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27 April 2010
In order to maximize efficiency in franchise agreements, franchise fees and other payments due to the franchisor are usually collected by direct debit. In contrast to credit transfers, such payments are triggered by the franchisor rather than the franchisee. In the direct debit procedure, the franchisor – with the agreement of the franchisee – can avail of either the direct debit mandate system or the pre-authorized withdrawal method.
Direct debit mandate system
In agreeing to use the direct debit mandate system, the franchisee issues an authorization to the franchisor to collect a payment due from its account without first having to instruct its bank to perform a direct debit. If the franchisee rejects the debit on its account, the amount will be recredited to it and debited to the account of the franchisor. If the franchisee issues such an authorization, it must notify its bank of the rejection of the unauthorized debit within approximately four and a half months.
Pre-authorized withdrawal method
If the parties choose the pre-authorized withdrawal method, the franchisee issues a general instruction (direct withdrawal authorization) to its bank to debit its account in favour of the franchisor. An authorized debit is thus concerned from the outset and no subsequent revocation of the payment is possible. The franchisee can revoke the general authorization, but this will not affect payments which have already been made.
Federal Supreme Court decision
In a petrol station management agreement which had been formulated by the defendant oil company, the petrol station manager was obliged to participate in the pre-authorized withdrawal method. As such, he authorized his bank using the authorization form, which was drafted in advance by the defendant and attached to the agreement.
According to the Federal Supreme Court (Decision VIII ZR 96/07), even the pre-formulated obligation to participate in the pre-authorized withdrawal method constituted an unreasonable disadvantage on the part of the manager. In the absence of the opportunity to reject a payment, a payment which had been debited could not subsequently be corrected. This constituted a serious and unjustified breach of the petrol station manager's commercial freedom which was not balanced by a corresponding benefit. Furthermore, the interests of the defendant would have been adequately protected by the alternative payment method: the direct debit mandate system.
The court also deemed the direct withdrawal authorization issued by the petrol station manager to his bank to be invalid. Section 307(1) of the Civil Code imposes general conditions of business under which any unilateral declaration that has been pre-formulated by the franchisor can be considered as unreasonable detriment.
The court did not decide how to regard a clause which provides that the pre-authorized withdrawal method is intended to be used only for such amounts which have been taken in for the account and on behalf of the recipient which is, in any event, entitled to all receipts.
This judgment has important implications for franchise agreements. In the absence of a revocation possibility for the franchisee, in principle the pre-authorized withdrawal method offers the franchisor greater security in the collection of debts than the direct debit mandate system. However, the decision clearly demonstrates that obligations to participate in the pre-authorized withdrawal method will be ruled invalid by the courts. Thus, increased financial risks for the franchisor arise.
With the invalidity of the direct withdrawal authorization, there is no valid instruction between the franchisee and his or her bank on which to base the debits. If the bank is obliged to refund the relevant amounts to the franchisee, the bank may have recourse over a long period (limitation period) against the franchisor. The franchisor would then have to enforce its claim again against the franchisee.
This is particularly risky if the franchisee becomes insolvent. Due to the aforementioned deemed approval, the insolvency administrator may revoke payments already debited in the (mostly validly agreed) direct debit mandate system only within a period of approximately four and a half months, while being able to claim repayment in the case of the invalidity of the direct withdrawal authorization for a considerably longer period. It follows that the franchisee's bank can also take recourse against the franchisor during the same longer period. The franchisor would then have to notify its claim against the franchisee, usually as an insolvency claim.
In light of this ruling, a valid obligation to participate in the pre-authorized withdrawal method can be secured under general conditions only with difficulty. Measures to balance out the unreasonable detriment to the franchisee of using the method are worth considering. The advantages of agreeing to use the pre-authorized withdrawal method should be weighed carefully against the associated risks.
For further information on this topic please contact Karsten Metzlaff or Karl Rauser 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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