Continued activities of the franchisee do not violate a non-competition clause

A judgment was recently rendered in preliminary relief proceedings in which the preliminary relief judge ruled that the former franchisee had not violated the post-contractual non-competition clause. The preliminary relief judge came to this judgment because of the fact that the franchisor did not continue the activities carried out by the former franchisee after the termination of the franchise agreement.

In the case at hand, party A (an operator of a motor and motorcycle driving school) entered into a franchise agreement as the franchisor with party B (an operator of a tractor driving school) as the franchisee.

At some point, the franchisee terminated the franchise agreement and the franchisor argued that this termination was unlawful and that it also violated the post-contract non-compete clause. The franchisor therefore claimed (primary) compliance with the franchise agreement and (alternatively), insofar as the franchise agreement would have ended anyway, compliance with the post-contractual non-competition clause. The Court in preliminary relief proceedings rejected both claims, based on the following considerations.

Termination in accordance with the franchise agreement

The franchise agreement stipulates that it will be tacitly extended by two years after the expiry of the term, unless notice has been given. Furthermore, the franchise agreement stipulates that notice of termination must be given by registered letter with due observance of a notice period of six months.

The franchisor argued that the franchisee had failed to meet both requirements by not giving notice of termination by registered letter and by not giving notice of termination at the end of the term (January 1, 2023) with due observance of six months (i.e. no later than July 1, 2022) but only in November 2022 to cancel by May 2023.

The provisional relief judge considers that a notice of termination can be given without any form, but that this can be deviated from. In this case, this has been deviated from by stipulating that the cancellation must be sent by registered mail. The purport of this, however, is that more certainty can be obtained that the franchisor will take cognizance of the cancellation. Since in this case it was established that the franchisor had taken cognizance of the cancellation, the preliminary relief judge (in my view rightly) ignores this defense of the franchisor.

With regard to termination at the end of the term, the Court in preliminary relief proceedings ruled that the franchise agreement does not explicitly stipulate that termination must be effected with a notice period of six months at the end of the term. If the franchisor had intended this, it would have been the franchisor’s responsibility to expressly include this in his franchise agreement. This omission is the responsibility of the franchisor as the drafter of the franchise agreement.

Post-contractual non-compete clause not violated

Now that it had been ruled that termination was justified, the question still arose whether there had been a violation of the post-contractual non-competition clause. It follows from this clause that after the end of the franchise agreement, the former franchisee is not allowed to offer competing or the same services for a period of three months in the district that would be harmful to the franchise chain. The franchisor argues that the franchisee violates this clause by still operating a tractor driving school.

The franchisee acknowledges that he is bound by this non-competition clause, but he denies that he violates this non-competition clause by operating his tractor driving school. The franchisor did not offer tractor driving lessons before entering into a franchise agreement with the franchisee, and even after the termination of the franchise relationship between the parties, it still does not offer such lessons. The franchisee, on the other hand, only offers tractor driving lessons and not the driving lessons offered by the franchisor for, for example, car or motorcycle driving licences. According to the franchisee, there is therefore no question of the provision of ‘the same services and deliveries that are harmful to the franchise chain’ by the franchisee’s driving school.

The preliminary relief judge agrees with the franchisee’s defense and also rejects this claim from the franchisor. According to the preliminary relief judge, it is decisive that the non-compete clause stipulates that the services must be harmful to the franchise chain. This fact is difficult to reconcile with the fact that the franchisor itself does not offer tractor driving lessons.

Conclusion

In short, in this ruling the franchisor runs into the way in which provisions in the franchise agreement are formulated.

Because it is not explicitly stipulated that the franchise agreement can only be terminated at the end of the term, the franchisor left open the possibility to terminate at any time (before the term expires).

With regard to the non-competition clause, the franchisor (unnecessarily) imposed an additional burden of proof on itself by stipulating that only ‘harmful’ competition is prohibited.

This judgment once again shows the importance of a clear franchise agreement that has been carefully thought through.

Incidentally, in my view, the question is whether the clause would have stood the test of criticism if the franchisee had (also) invoked the Franchise Act. This sets requirements for the post-contractual non-compete clause. For example, the clause must be indispensable to protect the know-how transferred from the franchisor to the franchisee. The question arises here which know-how has been transferred to the franchisee, since the franchisee already gave tractor driving lessons.