The master franchise agreement had no non-competition clause for the post-termination period so that the master franchisee was admitted the freedom to establish a new franchise network in the same business and to recruit the subfranchisees to become franchisees of the latter. The application by the franchisor for a court order enjoining the master franchisee from competing with the franchisor in the sales of lunch boxes was rejected.
In each of the master franchise agreements at issue, a fixed period is provided, which expires on the dates shown in the column of ‘termination dates’ in the attached list of master franchise agreements. No clause is contained in the agreements about the termination before the end of the period. Under a contract where a fixed period is provided and no right to terminate before the end of the period is retained by either party, such as those at issue, the period is in principle deemed to be for the benefit of both parties and termination made by one party unilaterally before the end of the period is void. However, if the period has been fixed not for the benefit of the terminated party or, even if the period has been fixed for the benefit of both parties, there are special circumstances that justify the termination of the contract by one of the parties before the end of the period in light of the common sense of the society, such termination validly brings the contract to an end, reserving the issue of whether or not any compensation is necessary for the profit that the other party could have gained during the remaining period.
In the agreements at issue, the respondent is granted the rights to operate owned outlets of Hokka-Hokka-Tei and give franchises to subfranchisees (including the right to install second-tier subfranchisor in some of the agreements) in each territory. The respondent as the subfranchisor is given a substantial degree of discretion and in fact engages in not only the operation of owned outlets, recruitment of subfranchisees and assisting of the latter’s outlets, but also development of new products. It is thus easily presumed that the respondent has operated owned outlets, recruited subfranchisees and assisted the latter’s outlets as well as developed new products as mentioned above by spending the costs or making investments of a huge amount with the expectation that the agreements at issue may not be terminated before the end of their periods, which means that the fixed period in the agreements at issue is for the benefit of the respondent.
On the other hand, the applicant by the agreements at issue merely grants the respondent the right to franchise and to use the marks in each territory and receives as payment therefor license fee at the time of entering into an agreement, know-how fee at the time every outlet is opened, renewal fee at the time of the renewal of an agreement besides royalty of 4000 yen (for the eastern territories) or 9000 yen (for Kyushu territory) per outlet and does not seem to have incurred any cost or made any investment recently for granting of the right to franchise and use the marks, putting aside the stories of the time of starting up the franchise system. We cannot see that the fixed period in the agreements at issue is for the benefit of the applicant except that it may expect receiving the royalties mentioned above.
The applicant keeps the membership of the Japan Franchise Association and organises training trips abroad, but these are not relevant in determining whether or not the fixed period in the agreements at issue is for the benefit of the applicant.
The applicant pays the management fee to the respondent but its source is the royalties paid by the respondent and not the cost incurred or investment made on its own. Considering that the applicant has less than thirty employees, it is presumed that the applicant does not incur any particular personnel or other expenses in order to maintain the agreements at issue.
Next, examining the process until the respondent terminated the agreements at issue, the applicant sent a notice in March 2007 stating ‘If your company cannot understand your status and duties of a member of a nationwide network, … it will no longer be possible to continue ‘Master Franchise Agreements of Hokka-Hokka-Tei’ that we have with you,’ followed by the refusals to renew master franchise agreements for Shizuoka area on 29 May, for Saitama/Gumma, Miyagi, Fukushima and Yamagata areas on 28 November without disclosing any reason for refusals. In particular, with regard to the refusal to renew the first agreement for Shizuoka area, the respondent could not see why its renewal was refused and was not able to find out the causes that had led to such a serious action as the refusal to renew. Besides, in February 2008 the conciliation process over the trademark dispute between the parties came to a deadlock so that the parties were on extremely bad terms.
Against these backgrounds, the respondent may have faced a threat that the agreements at issue were also going to be refused to be renewed, or terminated, with hardly visible reasons and was put under the uncertainties about the prospects of the agreements at issue in the future. As the respondent is running such a big business as to affect about 2260 outlets, including about 1000 owned outlets, it was not realistic to passively wait for the actions taken by the applicant with regard to so significant a problem of the renewal of the agreements at issue. We find, therefore, that it was unavoidable for the respondent to have decided to terminate the agreements at issue.
It is also noted that the respondent declared its intent of termination as of 14 May 2008 on 6 February of the same year, which gave a grace period of three months to the applicant. It might be said that the damages, if any, that could be incurred by the applicant due to the termination before the end of the period are mitigated to some extent.
As mentioned above, Considering that the period of agreements at issue is not for the benefit of the applicant, that it was unavoidable for the respondent to have decided to terminate the agreements at issue, and that the damages that could be incurred by the applicant due to the termination before the end of the period might be mitigated to some extent, we find the special circumstances that justify the termination of the agreements at issue.
Therefore, the termination was validly made and the agreements at issue will come to an end on 14 May 2008.
Souichirou Kozuka, IDI Country Expert for Japan