The special urgency necessary for an interim injunction does not exist if the franchisor has other means available to enforce the obligation to operate the business, such as an agreed contractual penalty. The anticipated damage to the franchisor's image does not outweigh the financial drawbacks which arise for the franchisee.
The Bochum Regional Court (July 5 2017, I-3 O 165/17) recently looked at whether a franchisee's contractual obligation to operate a business can be enforced by way of an interim injunction. Franchisors often have considerable interest in the continued operation of the franchisee's business integrated into the franchise system, which is why detailed obligations to keep the business open are often stipulated in contracts. If the franchisee breaches its obligation to operate its business, this can lead to:
- considerable reduction of fees (financial loss) for the franchisor;
- serious damage to the franchisor's image; and
- a breach of contract by the franchisor.
In such cases, the franchisor has an interest in not waiting several months or even years for a court ruling. It makes sense for the franchisor to try to enforce the franchisee's obligation to continue trading by having an interim injunction granted.
Under Sections 935 and 940 of the Code of Civil Procedure, an interim injunction is admissible only if two requirements are fulfilled:
- the franchisor must have a material claim (ie, the franchisee's obligation to run the business); and
- an interim injunction must be "necessary in order to avert significant disadvantages, to prevent impending force, or for other reasons".
In addition to a claim for the desired injunction, this matter must also be urgent for the applicant. In the event of an interim order of continued performance, which would pre-empt the substance of the case and thereby the ordinary proceedings, there are stringent requirements for urgency. Therefore, conflicting interests must be weighed up.
A franchisor of culinary gift shops applied for an interim injunction against one of its franchisees to oblige it to reopen its shop in a shopping centre and continue operating it from 10:00am to 6:00pm on weekdays. The franchisee had discontinued business operations as of June 30 2017 with prior notice.
The franchise agreement contained a corresponding obligation to continue trading on the part of the franchisee. A contractual penalty was also agreed between the franchisor and franchisee in the event of a breach of this obligation.
The franchisor asserted that the urgency required for the interim injunction resulted from the fact that it would otherwise face severe financial disadvantages. First, it was obliged in relation to the principal landlord to continue to operate the shop. A breach of this would entail a contractual penalty for the franchisor arising from the lease. Second, the discontinuation of business operations would have damaged the image of the franchise system, both for the principal landlord as the operator of several shopping centres and for other potential franchisees.
The Bochum Regional Court dismissed the petition for an interim injunction.
According to the court, although the applicant had a material claim resulting from the agreed obligation to continue trading, there was a lack of the necessary grounds for an interim injunction (ie, urgency). The stringent requirements for urgency were not in place in the specific case, because no overwhelming interest on the part of the applicant in having an interim injunction granted had been demonstrated.
The court left it open as to whether the case law on commercial leases, which allows for an obligation to operate the business to be enforced via an interim injunction, can be transferred to the relationship between franchisor and franchisee. In any case, this does not eliminate the need to weigh up the conflicting interests in each individual case.
The court concluded that the applicant had another financial means of enforcing the franchisee's obligation to operate its business in the form of the agreed contractual penalty, which is why there was no overwhelming interest for the franchisor. The court said that this applied even if the commercial premises lease obliged the franchisor in its relationship with the principal landlord to continue operating the shop on pain of a contractual penalty. The franchisor had not demonstrated that possible legal action taken by the principal landlord would put it in a financial or even survival-jeopardising predicament and thus there was no specific need for urgency, especially since the contractual penalty facing the franchisor was limited to the monthly rent and thus not a major financial outlay.
Equally, according to the court, alleged harm to the applicant's image could not lead to an assumption of the required urgency. When balancing interests, possible image damage does not outweigh the financial drawbacks that the franchisee would suffer if it continued to operate the business. As the franchisee already announced the end of its business operations in early June, presumably it had considered closing for some time and, if it were to continue the business, it would have to enter into new liabilities regarding employees and suppliers. Closing down the business and the related anticipated harm to the company's image are a common business risk which must be taken into account, but it does not lead to any overwhelming interest in an interim injunction on the part of the applicant.
The decision clearly shows that courts place stringent requirements on granting interim injunctions, not only to secure a claim but also to help fulfil it. The court refused to impose obligations on the defendant in summary proceedings which cannot be fully reversed at a later date.
The decision appears to suggest that it is possible that an obligation to continue operating a business can also be enforced by way of an interim injunction. However, the franchisor in this case was referred to the agreed contractual penalty as a suitable means of fulfilling the obligation to operate the business. According to the court, it does not matter that the franchisor was required to pay a contractual penalty to the principal landlord, as long as this obligation does not demonstrably jeopardise its existence. The court also clarified that an anticipated image loss following closure of the business, as a common business risk, has no special weight when balancing interests that would outweigh the franchisee's financial drawbacks in continuing the business.
To grant an interim injunction to enforce the obligation to keep the business open, it must be demonstrated that the franchisor faces serious losses at least equivalent to a threat to its survival or to drawbacks that cannot later be remedied. Additionally, alternative means of enforcing the obligation to continue trading (eg, an agreed contractual penalty) may prevent an interim injunction being granted, so the franchisor must have no other means of satisfying the obligation to continue trading via the franchisee in a reasonable manner.
Enforcing the franchisee's obligation to continue trading by way of an interim injunction may seem possible in principle, but it will remain the exception because of the very stringent requirements.
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