Rules of the game for internet sales

Court of Appeal ‘s Hertogenbosch 21 July 2015, ECLI:NL:GHSHE:2015:2754

On 21 July 2015, the ‘s-Hertogenbosch Court of Appeal ruled in a case involving a franchise agreement for a hairdressing supplies company. This concerned the interpretation of the agreement in relation to other activities of the franchisee in the same area. The question was whether these activities fall outside the context of the franchise agreement.

In 2006, the parties entered into a franchise agreement with Medusa as franchisor and Haarmode Tigera as franchisee. The franchise agreement includes the following obligations of the franchisee – insofar as relevant here:

–         The Franchisee is obliged to purchase at least 90% of the hairdressing supplies and hair articles to be acquired by the Franchisee from Medusa every year.

–         At Medusa’s request, the franchisee will allow it to inspect those parts of the administration that give a true and fair view of the scope of the purchase as referred to above.

–         Franchisee shall keep accurate records of its purchases broken down by supplier.

–         The Franchisee is obliged to purchase the Accountview software package at its own expense for the purpose of conducting its financial administration.

With regard to the fine – insofar as relevant – it has been determined as follows:

–         If a franchisee purchases less than 90% of the purchases through Medusa annually, the franchisee owes Medusa a penalty corresponding to the difference between the amount actually purchased through Medusa and the amount that should have been purchased from Medusa.

–        If the franchisee’s records do not provide a true and fair view of the total amount of the purchase, 90% will be taken of the franchisee’s average purchase over the past two calendar years and the difference with purchase will be settled in accordance with Article 10.1. . (…)

–        If the franchisee does not comply with any other provision, including those referred to in Articles 5 and 6, of this agreement, despite a reminder by registered letter, the franchisee will owe Medusa a fine of € 50,000 (…) and € 1,00 (..) per day, as long as there is non-compliance with any provision, without prejudice to Medusa’s right to claim full compensation. (…)

Franchisor Medusa has requested access to the administration of Haarmode Tigera for 2009. As a result of this investigation, Medusa’s accountant has informed Haarmode Tigera that in 2009 it did not meet the criterion that at least 90% of its purchases must be sourced through Medusa and that, in accordance with Article 10, paragraphs 4 and 5 of the franchise agreement, it has a an immediately due and payable fine. Haarmode Tigera has the correctness of the contents of the letter[accountants] on behalf of Medusa.

In the first instance, Medusa argues that Tigera has not fulfilled its obligations under the franchise agreement. According to Medusa, in 2009 Tigera incorrectly purchased an amount of € 150,675 from third parties, so that Medusa is entitled to that amount pursuant to Article 10.1 of the franchise agreement. (I), Tigera did not make the administration for 2010 available to it, so that Tigera must pay a contractual penalty of € 50,000 pursuant to Article 10.4 (II), Tigera has not made the complete data for 2010 available for 2010, so that pursuant to Article 10.2 it owes an amount of € 98,593. (III) and, pursuant to Article 11.1 of the franchise agreement, Tigera is liable for the full costs incurred by Medusa, which amount to an amount of €11,797 up to the summons. (IV).

Tigera argues in counterclaim primary that the franchise agreement must be nullified due to error/as being unreasonably onerous, alternatively that the agreement must be terminated on the basis of the attributable shortcoming of Medusa, which means that deliveries are not made in accordance with the contract at competitive wholesale prices and certainly not at prices that apply as wholesale purchase prices, and more subsidiary that the franchise agreement must be amended on the basis of the change of circumstances in the sense that the exclusive purchase obligation is removed from it and it is declared that Tigera is free to purchase elsewhere without this being in conflict with the franchise contract. In case she has forfeited fines, Tigera demands moderation. The court has rejected all claims in both the main and counterclaims.

On appeal, Tigera amended her counterclaim in such a way that, in short, she primary claim for nullification of the franchise agreement based on error and deceit, which they alternatively also claims dissolution as of September 3, 2013 (date of statement) and that it is due to her primary and subsidiary claims adds a claim for cancellation of all obligations and order of Medusa to pay €  21,864.75 and of compensation, to be drawn up by the State, to be increased by the statutory commercial interest.

Tigera argued in support of its claim of error at first instance that, at the time of concluding the agreement, based on the expectations generated by Medusa, it could and should have assumed that it would actually be able to operate as a wholesaler, which appears not to be the case because Medusa does not supply Tigera at wholesale prices. Tigera did not know and could not have known that Medusa would not keep to the agreements about the possibility to operate as a wholesaler. Tigera discovered at the end of 2009 that Medusa does not deliver at wholesale prices and certainly not at wholesale prices, according to Tigera. The court dismissed the misappropriation claim as insufficiently substantiated. Ground 1 of Tigera in the cross appeal relates to this. According to Tigera, she has sufficiently demonstrated that Medusa led her into the delusion that she could function as a wholesaler.

The court considers the following. In this appeal to error, Tigera apparently has in mind the situation of Article 6:228 paragraph 1 sub a of the Dutch Civil Code. Pursuant to that provision, an agreement that has been concluded under the influence of error and would not have been concluded with a correct representation of the facts is voidable if the error is due to information from the other party, unless the other party should assume that the agreement would also have been concluded without this information would be closed. It has not been argued or shown that Medusa gave Tigera an incorrect picture of the results of the branch prior to the takeover. The franchise agreement means that Tigera acquires the position of wholesaler vis-à-vis producers and suppliers. That has also been achieved; what Tigera put forward in the first instance and on appeal does not provide sufficient substantiation for the assumption that Tigera did not obtain that position or that it could in fact only function as a retail trade. No concrete information from Medusa has been provided by Tigera that has led to a misrepresentation on the part of Tigera. Tigera emphasizes that it had every confidence in Medusa when the agreement was concluded and based on that confidence assumed that the company would have a positive result. When Tigera concludes agreements on the basis of such trust, this does not mean that there is a situation as referred to in Article 6:228 paragraph 1 sub a of the Dutch Civil Code. Expectations cherished by Tigera itself that are not based on information provided by its counterparty that turned out to be incorrect do not constitute grounds for invoking error. The Court of Appeal agrees with the District Court’s opinion that this appeal on error fails, so that Tigera’s ground for appeal in the cross-appeal fails to that extent.

This ground of appeal also fails insofar as it is based on the argument that the franchise agreement should be nullified due to fraud on the part of Medusa. Pursuant to Article 3:44 paragraph 3 of the Dutch Civil Code, fraud is present when someone induces another person to perform a certain legal act through any intentionally incorrect statement made for that purpose, through the deliberate concealment of any fact that the concealment was obliged to disclose, or through another artifice. Generic recommendations, even if untrue, are not in themselves fraudulent. In the opinion of the Court of Appeal, Tigera has not put forward any concrete facts or circumstances that can support an appeal to this provision, so that the franchise agreement cannot be set aside on this ground either, and Ground of Appeal I of Tigera in the cross-appeal also fails for the rest.

With regard to Medusa’s claims in the main proceedings, the question is whether Tigera purchased more from suppliers other than Medusa in 2009 than was permitted under the franchise agreement and whether it has sufficiently fulfilled its administrative obligations towards Medusa.

The core of the dispute is whether Tigera’s (internet) activities under the trade name ‘t  Barber shop whether or not fall within the scope of the franchise agreement and the obligations arising therefrom for Tigera. The court ruled that it cannot be deduced from the text of the franchise agreement that Tigera’s activities also fall under the franchise agreement and that Medusa could not legitimately expect that the franchise agreement was all-encompassing with regard to those activities.

The Court of Appeal states first and foremost that the meaning of a disputed agreement must be determined by the court on the basis of what the parties have mutually stated and deduced from each other’s statements and behavior in accordance with the meaning they could reasonably assign to it in the given circumstances. and of what they could reasonably expect from each other in this regard. It follows from the foregoing that reasonableness and fairness play a role in this. The text of a written agreement plays an important, but not decisive role in this.

The court agrees with the court that the text of the franchise agreement does not imply that all activities of Tigera in the field of hairdressing supplies are covered by this agreement, even when the text of the agreement is read in conjunction with the agreement whereby the company was taken over and the lease. The parties could have included this in so many words in the agreement, but they did not. The next question is whether the other circumstances of the case lead to the interpretation that Medusa gives to the franchise agreement and on which its claims are based. This turned out not to be the case. This means that it cannot be maintained that Tigera had more or other obligations towards Medusa on the basis of the franchise agreement than those resulting from running a wholesale business in hairdressing supplies according to the Medusa formula. Medusa cannot therefore blame Tigera for having products delivered for its other business activities, under trade names other than Medusa, and for refusing to allow access to company data related to those other business activities.

Ground of appeal II of Tigera in the cross-appeal concerns the alternative Tigera’s claim for dissolution of the franchise agreement. In support of this claim, Tigera argues that Medusa has not enabled it to effectively act as a wholesaler and that Medusa has opened a new branch in[vestigingsplaats] has realized. Medusa disputed this with reasons. As for the new establishment[vestigingsplaats] As far as delivery is concerned, it can be left open to what extent it can be regarded as a Medusa establishment or a company comparable to it in terms of delivery. It has not been argued or shown that the franchise agreement between Tigera and Medusa entails an exclusivity guarantee, while Tigera has otherwise not sufficiently substantiated with concrete facts or circumstances that and why Medusa should refrain from involvement in a branch other than that of Tigera in[vestigingsplaats] . Tigera has also not explained why their legal relationship would not offer Medusa room for other business activities, but for Tigera itself.  

Tigera further argues that Medusa was imputably in breach of its obligations under the Franchise Agreement by charging Tigera inflated prices, which were in the nature of retail rather than wholesale prices, while the Franchise Agreement provided for a wholesale concerns and not a retail trade. Tigera argues in this regard that it was unable to achieve a sufficiently positive result with the company with those prices and the franchise fee it had to pay. According to Medusa, the one based on this fails subsidiary claim on the circumstance that it was not in default due to the lack of notice of default from Tigera. This defense succeeds. Tigera has not stated sufficiently concrete facts or circumstances that mean that a notice of default could be omitted. The foregoing leads to the conclusion that the appeal is dismissed.

Ground of appeal III of Tigera in the cross-appeal concerns her more subsidiary claim for amendment of the franchise agreement due to unforeseen/changed circumstances. Tigera apparently has in mind Article 6:258 paragraph 1 of the Dutch Civil Code, which gives the authority to change the consequences of an agreement at the request of one of the parties or to dissolve it in whole or in part on the basis of unforeseen circumstances of such a nature that according to standards of reasonableness and fairness, the other party cannot expect unaltered maintenance of the agreement, to which amendment or dissolution can be given retroactive effect. The court considers the following. This provision is only suitable for application in exceptional circumstances and should be applied with restraint by the court. It is for the party invoking this provision to assert and, if necessary, prove that such exceptional circumstances exist. What Tigera has put forward in this regard does not provide sufficient grounds for this, so that the Tigera’s further alternative claim fails and ground for appeal III in the cross-appeal is rejected.

The conclusion is that the judgment appealed from is upheld.

This ruling emphasizes the importance of unambiguously stating in the franchise agreement what the “rules of the game” are in internet sales and the resulting income.

Mr AC van Engel – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond? Mail to vanengel@ludwigvandam.nl