The facts of the case were the following.
The franchise system operated in the service industry and marketed its services towards consumers. In the main, the franchise system was designed so that the franchisee solicited services on the franchisor’s (and its suppliers) behalf and the consumer paid for the services directly to the franchisor. The franchisee received a commission on the sales solicited by the franchisee. The franchisor paid the commission to the franchisee at end of month, after deducting certain costs and franchise fees.
In this particular service industry, it was practice that suppliers paid out marketing contributions (or kick-backs if you will) based on total sales in the franchise system. It was also practice that the franchisor paid out parts of these kick-backs to each individual franchisee, based on the same performance measures that the supplier used. In other words, if the supplier paid the franchisor 15 per cent on a particular type of service sold, the franchisor would pass on to the franchisee those 15 per cent (provided the service was sold by the franchisee). The contribution would be paid when it was paid to the franchisor. The franchise agreement did not address marketing contributions at all.
The franchise agreement ended. At that same time, the franchisee’s business was sold to a competitor. When the franchise agreement ended, the franchisor did not pay out any commissions due to the franchisee, asserting that the franchisor had claims on the franchisee. Also, the franchisor did not pay out the marketing contributions to the franchisee.
Because of the non-payment, the franchisee brought a case before an arbitration panel. Among a variety of claims, the franchisee claimed that the franchisor was obliged to pay out the franchisee’s share of the marketing contributions. The franchisee based those claims on the franchise agreement and alleged (which was admitted by the franchisor) that marketing contributions had been paid out for the previous sixteen years of the franchise relationship.
The franchisor denied the claims, asserting that there was no contractual base to pay out marketing contributions. The franchisor continued and claimed that the franchise agreement had ended and that the marketing contributions were paid out by the supplier to support the use of the supplier’s products and services in the franchise system, not as an earnings’ generator for the franchisee. The franchisor also asserted that the franchise agreement constituted the parties’ entire agreement (under a provision in the agreement), to the effect that since there was no agreement to pay out the marketing contributions, the franchisor was not obliged under the agreement to pay out.
The arbitration panel noted that the agreement was not exhaustive as to what types of remuneration the franchisee was entitled to receive from the franchisor. Based on this, the panel concluded that the agreement did not exclude that the franchisee was entitled to marketing contributions. The panel also held that if there was an unclear or incomplete provision in an agreement and a provision in the agreement had been applied in a certain way since beginning of term and a party did not protest against that application, this is strong evidence to suggest the parties have intended for such application. Based on these arguments, the arbitration panel found that an interpretation of the agreement led to the conclusion that the franchisee was entitled to marketing contributions for sold services during term of the agreement. The arbitration panel held that the fact that the agreement had ended was of no significance. Since the agreement had ended the parties were obliged to conclude their affairs, applying the agreement’s provisions on events that had taken place during term, meaning that the franchisee was entitled to the marketing contributions for the services he had sold. The arbitration panel also dismissed the franchisor’s objection that the written agreement constituted the entire agreement, concluding that the agreement was not amended but interpreted, hence already containing a provision that obliged the franchisor to pay out marketing fees. There was consequently no change or news in the agreement.
The arbitration panel ordered the franchisor to pay out the marketing contributions.
Commentary: The case in itself is not changing any laws. It is however an excellent example of a Swedish arbitration panel applying an “entire agreement”-clause on the parties’ practice. It should be noted that when contracting in Sweden, a franchisor should make sure that all third party remunerations are explicitly reserved for the franchisor.
Anders Thylin, IDI franchising country expert for Sweden
