1. Italian rules applicable to franchise agreements.
The main rules governing franchising contracts in Italy are provided by law No. 129 of May 6, 2004, entitled “Rules on the regulation of franchising” (hereafter also “Law 129/2004”). Such law mainly deals with pre-contractual disclosure obligations, but also provides rules concerning the contents of franchising contracts, such as the requirement of the written form, the obligation to include certain clauses in the contract and a three years’ minimum duration for contracts for a fixed term.
A decree of the Ministry of Industry (Decree 204 of 2 September 2005, hereafter also “Decree 204/2005”) states a number of special rules on disclosure applicable to foreign franchisors, who have operated exclusively abroad, before the date of signature of the franchise contract.
General rules on contracts provided for in the civil code, as well as case-law, also apply to franchise agreements, especially with respect to issues not dealt with in Law 129/2004.
2. Good faith under Italian law.
Good faith is a general principle provided by the Italian civil code, which applies to all contracts and obligations. Such principle was already provided in the previous civil code of the year 1865 and has been reaffirmed, with a wider scope, in the current civil code (issued in 1942).
Pursuant to the Italian civil code, the notion of good faith (implying loyalty, fairness, etc.) must characterize the behaviour of the parties when negotiating, concluding and performing contracts. Such principle also applies to the interpretation of contracts.
The obligation to act in good faith during negotiation of contracts (provided by Article 1337 of the civil code) has the main purpose to protect one party in case of unjustified withdrawal from negotiations by the other: the innocent party, in that circumstance, can be indemnified for the expenses incurred and for the opportunities it has lost, while it was involved in the negotiation.
The obligation to act in good faith during negotiation can also imply an obligation to disclose certain information to the other party, particularly when such information is essential for the other party, in order to decide whether to conclude the contract, or not.
Moreover, pursuant to Article 1366 of the civil code contracts must be interpreted in good faith. Article 1375 provides that contracts must be performed in good faith. Several other provisions included in the civil code refer to good faith.
3. Good faith in franchising.
The principle of good faith has been transposed in Law 129/2004, with specific reference to the pre-contractual disclosure obligation, which is imposed to both parties.
Namely, Article 6 of Law 129/2004 provides:
1. The franchisor shall conduct himself, at any moment, towards the prospective franchisee with loyalty, fairness, and good faith and must timely provide the prospective franchisee with any data and information which the samedeems necessary or useful for the purpose of concluding the franchise contract, except in case of objectively confidential information or information that, if disclosed, would constitute an infringement of the rights of third parties.
2. The franchisor shall give reasons to the prospective franchisee for not disclosing the information and data requested by the latter.
3. The prospective franchisee shall conduct himself, at any moment, towards the franchisor with loyalty, fairness, and good faith and shall provide, in a timely, correct and comprehensive way, the franchisor with any information and data the knowledge of which is necessary or appropriate for the purpose of concluding the franchise agreement, even if such disclosure is not expressly requested by the franchisor.
In addition to this specific provision on good faith, all the other provisions of the civil code referring to such principle, also apply to franchise agreements.
Therefore, both franchisor and franchisee shall behave in good faith during negotiation, must act in good faith when performing their respective contractual obligations, in case of termination etc. Moreover, the text of franchise agreements must be interpreted in good faith.
4. The application of the principle of good faith to franchise agreements by Italian Courts.
The violation of the principle of good faith is very frequently claimed by the parties in Court cases (not only in franchise disputes); however, such claim is not often accepted by the judge, in the relevant decisions.
Moreover, even where Courts refer to good faith in their judgments, they not always ground their decision on such principle, but they often mention it as an “obiter dictum”, i.e. as a general statement not directly affecting the final decision.
We will limit our analysis to cases, where the relevant decisions have been based on a violation of the principle of good faith (as part of the “ratio decidendi”).
4.1 Good faith in negotiation.
With respect to franchise agreements the violation of Article 1337 c.c. has been recognised by Italian Courts only in few cases.
It is important to note that, when Article 1337 c.c. applies, the innocent party has the burden to prove the violation of the principle of good faith by the other party as well as the damages suffered which, in practice, restricts the number of cases in which Courts effectively grant damages. In addition, the damages granted to the innocent party in those cases are limited to the ‘negative interest’, i.e. lost opportunities in addition to expenses.
In one case (Tribunal of Rome, decision n. 16509 of 5/8/2008), a franchisor negotiated the conclusion of a franchise contract with a prospective franchisee; the latter started redecorating the premises to be used as point of sale, in accordance with the indications provided by the franchisor (colours, trademark etc.); the franchisor even delivered its standard furniture to the prospective franchisee. However, afterwards, the franchisor – regardless the solicitations of the prospective franchisee – never concluded the contract.
The Tribunal of Rome decided that, even in the absence of a signed document between the parties providing for an obligation to conclude the franchise contract, it was proven in Court that the prospective franchisee relied, in good faith, on the conclusion of the contract; on the contrary, the franchisor was not able to prove that the withdrawal from negotiation was justified by good reasons. Therefore, the Tribunal considered the franchisor’s behaviour in breach of Article 1337 c.c., and condemned the franchisor to damages. However, those damages were limited to the costs borne by the prospective franchisee for redecorating the premises (plus interests) and to the costs of the furniture delivered to it by the franchisor (that he hadn’t paid yet).
In another case (Trib. Genova, decision of 8/3/2013), the Court considered contrary to good faith (i.e. to Article 1337 c.c. as well as to Article 6 of Law 129/2004) the behaviour of a franchisor, which consisted in continuing negotiations and concluding the franchise agreement with a prospective franchisee, even knowing that the latter had financial and economical problems, that at the end resulted in non-payment of sums due to the franchisor.
The Court found both parties liable of further reciprocal violations: namely, the franchisor did not provide the franchisee with the pre-contractual disclosure (violating Article 4 of Law 129/2004) and failed to provide it with the assistance contractually provided, after the conclusion of the franchise agreement. The franchisee failed to pay a number of invoices to the franchisor.
In comparing and evaluating the respective violations of the parties, the Court decided that the breach of the good faith obligation by the franchisor during negotiations for the reasons explained above, came chronologically before the franchisee’s breach and was of such importance to ascribe the liability for the termination of the contract to the franchisor. As a consequence, the franchisee was relieved from its obligation to pay the outstanding invoices to the franchisor and the latter was condemned to pay the costs of the proceedings.
4.2 Good faith in performing the contract.
The case-law which deals with non-compliance of contractual obligations often refers to the principle of good faith, in order to support or reinforce a further breach of contract of one of the parties.
Two decisions can be mentioned in this respect.
In the first one, the Tribunal of Rome (judgment of 4/6/2009) found that the decision of a franchisee – which came just after its lack of payment of some invoices and the consequent call of a guarantee by the franchisor – to close its point of sale, without providing the franchisor with a previous notice, was contrary to good faith. The Court stated that, despite the above mentioned circumstances, the franchisee should have informed the franchisor of its intention to close the shop, by giving it a reasonable notice. The franchisee was therefore deemed responsible of the termination and condemned to damages.
In another case (Trib. Nocera Inferiore, 11/3/2013), the circumstance that a franchisee terminated the contract after 1 day from its signature was considered as contrary to good faith and the franchisee was – again – declared liable for serious breach of the contract and condemned to damages.
4.3 Interpretation of the contract in accordance with good faith.
In a further case, the Tribunal of Isernia (decision of 12/4/2006) applied the principle of good faith to the interpretation of a clause of a franchise contract.
In this case, Art. 2 of such contract provided the franchisor’s obligation not to appoint other franchisees, but expressly allowed the franchisor to conclude contracts other than franchise agreements, in the territory.
At a certain moment, during the performance of the contract, the franchisor started offering its products to the customers of the territory at prices much lower than those applied to the franchisee. By operating an aggressive strategy of this type, the franchisor was able to acquire all the main customers of the franchisee.
On the basis of the above circumstances, the Court decided that Article 2 had to be interpreted in accordance with good faith (as per Article 1366 c.c.), and therefore not in the sense that it allowed the franchisor to throw the franchisee off the market and to behave disloyally with him. The behaviour of the franchisor was in fact considered by the Court as contrary to the general obligation to cooperate (which was the essence of the franchise agreement) as well as an abuse of economic dependence. By consequence, the Court declared the contract terminated for serious breach by the franchisor and condemned him to damages.
The principle of good faith is applied by Italian Courts (in franchise disputes as well as in cases concerning other type of contracts) with a certain discretion.
Courts apply it when evaluating the behaviour of the parties, when assessing the seriousness of their respective breaches; sometimes, to fill gaps left by contractual provisions or to interpret them in an “equitable” way.
However, of course, such application must be made in compliance with the law, in conformity with the contents of the applicable contracts as well as with the evidence provided by the parties in the relevant Court proceedings.
Silvia Bortolotti, IDI country expert for Italy