An Italian judgement in the Tribunal of Palermo (7 September 2011) has offered an insight into how the Italian courts will assess whether a franchisor can validly terminate a franchise agreement for delayed payments by the franchisee.

Background

The parties entered into a franchise agreement in 1998. The terms of the agreement provided the franchisor with a right to terminate immediately in the event. This was of the franchisee's breach of certain obligations, which were specified in the agreement. One of these termination events was the franchisee's failure to pay for products within 90 days of the date of invoice.

During the term of the agreement, the Franchisee began to fail to meet its payment obligations under the agreement. Despite the fact that a termination event had been triggered under the agreement, the franchisor accepted the franchisee's delay in making payments. This eventually led to the accumulation of significant debt. Some of this debt was reduced by a payment plan which was agreed between the parties in June 2004. Nevertheless, the franchisor terminated the agreement in July 2004, citing the franchisee's failure to make payment for the products within 90 days of invoice as agreed.

The franchisee disputed the termination on the basis that the franchisor had been accepting the delayed payments. It was argued that the franchisor had therefore waived its right to terminate and implicitly agreed to vary the payment terms of the franchisee agreement.

Decision

The Court followed a decision of the Supreme Court (Cass. No. 3964 of 18/3/2003) which outlined the principle that the tolerance of repeated breaches of contract can be consistent with the good faith principles of the Italian Constitution and Civil Code. And such tolerance could not be regarded as a waiver of the franchisor's contractual rights nor a variation of the agreement.

The case illustrates the Italian's courts unwillingness to modify the terms of a written arrangement. The decision encourages franchisors to be accommodating with late payments from franchisees without being fearful of waiving their rights under a franchise agreement.