Franchise agreements: Inform the franchisee to avoid a long-lasting withdrawal right

The Higher Regional Court of Dresden reconfirms that franchisees may have a special right of withdrawal from the franchise agreement (3 February 2020, Case No. 4 W 918/19) – and franchisors should take care to inform the franchisee accordingly to avoid a long-lasting right of withdrawal.

Under German law – based on the EU Consumer Rights Directive – special rules apply to B2C contracts for delivery of goods by instalments. These special rules aim to protect consumers because contracts for delivery by instalments create similar obligations to those of a borrower due to longer-term purchase obligations. These rules apply to franchise agreements if they can be qualified as a contract for delivery by instalments (sec. 513, 510 German Civil Code, with the right of withdrawal following from sec. 355, 356c German Civil Code).

In contrast to contracts for delivery by instalments concluded for distance or off-premises, contracts for delivery by instalments concluded within the premises or which are otherwise not covered by the scope of the Consumer Rights Directive nevertheless underlie a right of withdrawal as the German legislator has decided to deal with all these contracts in the same way. The right of withdrawal exists for franchisees as far as they qualify as founders of a business. This applies as long as the cash payment related to the contract does not exceed EUR 75,000 (sec. 513 German Civil Code).

In the concrete case, the franchisee was entitled to withdraw from the franchise agreement since the franchise contract was a contract for delivery by instalments. The franchise agreement had a term of five years, and the franchisee was obliged to pay a license fee of EUR 5,000.00 and to purchase the basic equipment from the franchisor. In addition, the franchisee undertook to purchase all products from the franchisor. Before the conclusion of the contract, the franchisee was not commercially active and therefore qualified as a founder of a business, with the abovementioned special protective rules applying.

The decision reconfirms the longstanding German case law, dating back to the German Federal Court’s decision of 14 December 1994 (Case No. VIII ZR 46/94, para. 17 et seq.) – and reminds to take care of informing the franchisee accordingly – according to best practice in an annex to the franchise agreement, to be signed for confirmation by the franchisee.

Practical Tips:

• Franchisees may be entitled to withdraw from the franchise agreement if the franchisee is (i) to be considered as founder of a business and (ii) the franchise agreement is to be qualified as a contract for delivery by instalments – which is the case if it has as its object the obligation for the recurring purchase of goods. 

• Franchisors should inform franchisees about their right of withdrawal – because the right of withdrawal does only commence once the entrepreneur (here: franchisor) has informed the consumer (here: franchisee) as required by Article 246 (3) of the Introductory Act to the Civil Code as to the latter’s right of withdrawal.

• In such case, the formal requirements concerning the information must be strictly observed; especially the information must be in text form, clearly structured and explain the essential rights. For this purpose, among other things, explicit reference must be made to the right of withdrawal, the necessity of a declaration of withdrawal without stating reasons, the duration and beginning of the period of withdrawal as well as to the fact that the timely dispatch of the declaration of withdrawal is sufficient to meet the deadline. The franchisor bears the burden of proof for the handing over – as best practice, the franchisee should sign it, while it is sufficient if the franchisor keeps a copy of the signed information.

• The consequence avoidable by correct information is that an insufficient information would result in the extension of the revocation period by one year (sec. 356c para. 2 German Civil Code).