Interim dissolution of the franchise agreement by the franchisee in the event of loss-making operation possible?

Franchise agreement, franchisor, franchisee, non-competition clause

The Court of Appeal recently rendered a judgment in a matter that is very relevant to the franchise practice.

The core of the issue lies in the question of whether the collaboration may be terminated prematurely on the basis of a license agreement if the agreement has been entered into for a definite period of time, in this case 20 years. No interim termination option has been agreed in the agreement, other than limited to specific grounds stated in the agreement, which did not arise in this case. Referring to Supreme Court jurisprudence, the Court concludes “that such cooperation cannot, in principle, be terminated prematurely, but that an exception to this can be accepted if it is based on unforeseen circumstances, i.e. not taken into account in the agreement, which are not for the account of the terminating party and which are of such a serious nature that the other party cannot expect, according to standards of reasonableness and fairness, maintenance of the agreement until the agreed time. In other words: if there are serious, unforeseen circumstances, it may no longer be reasonable at any time for one party to hold the other to the license agreement, and by analogy the franchise agreement.

According to the Court of Appeal, this was the case here because interest in the activities covered by the agreement declined (declining interest in the application of a certain adhesive technology), which meant that the agreement as such began to lose its raison d’être. It is precisely here that the rub is now in franchise relationships. After all, what if a declining market means that a franchisee, or large groups of franchisees within the same format, are faced with such declining operating results that continued exploitation can no longer reasonably be required? There are in any event circumstances (external, notwithstanding whether the state of affairs is not attributable to the franchisor or franchisee) that are of such a serious nature that the loss-making franchisee can no longer be expected to continue the franchise agreement without further ado. to put. With this ruling, the way has been cleared to classify such situations under the justified denominator of unforeseen circumstances, which can herald an interim end of the franchise relationship. The reasoning that a contract is a contract is therefore no longer valid. Economic circumstances (from the outside), which cast a fundamentally different light on the franchise relationship than before, can therefore lead to a justified interim termination of the franchise agreement.

The question then arises of what the tenability is of a franchise agreement that, under those circumstances, attempts to hold a franchisee to a non-competition clause. More about that next time.

Mr Th.R. Ludwig – Franchise Attorney

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