Drafting a Franchise Agreement: Avoid Standard-Terms Pitfalls Early

A successful business cannot be turned into a sustainable franchise network simply by drawing up a detailed template agreement. Its provisions must also stand up to legal scrutiny. If you are preparing franchise agreements for the first time, you should therefore plan for a review under Germany’s rules on standard terms and conditions (Allgemeine Geschäftsbedingungen, or AGB) from the outset. This guide explains how to prepare your draft for a focused legal review before presenting it to prospective partners.

1. Understand why your template agreement is subject to AGB review

Germany has no standalone franchise act. Franchise agreements are governed in particular by the general law of obligations in the German Civil Code (BGB), alongside commercial, antitrust, trade mark and unfair competition law, depending on the provision concerned. Sections 305 to 310 BGB are particularly important for pre-drafted contract terms.

If you prepare a contract for use with several prospective franchisees and present it to them, you will generally be using standard terms and conditions. Calling it a ‘partnership agreement’ does not change that. Nor does a professionally produced document or both parties’ signatures automatically make every clause enforceable.

Franchisees typically act in a business capacity. Special rules for business-to-business transactions therefore apply: the prohibitions on particular clauses in sections 308 and 309 BGB do not apply directly. However, the principles behind them may be relevant to a review under section 307 BGB. Unclear terms or terms that place the other party at an unreasonable disadvantage therefore remain problematic, even between businesses.

The European Code of Ethics for Franchising provides additional standards for responsible cooperation. However, it is not legislation and does not replace statutory scrutiny of contract terms. Simply referring to the code does not make an agreement enforceable.

2. Bring all binding documents together

The review must not stop at the main agreement. Obligations may also appear in schedules, price lists, IT terms of use or binding references to the operations manual. Whether particular provisions qualify as standard terms and conditions depends on their content and how they are incorporated, not merely on their heading.

Start by creating a document register. For each document, record:

• its exact title and version;
• the rights and obligations it sets out;
• where the main agreement refers to it;
• any potential overlap with other documents;
• who is responsible for keeping its content up to date.

Next, use simple examples to check for inconsistencies. Does the agreement promise an included service while a schedule provides for an additional charge? Does the manual impose an obligation whose scope is not apparent from the agreement? Inconsistencies like these make working together more difficult and may have legal implications.

Work with your legal adviser to establish a clear order of precedence for the documents. This helps with interpretation, but it does not remedy invalid or legally ‘surprising’ clauses. Commercially significant obligations should be clearly visible, not hidden away in inconspicuous schedules.

3. Prioritise clauses by their burden and clarity

Effective preparation does not mean assembling legal boilerplate yourself. A more useful approach is to create a checklist that explains to your legal adviser the commercial purpose behind each sensitive clause.

Start with provisions that shift risks or costs disproportionately onto the other party. These include, in particular, broad exclusions of liability, contractual penalties, fixed-sum damages provisions and restrictions on rights of set-off or retention. Such clauses are not prohibited outright, but their precise wording and effect require careful review.

For each clause, note three points: What legitimate interest is it intended to protect? What burden does it place on the franchisee? Is there a less onerous solution? This turns a general desire for ‘maximum protection’ into a specific drafting issue that can be assessed.

Also test the wording for clarity: could an independent person with business experience understand when the provision applies and what its consequences are? Phrases such as ‘all costs incurred’, without a clear explanation of which costs are meant, warrant further questions.

Do not assume that a court will later narrow an excessive clause to an acceptable scope. As a rule, invalid standard terms are not rewritten in this way to preserve their enforceability. Under section 306 BGB, the rest of the agreement generally remains in force, with the applicable statutory provisions normally replacing the invalid term.

4. Keep clear records of review, negotiation and approval

Give your legal adviser not just the draft agreement, but the complete set of documents and your explanations of their commercial purpose. Ask for particularly onerous clauses to be reviewed expressly. For provisions that raise antitrust concerns, an AGB review alone is not enough.

Then distinguish between terms presented unchanged and agreements that have genuinely been negotiated. A choice between pre-set alternatives, handwritten additions or a statement that a term was ‘individually negotiated’ does not, by itself, prove genuine negotiation. The decisive question is whether the substance of the provision was genuinely open to negotiation. Individually negotiated agreements take precedence under section 305b BGB.

Document genuine negotiations and record agreed departures clearly. Thereafter, use only approved versions. Even well-intentioned, spontaneous additions made by the sales team should be reviewed before use.

Practical takeaway: Gather all parts of the agreement, flag provisions that place a one-sided burden on the franchisee and explain their commercial purpose. An early, documented review of standard terms provides a more reliable foundation for your franchise network than simply making your template agreement as strict as possible.