The hardness of a non-competition clause in bankruptcy
Most franchise agreements contain post-contractual non-competition clauses, meaning that the former franchisee may not operate in the industry in which he operates, whether or not limited to the former location, exclusive territory, or even broader designation. Does this clause now also work if the franchisor goes bankrupt?
In the event of bankruptcy of the franchisor, the trustee assumes the rights of the former franchisor. The trustee represents the interests of everyone involved in the bankruptcy, including the creditors. In his capacity, the trustee is entitled to demand compliance with the post-contractual non-competition clause. Contrary to popular belief, the franchisee is therefore not released from its non-compete obligations on the grounds that the franchisor has gone bankrupt.
However, bankruptcy does not just happen. It is not uncommon for the franchisor’s conduct to be relevant to the cause of the bankruptcy. If that is the case, the franchisees suffer damage that can in principle be attributed to the franchisor. This line can then be extended to the trustee. The franchisees can therefore hold the trustee liable for the damage suffered. An important condition for successfully addressing the trustee is that the estate offers the necessary redress. That is not always the case. However, it is indeed possible for franchisees to do what is necessary against the invocation of the non-compete clause by the receiver. In practice, this usually leads to consultation between the trustee and the franchisees, in which an arrangement is reached that is satisfactory to all parties. However, a satisfactory settlement is never really realized in a bankruptcy. Damage has occurred for all parties, and there is usually little choice but to limit the negative consequences as much as possible. Alert franchisees are therefore advised to take the right steps in the event of an impending bankruptcy, as outlined earlier in this section.
Ludwig & Van Dam franchise attorneys, franchise legal advice
Other messages
Supermarket letter – 26
Supermarket Newsletter No. 26
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It is no exception within a franchise relationship that the parties agree that the franchise agreement and the rental agreement are inextricably linked.
Termination of franchise agreement in case of changes in leased retail space – September 27, 2019 – mr. AW Dolphin
Termination of a franchise agreement in light of a substantial change in the leased retail space.
Article De Nationale Franchisegids: “Distribution of (potential) customers prohibited?” – September 17, 2019 – mr. AW Dolphin
Within many franchise organizations, agreements are made about the recruitment of (potential) customers in a certain area.
District protection no protection against termination due to urgent own use – dated September 17, 2019 – mr. AW Dolphin
As a landlord, can the franchisor terminate the lease for urgent own use, in the sense of district protection, while this would be excluded on the basis of the franchise agreement.
Unreasonable compensation at the end of the franchise agreement – dated September 17, 2019 – mr. AW Dolphin
Some franchise agreements stipulate that the franchisee always owes the franchisor a minimum of a certain amount of costs upon termination of the franchise agreement.