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16 August 2005
Under German civil law, a number of provisions protect consumers who lack legal and business experience as compared to seasoned businesspeople. The provisions are based on the requirements of EU law and, therefore, are relevant to all member states. The parties to an agreement may not diverge from the statutory provisions on consumer protection, or may only do so to the benefit of the consumer. Breach of this principle renders the agreement invalid and the statutory provisions apply.
The decisive factor in applying the provisions on consumer protection to an agreement - thus limiting the freedom of contract - is whether one of the contracting parties is a consumer. According to the legal definition, a 'consumer' is a natural person who enters into a legal transaction where the objective does not constitute part of that person's commercial or independent professional activities (Section 13, Civil Code). In contrast, any natural or legal person who at the time of entering into a legal transaction is acting in his or her or its commercial or independent professional activities is deemed a 'businessperson' (Section 14, Civil Code).
In the field of franchising, this is particularly relevant to the conclusion of franchise agreements, since the franchisee takes up an independent professional or commercial activity by way of the franchise agreement. The validity of some terms in a franchise agreement will depend on whether the franchisee is considered a businessperson or consumer. However, a recent Federal Court of Justice decision has clarified the situation.(1)
The Federal Court of Justice decision concerned the validity of an arbitration tribunal in an agreement through which one contracting party took up independent business activities. Under German law, an agreement with a consumer is valid only if it is concluded in writing and contains solely the arbitration clause. However, if both contracting parties are businesspeople, the formal requirements do not apply, in which case a valid arbitration agreement can arise, for instance, from correspondence between the contracting parties.
In its decision of February 2005 the Federal Court of Justice held that a contracting party is deemed a businessperson at the time of the conclusion of the contract through which he or she takes up or prepares for his or her activities as a businessperson.
The court held that in this respect, the distinction between a businessperson and a consumer does not depend on whether the person has business experience (eg, based on previous commercial or independent professional activities). The decisive aspect is whether the conclusion of the contract belongs in the private or the commercial-professional sphere. Legal transactions entered into in the course of setting up a new business are clearly aimed at entrepreneurial activities. Therefore, a person setting up a new business is not acting as a consumer, but rather demonstrates in legal dealings that he or she is subject to the law governing businesspeople and intends to avail of that law. Therefore, there is no reason to protect the person as a consumer.
The Federal Court of Justice decision ends discussion on whether a person setting up a new business is considered a consumer or businessperson at the time of the conclusion of agreements which prepare or take up independent professional or commercial activities. The question had been considered by a number of higher regional courts, which ruled that at the time an agreement through which a person becomes a businessperson is concluded, the person setting up a new business still enjoys consumer protection. The reason stated by the higher regional courts was that the contracting party who lacks legal knowledge and experience should be protected and a person setting up a new business has no business experience prior to taking up his or her independent activities. However, the courts did not address why a person setting up a new business immediately gains business experience and legal knowledge on signing the first agreement, through which he or she becomes a single proprietor of a business or a businessperson, or why the provisions on businesspeople and entrepreneurs automatically apply from then on.
The Federal Court of Justice decision means that it is no longer necessary to observe (for safety's sake) the provisions on consumer protection when entering into a franchise agreement. This leaves the contracting parties with more room for manoeuvre in drawing up an agreement.
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 (firstname.lastname@example.org or email@example.com).
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