contractual partner had been granted a right to which he had no statutory entitlement. The principle of contractual freedom is also an argument against the strict application of the statutory requirements. Nevertheless, the court's ruling makes it clear that before entering into a franchise agreement with a franchisee, it should be reviewed whether the franchisee has any right of withdrawal. If it is standard practice to include instructions on exercising a right of withdrawal in every franchise agreement, these must always comply with statutory requirements.
For further information on this topic please contact Karl Rauser or Karsten Metzlaff at Noerr LLP by telephone (+49 30 20 94 20 00), fax (+49 30 20 94 20 94) or email (firstname.lastname@example.org or email@example.com).
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