We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
08 July 2008
A uniform presentation is the main characteristic of any franchise system. The franchisor develops a concept from which all participants in the franchise system profit by implementing the concept uniformly under the franchisor's trademark. Therefore, externally the franchise system is perceived as a single business rather than as a group of legally independent entrepreneurs.
However, it does not follow that the franchisor becomes contractually bound by contracts between the franchisee and the customer. Such a bond is the absolute exception because the franchisor makes it apparent that it is a separate legal entity by distinguishing its name or business name. In addition, since franchise systems are an accepted part of legal and economic life, the business community must take them into account. At most, the franchisor becomes legally bound if the franchisee has created the legal impression that he or she acts for a single business and the franchisor tolerates this or should have known of and prevented it.
Legal texts accept that such an impression is created if, in the course of business, the franchisee does not make his or her own name clear to customers.(1) Although the franchise agreement usually obliges or should oblige the franchisee to use a visible, distinct business name, in practice this is often different. Sometimes the customer does not know the identity of his or her actual contracting partner because, for example, there is no reference on the premises or the business correspondence of the franchisee to a business name or to a licence or franchise. Recourse to the franchisor will most likely be taken when the subject matter is of greater value (eg, foreign travel) and the franchisee (eg, a travel agency) is insolvent.
The Federal Supreme Court recently dealt with a case which, while atypical as the dispute did not arise from a contract with the customer, nevertheless clearly illustrated the problem.(2) The franchisee, a care hire operator, contracted with a workshop using, in addition to its own name W, the description or initials of the franchisor FR and signed 'F and RW'. Since the franchisee could not pay, the workshop attempted to claim its debt from the franchisor, whose business name was FR-GbR K und H. However, the Federal Supreme Court dismissed the claim against the franchisor.
The court stated that in view of the difference in the names – 'F und RW' and 'FR-GbR K und H' – it was clear that the franchisee ordered the work in its own name and not in the name of the franchisor. Therefore, the contract was solely between the franchisee and the workshop.
As the business name of the franchisee included the elements 'FR' and the franchisee concluded the contract with the workshop in this name, no implied legal liability of the franchisor followed, according to the court . While the common use of the elements 'FR' constituted a certain similarity between the two business names, the fact that within a franchising system trademarks and other descriptions are used to create business descriptions did not give rise to an obligation of the franchisor, unless other circumstances applied at the conclusion of the contract.
Through its judgment the Federal Supreme Court confirmed, with a clarity welcomed by practitioners, that only the franchisee is bound by the contracts which it concludes. The judgment also confirmed that a presentation under a uniform trademark does not result in implied liability of the franchisor; rather, such liability is an exception and arises only if other circumstances are also present.
The court did not specify what it meant by 'other circumstances'. Therefore, the judiciary reserved the possibility of reacting to the special circumstances of each individual case without determining a set of practical criteria in advance. Therefore, in spite of this judgment, the risk remains that a franchisor (particularly in the event of the franchisee's insolvency) will be targeted by customers of the franchisee if the latter does not adequately point out its legal independence.
Therefore, a franchisor should contractually oblige its franchisee to refer to its legal independence. Furthermore, compliance with this obligation should be monitored through the inspection of business papers, letterheads, business cards and invoices.
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).
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.