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24 August 2010
The possibility of dismissing an employee without notice because he or she is suspected of a crime (ie, 'dismissal on suspicion') has long been acknowledged in German employment law. Furthermore, the principles developed on this subject in the relevant case law have long been applied to recurring contractual relationships in other areas of law. However, until recently the higher courts had not ruled on the application of the principles of dismissal on suspicion to franchising.
On November 13 2009 the Frankfurt am Main Higher Regional Court delivered a decision which constitutes the first time that a higher court has taken a position on the validity of termination of a franchise without notice based on the suspicion of a crime. The court ultimately affirmed the termination.(1)
The court had to consider whether the suspicion that the franchisee had engaged in fraud with regard to donations entitled the franchisor to terminate the franchise without notice. The franchisee had the opportunity, through a foundation that was organisationally separate from and legally independent of the franchisor, to place donation boxes in its restaurant in order to collect donations for children with serious illnesses. The suspicion arose that customer donations were not being passed on to the foundation, but rather had been deposited in the franchisee's private account. The franchise agreement provided for termination without notice if "a justified suspicion existed that the franchisee... had committed or participated in a serious crime, in particular a property or tax offence with major consequences".
Main grounds of judgment
Validity of termination clause
The court found that the contractually agreed termination provision was valid since the clause did not unreasonably prejudice the franchisee contrary to the principle of good faith and did not deviate to his serious disadvantage from dispositive (ie, federal) law. Independently of contractual provisions, the destruction of the necessary trust could, under Section 314 of the Civil Code, constitute grounds for termination without notice, particularly in the case of a recurring contractual relationship. Even a suspicion leading to the destruction of trust – in particular, the 'immediate' suspicion of a crime against the franchisor – could constitute adequate grounds for termination. The possibility of termination contractually provided on the basis of a "justified" suspicion only did not seriously deviate from the statutory provision in a manner that was prejudicial to the franchisee.
The court expressed its doubts as to whether the contractual wording was less onerous than the statutory requirements for a dismissal on suspicion. Since the clause required a "justified" suspicion of a "serious" crime with "major consequences", it imposed more stringent requirements on the franchisor's possibility of termination than the statutory provision.
Existence of good cause
The court applied the principles of dismissal on suspicion developed in employment case law to the facts of the case. Accordingly, based on objective facts, at the crucial time of the termination there was a serious suspicion of fraud with respect to the donations.
In the court's view, that suspicion, also related to a serious crime with major consequences within the meaning of the contractual clause. The classification of a crime as "serious" depends not only on the provisions of the Criminal Code; it is decisive that the contractual provision as a whole constitutes good cause rendering continuation of the contractual relationship unreasonable for the terminating party. According to the contract in question, it is crucial whether a property or tax offence is to be regarded as a serious crime "with major consequences". Whether this is the case can be answered only by considering the contractual relationship in question and by weighing the mutual interests against each other. In this process, it is also crucial to take into account the effects that the misappropriation of donations could have had for the franchisor, in particular with regard to its reputation. The seriousness of the crime and its consequences arose from the possible substantial damage to the franchisor's image and the associated loss of turnover in its restaurants, since visitors to the restaurant who donated money would associate the case with the franchisor as much as with the foundation.
Validity of termination without notice
Having considered these factors, the court found that the termination on suspicion was justified. The franchise relationship and all agreements concluded with the franchisee for four difference restaurants were ended with immediate effect. The court stated in passing that it also saw indications of a breach by the franchisee of the contractual prohibition on competition which in its view could also justify termination on suspicion.
The court refused leave to appeal the judgment to the Federal Court of Justice. The franchisee has appealed against this refusal and thus the judgment has not yet acquired legal effect.
With this judgment the Frankfurt am Main higher court has contributed to legal certainty regarding franchises in Germany. After the regional court at first instance found the termination to be invalid – thereby implying that the conduct of the franchisee was 'a tolerable sin'. The higher court attributed the appropriate significance to an important factor in the success of any franchise system. It is possible in such a situation to protect the high regard and reputation of the franchise system's brand in the interests of all participants in the system, particularly those of the other franchisees. If the individually rigorous requirements for a dismissal on suspicion are met, a franchisor can, based on this judgment, prevent possibly serious damage to its reputation, even if the signs do not yet amount to proof of a crime. The judgment is to be welcomed as being very much in the interests of the German franchising industry.
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 (email@example.com or firstname.lastname@example.org).
(1) Decision 2 U 76/09.
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