economic infeasibility of franchise agreement

inviabilidad economica franquicia

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It is common for a short time after the inauguration, the franchisee realizes that his business was not as good as it presented itself. Then we raise the question, ¿I can ask for the resolution of the franchise agreement because the business is not viable?

Then, We analyze two disparate sentences with pronouncements on the resolution of franchise agreements for losses and economic infeasibility of the business model.

The judgment of the Provincial Court of Burgos of 10 April 2018, You understand that the duty of pre-contractual information is essential and mandatory. His guardian pronouncement regarding this lack of information in the case as, the origin and quality of the products supplied by the franchisor hid. So, believed franchisees purchase, for resale on site, European fashion products and high quality. But the reality was that they offered very low quality products, acquired Chinese bazaars and extremely high prices. Specifically, They paid to franchisees 14.000 euros more for the products supplied regarding the value they had on the market. This caused a situation of great economic infeasibility in the franchise agreement.

The Court ruled understanding that, They have known the quality and provenance of the products supplied by the franchisor, franchisees would not have signed contracts. Thus, annulled franchise agreements for vice invalidating the consent given by franchisees.

For his part, the judgment of the Provincial Court of Madrid, of 16 November 2012, not as favorably resolved franchisees. Specifically, the pronouncement of the Court revolved around the duty of care of the franchised. So, The litigation also dealt with the lack of pre-contractual information necessary to know the risks and viability of the business. But, In contrast with the duty of the franchised check and contrast the information poured by the franchiser. Namely,  the franchisee must have operated diligently, Well, in the past he had made commercial business operations.

Thus, She hearing resolved dismissing a possible nullity of the franchise agreement because there was no sufficient relevance to the involvement and consent, plus the possible error did not concern essential elements of the contract, but simply fell on the same aspects accessories.

Judgment of the Audiencia Provincial de Burgos, section 3, 10/04/2018, no nothing. 116/2018

The dispute brings into five independent because franchise agreements concluded between the applicant corporation "DI PIU MILANO, SLU "as a franchise.

In the five franchise agreements the company was down to franchisees the right to use the trademark and brand "Di Piu Milano" for sale at the retail clothing items, accessories and fashion accessories.

As consideration franchisees must pay the franchiser trade in monthly fees the amount of input 20.000 the 25.000 euros, plus VAT. There was no obligation to pay a monthly or periodic fee, While franchisees assumed the commitment to acquire the franchise's monthly purchase 100 articles. And, Failure to do so, they paid 400 euros per month as penalty. And the embroidery, Franchisees also assumed the obligation to purchase the local store and pay for the renovation and decoration, as well as rental and maintenance expenses.

The contracts have a duration of five years, renewed for periods,  so good, a minimum term was agreed two years, may terminate the contract with three months' notice.

The franchisor may terminate the contract for breach of obligations of franchisees and demand in such a case, 23.000 Euros worth, plus compensation for damages.

The 26 November 2013 franchisees informed the franchiser resolving their franchise agreements. They alleged serious breaches by the franchiser in particular by failing to send any "know how" and deliver items bought cheaply in Chinese bazaars for resale to non-competitive prices, Therefore not being viable from an economic perspective stores.

Reselling the products provided by the franchiser prevented the profitability of the business, because it was of poor quality items resold at a much higher price to franchisees.

The franchiser trade brought an action for breach of the duration of contracts and contractual post competition in stores where franchises were located.

The 9 December 2016, the Court of First Mercantile of Burgos gave judgment and dismissed the defendant of the franchiser. So, partially estimated counterclaims of franchisees and mistakenly declared null franchise agreements.

The judge considered that the franchisor did not inform franchisees about the circumstances of the same, especially on the absence of a tested business, commercial infrastructure, own network of suppliers and hid the items to be supplied were purchased from Chinese bazaars at low prices and resold at much higher prices that made it unfeasible profitability of the business. The franchiser also failed its obligation to convey the "know how".

Filed against the judgment of instance I appeal the applicant trade. He alleged that supplied items as agreed, It is irrelevant that these were acquired in Chinese bazaars. He refused to turn the contracts were void by error or fraud, because it rejected having provided false information or conceal essential data franchisees franchise.

The defendants opposed the motion requesting his dismissal.

The 10 April 2018, Section 3 of the Provincial Court of Burgos, He gave judgment dismissing the appeal.

He referred the audience to the importance of contractual good faith requires that pre-contractual or prior to the signing of the contract the franchisee stage the potential franchisee provide all truthful and sufficient information about the unique business model and tested, created and developed by the first. As well as, the characteristics of the franchise network which will integrate the franchisee and the conditions under which it will develop the business.

He considered the audience not knew that the plaintiff had provided franchiser-franchisees information is required by law before the signing of contracts. With the consequence that, the only information that franchisees had about franchising is that obtained through the website of the franchise. In this, along with a set of images or photographs on decorating stores and products to sell, It was referred to a franchise success, allowing franchisees to open a "Boutique elegant and refined" and where "Customers are perplexed to see irresistible prices".

Therefore, no record of the franchiser had created a model of business or singular business, original or innovative in its sector. Not that it was tested, in the sense that it has had a relative commercial success that has led to a favorable experience and allow the expansion of the business through its replica. This is because there was no evidence that the franchiser, before transmitting the franchise, had exploited the kind of franchised business itself by opening stores that success could say that there.

And if you have not been a singular and tested business created or developed by the plaintiff, I could not be a unique business model or business activity created or developed by the franchised in advance to the franchise agreements which in turn has been tested with success business that allows its replication or reproduction by duty assignment. Tampoco existía un “know how” propio y singular derivado de una experiencia empresarial previa, singular and successful, and that it can be transmitted to franchisees to develop effectively and with some probability of success own business model franchise.

But also, the Court noted other elements that allowed reinforce the conclusion that it was not a real franchise, but purely fictitious and nominal:

a) There was a network of franchised stores. Only knew that, along with stores defendants franchisors, only in Spain had opened ten or twelve stores. There is no record that any of them had business success, or continue open.

b) In advertising, the franchiser alluded to opening stores abroad, particularly in London. That being totally false statement and a lie rude.

c) Also he implied that the franchiser had its own network of European suppliers providing selected and quality products, all resulting false. The plaintiff acquired products then resold in Chinese bazaars at very cheap prices. The quality of these products was limited because they could be obtained scarce price in markets and bazaars or Chinese stores. About, He pointed out the audience that "certainly not the plaintiff undertook to provide to franchisees branded products or, where applicable European manufacturing products, which undoubtedly greatly encarecería product to sell when the characteristic of the franchise was to sell cheap products, but despite this contractual duty of good faith required the appearance that does not crease the products were acquired exclusive suppliers and selected, and that concealed the actual acquisition was in Chinese bazaars to low price, such as acquisition is the scope of any, and as it is obvious nobody buys a franchise to the franchisee will provide resale purchased products to low price in Chinese bazaars where everyone can buy, for such type of commercial distribution lacks any merit and business value

d) There was no own commercial structure of the franchiser. No record that had a store, shops or offices, or personnel or vehicles.

and) He did not have the franchiser with a product catalog. The orders were to be carried out by its generic name and were served without a proper labeling. This contravened trade rules and could generate administrative sanctions.

f) The plaintiff-franchiser bought in bazaars Chinese products at cheap prices to franchisees resold at much higher prices. This fact meant that resale prices were not competitive and made it unfeasible profitability of the business franchisee. Specifically, Franchisors acquired the franchised products by 18.844 euros, with a value higher than the market 14.000 euros. So that, the acquisition cost of the products made unviable obtaining any kind of profitability and necessarily abocaba franchisees to suffer losses.

Consequence of this, Hearing concluded, was the no contract for lack of one of the essential elements of the same (art. 1.261 CC), and specifically for lack of purpose or lack of cause. Which entailed the absolute or nullity. While the annulment was not requested by the applicants so, there was no benefit from this route.

However, if they were made by the defendants in the counterclaim action of nullity of the franchise agreements for existence fraud and error vitiating the consent given. It is such rescission and appreciated by the trier of estimated counterclaims instance.

Hearing thus confirmed the welcome conclusion instance by the judge because "it is obvious that franchisees defendants hired based on bases that are false and do not correspond to reality, that is confident in an appearance created by the franchised and that does not correspond to reality, and having known the true reality underlying this appearance would not have signed a contracts that clearly were not viable... and especially that products supplied were products of low cost and quality that were purchased from Chinese bazaars and then resold at much higher prices with which not made possible that franchisors from obtaining a minimum return, thereby it is unviable businesses…”.

Moreover, franchisors such error was induced by deception franquiciada. Namely, providing false information, with lies and malicious concealment of the true reality. So there was thus a contractual bad faith evident applicant.

So, the Court dismissed the appeal filed by the plaintiff-franquiciadora. Thus he confirmed the dismissal of the lawsuit and the partial estimate of the counterclaim nullifying vice invalidating the consent given franchise agreements concluded.

Sentencia de la Audiencia Provincial de Madrid, 20th section, 16/11/2012, No.. res. 510/2012

The present case has as background the franchise agreement signed on 14 September 2007 franquiciadora between OLE BULLFIGTHER SLU, and franquiciada TORO BLANCO SL.

The 17 March 2008 the franchised he decided unilaterally from the franchise agreement and filed suit against OLE TORERO. It requested the annulment of the contract signed franchise existence declared by error and / or fraud in the consent given.

and the franchised claimed that the conditions imposed franchisee, inter, the choice of the local, “the business was destined to failure, since neither the minimum sales (210.000 euros), nor real sales (495.360 euros) You could get no profit margin. He also claimed in its application that the franchisor had breached its contractual obligations as it will not provide pre-contractual information required legally, He not supplied to the franchisee of the necessary products, It has not promotion or advertising, lack of advice, lack of transmission of the know how, inter alia.

Therefore the plaintiff requested compensation for damages caused materialized in a total of 260.532,50 euros

The franchiser-defendant opposed the lawsuit and filed a counterclaim. He alleged the defendant that the premises were not imposed by it to the franchisee if that was not the one who chose. Also, the clauses of the contract were negotiated between the parties for a few months. Negotiations that finally materialized with the signing of the contract in September 2007.

He further noted the defendant that there was no defect in the consent to sign the contract by the franquiciada. This is because, “it is impossible to evaluate in six months the profitability of a business. Also, OLE TORERO at no time guaranteed any franchisee profitability of your business. Also, the lack of profitability of a particular franchise will respond more to the lack of preparation or lack of experience of the franchisee, that the franchise system whose TORERO ... Success is ensured by 57 establishments throughout Spain and 4 abroad.

Finally, in relation to the breaches he pointed out that the defendant has fulfilled all the obligations of the franchise agreement.

The 14 May 2010 el Juzgado de Primera Instancia nº37 de Madrid dictó sentencia por la que desestimó la demanda interpuesta por la franquiciada. Estimó, at the same time, en su integridad la reconvención formulada por la franquiciadora.

Respecto del fondo del asunto, la sentencia declaró la validez y plena eficacia jurídica del contrato de franquicia suscrito.

And, en relación con el supuesto dolo y/o error al suscribir el contrato, la Juzgadora sostuvo que de la testifical practicada se pudo comprobar que el contrato se formalizó con tiempo suficiente para su negociación, análisis y maduración. Therefore, no se ha acreditado la concurrencia de alguno de los vicios del consentimiento, previstos en los artículos 1254 CC y 1258 CC, ni las causas de nulidad establecidas en los preceptos 1265 CC y 1266 CC. Consecuentemente, se desestimó la pretensión principal de la demanda.

Against the first instance judgment, TORO BLANCO (en ese momento en fase de liquidación), interpuso recurso de apelación fundamentado en las mismas pretensiones del escrito de demanda. Thereby, sostenía el apelante un error en la valoración de la prueba y una errónea aplicación del Derecho. Solicitó la revocación íntegra de la sentencia.

For his part, la franquiciadora se opuso al recurso de apelación. Alegó que era falso que el contrato se hubiera formalizado sin una previa meditación y análisis del negocio. And, más concretamente, He added that "la franquiciada no aportó ningún documento contable para acreditar la inviabilidad del negocio y sus pérdidas.

The 16 November 2012 20th Section of the Provincial Court of Madrid issued its judgment in No.. resolution 510/2012 dismissing the appeal.

Centrándonos en la existencia de error en el consentimiento prestado por la franquiciadora, la franquiciada señaló que no se le había entregado el documento de información precontractual con 20 días de antelación a la firma, que no existió ninguna negociación previa a la firma, que la franquiciada no tenía experiencia en negocios relaciones y que el franquiciador les impuso el local y todas las condiciones del arrendamiento. Por todo ello sostenía que existió error en varios elementos esenciales del contrato que generaban una nulidad del consentimiento y, hence, la nulidad del contrato de franquicia.

La Audiencia consideró acreditado que la franquiciada había desarrollado a lo largo de su vida una actividad empresarial en diferentes sectores del mercado.

Respecto de la obligación de información precontractual, no se podía afirmar la existencia de un incumplimiento por razón de no suministrar la suficiente información a la franquiciada. Therefore, la Audiencia consideró que la franquiciada sí había obtenido la suficiente información para conocer la viabilidad de la franquicia.

The Court noted that, para la existencia real de un contrato debió existir un concierto de voluntades serio y deliberado, que en este caso, muy a pesar de lo manifestado por la actora, existió. In fact, the expression of this voluntary agreement was reflected in the document provided consisting of the franchise agreement with deposit, signed by the parties. When parties negotiate clauses in the contract, provide some obligations and rights for the parties, which means that the franchisee, as an independent entrepreneur, assumes full risk and responsibility for the operation of its business.

So, from May, where they contacted the parties, hasta el mes de septiembre que se suscribió el contrato, la franquiciada podía haberse informado y asesorado sobre la viabilidad o no de la franquicia OLE TORERO.

And, finalmente sobre el error invalidante del consentimiento prestado en elementos esenciales del contrato, la apelante alegaba que este se produjo “to the creer que el negocio era objetivamente viable en las condiciones que le habían sido impuestas por el franquiciador, y en la creencia que el franquiciador había efectuado un riguroso estudio de mercado aseguraba la viabilidad del negocio”.

Al respecto concluyó la Audiencia que la franquiciada se equivocó. Y no solo en cuales eran los elementos esenciales del contrato, y sobre cuales versaba el error, sino también en que “independientemente de que la franquiciadora haya analizado la viabilidad del negocio, the <<franquiciada>>, con una cierta diligencia profesional, propia de una persona que posee experiencia en el ámbito de los negocios, también debía haber articulado…ciertos mecanismos para asegurarse de la viabilidad de la franquicia”.

En este sentido citó la Audiencia la ilustrativa sentencia del Tribunal Supremo, of 27 February 2012, by which "lo que parece querer alegar la parte recurrente es que todo sistema de negocio objeto de la franquicia debe tener una experiencia tan constatada que, prácticamente elimine cualquier riesgo para el franquiciado, pero esto no cuenta con apoyo alguno en ninguna de las normas que se citan como infringidas.

So, para determina la existencia de error en la emisión del consentimiento, este debía caer sobre un requisito esencial del contrato de franquicia. Now, la información sobre previsiones de venta o resultados de explotación del negocio no era una prestación principal del contrato de franquicia.

Para ello citó la Audiencia la sentencia de la Audiencia Provincial de Barcelona de 21 September 2004 according to "no puede entenderse que posea la relevancia suficiente para provocar la nulidad del contrato, el incumplimiento por el franquiciador de prestaciones accesorias precontractuales, como es la información sobre previsión de inversiones y gastos en un negocio tipo, and previsiones sobre cifras de ventas o resultados de explotación del negocio, atendido que en cualquier caso no puede entenderse que hubo en este supuesto un compromiso contractual asumido por el franquiciador de alcanzar una cifra de beneficios determinada…”.

Also, para que el error invalidase el consentimiento era necesario que esta fuera excusable, es decir que no ha podido ser evitado mediante el empleo de una diligencia media o regular. La Audiencia aludió nuevamente a la SAP de Barcelona por la que, “teniendo en cuenta la condición de las personas, siendo mayor la diligencia exigida cuando se trata de un profesional o un experto, y menor cuando se trata de una persona inexperta”.

La franquiciada era una sociedad mercantil con pasado empresarial. So that, concluyó la Audiencia que, la diligencia que debía haber mostrado tenía que ser mayor a la de cualquier otro sujeto lego en la materia.

Therefore, la Audiencia desestimó íntegramente el recurso interpuesto por TORO BLANCO, SL y, confirmó la sentencia de instancia.

Ultimately, the right to terminate a franchise agreement to be economically viable is a controversial issue. In any case, we recommend that you advise for lawyer specializing in franchise.

Consult your case now

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