Saving Clause May Not be Enough to Safeguard Validity of Agreement

Background
Facts
Decision
Comment

Background

If an individual clause in a franchise agreement is invalid - for example because it breaches competition law - the question arises as to whether the other clauses in the agreement are affected by its invalidity. This question is governed firstly by statute. Section 139 of the Civil Code provides that the invalidity of one term of a contract will invalidate the entire contract if it cannot be assumed that the parties would have entered into the contract without the invalid term. However, the parties to a franchise agreement may choose to contract out of Section 139 and instead expressly agree on a saving clause, under which the invalidity of one clause will not affect the validity of the remainder of the agreement.

In its Pronuptia II decision of February 8 1994 the Cartel Division of the Federal Supreme Court considered whether a franchise agreement which included both a saving clause and certain other clauses that were partially in breach of competition law was invalid in its entirety. It decided that the remainder of the agreement should remain valid because of the saving clause. The parties' intent was not the decisive issue. However, the Cartel Division has now reversed its position in a judgment issued on September 24 2002.

Facts

The contract to be reviewed by the Federal Supreme Court contained a saving clause, which stated: "If one or more of the provisions of this agreement is or are ineffective or invalid, the effectiveness of the remaining provisions shall not be affected thereby." The agreement contained a pricing clause which was ineffective because it was in breach of competition law. The plaintiff believed that in view of the saving clause the agreement remained valid, and claimed payment based on the agreement. The defendant argued that the agreement would not have been concluded without the invalid pricing clause. The appeals court found that by virtue of the saving clause, the agreement was valid despite the invalid clause. It relied on the Pronuptia II judgment in making its decision.

Decision

The Cartel Division, as the court of final appeal, reversed its own Pronuptia II ruling.

The court ruled that in Section 139 of the Civil Code the legislature expressly specifies that the partial invalidity of a contract will lead, in principle, to the invalidity of the entire contract, unless it can be assumed that the contract would have been concluded without the invalid part. Through this provision the legislature intended to determine the burden of proof. According to Section 139, the burden of establishing and proving the validity of a contract rests with whomever wishes to rely on the contract's validity, despite its having an invalid clause. If that party cannot provide the required proof, the entire contract is considered invalid.

According to the Federal Supreme Court's new position, a savings clause merely reverses the burden of proof. Accordingly, a party that wishes to rely on the invalidity of the entire contract must prove that the contract would not have been concluded without the invalid clause. The defendant made this submission in the case in question. The Federal Supreme Court held that the appeal court should have dealt with this issue. As it failed to do so, the Federal Supreme Court returned the case to the appeal court to allow it to consider the issue.

Comment

It follows from the new judgment that even where a savings clause has been included in the franchise agreement, the entire agreement will be found invalid if the party wishing to invalidate it can prove that the agreement would not have been concluded without the invalid clause.

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 (karsten.metzlaff@noerr.de or karl.rauser@noerr.de).