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
The benchmark for franchise forecasts – dated 29 May 2019 – mr. AW Dolphin
On 19 March 2019, the Den Bosch Court of Appeal, ECLI:NL:GHSHE:2019:1037, listed the case law of the Supreme Court on prognosis in franchising.
Franchise arbitration: too high a threshold? – mr. M. Munnik
When entering into an agreement, it is possible for the parties - contrary to the law - to designate a competent court. This also applies to the franchise agreement. Of this possibility
Franchise appeal for error due to incorrect forecasts and lack of support rejected – dated April 25, 2019 – mr. K. Bastian
The Court of Appeal of 's-Hertogenbosch ruled (ECLI:NL:GHSHE:2019:697) on the question whether the mere fact that forecasts did not materialize justifies the conclusion that the franchisee has been shortchanged...
Article De Nationale Franchise Gids: “Increasing protection against recruiting franchisees” – dated 2 April 2019 – mr. AW Dolphin
It is becoming increasingly apparent that recruited franchisees can be protected on the basis of the Acquisition Fraud Act.
The Franchise Association and Franchise Binding – Contracting 2019, No. 1
A contribution on common provisions in franchise agreements that require a franchisee to be a member of a franchisee's association.
Deception in recruiting a franchisee?
A ruling on whether the franchisor had made a misrepresentation when recruiting a franchisee.