In a recent decision from the Appeal Court (Eidsivating lagmannsrett, LE-2018-63987), the court found that the franchisor had terminated the franchise agreement with immediate effect without sufficient cause. However, the franchisee was not entitled to damages as no losses were documented.
Scandic Markiser AS (the franchisor) had terminated the franchise agreement with a notice period of three months due to falling sales compared with the previous year. About 14 days after the termination notice was sent, the franchisor terminated the agreement with immediate effect due to alleged material breach, claiming that SVT Gruppen AS (the franchisee) had been in direct contact with a supplier to facilitate direct trade. During the process further arguments in support of the alleged breach were added.
2 Material breach/immediate termination without notice period
The appeal court found that the owner of the franchisee had in fact made contact. However, the court found that this did not constitute a breach of the agreement, as the franchise agreement did not contain clauses identifying the owner and the franchisee, pointing out that such an identification could not be interpreted into the agreement as the franchisor had prepared the agreement and was the stronger party to the agreement in accordance with normal Norwegian interpretation principles.
The appeal court added that the fact that contact had been made by the owner did not constitute a material breach even if such identification was made, as it was just a general inquiry in the open, checking the possibilities of a future collaboration. The court added that this happened in the notice period, giving the franchisee more leeway. It was also pointed out that the franchisor was not an exclusive distributor to the supplier and that the supplier only represented a small part of the franchisor's total turnover.
As for the other reasons that were added during the process, the appeal court concluded that the terminating party normally is prevented from changing position or adding new or supplementing reasons behind a termination if these reasons were present at the time of termination.
Regardless of this, the appeal court stated that the other reasons – marketing outside the territory and alleged use of marketing material – was not proven and/or did not constitute a material breach, neither alone or together.
Thus, the appeal court concluded that the franchisor could not terminate the agreement with immediate effect, but that the franchisee was entitled to a notice period in accordance with the franchisee agreement, either 3 or 12 months.
3 Termination with notice period
Principally, the franchisor argued that a notice period of 3 months was applicable after the contract due to falling turnover. The appeal court disagreed, as it found that the parties had never followed the agreement regarding budgets and that the relevant article could not be understood as a minimum turnover clause or to give the franchisor the option of terminating the agreement if the turnover was lower than the previous year.
Alternatively, the franchisor argued that the general termination notice of 12 months was applicable even though the immediate termination did not specify this, whereas the franchisee argued that no termination was given. The court of appeal agreed with the franchisor on this point, thus deciding that the immediate termination had to be understood as a normal termination with 12 months' notice in accordance with the agreement, regardless of any reference to this in the immediate termination.
The franchisee claimed damages for losses due to the unjustifiable immediate termination, i.e the lost profits for the 12 month notice period. The franchisee presented the lost earnings (commission and additional income on each sale), documented by the income made by the new franchisee in the relevant territory. From this, the franchisee deducted saved earnings.
The appeal court found that the presented evidence was unsuitable in proving that the franchisee would make a profit during the 12-month notice period, which in the courts assessment was the relevant issue. Instead, the court based its assessment on the franchisee's profit and loss account, showing that the franchisee had a negative result in 2015 and up until the termination in July 2016. Thus, the court concluded that it was unlikely that the franchisee would be able to turn the negative result to a positive result during the 12-month period. Therefore, the franchisee was not entitled to receive any payment for damages despite being prevented from performing the contract during the agreed notice period.
5 Take-home points
a) A franchisor should ensure that the agreement identifies the owner of the franchisee with the franchisee where relevant.
b) A party that terminates the franchise agreement (or any other agreement) with immediate effect should mention all the reasons for such termination in the termination letter, as the courts are not inclined to accepting reasons that are given at a later stage.
c) An unjustifiable immediate termination for alleged material breach will often be understood as a termination with notice period in accordance with the franchise agreement (if the agreement contains such an opening), but to be on the safe side it is advisable to be specific on this in the termination letter. If the franchise agreement cannot be terminated with a notice period without cause, this increases the risk.
d) There's no benefit in lengthy and costly proceedings regarding the termination issue if the franchisee fails to prove actual losses caused by the immediate termination. This must be properly considered before filing a claim. From the franchisors perspective it can be said that he could consider the franchisee's results if in doubt as to whether or not there is enough evidence to secure an immediate termination, as the risk of becoming liable for damages is non-existent if the franchisee will be unable to prove a loss.
Karl-Anders Grønland, IDI Country Expert for franchising in Norway
Henrik Renner Fredriksen, IDI Member