Core obligations in the franchise relationship III

Mr Th.R. Ludwig

This is the third and final article in a short series on some core obligations in the relationship between franchisor and franchisee and how to handle them. In the previous two editions of this magazine, the topics of information provision and limitation of liability for forecasts have been discussed. This article will discuss dispute resolution, including mediation. As in the previous two articles, the author also comes to a proposal that aims to further regulate conflict management as a result of liability in the case of forecasts provided.

STANDARDS

In connection with dispute resolution, it is first of all necessary to follow the relevant provisions in regulations, as well as jurisprudence. Article 2 paragraph 4 of the European Code of Honor on Franchising stipulates the following: “The continuing obligations of both parties. Parties must: Resolve complaints, grievances and disputes in good faith, willingly through honest and reasonable, direct communication and negotiation”. Franchisor and franchisee therefore have the “ongoing” core obligation towards each other with the necessary “willingness…. complaints grievances and disputes ….. in good faith”. A franchisor in particular may not be guided primarily by its own interests, but must put the interests of the franchisee first if the franchisee has run into or threatens to run into business difficulties due to the actions of the franchisor. It goes without saying that a franchisee must also consider the interests of both parties in the event of a conflict, but the nature of the franchise relationship and the resulting fundamental inequality of the parties entails a considerably more far-reaching obligation in this regard for the franchisor. In this connection, reference is made, inter alia, to a judgment of the Arrondissementsrechtbank in Arnhem, dated 18 June 1999, KG 1999/259, in which, among other things, the following is determined: “According to established case law and literature, a special duty of care of the franchisor (…). It also follows from the franchise agreement that, certainly if the forecasts presented are not met, the franchisor is obliged to continue to provide advice and assistance to the franchisee” (…). it has become apparent that the defendant has repeatedly been asked for assistance by/on behalf of the vof or that various, at first sight quite reasonable, proposals have been made to arrive at a solution to the financial problems that have arisen on the part of the vof. However, the defendants have largely responded negatively to this.” After this fact is further elaborated in the judgment, the President concludes as follows: “In view of the foregoing, a constructive attitude of/on the part of the defendant, which could certainly be expected from a franchisor in a case such as the present one, is therefore out of the question for the time being. been. Significant in this connection is also the above under g. said summons from/on behalf of the defendant to the vof for payment of the outstanding debt and the associated threat of filing for bankruptcy of the vof”. Such an attitude is therefore not appropriate for the franchisor under the given circumstances.

DUTY OF CARE

The doctrine to be derived from case law therefore teaches that the franchisor is independently obliged to provide the franchisee with active advice and assistance if, due to incorrect information provided in the pre-contractual phase, the latter finds itself in a less favorable position than it would have been when entering into the franchise relationship. are expected. In that context, it should be pointed out that the franchisor has an independent obligation to limit damage on the basis of the law. The obligation therefore also applies before any conflict situation has arisen. In various judgments in 1999, various courts pointed out in so many words that the obligations of the franchisor towards the franchisee, as outlined in the previous two articles and outlined above, are settled case law. Treatment of the problems outlined should therefore primarily take place on the basis of this. In addition, it should be noted that the number of cases that can be settled, as can be deduced from case law, is considerable. After all, only a very small proportion of the disputes relating to the subject matter referred to here lead to legal proceedings. The vast majority of cases are settled, in many cases accompanied by damages from the franchisor to the franchisee. In addition, the parties allow a large number of problem situations to continue so that they remain unresolved. Allowing these situations to continue increases liability and entails significantly higher social costs than adequately resolving them. Indeed, in most cases, the problem situations in question cause, on the part of both the franchisor and the franchisee, reduced income on the one hand and increased costs on the other hand in order to keep a potentially sinking ship afloat. In the absence of a solution, those costs rise steadily, all too often being the ultimate cause of the bankruptcy of the franchisor or franchisee, and which also proves to be an irresolvable disadvantage for creditors, including the bank. These social costs are disproportionate to the costs associated with adequately resolving the problem situation that has arisen. In general, those costs are best manageable in case an amicable settlement is reached, but even the costs of legal proceedings are in most cases only a fraction of the costs involved in failing to find an adequate solution.

DISPUTE SETTLEMENT

The course of events outlined above argues in favor of an out-of-court settlement, in the context of which the franchisor and franchisee undertake to resolve the undesirable situation in all reasonableness. The parties would be wise to allow themselves to be guided by the established case law that has now been formed.

In practice, there are various forms of mediation applied to franchise disputes. In mediation, the parties try to find a solution to a problem that has arisen by clarifying their position and respecting mutual arguments. The NFV dispute settlement procedure, which has been used to resolve various disputes between franchisor and franchisee, deserves special attention in this regard. The disadvantage of the various forms of mediation with regard to franchising that occur in practice, however, is that the parties try to resolve the dispute on a voluntary basis. If the mediation does not succeed, the parties are just as far as they were before. This does not mean that mediation would not be appropriate in advance, on the contrary. It would even be a good idea for the parties to first try to reach a solution in this way. If this is not the case, further regulations will come into force. It is advisable to contractually agree on an arrangement in which the parties commit themselves in advance to bring the dispute to a successful conclusion, without involving the courts, not even by way of arbitration. Arbitration has been used repeatedly in recent years and, apart from a number of advantages, certainly also offers a number of disadvantages. Arbitration has proven to be very expensive in practice because of the fee payable by the parties for the usually multi-headed board of arbitrators. In addition, arbitration proceedings do not always proceed faster than proceedings before the civil court. Finally, it happens more than once that an arbitrator nominated by one of the parties tries to frustrate the course of justice, for example by asking for an excessively high advance for his own fee or is guided solely by the pretended interest of the party who has appointed him. nominated as arbitrator. If the parties commit themselves in advance to settle and terminate a dispute that has arisen without further ado, possibly prompted to do so with a soft or firm hand by a binding advisor, it may be possible to arrive at a simpler, cheaper and faster settlement of the problems outlined in this series.

The regulation proposed here must be viewed in the light of sub a, b, c and d as formulated in the previous articles and must be approved in advance by the insurer who wanted to cover the risks. Taking this into account, I propose to add sub e as follows:

e. parties undertake, if necessary through the formation of an opinion by a binding advisor acceptable to both parties, to make an arrangement against final discharge if, with due observance of sub a, b, c and d, substantial damage has arisen or will arise with regard to the ( former) business operations of the franchisee, arising from or related to the franchise agreement concluded between the parties.

Mr Th.R. Ludwig is a lawyer in Rotterdam