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.
28 April 2009
Supreme Court Judgment
Franchise agreements usually have a fixed term (eg, five years), during which the agreement may not be terminated without good cause. Only in the event of a serious breach can the party affected by the breach terminate the franchise agreement during its term by termination without notice. However, the mere existence of good cause does not usually suffice. Usually, the party that wishes to terminate the agreement must first give the other party the opportunity to cure the breach.
If this rule is not observed, unpleasant consequences may result. The party to which the unjustified termination was issued can use the occasion to itself terminate the franchise agreement without notice, and may in some cirumstances claim compensation. Termination for good cause is thus a highly sensitive issue. A recent Supreme Court ruling, while directly affecting a commercial agent, is significant for all forms of distribution agreements.
A commercial agency agreement in relation to financial products was terminated by the principal without notice on the grounds of the principle of good cause . The term of the agreement was indefinite, and under its terms after five years of its coming into effect the principal was no longer entitled to terminate unless the commercial agent became incapacitated or reached pension age. After the agreement had run for approximately 10 years, the principal terminated it on the grounds that the commercial agent had breached the non-competition clause. This was disputed by the commercial agent, but the principal maintained its position.
The commercial agent then filed for termination on the principle of good cause. He also took up employment which was less financially rewarding than the commercial agency, and claimed the difference in his income as compensation. He also claimed a declaration that the principal was liable for all future losses of income incurred by him resulting from the termination of the agreement.
In its judgment of July 16 2008, the Federal Supreme Court found in favour of the commercial agent and ordered the principal to pay about €60,000. It further ruled that all future loss of income incurred by the commercial agent were to be made good.
While it may be unusual in franchise agreements that the franchisor waives, after a certain period of the agreement, the right to end the agreement unilaterally and without stating grounds, nevertheless this judgment makes it clear that termination for good cause must be based on a firm foundation and must not be issued either too hastily or after long hesitation.
When termination for good cause is invoked, it is often to end business agreements which, in the case of franchises, have been projected into the long term. Furthermore, such agreements are often connected with major investments on the side of both parties. The law therefore sets out relatively onerous requirements that must be fulfilled before termination for good cause can take 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).
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.