International Franchise Agreements: Choice of Law and Jurisdiction Clauses.

Background

Franchise agreements, especially master franchise agreements and area developer agreements, are often international in scope. The franchisor may have its headquarters in the United States, Australia or Switzerland, while the franchisee is domiciled in Germany. The question of choice of law and jurisdiction plays an important role, especially where the franchisor is a non-European enterprise. Frequently the franchisor succeeds in imposing the law of its home country and also specifies a place of jurisdiction in its favour. In such cases the contractual clause will stipulate that the German courts have jurisdiction only where there is an infringement of the franchisor's industrial property rights; this allows the franchisor to respond swiftly and effectively should the franchisee infringe its trademarks.

Under German law, such agreements on choice of law and place of jurisdiction are generally unproblematic. They do not violate private international law; nor do they unreasonably prejudice the franchisee in the sense of the law on standard business terms - one reason being that, as a rule, the parties to an international franchise agreement are businesspeople who as such are generally in a position to assess the risks of such clauses. Should a franchisee have recourse to a German court with regard to a dispute with the franchisor, the court would have to refuse jurisdiction in view of the legal situation.

This scenario is relevant where a franchisee attempts to enforce a claim for compensation against the franchisor before a German court. Under German law, in certain circumstances a franchisee can bring a claim against the franchisor upon termination of a (master) franchise agreement. The claim arises from the fact that the franchisee solicited customers for the franchise system and the franchisor profits from the franchisee's activities. The legal basis for the claim is Section 89b of the Commercial Code, a provision under the law on commercial agency. Since a franchisee is to a certain extent comparable with a commercial agent according to German legal opinion, in certain circumstances Section 89b can apply to franchisees by analogy. The development of the law on commercial agency is therefore of correspondingly major relevance to franchising.

In a recent decision the Higher Regional Court of Munich held, with regard to a German-US commercial agency agreement stipulating the jurisdiction of US courts in case of dispute, that the mandatory provisions on the commercial agent's claim for compensation under German law cannot be undermined by such a stipulation.(1) The specific consequence of the decision was that the commercial agent was entitled to sue the US enterprise in Germany, and not in the United States.

Facts

The plaintiff was a commercial agent resident near Munich and was engaged in the sale of semiconductor components. The manufacturer being sued was domiciled in California and manufactured semiconductor components. On the basis of a commercial agency agreement concluded in 1998, the commercial agent distributed the manufacturer's products in Germany and Austria on an exclusive basis. The agreement was governed by the law of California. The Californian courts had jurisdiction according to the agreement. In August 2004 the manufacturer terminated the distribution agreement. The commercial agent contested the termination and sought to obtain equitable compensation for a commercial agent under Section 89b before the Regional Court of Munich.

Decision.

The Regional Court of Munich held that it did not have jurisdiction to hear the dispute; rather, the Californian courts had jurisdiction. The commercial agent appealed against the decision. The Higher Regional Court of Munich held that a commercial agent is entitled to bring a claim before the German courts, at least where the manufacturer being sued has assets in Germany (the point of attachment).

The Higher Regional Court of Munich emphasized that a commercial agent's claim to compensation constitutes mandatory international (European) law which cannot be excluded by choosing another legal system. The German courts must therefore continue to have jurisdiction. In the opinion of the Higher Regional Court of Munich, such a case arises where a foreign court most probably would not apply mandatory international law. The court held that the objective and consequences of an agreement on jurisdiction can be that the law of the country whose exclusive jurisdiction is agreed will apply exclusively. However, the mandatory provisions of the German law on compensation of commercial agents (Section 89b of the Commercial Code) and on compensation in case of a post-contractual competitive restriction (Section 90a of the Commercial Code) cannot be undermined upon termination of an agreement if the law of the chosen jurisdiction does not allow a commercial agent to bring a compensation claim. According to the Higher Regional Court of Munich, this is the case if there is a clear risk that (mandatory) German law will not be applied by the foreign court.

According to the view taken by the Higher Regional Court of Munich, there are serious doubts as to whether the Californian courts would apply the German legal provisions on compensation for commercial agents in view of the choice of law clause. A Californian court could take the view that the contractual relationship between the parties was governed by Californian law alone, since there are no ties to EU directives or European Court of Justice case law. The judgment is not final.

Implications for Franchising

The judgment handed down by the Higher Regional Court of Munich is well reasoned and logical. It is highly probable that, due to the jurisdiction of the Californian courts, the mandatory provisions on compensation for commercial agents under German law would ultimately be undermined. However, as long as a commercial agent's contracting partner has assets (eg, claims against customers and shares) in Germany, the commercial agent can sue his or her contracting partner in Germany for payment of the compensation despite the existence of a conflicting clause on jurisdiction. The judgment is therefore of considerable relevance to international commercial agency agreements, insofar as a governing law and place of jurisdiction in a country outside the European Union are agreed. The question of whether commercial agent will be able to enforce such a judgment in another country if the assets within Germany are too insubstantial is a different story altogether.

Yet the decision is unlikely to have significant implications for franchising. It is true that a franchisee - like a commercial agent - might be able to claim compensation pursuant to Section 89b. However, under German law, the claim arises only under the application by analogy of the law on commercial agency to franchisees. Section 89b is mandatory international law only if the person concerned is a commercial agent in the sense of the law. This is because Section 89b resulted from the 1986 EU Directive on Commercial Agents, which is aimed at the protection of commercial agents alone, and not other sales agents.

Franchisees do not fall within the ambit of the directive, which is why a franchisee's compensation claim through the application by analogy of Section 89b will not constitute mandatory law within the context of private international law. If the parties to a (master) franchise agreement agree that the agreement is to be governed by, for example, Australian law, then the franchisee will be unable to bring a compensation claim because German law is not applicable. However, in the absence of a court judgment on this issue, it is possible that a German court will nevertheless qualify the franchisee's compensation claim as being mandatory German law - with the relevant consequences for an agreement on jurisdiction. In such case the decision could be of relevance to franchising after all.

"International Law Office"