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11 April 2006
A large number of franchise agreements authorize the franchisor to collect amounts due (eg, franchise fees) directly from the franchisee's account. This has many benefits for both parties. For instance, the franchisor may enjoy considerable rationalization, especially with regard to the management and accounting of fees due, whereas the franchisee does not have to issue payment orders and avoids defaulting due to mere carelessness.
However, granting direct debit authorization to the franchisor within a franchise agreement must be judged according to the law on standard terms and conditions. Therefore, a direct debit authorization clause must be equitable. The Federal Court of Justice handed down a decision on this issue on January 23 2003 in Case III ZR 54/02.
The Federal Court of Justice decision examined the admissibility of a direct
debit authorization granted to a mobile phone services provider in view of the
law on standard terms and conditions. The Federal Court of Justice held that,
in principle, direct debit benefits both sides. Therefore, a direct debit authorization
is certainly equitable (as under the law on standard terms and conditions) with
regard to smaller sums which are directly debited in unchanging amounts determined
However, the situation is different with regard to larger sums which are paid at irregular intervals and are not determined in advance. In this case the account holder might be compelled to maintain significant amounts in its account so as to avoid the risk of defaulting on payment or incurring interest on an overdraft. In addition, the court held that the account holder was compelled to perform the direct debit order before it had been able to verify the calculation of the claim. It was of no avail that the customer was able to object to the debiting of his or her account, as unjustified debiting could exhaust the account so that other payment orders tied to specific dates could not be effected by his or her bank.
Therefore, in the case of larger amounts which are paid at irregular intervals and are not determined in advance the Federal Court of Justice held a direct debit authorization to be equitable and hence permissible only if the customer had five working days between receipt of the invoice and the direct debiting in order to check the invoice and ensure that there was cash in his or her account.
The Federal Court of Justice decision further developed the case law on the admissibility of direct debit authorizations under the law on standard terms and conditions, and also resolved numerous ambiguities. However, there is also the question of whether the case law applies to franchise agreements. In principle, it can be argued that - based on its turnover notifications - the franchisee is already aware of the amount payable in franchise fees in each case. Therefore, as opposed to the recipient of a mobile phone bill, the franchisee is usually aware of the extent of the cash needed in its bank account. In this respect the situation with regard to franchise agreements is more like those cases in which the Federal Court of Justice has held a direct debit authorization to be equitable as an exception, even without the verification period of five working days.
However, if a reasonable verification period is not provided between receipt of an invoice and direct debiting, there is a risk that debiting will be unjustified and possibly excessive, so that the bank may refuse to effect other payment orders that are tied to specific dates. Therefore, the verification period of five working days proposed by the Federal Court of Justice is also in line with the interests of a franchise relationship. It represents a sensible balance between the franchisor's interests and those of the franchisee. Both sides are able to participate in the benefits of the direct debiting procedure and the franchisee receives notification of imminent direct debiting when the invoice is issued. Therefore, it is advisable to set out in the corresponding contractual clause a provision that the franchisor will notify the franchisee in due time about the imminent direct debiting of its account (eg, through an invoice to be received five days before the direct debiting takes place).
For further information on this topic please contact Karsten Metzlaff or Karl Rauser at Nörr Stiefenhofer Lutz by telephone (+49 30 20 94 20 00) or by fax (+49 30 20 94 20 94) or by email (email@example.com or firstname.lastname@example.org).
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