Franchise networks are striving to multiply their successes, rather than their failures!
Nevertheless, difficulties can sometimes arise between a franchisor and franchisee. Constructive solutions are urgently needed in such cases. Regarding constructive solutions, there is abundant literature on the need for effective communication and consultation between parties; and for mediation mechanisms both within and outside the franchise network.
In the event of contractual breach, and after Book 5 of the Civil Code having come into force (on January 1, 2023), parties to a franchise contract have a number of “unilateral sanctions” at their disposal.
The classic remedies (with one exception) are clearly listed in article 5.83 of the Civil Code, which states (our informal translation): ‘Unless otherwise agreed by the parties, the creditor has the following sanctions in the event of non-performance attributable to the debtor:
1° the right to performance in kind of the obligation ;
2° the right to compensation for damages;
3° the right to have the contract rescinded;
4° the right to reduce the price;
5° the right to suspend performance of the creditor’s own obligation’.
- The most obvious and undoubtedly fairest sanction is the exception for non-performance, the cornerstone of any two-sided (‘synallagmatic’) contract. If the franchisee fails to pay its invoices, the franchisor is entitled to suspend its services until payment is received, and vice versa.
- The right of a franchisee, who is dissatisfied with the franchisor’s services, to take legal action and claim a right to a price reduction (reduction of royalties, for example) also springs to mind. Moreover, the franchisee can apply such a reduction unilaterally by sending a written notification, provided that he or she justifies the reduction and ensures that it is proportional to the difference between the value of the service received and that agreed at the time the contract was concluded. If a franchisor fails to meet his marketing commitments, he may be obliged to reimburse the unspent budget to the franchisee.
- When a contractual breach worsens, either party retains the right to demand specific performance of the franchise agreement, or its termination, provided that the breach by the person who owes the obligation (the “obligor”) is “sufficiently serious”. Termination may result from (1) a court decision, (2) the application of an express resolutory clause, or (3) a notice sent by the obligee (to whom the obligation is owed) to the obligor. In the last two cases, immediate and unilateral action is possible without waiting for a court judgment, by sending a detailed letter for example. A franchisee who violates a non-competition clause is exposed to this severe sanction, as is a franchisor who is unable to supply its network notwithstanding its exclusive supply clause.
- In the event of termination of the franchise agreement, it goes without saying that the judge will also order compensation for damages suffered.
However, a more important question arises, which is whether these contractual sanctions (which can be combined as long as they are not contradictory), are really appropriate in the franchising context?
Is there a risk of irreversible unilateral decisions being taken too hastily, without waiting for review by a judge?
Certain limitations and restrictions exist that moderate the use of “unilateral sanctions”. A party must respect the specific conditions permitting use of unilateral sanctions (regarding termination, see art. 5.93 of the Civil Code) and must send a prior formal notice to the other party.
After a unilateral right has been exercised, an after the event (‘a posteriori’) judicial review remains possible, to verify that the right in question was not abused. Note that a notification by which an obligee invokes termination of a contract is ineffective if the conditions for termination (resolution/ beëindiging) are not fulfilled or if the termination is abusive (art. 5.94 of the Civil Code). Moreover, this article may lead to an exchange of termination notices between the parties, necessitating rapid judicial intervention.
CONCLUSION
The possibility for a disgruntled franchisee to unilaterally reduce royalties or withdraw could jeopardize the continuity of a franchise network, with detrimental effects on the entire network (both the franchisor and franchisees included). Therefore moderating, or even excluding some of these unilateral sanctions from the franchise contract may seem justified. A decision to do so should be motivated in a balanced way so as to remain within the limits of the ‘grey clauses’ provisions of article VI.91/5 of the Code of Economic Law and be in conformity with the requirements of article 5.73 of the Civil Code, which imposes the requirement of good faith in the performance of contracts and prohibits abuse of rights.
Benoit Simpelaere
Partner
benoit.simpelaere@flinn.law
+32 2 274 51 83
.
Leonard Hawkes
Of Counsel
leonard.hawkes@flinn.law
+32 2 274 51 88
.
Anne-Lin Vervaet
Associate
+32 2 274 51 91
.
Tatiana De Schepper
Associate
+32 2 274 51 87
.
FLINN.law
Avenue des Arts 46, 1000 Brussels, Belgium
+32 2 274 51 80
