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24 July 2001
In Germany no special statute exists that specifically governs franchise contracts. Therefore, all problems affecting franchising systems are handled by the courts on the basis of existing laws. This is also the case with respect to the termination of franchise agreements without notice. Generally, franchise agreements are ended by lapse of time, by termination with notice, or by an agreement to terminate or annul the franchise relationship. However, in some cases circumstances may exist that lead to intense friction in the relationship between the franchisor and the franchisee. As a consequence, one party might wish to terminate the franchise agreement without notice.
With regards to the termination of a franchise agreement without notice, the Federal Supreme Court has laid down basic criteria that must be taken into account. The court stated that a termination without notice requires an overall assessment of the circumstances of each individual case and an evaluation of the interests of the franchisor and the franchisee. Further, the termination must take place within a reasonable time after the occurrence of the friction in the relationship. The Court of Appeal in Berlin further developed these criteria through an important judgment delivered in the Burger King Case (Kammergericht, Judgment of November 21 1997).
The franchisor in this case is the owner of a worldwide chain of fast-food restaurants. The franchise agreement with the franchisee had been concluded for a 20-year term. During the term of the agreement, the franchisee had the right to use the franchisor's trademark in connection with the operation of fast-food restaurants. After several years, a dispute arose between the parties which led the franchisee to cease payment of the monthly franchise fee. Further, the franchisee forbade the franchisor from making unannounced visits and he began to purchase goods that were not authorized by the franchisor. As a consequence, the franchisor sent the franchisee a standard reminder and some time later a termination letter without notice. The period between the date on which the franchise fee became due and the termination without notice was less than six weeks. As the franchisee did not change his behaviour, the franchisor sent the franchisee a second termination letter without notice.
The Court of Appeal ruled that the first and second termination without notice were void and that the franchise agreement was therefore still in force. The court stated that Section 89 of the Commercial Code, which deals with termination without notice of a commercial agency, could be applied by analogy. This provision allows that a contract can be terminated without notice by each party for an important reason. The assessment of whether an important reason exists necessitates an evaluation of interests in which the terminating party must show that continuation of the franchise agreement is not reasonable. The following factors must therefore be taken into consideration:
According to the court, long-term agreements lead to a greater need to protect the franchisee; therefore, an important reason will only be accepted if the following requirements are fulfilled:
The court found that the franchisor had not complied with any of these requirements and that the first termination without notice was therefore void. With regard to the second termination without notice the court ruled that this termination was also void, because the franchisor had not himself behaved according to the terms of the contract and therefore had lost his right to terminate the franchise agreement without notice.
According to the court, the franchisor's contractual breach had been the first termination without notice (for the above reasons). While the franchisee had continued to breach the contract after the first termination without notice, the franchisor was not allowed to invoke this behaviour as an important reason for the second termination without notice because of the franchisor's contract breach.
Although there is no special provision governing the termination of franchise
contracts without notice in Germany, it follows from court decisions that terminations
without notice are generally admissible. However, a termination without notice
- especially in the case of long-term franchise agreements - may only be effective
if there is an important reason for the termination. The respective requirements
are well enumerated in the decision by the Berlin Court of Appeal. This decision gives good orientation for both franchisor and franchisee and marks an
important contribution to the development of the law on franchising.
For further information on this topic please contact Karsten Metzlaff at Nörr Stiefenhofer Lutz by telephone (+49 30 20 94 20 00) or by fax (+49 30 20 94 20 94) or by e-mail (firstname.lastname@example.org).
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