The Franchise Agreement provided for the standard mutual obligations of the parties according to the relevant international practice in the sphere of the franchising relations.
However, after entering into the Franchise Agreement both parties have infringed the provisions of the latter. Finally, the Franchisor filled the claim within the competent commercial court for (a) termination of the Franchise Agreement because of the significant violation thereof by the Franchisee and (b) undertaking the Franchisee to indemnify all damages suffered by the Franchisor due to the said Franchisee’s violations of the Franchise Agreement.
In its turn, the Franchisee brought a counterclaim and also claimed the commercial court to (a) declare the Franchise Agreement as unconcluded in view of its non-registration by the Franchisor and (b) declare the Franchisor to be in violation of the rules set forth in the Franchise Agreement for its termination.
I. Consideration of the case by the first instance commercial court and the commercial appeal court.
The first instance commercial court has rendered that the Franchisor has not fulfilled its obligations set forth in the Franchise Agreement duly, and in virtue of the latter the Franchisee was not able to use a set of the rights to be initially granted and thus, has not accepted the franchisee’s status. Moreover, as the Franchise Agreement has not been duly registered, the latter shall be regarded as unconcluded. The commercial appeal court confirmed the said decision. Finally the case was appealed to the Higher Commercial Court of Ukraine.
II. Consideration of the case by the Higher Commercial Court of Ukraine.
2.1. Lack of proper legal analysis of the related facts in the courts of lower instances.
By considering the case, the Higher Commercial Court of Ukraine found that both the commercial court and the commercial appeal court stated that non-fulfillment by the Franchisor of its obligations provided in the Franchise Agreement and absence of state registration thereof led to impossibility for the Franchisee to accept the franchisee’s status.
At that both courts did not duly verify all information and evidence related to the case and did not take into account that according to the latter the Franchisee has in fact accepted the respective status.
2.2. Comments on the lack of registration.
The Higher Commercial Court of Ukraine has also concluded that both the commercial court and the commercial appeal court came to the incorrect judgment regarding the legal consequences of the absence of state registration of the Franchise Agreement. The state registration of franchise agreements has legal effect only in respect of the relations with third persons. Therefore, absence of state registration shall not be regarded as a ground for invalidating the Franchise Agreement and dismissing the Franchisor’s claims in the framework of the present case (i.e. the present case concerned exclusively relations of the parties to the Franchise Agreement). In addition, the Higher Commercial Court of Ukraine stated that neither the commercial court nor the commercial appeal court have duly established whether the relevant Ukrainian legislation set forth procedure of state registration of franchise agreements and thus, whether there was a mere possibility for the Franchisor to fulfill its obligations regarding state registration of the Franchise Agreement.
Proceeding from the above, the Higher Commercial Court of Ukraine upon examination of the decisions of the courts of the lower levels has decided to revoke both of them and to return the case for reconsideration because both courts did not establish all facts and did not analyze all relevant evidence comprehensively, completely and objectively.
III. Reconsideration of the case by the commercial court.
Following a decision of the Higher Commercial Court of Ukraine, the first instance commercial court (in new personal composition) has reconsidered the case and concluded as follows.
3.1. Decision of the commercial court regarding the Franchisor’s claims.
3.1.1. The Franchisor’s claim to terminate the Franchise Agreement.
Under the Civil Code of Ukraine a court is allowed to terminate or change a contract on the request of one of the parties thereto in case of significant violation thereof by the other party and in other cases directly established by a contract or laws.
The Franchisor claimed Franchisee has sufficiently infringed the Franchise Agreement. However, having analyzed evidence and information provided by the Franchisor and the Franchisee, the commercial court found as follows:
- Regarding the Franchisee’s obligation to use software programs.
The commercial court found that the Franchisor did not provide the proofs that it has duly transferred software programs to the Franchisee. The fact is that under the Franchise Agreement transfer of software programs from the Franchisor to the Franchisee should be confirmed by means of acceptance acts. However, the Franchisor did not submit such acceptance acts to the commercial court. Instead of the latter, the Franchisor provided the commercial court only with the letter sent by the Franchisee to the Franchisor. The said letter, in the view of the commercial court, could not be regarded as a proof of transfer of software programs to the Franchisee since such letter could not be treated as appropriate evidence4 in the respective case. Therefore, as the Franchisor did not provide the Franchisee with such software programs, the latter was not able to use thereof.
- Regarding the Franchisee’s obligation to assist the Franchisor’s inspections of the Franchisee’s business. The commercial court stated that the Franchisor did not prove by means of appropriate evidence (i.e. duly executed documents, testimony etc.) the fact that the Franchisee hindered the Franchisor to inspect the Franchisee’s business.
- Regarding quality of goods and services sold/rendered by the Franchisee.
The commercial court mentioned that the Franchisor did not submit appropriate evidence (i.e. acts on inspection of quality of the Franchisee’s goods/services, acts executed by the relevant state authorities etc.) confirming that the Franchisee sold /rendered poor quality goods and services.
Also the commercial court did not take into account the article in mass media submitted by the Franchisor, according to which poor-quality goods/services were sold/rendered in the restaurant ‘Pan-Pizza’, due to the following: the said article constitutes inappropriate evidence and it did not contain enough information to determine definitely the restaurant ‘Pan-Pizza’, in which poor-quality goods/services were sold/rendered.
Therefore, the commercial court did not find any infringements from the Franchisee’s side in the field of quality of its goods/services.
- Regarding the Franchisee’s obligation to pay fees for the behalf of the Franchisor.
(i) Periodical fees/royalties and advertising fees.
The commercial court concluded that as the Franchisor infringed its obligations under the Franchise Agreement (to transfer organization of delivery service book and software programs, to conclude license agreements with the Franchisee etc.), the Franchisee was not obliged to pay periodical fees/royalties and advertising fees.
(ii) A fee to be paid for setting up of the second restaurant (the ‘Fee’).
In the words of the Franchisor, the Franchisee did not pay the Fee within the set terms. The commercial court pointed that the Franchise Agreement did not provide for exact terms, during which the Franchisee should pay the Fee. Therefore, the commercial court found that the Franchisee could not be regarded to be in default of the Franchise Agreement in this respect.
- Regarding usage of the Franchisor’s intellectual property rights.
The Franchisor tried to substantiate that the Franchisee used the Franchisor’s intellectual property rights on trademarks and commercial nominations unduly (i.e. without entering into license agreements with the Franchisor). In order to prove the above, the Franchisor submitted to the commercial court a menu containing such trademarks and commercial names. However, the commercial court disregarded the evidence because menu did not contain any information on the Franchisee e.g. its name or address or seal etc. and thus, it was not possible to define whether the latter was used definitely by the Franchisee.
In addition, the Franchisor required the commercial court to oblige the Franchisee to return all certificates and patents confirming transfer of the Franchisor’s intellectual property rights to the Franchisee. However the commercial court stated that the said Franchisor’s demands are not to be satisfied as well due to the following: (a) the Franchise Agreement did not provide for any terms and conditions, subject to which such certificates and patents should be returned by the Franchisee; (b) the Franchisor did not submit to the commercial court any evidence confirming the initial transfer of the said certificates and patents to the Franchisee.
- Regarding the Franchisee’s obligation to use software programs.
3.1.2. The Franchisor’s claim for indemnification.
In this regard, the commercial court stated that due to the Franchisor’s significant infringements of the Franchise Agreement, the Franchisee was not able to fulfill its obligations duly that, in the end, caused damages to the Franchisor. However, as damages were caused to the Franchisor without fault of the Franchisee, such damages should not be indemnified by the latter./p>
3.2. Decision of the commercial court regarding the Franchisee’s counterclaims .
3.2.1. The Franchisee’s claim to declare the Franchise Agreement as unconcluded.
The commercial court mentioned that absence of state registration of the Franchise Agreement should not be regarded as a reason to declare the latter as unconcluded due to the following. Local authorities, being asked to perform such state registration, have executed the letter, under which they denied to perform state registration of franchise agreements because the latter was out of authorities thereof. Therefore, state registration was rejected and the Franchisor was not able to fulfill its obligations duly.
3.2.2. The Franchisee’s claim regarding violation by the Franchisor of termination procedure set out in the Franchise Agreement.
The Franchise Agreement sets out the following termination procedure: a party intending to terminate the Franchise Agreement shall file a termination notice to the other party thereto not later than 30 days prior to such termination; the other party is entitled to eliminate reasons for termination indicated in the termination notice. In the latter case, such party shall immediately provide the other party with an elimination notice.
Pursuant to the materials of the case, the Franchisor submitted to the commercial court evidence proving that the Franchisor dispatched the termination notice to the Franchisee. In its turn, the Franchisee provided the commercial court with its elimination notice and with evidence that the latter was sent to the Franchisor. However, the Franchisor simply did not take the said elimination notice from the post (i.e. the Franchisee provided appropriate evidence of the above).
In this regard, the commercial court found that the termination procedure set forth in the Franchise Agreement was infringed by the Franchisor. The Franchisee duly executed the elimination notice and sent the latter under the terms and conditions stipulated in the Franchise Agreement. However, the Franchisor did not perform its obligations but just avoided the receipt of the elimination notice at the post. Therefore, in the view of the commercial court there are no justified grounds to regard the Franchise Agreement as terminated.
Proceeding from the above, the commercial court dismissed both the Franchisor’s claim and the Franchisee’s claim.
The above analyzed case law testifies that currently the institution of franchising is still rather new for Ukrainian business and judicial community. Following very formal approach usually taken by the state judges it is important to take into account the following. Franchise agreements shall be rather detailed in order to ensure rights/obligations of foreign franchisors and/or franchisees (i.e. franchise agreements shall stipulate directly and definitely a set of rights to be granted by a franchisor, rights and obligations of parties thereto, payments to be performed for the behalf of a franchisor, termination procedure, consequences of termination of a franchise agreement etc.).
Also it is very important to fully comply with all provisions of franchise agreements and to provide for formal confirmation of the latter i.e. to execute in the set cases acceptance/ inspections acts, confirm receipt or sending of the letter; provide for e-mail correspondence as an agreed way of party’s communications etc.
Slipachuk Tatyana, IDI country expert for Ukraine.