Agreeing to exclusivity in franchise agreement is very important!

Agreeing to exclusivity in franchise agreement is very important!

A common part of a franchise agreement is the purchase obligation, in which the franchisee is obliged to purchase, for example, 90% of the products to be sold from the franchisor. But does this purchase obligation also apply if the franchisee conducts activities connected to the franchise under another name? What exactly is covered by the franchise agreement? Dutch contract and franchise lawyer Hidde Reitsma explains.

 

Franchise agreement for hairstyling products

A franchisor developed a formula for the wholesale trade in hairstyling products under the name Medusa. A franchise agreement is concluded with a franchisee in which the franchisee gains the right to operate a Medusa wholesale trade and, among others, the franchisee is obliged to purchase at least 90% of his hairstyling products from the franchisor.

Franchisee has another business

At a certain point in time it becomes clear that the franchisee is also active in the hairstyling business outside of Medusa and sells products on the internet, under the name “Het Kapperswinkeltje”, which he has not purchased from the franchisor. The issue is whether these other (internet) activities of the franchisee are covered by the franchise agreement. As it is, based on this agreement virtually all products have to be purchased from Medusa.

Interpretation of the agreement pursuant to Haviltex standard

In answering this question, the Court of Appeal assumes the interpretation that both parties gave to the agreement, in which the expectations that they could reasonably have according to each other’s conduct and notices is important. The Court of Appeal finds that the franchise agreement does not cover all activities of the franchisee in the hairstyling products business. The parties could have included such an exclusivity clause in the agreement, but failed to do so.

Court of Appeal: no exclusivity clause in contract

Medusa could not assume that by entering into the franchise agreement, all activities of the franchisee, apart from his activities for Medusa, would be covered by the agreement. Concerning “Het Kapperswinkeltje” (and other non-Medusa activities) the franchisee is therefore free to purchase products from whatever source.

Dutch lawyer when drawing up a franchise agreement

A purchase obligation for products to be sold is an important part of a franchise agreement. But please do not forget to include an arrangement about exclusivity or a noncompetition clause. A franchisor prefers that a franchisee does not compete with the own franchise. In this case such a clause had not been concluded in the agreement and the franchisee was therefore free to start another business in hairstyling products under another name. This was an unexpected blow for the franchisor. Therefore always have a franchise agreement drawn up by an experienced lawyer. AMS Lawyers specializes in franchise cases.

Hidde Reitsma - Advocatenkantoor AMS Advocaten
Hidde Reitsma Hidde has a varied consultancy and litigation practice, focusing on corporate law and insolvency law. He frequently acts in proceedings before the Enterprise Chamber of the Court of Appeal in Amsterdam and in cases on directors’ liability. Hidde also advises on drawing up and negotiating contracts, mergers and acquisitions and joint ventures. Follow Hidde also on Google or LinkedIn. Hidde is available via e-mail and +31 (0)20-3080315.
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