The successful expansion of a franchise system in Germany depends largely on whether the franchisor is set up in a legally secure manner to react flexibly to the termination of individual franchise agreements at any time. In this context, it makes sense to regulate the consequences of contract termination in detail in the franchise agreement to avoid unnecessary costs and lengthy legal disputes. Many special regulations apply to premature termination of contractual cooperation, meaning that extensive expertise is required to develop a legally secure solution.
If you are considering setting up a franchise company in Germany or intend to expand your franchise system to include additional franchisees and are unsure about how to draft contracts, our German franchise lawyers have the necessary expertise and industry-specific knowledge to provide you with comprehensive support when drafting contracts and after the termination of franchise agreements.
Post-Contractual Fiduciary Duties | Protection Against Avoidable Damage
After the end of the contract, the franchisor and franchisee continue to have various obligations, including protecting the other party from avoidable damage and fulfilling the contract properly. Breaches of these obligations may result in claims for damages.
Part of the franchisor’s obligations is to authorise the franchisee to continue operating as an independent business – provided there is no risk of confusion with the franchise and property rights are observed. Alternatively, the franchisee can take back any remaining parts of the stock or grant the franchisee the right to sell the goods. If the franchisee’s customers request the delivery of special equipment or spare parts, the franchisor must provide them to the franchisee.
Post-Contractual Non-Compete Clauses to Protect the Franchise System
Non-competition clauses are an effective method of protecting against the loss of vital corporate secrets. These prohibit competitive activity – during or after the end of the contractual cooperation – and are usually contained in exclusive agreements.
A breach of these prohibitions by the franchisee during the term of the agreement may damage the franchisee’s business and is, therefore, rare. If franchisees decide to open their own business after the end of the contract, they must observe the post-contractual non-competition clause. These are violated, for example, if the franchisee takes over key elements of the expertise. This includes, for example
- location search,
- choice of equipment,
- training concept and
- employee training programmes.
The franchisee has a legitimate interest in protecting its operational expertise through non-compete clauses. However, this severely restricts the former franchisee’s professional freedom, meaning that the non-compete clauses must be specific: Geographically, they may only refer to the contractual territory with reference to contractual products or services. In terms of time, the maximum term is one year from termination of the contract. Generalised formulations are often ineffective.
Compensation for Loss of Earnings to Secure Living Expenses
To be effective, post-contractual non-compete clauses must always provide for compensation. These represent the contractual consideration for not competing with the franchisor after the end of the contract term. This ongoing monetary payment is intended to enable the former franchisee to lead a reasonable lifestyle for the duration of the subsequent non-compete clause – usually for one year. The appropriate amount of the compensation depends, among other things, on the previous earnings at the location of the respective franchisee but not on private savings or income benefits. In individual cases, a short collaboration of just a few months is sufficient for this to occur. For these reasons, a cost-benefit analysis of the financial benefits of post-contractual competition clauses should be carried out at the contract drafting stage.
Compensation for non-competition, on the other hand, does not apply in the event of serious breaches of duty by the franchisee in relation to the non-competition clause – both during and after the term of the agreement. In these cases, compensation payments are also possible.
Early Contract Termination through Extraordinary Cancellation
Against the background of increased planning security, franchise agreements in Germany are often concluded for a contract term of 5 or 10 years, while ordinary termination is excluded. In addition to the agreement of a cancellation contract, extraordinary termination remains possible in the event of serious breaches of the contract. These include, for example, the franchisee’s competitive activities or the franchisor’s continuous delivery of defective goods.
Requirements for Extraordinary Terminations in Germany
In the event of extraordinary termination, all circumstances of the individual case must be considered. For example, the franchisor must observe the principle of equal treatment when giving notice of termination. If the franchisor has not given notice of termination for similar behaviour by other franchisees, it may be invalid due to a breach of the principle of equal treatment. In addition, termination penalties that oblige the franchisor to make certain repayments in the event of early termination are only rarely permissible.
Franchise agreements often stipulate a special right of termination for franchisees if their franchise outlet is not profitable. However, franchisees may allow themselves to terminate the contract without notice if their business is unprofitable. Therefore, this termination option only exists if the franchisor caused the lack of profitability.
Extraordinary termination is sometimes also justified by several minor breaches of contract – for example, damage to the reputation of the brand and the franchise system as a whole.
Practice Group: German Corporate Law
Practice Group:
German Corporate Law
Contact our Lawyers for Germam Corporate Law
Please use our online form to outline your request to us. After receiving your request, we will make a brief initial assessment based on the facts described and provide you with a cost offer. You can then decide whether you would like to engage our services.
