Can a franchisor profit from a franchisee’s default?

Court of Amsterdam

It has already been noted in previous articles in this section that a post-contractual non-compete clause in a franchise agreement is, in principle, ‘normally’ enforceable, unless there are reasons to exclude or moderate the non-compete clause. If a (former) franchisee is therefore confronted with such a clause at the end of the franchise agreement, he actually has two choices: accept and comply with the clause, or violate the non-compete clause and take the risk that the (former) franchisor notices the violation and takes (legal) measures.

In the present case before the Amsterdam Court of Appeal there was a franchisor (B), which had included the father of an ex-franchisee (X) of franchisor (A) in its formula. The (terminated) franchise agreement between A and X contained a post-contractual non-compete clause, which – in short – prohibited X from joining B’s formula within a period of one year.

X’s father had not signed such a clause, so that in principle there was no (contractual) obstacle for X’s father to enter into a contract with franchisor B. However, X’s father was already elderly and had apparently never worked in the sector in question, so that franchisor A apparently began to suspect that X, by putting forward his father as a stooge, was evading the non-compete clause. In (previous) proceedings, franchisor A was indeed able to demonstrate that it was not X’s father, but X himself, who was the manager in the new company and that X was therefore violating the non-compete clause.

However, in the present proceedings A has aimed its arrows at franchisor B; after all, he could have known – in A’s view – that X’s father was only a stooge and that X was bound by a non-compete clause. By nevertheless cooperating in a construction whereby X would (actually) violate the post-contractual non-compete clause, B has benefited from X’s default. Franchisor B, however, takes the position of not being aware of any harm and only to have had contacts with X’s father. X was therefore not in the picture at all, let alone his non-compete clause, according to B.

According to the Court of Appeal, a party is not directly acting unlawfully if it contracts with another party and knows that, by contracting, this other party is not complying with an agreement with a third party (default). According to the Court of Appeal, there is first a question of unlawfulness if a) a party knows – or should know – of the (future) default of the other party and b) there are also special circumstances, which, for example, consider the seriousness of the harm to the third party, as well as the extent to which one party influenced the breach.

In short, it is therefore quite possible under certain circumstances for a franchisor to act unlawfully towards another franchisor by causing a franchisee to commit a breach of contract against the other franchisor. When a franchisee transfers from one franchise formula to another, it is therefore wise for all parties involved to make an extensive inventory of the scope of the franchisee’s post-contractual non-compete clause. An investigation, therefore, not only by the franchisee, but also by the ‘new’ franchisor, in order to prevent the ‘old’ franchisor from addressing him at any time – rightly or wrongly.

Mr JH Kolenbrander – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to coalbrander@ludwigvandam.nl