Buying a Franchise: Check Dispute Resolution and Jurisdiction Clauses

A franchise network depends on cooperation. Even so, disagreements can arise, for example over promised services or the interpretation of the contract. Before joining, you should understand how such disputes will be resolved. Dispute resolution clauses determine where you can enforce your rights, which procedural steps are required and what costs may arise. They should therefore form part of your legal due diligence before buying a franchise, rather than being left until the relationship comes under strain.

1. Understand the legal framework

Germany has no specific franchise legislation. Nor is there a requirement for franchise-specific registration with a public authority or official approval of the contract. The contractual relationship is governed primarily by the German Civil Code (BGB), the German Commercial Code (HGB), where applicable, and other general legislation. Court proceedings and arbitration are governed by the German Code of Civil Procedure (ZPO).

Franchise agreements are often drafted in advance for use with multiple partners. This makes the rules governing standard terms and conditions under sections 305–310 BGB particularly important. Even in business-to-business dealings, clauses that are unclear or place one party at an unreasonable disadvantage may be invalid, particularly under section 307 BGB. However, not all consumer protection rules apply unchanged in this context.

For buyers, this means that a dispute resolution clause is not valid simply because it appears in the standard agreement. Conversely, a jurisdiction clause that seems unfavourable is not automatically invalid. Have the specific provision reviewed alongside your legal status and the rest of the contract. Do not assume that you will be able to challenge a problematic clause successfully later.

2. Distinguish between jurisdiction and governing law

A choice-of-law clause determines which country's law is to govern the contract. A jurisdiction agreement, by contrast, concerns which national courts are to decide a dispute. Both may appear in the same paragraph, but they have different consequences.

In purely domestic German cases, agreements on jurisdiction made before a dispute arises are permitted particularly between parties with merchant status under section 38 ZPO. Not every self-employed business owner automatically qualifies as a merchant under German law. Especially when setting up a business, you therefore need to check whether the agreement is permissible in your particular circumstances. Different rules, particularly EU rules, may apply to cross-border contracts.

Before signing, check:

• Location: Which court is to have jurisdiction, and how demanding would it be to bring or defend proceedings there?
• Exclusivity: Is this the only court designated, or could other courts also have jurisdiction?
• Governing law: Is German law or another country's law to apply?
• Related agreements: Do any additional agreements contain conflicting provisions?

A foreign jurisdiction clause may mean additional translation, travel and legal advice. A choice of foreign law also warrants a separate review. It does not automatically override all mandatory German or EU rules. Ask for a clear explanation of why the proposed arrangement is considered appropriate for both parties.

3. Distinguish between mediation, conciliation bodies and arbitral tribunals

These terms may sound similar, but they describe different procedures. In mediation, a neutral person helps the parties reach their own agreement. The mediator does not decide the dispute. A conciliation body may propose a solution, depending on its procedural rules. Whether that proposal becomes binding depends on the applicable rules and agreements.

An arbitral tribunal, by contrast, decides the disputes covered by the arbitration agreement in place of a national court. Its award is generally binding; there is no review of the merits comparable to an ordinary appeal. National courts can set aside an arbitral award only on limited statutory grounds. The rules on arbitration are set out in sections 1025 onwards of the ZPO.

Do not, therefore, be satisfied with a label such as “partnership-based dispute resolution body”. Request the full procedural rules and clarify:

• Who appoints the people who will facilitate a settlement or decide the dispute?
• How is their independence ensured?
• Where will the proceedings take place, and in which language?
• What advance payments and fees are required?
• Who ultimately bears the costs?

Arbitration is not automatically cheaper than court proceedings. Its suitability depends, among other things, on the amount in dispute, the composition of the tribunal and the procedural rules. Confidentiality should also be expressly clarified rather than simply assumed.

4. Link escalation stages to deadlines and legal protection

A staged process can help preserve the working relationship: first, a discussion with a named contact, then mediation and, if necessary, a court decision. Problems arise when stages have no clear endpoint or one party can delay the next step indefinitely.

Insist on clear rules specifying how a dispute must be notified, when a response is due and when the next stage may begin. Also clarify what happens if the other party refuses to engage in discussions. Requirements to hold preliminary discussions should not, in practice, prevent access to urgent court relief.

Limitation periods are particularly important. An internal complaint does not automatically stop the limitation clock. Whether negotiations or a particular dispute resolution procedure suspend the limitation period depends on the statutory requirements. Have any steps needed to preserve your claims assessed independently of the progress of discussions.

Practical takeaway: Before buying, have the jurisdiction clause, choice of law, procedural rules and escalation deadlines reviewed together. A workable arrangement enables fair dispute resolution without unnecessarily restricting access to effective legal protection.