Business transfer franchisee: franchisor properly facilitates franchisee in settlement

On November 12, 2014, the District Court of Rotterdam ruled in a case between the franchisor and the franchisee about the lawfulness of the termination of the franchise agreement.

A franchise agreement existed between the franchisor and franchisee for a period of ten years. The franchisor has terminated the franchise agreement at the end of the term, for reasons including the lack of performance by the franchisee. Because the franchisee promised to get better, the franchisor extended the franchise agreement by a period of 10 months after the agreed ten years had expired. During this so-called trial period, the franchisee could still show that he could improve his performance. If that were the case, the franchise agreement would still be extended for another 10 years. Because it soon became apparent within that 10-month period that the franchisee could not fulfill his commitments, the franchisor has already indicated after six months that he will not extend the franchise agreement beyond the agreed 10-month period. It was then agreed between the parties that the franchisee himself would take care of the sale of his company. Because the franchisee still had not sold his company after the 10 months had expired, the franchisor granted him a new period of 3 months to still be able to sell his company. One of the conditions set by the franchisor was that the sales price should be in line with the market, so that the sales process would not take too long. After those 3 months, the franchisee still had not sold his business. At that point, the franchisor had had enough. At the end of that period, the franchisor took over the franchisee’s establishment because the franchise agreement had meanwhile been terminated. The franchisee was no longer entitled to use the franchisor’s formula. In the proceedings initiated by the franchisee against the franchisor, the franchisee accuses the franchisor of acting unlawfully, or acting contrary to the franchise agreement or the ensuing principles of reasonableness and fairness, because the franchisor allegedly did not give it the opportunity to business and the franchisee claims that he has suffered damage as a result.

The court ruled that the franchise agreement provided that the collaboration between the parties would end after 10 years. The court also states that the franchisee has not met the condition for continuation of the cooperation after the period of 10 months. The court also ruled that the franchisor was not obliged to extend the agreement for another 10 years. The fact that the franchisee has not been able to sell his business within the term is entirely at his own expense and risk.

The court finds that there is no wrongfulness on the part of the franchisor by terminating the franchise agreement and not extending it for a further period of 10 years. Furthermore, there is no question of unlawfulness by not giving the franchisee a longer period to sell his company.

The conclusion we can draw from this is that unlawfulness is unlikely to arise if the agreement is terminated after the period agreed between the parties, certainly if the franchisor facilitates settlement properly in accordance with its duty of care.

Mr AC van Engel – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond? Mail to vanengel@ludwigvandam.nl