Franchise arrangements often involve a three-way relationship whereby franchisors enter into commercial leases with landlords and then sublease the rented premises to franchisees. Such leases often contain an exclusivity clause limiting the landlord's ability to lease nearby commercial space to competitors of the franchise network. The Superior Court of Quebec recently confirmed that exclusivity clauses must be interpreted and applied restrictively so as not to unduly interfere with the parties' freedom of contract.
The Ontario courts have recently endeavoured to clarify the outer limits of the parameters within which a franchisee may exercise its right to rescind a franchise agreement. A long-awaited Ontario Court of Appeal decision sends a clear message to the lower courts that a franchisee's right to rescission is an exceptional measure that should not be granted lightly, and that the terms and conditions negotiated between a franchisor and its franchisee cannot be ignored.
The Ontario Court of Appeal overturned a lower court's finding that a deficient disclosure document may be forgiven if the franchisor has provided the franchisee with sufficient information to make an informed decision regarding the acquisition of the franchise. It also held that, where disclosure is insufficient, rescission may be granted regardless of whether the franchisee has read the contents of the franchise disclosure.
Renewal clauses are common in commercial contracts, particularly in the case of franchise agreements. The Supreme Court recently upheld the validity of a clause which had the effect of allowing a franchisee to renew a franchise agreement perpetually. In its landmark judgment, the court affirmed the lower courts' determination that a renewal clause which does not limit the number of times that a contract of affiliation may be renewed is legal pursuant to Quebec civil law.
Until recently, there was significant doubt as to the validity of fees payable by professional franchisees on the basis of professional revenue. However, two decisions in Quebec have established certain conditions for such fee payments to be considered valid, in particular that the fees are related to the fair market value of the goods or services provided to the professional.
Where a court considers that a lack of information (or inaccuracy in this regard) has deceived a franchisee, it may hold the franchise agreement null and void and, in some cases, find the franchisor liable for damages. The challenge for franchise agreements is that restitutions made to franchisees often include entry fees and royalties paid by the franchisee during the agreement, while the services provided by the franchisor may not be restituted as such.
The French courts often address the issue of whether a franchisor has properly fulfilled its assistance obligation. In a recent case, the Paris Court of Appeal held that this obligation is exclusively technical and commercial and constitutes purely a 'best efforts' obligation. This decision has confirmed that franchisors need not provide financial assistance to their franchisees. Instead, the assistance obligation consists only of helping the franchisee to operate the business from a commercial and technical standpoint.
The extent of the group in the context of a franchising network has given rise to a number of court decisions, leading to some uncertainty for employers as to the scope of their reassignment obligations. A set of bills was recently enacted as part of the priority measures intended to bring greater flexibility to labour legislation. One such measure provides a narrow definition of a 'group' in relation to the obligations to reassign employees who are dismissed either for economic reasons or for personal inability.
One of the key components of any franchise agreement is the transmission of know-how by the franchisor to the franchisee. Absent this, the agreement may be held null and void or requalified as a mere distribution agreement. In a recent decision, the Supreme Court held that the absence of any pilot outlet run by the franchisor does not amount to a lack of know-know transmission.
Under French civil law, a party to a contract has a duty of loyalty to its contracting party in the performance of the contract. The Supreme Court recently applied this duty of loyalty to a franchisor which had concluded a framework contract with a master franchisee. The court held that the franchisor did not cooperate with, assist or advise the master franchisee loyally. The court also held that it had terminated the framework contract in an unfair manner.
The Bochum Regional Court recently looked at whether a franchisee's contractual obligation to operate a business can be enforced by way of an interim injunction. To grant an interim injunction to enforce the obligation to keep the business open, it must be demonstrated that the franchisor faces serious losses at least equivalent to a threat to its survival or to drawbacks that cannot later be remedied.
The Federal Court of Justice recently ruled that an authorised dealer, such as a franchisee, has no compensation claim in analogous application of the regulation governing sales representatives contained in the Commercial Code if the franchisor is contractually obliged to block the customer data provided to it by the franchisee, to discontinue using it and to delete it at the request of the sales intermediary when the contract is terminated.
The Federal Court of Justice recently criticised a franchising advertising flyer in terms of competition law. One interpretation of this judgment is that it makes the advertising of franchise systems significantly more difficult. However, this point of view does not ultimately do justice to the decision, as the judgment does not fundamentally question the typical advertising of franchise systems.
A Brandenburg Higher Regional Court decision regarding the payment of franchise and marketing fees in arrears shows the importance of a substantiated presentation of a claim, as well as the importance of accurate, transparent and comprehensible billing by franchisors. The court could not ascertain whether there were unpaid franchise or marketing fees, as the franchisor failed to present sufficient facts demonstrating the exact amount of the franchise and marketing fees in the respective timeframes.
The Federal Supreme Court recently ruled that a franchisor's supplement containing prices stipulated as being "non-binding recommendations" obtainable only "in participating markets" constituted an act of unfair competition as the disclaimer was insufficient. The judgment raises questions about disclaimers, franchisor advertising obligations and whether franchisors are prohibited from enlisting franchisees to participate in a promotion.
Franchising provides a flexible model for growth or re-engineering, with a variety of structures to meet different needs. Of all of the structures, the joint venture franchise is the least understood and most likely to cause difficulties if not structured correctly. In order to understand why this is so, it is necessary to consider the rationale for using the joint venture model and the manner in which such a relationship should be structured.
Executed in the right way, a business's international franchising strategy can become a core asset, helping to secure the long-term future of the business as a global brand and hedging the impact of economic risks in the domestic market. However, such ventures must be carefully structured to reflect the needs of the business, the target market and the franchise partner.
It is common in franchise relationships for the franchisor to execute a property lease agreement to ensure that, on termination of the franchise agreement, the premises will be available for the franchisor's own use or that of new franchisees. However, the franchisee can refuse to vacate the premises and claim for unlawful termination of the franchise agreement. A recent Court of Milan decision confirms that a precautionary injunction can be obtained to have premises vacated.