The parties PROVIDENCIA TRANSIT BONUM (franchisee) and FUN SCIENCE-CIENCIA DIVERTIDA, S.L. (franchisor) had entered into a franchise agreement in March 13th 2003 according to which the franchisor was obliged to transfer to the franchisee the ‘know how’ or the exploitation right of a system for the commercialization of services for the leisure and education of children from 4 to 12 years old, consisting in the learning of scientific knowledge in an easy and funny way. The contract also included technical assistance. Franchisee had to pay an entrance fee (21.000 euros) as well as a royalty for the exploitation consisting in a 2% of the monthly net invoices with an annual minimum. The territory was the province of Girona and the agreement had duration of 7 years.
As a part of the agreement the franchisee paid 15.000 euros (plus VAT) as a part of the entrance fee of 21.000 euros (plus VAT). On November 10th 2003, franchisee terminated the contract by an extra-judicial unilateral decision due to the breaching of the contract by the franchisor. Franchisor did not accept the termination and claimed against the franchisee.
According to the evidences presented in the procedure, it was proved that although the franchisor was obliged to transfer the know-how for children from 4 to 12 years old, it was not done so for children between 4 to 5 which was considered by the Court essential in the relationship.
The Court considered that the total (essential) breaching of the contract permits the party having respected its obligations, to terminate the contract; on the other side a partial breaching of the contract would only permit an indemnity for damages. This said and considering the evidences, the Court decided that it was not possible to simply apply a mathematic formula to determine that because the agreement was respected for the activity for children to 6 to 12, then it was a partial breaching having only right to a damages indemnities but not to the termination of all the contract. The Court then considered that the breaching was essential and not a minimum one as pretended by the franchisor because only a part of the public was not covered.
For this reason, the Court declared that the agreement was correctly terminated by the franchisee by the extra-judicial unilateral decision, that the franchisee was only obliged to pay a proportional part of the entrance fee and that the franchisor was therefore obliged to reimburse the difference already anticipated.
The High Court (Audiencia Provincial) of Madrid, Section 19th, in February 15, 2008 has issued a sentence concerning a Franchise agreement terminated by the franchisee before the ending date. The franchisor did not respect its obligations according to the contract: (i) the lack of transmission of the agreed know-how, (ii) the absence of formation for the franchisee’s employees and (iii) the absence of all kind of advertising. The economic provisions on the franchising in the information granted to the franchisee before the signature of the contract were also incomplete and far from the real investments the franchisee incurred in once the contract was signed.
The parties, GESTIÓN Y DESARROLLO DE FRANQUICIAS, S.L. (Franchisor) and Mr. Carlos Antonio (Franchisee) signed a franchise agreement in November 4, 2004. Before the signature of the contract, the franchisor informed the franchisee about some relevant economic questions of the franchising. According to the franchisor’s information, the franchisee would have paid 185.000 euros for the installation of the business (a sandwich bar) and other related investments. Once the contract was signed, amongst its clauses, the franchisor was obliged to grant to the franchisee the know-how for this business, as well as to follow some formation obligations for the employees, and produce some advertising.
The franchisee considered that the information he received from the franchisor was not correct (the final investments for the opening of the premises were higher than 560.000 euros instead of the 185.000) and that the franchisor did not respect his obligations, particularly those referred to the formation of the franchisee’s personnel, the agreed publicity and the relationship with providers.
The High Court, after a complete description of the definition of the franchising agreement according to the Spanish case-law and legislation decided that the termination of the contract by the franchisee was correct and not contrary to the good faith because:
- The previous information granted to the franchisee was not accurate.
- The transmitted know-how was not very clear and with no specificity (it consisted in the way to prepare sandwiches that the Court considered very commonly known in these sort of Spanish bars).
- The providers (which belong to the same company group of the franchisor) had an anarchic behaviour towards the franchisee.
- The formation obligation for the franchisee employees’ was not fulfilled by the franchisor.
- The advertising obligations were not respected because the franchisor did not invest even one euro for these purposes.
- The franchisee did not continue with the same business after the termination even if he was still running a similar restaurant but with no use of the pretended transmitted know-how.
- The franchisor left all the elements and decoration material at the franchisee’s premises.
- And the franchisor was not registered at the Franchisors Registry although this condition was not considered essential.
Ignacio Alonso, IDI Country Expert for Spain.