When Franchisors Go KO! Legal Defeats

Kramer vs. Kramer, or if you prefer, War of the Roses. The relationship between franchisors and franchisees can lead straight to the courtroom, with harsh judgments and significant economic damages. Often, it’s the franchisor who bears the brunt, making gross errors that tarnish its image and reputation. For this reason, I’ve always maintained that prevention is the best Legal Strategy in the Franchising field.

In this article, I’ll tell you about some judgments that demonstrate how the franchising business is no child’s play but requires great attention and caution, especially in the legal area.

Until the Last Round

The first judgement I’ll tell you about is from the Trani Court, dated February 5, 2018. The case sees a franchisor of food products suing one of its franchisees. The franchisor’s accusations against the franchisee are numerous:

• They terminated the contract late.
• They did not purchase the franchisor’s products as per the contract.
• They did not participate in the group’s advertising initiatives.
• They removed the brand’s sign from the point of sale.

On the other side of the ring, the franchisee has no intention of being the sacrificial victim. With a surprise move, they appear in court, arguing that the franchising contract should be annulled because the franchisor did not deliver a copy of the contract and its attachments at least 30 days before the stipulated date, as required by law.

Cornered, the franchisor emphasizes that there is a clause in the contract indicating that the franchising contract was indeed delivered 30 days in advance of the stipulation. Unfortunately for them, they couldn’t prove it in court.

How did it end? The judge found that there was a breach by the franchisor, but it wasn’t enough to annul the contract, as requested by the franchisee.

A Fatal “One-Two“

The protagonists of this judgment, issued by the Milan Court on November 26, 2018, are two franchisees who sued a franchisor, speaking ill of them.

The story here is quite interesting: the two franchisees are former employees of the franchisor. The franchisor persuaded them to set up two companies and then sign franchising contracts for managing two points of sale of the same franchisor.

According to the two, the franchisor boasted about their projected earnings, promising a certain operating profit, which, however, did not correspond to what was actually achieved. Furthermore, it seems that the franchisor also persuaded one of the employees to give up their TFR (severance pay) precisely because of the “significant income” they would have had by signing the franchising contract.

How did the story end? The judge found the franchisor’s behavior incorrect, as they did not give the franchisees the opportunity to verify the actual profitability of the business. The judge did not buy the franchisor’s defense that they had “acted in good faith.” Good faith or bad faith are subjective categories, while objective are the damages suffered by the franchisees and the pre-contractual liabilities of the franchisor.

Technical KO

In this third story, we’re at the Milan Court, in a judgement dated March 29, 2017. Here we have a contender who doesn’t spare accusations and blows against their opponent.

The protagonist franchisee requests the annulment of the franchising contract due to the violation of pre-contractual information obligations. Furthermore, they request the annulment of the clause by which the franchisor had suspended the contract’s execution.

It’s a double defeat for the franchisor. Regarding the first request, the judge believes that the franchisor did not fulfil several contractual obligations, including training, providing advertising material, and providing a secretarial service, as per the contract. Furthermore, an aggravating factor is emphasized: the franchisee demonstrated that the franchisor, through its call center, directed potential customers to points directly managed by them.

The judge then rejects the franchisee’s request to declare the clause that gives the franchisor the power to suspend the contract’s execution null and void. However, they declare that the franchisor did not have the right to exercise it; the franchisor’s request for suspension is illegitimate.

For all these reasons, the judge accepts the franchisee’s request to terminate the contract due to the franchisor’s serious breach.

Defeat Before Stepping into the Ring

At the Genoa Court, on March 8, 2013, two reasons clash: on one side, the franchisee requests the resolution of the commercial affiliation because the franchisor did not deliver all the attachments provided for in the documentary phase, but only the contract and the trademark. On the other side, there are the franchisor’s reasons, which accuse the franchisee of not having paid some invoices.

Which of these two breaches is more serious according to the judge?

The franchisor’s shortcomings. The judge considered the franchisor’s non-compliance more serious than the non-payment of invoices. Moreover, adding insult to injury for the franchisor, according to the judge, they made two mistakes: they entered into a contract with someone who did not offer payment guarantees. After all, the selection of franchisees remains one of the most delicate aspects of creating a network, as I explain in Chapter 8 of my book “Let’s Franchise.”

These examples demonstrate well how the contract is the heart of franchising, but concluding behaviors are equally important. Therefore, it is necessary to establish a legal framework with the help of experts to minimize risks for both the franchisor and the franchisee. To learn more about how to draw up a legally unassailable franchising contract, read Chapters 5 and 6 of my book: “The Secrets of the Franchising Contract.”