Article 62 of the Spanish Law on the Regulation of Retail Trade establishes, in section 1. that “the commercial activity under the franchise system is that which is carried out by virtue of an agreement or contract by which a company known as a franchiser cedes to another company, known as a franchisee, the right to operate its own system of marketing products or services”.
Likewise, said article in section number 3 establishes that:
“(…) at least twenty days prior to the signing of any franchise contract or pre-contract or delivery by the future franchisee to the franchisor of any payment, the franchisor must have given the future franchisee, in writing, the necessary information so that he may freely and knowingly decide to join the franchise network and, in particular, the main data identifying the franchisor, a description of the sector of the activity of the franchised business, the content and characteristics of the franchise and its operation, the structure and extent of the network and the essential elements of the franchise agreement (…)”.
Taking into account the above legal concepts, in this article we shall analyse the Supreme Court judgment 438/2018 of 11th September which deals with the breach of obligations contractually agreed between a franchiser and a franchisee.
In said case, the franchiser and the franchisee signed a franchise contract for the operation of restaurants, pursuant to which the former authorised the latter to use the trade mark Foster’s Hollywood in a business establishment.
Five years later the franchiser sent a certified fax to the franchisee notifying the latter of the termination of the franchise contract for breaches of the franchise due to the non-payment of royalties and advertising fees.
Several months later the franchiser filed a claim against the franchisee requesting that it be declared that the termination of the contract had been carried out in accordance with Law and that the franchisee be ordered to pay the franchiser Euro 61,585.71 for royalties and advertising fees; a compensation of Euro 90,000 for breach and infringement of the contract, and further compensation, also agreed in the contract, for the infringement of the obligation to return the know-how manuals, for not withdrawing the trademarks, elements and other symbols, methods and components of the franchising system amounting to Euro 102,000, without prejudice to the amounts which would continue to be generated as from the date of the calculation and the applicable interest in accordance with the rate set forth in the contract.
The Court of First Instance dismissed the claim because it deemed that it had not been proven that the franchising company had completely fulfilled the obligations imposed by article 62.3 of the Spanish Law on the Regulation of Retail Trade, relative to the provision of accurate precontractual information to the franchisee. The Courts concluded on the basis of article 1124 of the Civil Code that given that one party of the contract may not demand from the other the fulfilment of its obligations if it has not complied with its own, thus the franchising company lacks legitimacy for engaging the contractual termination based upon the non-fulfilment of the counterparty.
The franchising company appealed the judgment in second instance, but the Provincial Court dismissed the appeal based upon the same argument as the Court of First Instance.
The franchising company then filed an appeal against the judgment in second instance.
The decision of the Spanish Supreme Court established that the franchising company breached the obligation to inform the franchisee that article 62.3 of the Spanish Law on the Regulation of Retail Trade was applicable and that non-fulfilment thereof prevented him from demanding from the franchisee the fulfilment of its contractual obligations, likewise it also impeded him from calling for the termination of the contract.
For this reason, the Supreme Court prevented the termination of the franchise contract and decided that the franchisee could carry on using the know-how, the trademarks, emblems and other elements of the franchising company without paying any amount whatsoever.
Hugo Ester
Vilá Abogados
For more information, please contact:
