Case law on franchising abroad

In general, this column focuses on Dutch law, as well as Dutch jurisprudence, which is of course not surprising given the background of the average reader. Nevertheless, it might be nice to look at a judgment of a foreign, ie an English, judge and compare its judgment with the judgment of a Dutch judge in a – as far as possible – similar matter.

In any case, it is important to note in advance that the English legal system differs substantially from the Dutch legal system. For example, the English legal system is based on the “Common Law”, which – very briefly – means that the judges ‘rely’ heavily on previous case law to determine the scope of the law. The judiciary is in fact the most important source of law in England. This is in contrast to the legal system in the Netherlands (“Civil Law”), where previous case law certainly plays a role in determining what is law, but where the legal texts themselves continue to play a dominant role.

Two judgments will be discussed below, first one from the Netherlands and then one from England, which may be exemplary of the differences in legal systems in both countries. The theme of both judgments is the interpretation of a contractual clause in an agreement and the way in which the court should resolve any ambiguities in such a clause.

The Dutch verdict

A franchisee operated a Formido DIY store from 1998 to 2008. The franchise agreement includes a contractual clause on the basis of which – in short – the franchisee is obliged, if he wishes to sell the hardware store to a third party during the term of the franchise agreement, to first offer the hardware store for sale to the franchisor. The franchisee indicated at some point that he wished to terminate the cooperation with the franchisor on April 28, 2008. After the termination of the franchise agreement, the franchisee would like to sell the hardware store to a third party.

Because the franchisee intends to first sell the hardware store after the term of the franchise agreement, the franchisee is of the opinion that he is not obliged to first offer the hardware store to the franchisor according to the contractual clause. After all, this clause only applies if the franchisee wishes to sell the hardware store during the term of the agreement. The franchisor, in turn, is of the opinion that the contractual clause also applies at the time when the actual disposal takes place after the termination of the franchise agreement, but if the intention to sell has been announced earlier.

The Dutch court is of the opinion that the answer to the question of how the relations of the parties are regulated in a written contract cannot be determined on the basis of a mere linguistic interpretation of the provisions of that contract. After all, the answer to that question also depends on the meaning that the parties could reasonably assign to these provisions in the given circumstances and on what they could reasonably expect from each other in this regard. For this reason, the court considers the moment at which the intention to sell the hardware store comes about more relevant than the moment at which the hardware store is actually sold to third parties. Insofar as there is any ambiguity about the scope of the contractual clause, this ambiguity will be resolved by making use of reasonableness and fairness.

The English verdict

The English court takes a slightly different approach to interpreting a contractual term in the present case. In this case, the court had to assess to what extent a post-contractual non-compete clause was legally valid.

After the franchise agreement was terminated at the end of 2007, (former) franchisee Mr Kerr continued his activities as a car paint repairer in the same building as before, but not under the flag of the franchise formula and without using formula-specific products.

The franchisor believed that Kerr was in breach of the post-contractual non-compete clause of the franchise agreement. The text of the clause in question stated – briefly stated – that a (former) franchisee was not allowed to develop any activities that would compete with “The Business” within “The Territory” for 12 months after the termination of the franchise agreement. In the franchise agreement, “The Business” was described as the franchise formula.

Because Kerr had ceased to be a franchisee of the formula in question, there was effectively no longer “The Business” within “The Territory” to compete with. A new franchisee of the formula therefore first had to establish itself within “The Territory” before there could be competition with “The Business”. This was obviously not what the franchisor had intended to arrange with a non-compete clause; he obviously wanted Kerr to cease his activities outright.

Although the English court immediately establishes that the post-contractual non-compete clause is actually nonsense, it sees no reason to protect the franchisor by correcting the obvious design errors in the contract. The court follows a restrictive and purely linguistic interpretation of the clause and finds that the clause has no effect on which the franchisor can rely.

Such an interpretation of a clause is therefore considerably different from the interpretation used by the Dutch court in case 1. After all, in that case not only a purely linguistic interpretation of the franchise agreement was taken into account, but also the sense that the parties could reasonably assign to the provisions and what the parties could reasonably expect from each other. It is therefore not improbable that the English question in the Netherlands might have had a completely different outcome.

The lessons that can be drawn from this are – firstly – that a clause in a contract should be as clear as possible to prevent discussion and – secondly – that it is essential to call in specialized legal assistance if one is involved in a legal dispute where foreign law applies.

Ludwig & Van Dam franchise attorneys, franchise legal advice