If the former affiliate plays smart

Franchising is, first and foremost, a contract. The contractual formula that regulates commercial affiliation is the cornerstone upon which the relationship between the Franchisor and its Franchisees rests. However, since, as Aristotle says, “If love prevailed on earth, all laws would be unnecessary,” it is always necessary to pay close attention not only to how the franchising contract was set up but also to how to act promptly and effectively in the face of what we feel to be “clear violations” of the contract itself. This month’s case concerns precisely an episode of contractual violation and the countermeasures adopted.

The fact

A brand operating in the restaurant sector opened a franchised location in an area not far from the flagship location. However, one year into the business, the affiliate, citing dubious reasons about the profitability of the model (despite a turnover of 550 thousand euros) and the difficulties of managing personnel, decided to terminate the affiliation contract. This is a legitimate action if the ongoing activity proves to be unprofitable to the point of being unsustainable (however, this needs to be demonstrated). However, the affiliate left open debts both regarding royalty fees and the payment for raw materials and products received from the Head Office. In this way, the affiliate caused a double damage to the Franchisor (contract termination and unpaid credits).

Issue: A murky post-termination situation

Three months after termination, the affiliate closed the old company but opened a new one with a relative as the sole director, with other family members as company members. Although he does not appear, the direct family relationship leaves little doubt about the potential bad faith of the affiliate.

As for the business, only the name and sign were changed, while personnel, furnishings, and equipment remained essentially unchanged. Not only that, in addition to using equipment and premises, as well as the same clientele, the commercial formula remained unchanged.

In light of what has been blatantly revealed, there is, in fact, a violation of the non-compete clause, typical of the franchising contract, even if the violation was not committed directly by the affiliate but by indirectly connected individuals (relatives).

However, there is also another violation, not immediately apparent.

When an affiliate terminates the franchising contract and ceases activity, they must, according to the contract, guarantee the Franchisor the right of first refusal, i.e., give the Parent Company the opportunity to acquire the business in question and thus settle with the exiting affiliate. In this case, there is a questionable transfer of a new business start-up that effectively conceals a direct transfer of the company, despite the closure of the old company.

We are faced with two major violations: the breach of the non-compete clause and the failure to offer the right of first refusal, where it would be possible to demonstrate the transfer of the business unit.

Solution: Prompt and Targeted Legal Actions

First thing to do: injunction for payment to recover the outstanding debt resulting from the non-payment of royalties and raw materials supplied from the affiliate. This action does not present particular difficulties since the contract specifies what, how, and when to give to the franchisor and, if the affiliate fails to meet that obligation, the franchisor has the right to be paid, producing unpaid and contested invoices in the documents.

Secondly, it is necessary to act promptly through the special recourse under article 700 of the Civil Procedure Code, as the prerequisites provided by law are present: the periculum in mora (that is, a somewhat likely damage to the franchisor that can worsen over time) and the fumus boni iuris (that is, the clear reasonableness of the damaged party to request extraordinary proceedings), since there is undue exploitation of the know-how (the business has retained staff, equipment, and an identical commercial formula), resulting in customer diversion from the affiliated brand, thus causing a loss of profit for the parent company that increases progressively over time.

The extraordinary recourse thus obtained provides for a special trial without contradiction to block the commercial activity in question. In this way, first of all, the damage is limited, and then, proceedings are carried out with an ordinary trial to request compensation not only for the due but also for what was subtracted. The action of the extraordinary recourse does not preclude other actions such as injunctions for payment and ordinary judgments for the aforementioned violations and criminal actions that, however, have less rapid times.

It is important to remember, starting from this example, that at the basis of a franchising project, there must be a solid contract, but that this does not always prevent a dishonest affiliate from acting against it (otherwise it would be an almost perfect world). So, it is important to be ready for any eventuality and to act with decisiveness and promptness.

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