Choice of law and forum clauses in franchise agreements with Austrian franchisees or foreign franchisees operating in Austria

We are frequently asked by clients whether and to what extent in franchise agreements with Austrian franchisees and/or foreign franchisees operating in Austria (i) forum clauses according to which the courts of a country other than Austria shall have exclusive jurisdiction and (ii) choice of law clauses according to which the laws of a country other than Austria shall govern the contract are permissible and effective under Austrian and European law.

Forum clauses

Under the condition that the legal relationship is "foreign related" (= if one or both parties are foreigners or one or both parties are operating in a foreign country), agreements on the place of jurisdiction in franchise agreements are, with few exceptions for specific disputes (i.e. labor law disputes, disputes with consumers, disputes related to real-estate), permissible and effective under Austrian and European law. Requirement for the effectiveness and enforceability before Austrian Courts is that the forum clause is agreed in writing (the contract containing the forum clause must be signed).

Choice of law clauses

Under Austrian law the parties' choice of a foreign law is deemed admissible and effective on the condition that the circumstances (the contract) contains sufficient cross-border aspects, hence a foreign element (= if one or both parties are foreigners or one or both parties are operating in a foreign country).

The freedom of choice of law of the contracting parties is however limited by the so-called "Overriding mandatory provisions" according to Art 9 of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (“Rome I Regulation”). According to Article 9(1) of the Rome I Regulation, overriding mandatory provisions are provisions respect for which is regarded as crucial by a country for safeguarding its public interests, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law applicable to the contract under that regulation (“ordre public”). Article 9(2) provides that the Rome I Regulation does not preclude the application of the overriding mandatory provisions of the State of the forum. Article 9(3) states that the court of the forum may give effect to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. It is added in Article 9(3) that, before deciding to give effect to the latter provisions, the court of the forum is to have regard to their nature and purpose and to the consequences of their application or non-application.

For example (and since in some countries - e.g. in Austria - commercial agency law is, under very specific circumstances, to some extent also applied to franchisees), the Decision ECJ, 9.11.2000, C-381/98 (Ingmar GB Ltd. v Eaton Leonard Technologies Inc.) granted Articles 17-19 of EU Directive on commercial agency (Council Directive 86/653/EEC of 18 December 1986), which regulate the claim for compensation (Article 17 (2)) and the claim for damages (Article 17 (3)) in the event of termination of the agency relationship, international validity, i.e. the quality of an "overriding mandatory provision" within the meaning of the Rome I. The case dealt with the fact that an English commercial agency company asserted a claim for compensation against its entrepreneur domiciled in California, although the law of the state of California had been contractually chosen, which did not know such a claim. The ECJ based its decision essentially on the fact that the Directive is intended to protect commercial agents within the meaning of its provisions, with Articles 17-19 of the Directive serving to protect the commercial agent after termination of the contract. According to Art. 19 of the Directive, the parties may not deviate from it to the detriment of the commercial agent before the expiry of the contract. According to the ECJ, it is of fundamental importance for the legal order that a trader established in a non member country whose commercial agent carries on his activities within the EU cannot circumvent those provisions simply by choosing the law applicable to him. The purpose of those provisions requires them to be applicable, irrespective of the law to which the contract is to be governed according to the will of the contracting parties, if the facts have a strong EU-connection, for example because the commercial agent carries on his activities in the territory of a Member State.

In conclusion, in franchise agreements with Austrian franchisees and/or foreign franchisees operating in Austria, choice of clauses according to which the laws of a country other than Austria shall govern the contract are permissible and effective under Austrian and European law, provided that there is a sufficient foreign connection. However, it must always be examined on a case-by-case basis whether and which mandatory Austrian provisions may nevertheless be applicable.