In most countries, the franchisee will
be entitled to compensation if the franchisor
wrongfully terminates the Franchise Agreement.
Such compensation may include damages for loss of
revenue and a possible refund of the initial
franchise fee or part of the initial investment
made.
But some countries go yet
further!
In Germany, Austria and Switzerland the
courts have repeatedly suggested that compensation
is payable to a franchisee for loss of good will
and customer base. Such compensation is thought to
be payable in the following
circumstances:
-
upon expiry of the
Franchise Agreement
-
upon termination of
the Franchise Agreement by the franchisee
-
upon termination of
the Franchise Agreement by the franchisor unless
such termination was justified by a substantial
material breach of the
franchisee
The
fact that compensation may be payable upon expiry
of the Franchise Agreement without any breach will
come as a surprise to many franchisors. How can
such compensation payments be avoided?
-
We
recommend that franchisors do not agree to
German, Swiss or Austrian law as the governing
law of a Franchise Agreement.
-
If
the application of these laws cannot be avoided,
franchisors should consider other defensive
measures such as the removal from their
Franchise Agreements of any provisions which
demand transfer of customer data.
-
Another solution
may be to agree a formula for calculation of the
compensation. It has to be noted however, that
any such formula will be subject to challenge in
the courts particularly where franchisors
attempt to significantly reduce the compensation
claim.
How much
compensation should franchisors expect to pay if
they have fallen foul of these laws?
In
most countries compensation is capped at the
annual average income of the franchisee. Further
discounts can be made where it can be shown that
customers will continue to do business with the
franchisee under his or her new business name.
Further information is available from
Babette Märzheuser-Wood or Mark Abell at Field Fisher
Waterhouse.