Signing a Franchise Agreement in the Digital Age – Mr. K. Bastiaans – dated December 14, 2020

Within today’s society, under the guise of ‘the new normal’, digitization is increasing. It is therefore no surprise that this digitization has an effect on the way in which agreements are offered and whether or not accepted by the other party. In a judgment of 2 December 2020, the civil judge of the Rotterdam District Court further elaborated on the manner of acceptance of an agreement and the consequences this entails.

Facts
Central to the discussion was the question of whether legally valid franchise agreements had been concluded between the plaintiff (franchisor established in Luxembourg) and defendant (master franchisee established in the Netherlands) and whether or not the franchisee has failed to fulfill its obligations arising from from the agreements.

PH Europe is the franchisor of the ‘Pizza Hut’ franchise formula. On May 24, 2016, a Development Agreement was concluded between the franchisor and the franchisee with regard to the defendant being allowed to open 15 Pizza Hut branches in the Netherlands. At the end of December 2018, an International Franchise Agreement (IFA) was sent by the franchisor for each requested Pizza Hut location by e-mail to the franchisee via the DocuSign program.

Since the franchisee has not fulfilled its payment obligations arising from the IFAs from the start of the franchise relationship, consultations have been held between the parties about the fees from June 2019 to January 2020, with the franchisor making several payment proposals to the franchisee. Franchisee has paid a total amount of $25,600.00 in lieu of the $131,845.69 owed. Ultimately, on February 27, 2020, the franchisor dissolved the franchise agreements concluded between the parties.

The franchisor has argued that the franchisee infringes its trademark law, fails to comply and that it, as well as its franchise formula, suffers damage as a result of those shortcomings. Franchisee, however, takes the position that there are no shortcomings on its part; the IFAs are not applicable now that were never signed by the franchisee. On the basis of the verbal franchise agreement that was concluded as a result, the franchisee would therefore simply be allowed to use both the trademark law and the formula. Because the franchisor would not perform well, the franchisee was forced to suspend its payment obligation in mid-2019.

The assessment in the incident
Before being able to answer the question of whether or not the franchisee is allowed to use the ‘Pizza Hut’ brand, the question must first be answered whether IFAs have been legally valid or whether there are only ‘verbal franchise agreements’. ‘, as the franchisee argues.

The court does not follow this defence. By sending the IFAs via DocuSign, the franchisor has made an offer under which terms it was prepared to enter into the franchise agreements with the franchisee. Franchisee subsequently implemented those IFAs by opening and operating several Pizza Hut locations. It is also important here that the franchisor has referred to the IFAs several times in the e-mail correspondence between the parties. The franchisee has never responded to this. The court ruled that if the franchisor had wrongfully invoked the provisions of the IFAs, the franchisee should have made this known to the franchisor in a timely and clear manner, which did not happen. Only after dissolution of the agreements does the franchisee take the position that the IFAs would never have been accepted by it. Furthermore, the court still attaches value to the payments made by the franchisee; franchisee has acknowledged and agreed to pay the fees due, which also indicates acceptance of the IFAs.

The court is therefore of the opinion that there are no oral franchise agreements, as the IFAs have simply been agreed between the parties.

With regard to the shortcomings, the court rules as follows:

Pursuant to the IFAs, the franchisee had to pay an initial fee per branch on or before the date on which the right to use the franchise formula was granted. These fees are therefore separate from any services/support provided by the franchisor. Since the franchisee had to perform first, it is not entitled to suspension. Now that the franchisee has failed to pay the fees and, despite multiple proposals, no payment arrangement has been made, the franchisor was free to terminate the agreements in February 2020. The dissolution means that the franchisee must cease and must continue to use the Pizza Hut trade name, the trademark law and the formula itself. However, the franchisee has not responded. By continuing to make unjustified use of the (trademark) rights accruing to the franchisor, the franchisee has acted unlawfully towards the franchisor.

The court therefore ruled in the present proceedings that the franchisee is not allowed to continue to use all (trademark) rights belonging to the Pizza Hut formula after the dissolution of the franchise agreement.

Conclusion
The court once again makes it clear that the acceptance of a franchise agreement is established by an advance directive addressed to the provider, whereby the acceptance of a franchise agreement can take place in any form. The absence of a signature under a franchise agreement therefore does not have to affect the validity of that franchise agreement and the rights and obligations arising from it.

The ruling also illustrates how important it is to make this known to the other party in a timely and clear manner if the validity of a franchise agreement is contested. For example, if the validity is only contested after a dissolution, there is a risk that the franchise agreement will be deemed to have been accepted and legally concluded.

mr. K. Bastiaans – franchise lawyer
Ludwig & Van Dam attorneys, franchise legal advice.  Do you want to respond? Then go to bastiaans@ludwigvandam.nl