Franchise Law and Standard Terms and Conditions

Franchisors generally use uniform franchise agreements for the purposes of maintaining a consistent distribution system and ensuring equal treatment of franchisees. These agreements therefore constitute standard terms and conditions within the meaning of section 305(1) sentence 1 of the German Civil Code (BGB). To the extent that they are not individually negotiated by the parties, they are subject to strict judicial review of standard terms.

Some interesting decisions may be noted in this respect. For example, the Federal Court of Justice (BGH XII ZR 1/17) held that a clause on the automatic extension of a contract is invalid for lack of transparency if, at the beginning of the contract, it is not clear by when notice of termination must be given at the latest in order to prevent the extension. This naturally also applies to other contracts, including franchise agreements. In the case at issue, the BGH considered that there was irresolvable uncertainty regarding the commencement of the contract and thus also regarding the expiry of the notice period. The BGH stated that the lack of transparency regarding the last possible termination date meant that the contractual partner could not effectively exercise the right of termination. Such a provision is invalid.
Franchise agreements should therefore contain clear provisions on commencement of the contract and termination / end of the contractual term.

Also of interest is the BGH decision VII ZR 308/16 on standard terms and conditions. According to that decision, a flat-rate contractual penalty clause in standard terms and conditions used by the issuer of a voucher booklet was held to be invalid. In the BGH’s view, the clause was invalid because the sanction was disproportionate even to minor contractual breaches and therefore placed the contractual partner at an unreasonable disadvantage contrary to the requirements of good faith.

In this respect, it is advisable either to provide a provision tailored to individual breaches — although this may be impractical because it can become very extensive — or to include a provision under which the franchisor determines the amount of the penalty at its reasonable discretion, taking into account the circumstances of the individual case.