Update: Effectiveness of jurisdiction ­agreements with business founders

In its judgment dated 31 May 2021 (Case 10 O 107/19) Berlin Regional Court surprisingly decided that jurisdiction agreements made with business founders in franchise agreements are ineffective. In doing so, it contradicted the seemingly prevailing case law and literature. We previously reported on this judgment in our article dated 6 October 2021.

Berlin Court of Appeal has now repealed Berlin Regional Court’s decision and gone along what is apparently the prevailing opinion. It has confirmed that jurisdiction agreements agreed with franchisees who are business founders can be entered into effectively.

Judgment of Berlin Court of Appeal

Berlin Court of Appeal’s judgment concerned the following jurisdiction agreement contained in the franchise agreement:

“The parties agree that the regional court at the location of the franchisor's registered office shall have exclusive jurisdiction for any lawsuit related to or arising under this franchise agreement.”

While Berlin Regional Court held that the franchisee already had to be considered a merchant before the franchise agreement was signed in order for the jurisdiction agreement to be effective under section 38 of the German Code of Civil Procedure, Berlin Court of Appeal justifies the effectiveness of the jurisdiction agreement as follows:

• It begins by stating that a jurisdiction agreement pursuant to section 38 of the German Code of Civil Procedure can also be effectively concluded in the contract which establishes the status as a merchant that is required for this in the first place. It maintains that it is not necessary for the party to already be a merchant at the time the jurisdiction agreement is entered into. Accordingly, it states that section 38 of the German Code of Civil Procedure is also to be applied to merchants who are in the process of setting up a business.
• The Court points out that no different interpretation follows from the wording of the procedural provision (section 38 of the German Code of Civil Procedure) which refers to “merchants”. It reasons that as this term is not defined in procedural law, the term for “merchant” used in commercial law must be used (section 1 of the German Commercial Code). Both terms are thus to be interpreted uniformly.

• The Court explains that section 1 (1) of the German Commercial Code states that a “merchant within the meaning of this Code is a person who carries on a commercial business.” It holds that the phrase “carrying on a commercial business” is certainly to be seen as entering into the relevant contract establishing the commercial activity – in this case the franchise agreement. By entering into the contract, the franchisee is expressing to a third party in civil-law legal transactions that it will be carrying on a commercial business from that time. Thus the Court believes that it would not make sense to wish to still regard the decisive entrepreneurial founding act a business as private but to then regard every other subsequent action unquestioningly as being commercial.
• The Court of Appeal continues that nothing to the contrary arises from the point of view of consumer protection law, arguing that anyone deciding to carry on a certain commercial or independent freelance activity and to enter into transactions with the aim of taking up an entrepreneurial activity is exposing themselves to the “rougher winds” of commercial business as opposed to consumer transactions. And they cannot still claim protection in the consumer sphere in relation to their future business partners and possibly competitors. It adds that above all those acquiring a business or entering into a commercial agency or franchise agreement in order to engage in commercial activities in the future cannot claim protection as a consumer for this “founding transaction”.

In view of these arguments, for the jurisdiction agreement to be effective it is sufficient for the enterprise that is to be operated after the conclusion of the franchise agreement to undoubtedly be intended as a commercial business.

Consequences in practice

All in all, in its judgment Berlin Court of Appeal follows what appears to be the prevailing opinion in case law and literature and makes clear that it is correct that jurisdiction clauses can also be effectively agreed with franchisees who are business founders. Berlin Regional Court’s arguments to the contrary were unconvincing. To date, practically every franchise agreement provides for a jurisdiction agreement favouring the location of the franchisor’s registered office, even if the franchisee is merely a business founder at the time the franchise agreement and jurisdiction agreement are signed. With this judgment Berlin Court of Appeal now also provides clarity for jurisdiction agreements with business founders intending to designate Berlin Regional Court as the court of competent jurisdiction. Despite this, since a decision by the German Federal Court of Justice is still outstanding, care should still be taken when agreeing jurisdiction agreements with franchisees who are business founders.