Formula change by the franchisor is not automatically a ground for dissolution

Court of Appeal in Arnhem

A franchisee generally participates in a franchise formula for certain specific reasons. These reasons can be diverse. For example, the franchisee may be concerned about the name and appearance of the formula, the margin policy or the excellent goods or services that can be delivered to customers. If the franchisor also indicates that it wishes to merge the formula with another (industry-related) franchise organization in the long term, as a result of which at least the name, image and the goods and services to be supplied will change, then it is not surprising if a franchisee against this. After all, ‘his’ formula is being changed into something new, of which the question is to what extent the franchisee will like it. A wish on the part of the franchisee to leave the formula is therefore obvious, although such a change is not immediately a justified reason for the franchisee to terminate the franchise agreement prematurely, according to the Arnhem Court of Appeal.

In short, the case at the Court of Appeal was as follows. The franchisor of the ‘Big Boss’ hardware store formula intended to enter into an organizational merger with the (competing) hardware store formula ‘Multimate’. In due course, all ‘Big Boss’ hardware stores would disappear and – where possible – be replaced by ‘Multimate’ hardware stores. Franchisees who wanted to switch directly to ‘Multimate’ could do so. The other franchisees were allowed to serve out their franchise agreements as normal.

A ‘Big Boss’ franchisee apparently did not find the ‘Multimate’ formula very appealing and informed his franchisor that he wished to terminate the franchise agreement early. The franchisee believed that, based on the intended change, he already had good reasons to fear that his franchisor would fail to comply with the franchise agreement in the future and that the dissolution could already be invoked for that reason.

However, the Court of Appeal held that the franchisee had not made sufficiently concrete and clear what his grounds were for assuming now that his franchisor would fail to comply in the future. According to the Court of Appeal, the mere intention to enter into a merger was in any case not a good reason to justify the already existing dissolution. Because the franchisees, who did not (yet) want to switch, could continue to operate their ‘Big Boss’ construction market as normal, there would not have to be an attributable shortcoming. The fact that the franchisor aimed to have as many ‘Big Boss’ franchisees as possible switch to the ‘Multimate’ formula in the long term did not change this. In short, according to the Court of Appeal, there were insufficient grounds that made it clear that the franchisor would fail towards the franchisee in the future. The dissolution was therefore premature and not legally valid.

The reasoning of the Court of Appeal can be followed without further ado. Without clear and demonstrable reasons for a future shortcoming, it is not in the interest of legal certainty to allow a dissolution. But isn’t such a case of such a nature that less clear and demonstrable grounds could also play a role? That more sympathy can be had for the fate of the franchisee? After all, this fate can be summarized in the Anglo-Saxon term “dead man walking”. In short, this is the knowledge of the franchisee that ‘his’ formula will no longer be (really) innovated by the franchisor. The knowledge that the franchisor’s investments in the formula – if any at all – will probably be minor and purely cosmetic. Above all, it is the knowledge that all of the franchisor’s energy will actually be focused on the (competitive) ‘Multimate’ formula, which will get you outcompeted by your own franchisor.

Of course, the franchisor “above the table” will be just as cooperative as before, but under the table the chair legs have already been completely sawn away under the “Big Boss” formula. After all, in every decision the franchisor makes, the interests of ‘Multimate’ will be pursued rather than those of ‘Big Boss’. After all, the first formula has the future, while the second is a formula that will be doomed to extinction. Not a pleasant science if you still pay a franchise fee every month as a ‘Big Boss’ franchisee.

The demise of the ‘Big Boss’ formula is likely to proceed in a manner that does not result in obvious attributable shortcomings on the part of the franchisor. In that case the formula ‘just’ ceases to exist. In that case, based on the considerations of the Court of Appeal, the franchisees will be completely on their own. And that doesn’t feel quite right either.

Mr JH Kolenbrander – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to coalbrander@ludwigvandam.nl