uï¿½ï¿½Is it the trader or the consumer who is responsible for return of defective goods?
uï¿½ï¿½New regulatory framework for online operators?
u Franchisee doubts the accuracy of the forecast - no error
u Avoidance of compensation claims of an Austrian distributor / franchisee
u Retail. Technology has arrived.
u Purchase exclusivity: the legitimate limits to the franchiseeâ€™s freedom
u Specific features of the proof of damage in unfair competition cases
u The provisional enforcement of a ruling ordering compliance with a post-term non-competition clause
u Significant imbalance: the automatic exclusion of the suppliersâ€™ terms and conditions of sale and the implementation of a discounted advance payment program without consideration are unfair
u Modification of the sales periods and their duration
uï¿½ï¿½Franchising in Germany - Franchise agreements risk being void if they unduly impair the franchiseeâ€™s freedom
Purchase exclusivity: the legitimate limits to the franchiseeâ€™s freedom
The legal and economic independence of the franchisee is an important element of the franchise relationship. The franchisee is indeed an independent trader who manages his business independently.
The franchisorâ€™s failure to respect the franchiseeâ€™s independence, when it leads to the franchisee being turned into a â€œmere executive agentâ€ and causes him to lose all autonomy creates a risk of the franchise agreement being reclassified as an employment agreement (Court of Cassation, 18 January 2012, No 10-16342).
Therefore, the franchisor must be cautious not to interfere excessively in the management of the franchiseeâ€™s business.
However, this does not mean that the franchisor cannot monitor the franchiseeâ€™s activity. The franchisor must be able to ensure the uniformity of its network, compliance with the
system and its know-how and to protect the reputation of the brand.
In the case at hand, a franchisee had signed a franchise agreement for the operation of a restaurant. In the year following the opening of the outlet, the franchisee had initiated proceedings to obtain the annulment of the agreement and compensation for the alleged infringement of competition rules, claiming that it had no independence or room for action in the conduct of his business.
The franchisee notably alleged that:
uï¿½the franchisor imposed the prices to be charged to the clients and remotely controlled the franchiseeâ€™s point of sale system;
u the menus were imposed by the franchisor;
u the franchisor imposed the exclusive sourcing from its central purchasing office and approved suppliers for the furniture of the restaurant and the products used by the franchisee (including products that were not specific to the
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The Court rejected this argument and ruled that the prices indicated by the franchisor were only recommended prices, which many franchisees in the network had changed. The franchisee was free to do so as well. In addition, the control of the point of sale system by the franchisor only allowed the franchisor to obtain information on the sales of the franchisee.
Regarding the exclusive purchase obligation, the Court ruled that the imposition of specific furniture and products for the preparation of recipes was justified by the necessity to preserve the identity of the network. For other (non-specific) products, the Court noted that the exclusive purchase obligation allowed the franchisor â€œto ensure their quality level and food safety and thus to preserve the reputation of the network.â€
The Court of Appeal thus refuted the existence of a wrongful interference by the franchisor and rejected the claims of the franchisee.
This decision is a useful reminder that, whereas the franchisee must manage its activity independently, the franchisor is always legitimate to impose operational rules and monitor that they are complied with, in order to protect the reputation of the brand and the homogeneity of the network.
Authors: Myriam Berger and GrÃ©goire Toulouse
Specific features of the proof of damage in unfair competition cases
Court of Cassation, 10 April 2019, nÂ°18-13612
To ground a tort action based on article 1240 of the Civil Code (former article 1382) three elements are required: the existence of a fault (causal event), a damage and a connection between these two elements. All three elements need to be proven by the plaintiff.
However, unfair competition proceedings benefit from a more flexible regime, based on a presumption of proof of the existence of a damage (Court of Cassation, 22 October 1985, nÂ°83-15096; Court of Cassation, 28 September 2010, No. 09- 69272; Court of Cassation, 11 January 2017, No. 15-18669).
This is the principle that was underlined in the ruling of the Court of cassation dated 10 April 2019.
In this case, music publishing company complained that a competitor had distributed CD covers that reproduced the original characteristics of its own CD covers.
The music publishing company therefore sued its competitor for counterfeiting and, in the alternative, for unfair competition and economic parasitism.
The Court of Appeal of Versailles had dismissed the music
publishing companyâ€™s claims. First, regarding the action on counterfeiting, the Court of Appeal considered that the originality of the covers was not established, because of the banal nature of their various elements. As for the action for unfair competition and economic parasitism, the Court of Appeal considered that the plaintiff did not provide justification of any damage related to the distribution of the disputed CD covers.
The Court of Cassation overruled the decision in all its provisions.
First of all, the Court of cassation considered that the originality of the covers must be assessed as a whole, with regard to the various elements, even ordinary, that compose them (see already Court of Cassation, 30 September 2015, nÂ°14-11944).
Regarding the unfair competition claim, the Court of cassation ruled, on the basis of article 1240 of the Civil Code, that a damage is necessarily inferred from an act of unfair competition (this presumption being however rebuttable: Court of Cassation, 8 July 1997, nÂ°95-16984).
In the present case, the Court of Appeal had decided that the creation of a risk of confusion between the two disputed covers constituted an act of unfair competition. Consequently, a damage had to be presumed.
The amount of damages that is awarded by the Court might end up being symbolic, but the solution has the advantage of allowing automatic sanction of unfair behaviors.
Authors: NoÃ©mie Vincent and GrÃ©goire Toulouse
The provisional enforcement of a ruling ordering compliance with a post-term non-competition clause
Court of Appeal of Paris, 17 April 2019, nÂ° 19/03841 (First President Ordinance)
When a franchisee does not comply with the post-term non- competition clause contained in the franchise agreement it has entered into, the franchisor has two options: either to bring an action on the merits before the Court to obtain compensation for the damage suffered and the ceasing of the practice (although the time constraints are such that the request may be ineffective) or to bring an action before the interim relief judge to quickly put an end to such unauthorized competition.
In the case at hand, following non-compliance by a group of franchisees with their post-term non-compete undertakings, the franchisor brought a claim against them on the merits to obtain payment of various amounts and an injunction to the franchisees to cease carrying on their competing activities in the exclusive areas that had previously been granted to them.
In a ruling dated 6 February 2019, the Commercial Court of Paris welcomed the franchisorâ€™s claims and ordered the franchisees, under penalty, to cease the competing activity in the territories covered by the non-compete undertakings for a period of one year following the termination of the franchise agreements. The Court further ordered the provisional enforcement of its decision.
The franchisees appealed the ruling and referred the matter to the first President of the Court of Appeal of Paris to obtain a stay of the provisional enforcement of the Commercial Court ruling on the basis of Article 524 of the Code of Civil Procedure.
The provisional enforcement of a ruling can indeed be stopped in three cases: (i) if such provisional enforcement is prohibited by law; (ii) if it is likely to lead to obviously excessive consequences; and (iii) in the event of an obvious violation of the principle of the adversarial procedure or of Article 12 of the Code of Civil Procedure and only if the enforcement is likely to lead to obviously excessive consequences.
The â€œobviously excessive consequencesâ€ are assessed â€œhaving regard either to the financial difficulties of the debtor or to the creditorâ€™s ability to repay the sums paidâ€ if the first instance decision is overruled (since Court of Cassation, Plenary Assembly, 2 November 1990, No. 90-12698) and can therefore only be of a financial nature.
In the present case, the franchisees argued that the provisional enforcement of the ruling ordering them to cease their competing activity had the following obviously excessive consequences:
u According to them â€œthe human and economic stakes [were] high since the ban concerns 5 outlets employing 19 permanent and 516 temporary workers and will have consequences for their clientsâ€;
u Also, according to them, â€œthe activities and related jobs [would] definitively be jeopardized simply because the outlets have to bear operating costs of â‚¬1.6 million over the period without any revenue.â€
To support their position, the franchisees submitted as evidence their annual accounts for 2017 as well as a certificate from a certified accountant.
After underlining that the risk of obviously excessive consequences was assessed â€œby reference to the injunction to cease activity and not by reference to the amount of any liquidation of the penalty accompanying it, which is only incidentalâ€, the First President of Paris Court of Appeal of Paris dismissed the franchiseesâ€™ claims, emphasizing that the injunction was limited in time (since the injunctive ruling had been served on 12 February 2019 and the non-competition
clause expired on 4 June 2019) and that the risk of obviously excessive consequences was not demonstrated on the mere basis of the annual accounts and the certificate produced in Court.
Authors: Fanny Levy and GrÃ©goire Toulouse
Significant imbalance: the automatic exclusion of the supplierâ€™s terms and conditions of sale and the implementation of a discounted advance payment program without consideration are unfair
Court of Appeal of Paris, 12 June 2019, RG No 18/20323
In In this case, the Court of Appeal of Paris had to rule on the compliance of clauses stipulated in the terms and conditions of purchase and standard agreements of a manufacturer in the light of the rules prohibiting significant imbalances between the rights and obligations of the parties.
The manufacturerâ€™s terms and conditions of purchase contained a clause providing for the inapplicability of the supplierâ€™s terms and conditions of sale in the context of the commercial negotiation. As for the manufacturerâ€™s standard supply agreement, it provided for an automatic price reduction in the event of early payment.
Following a claim lodged by the Minister for Economic Affairs, the Commercial Court of Nancy had considered that these clauses did not create a significant imbalance to the detriment of the suppliers.
In appeal, the Court of Appeal of Paris overturned the first instance decision and ruled that the manufacturer had subjected or attempted to subject nearly half of its suppliers to these clauses.
To characterize the capacity of the manufacturer to submit the suppliers, the Court noted that the manufacturer had a very strong market power and was an â€œundisputed leaderâ€ in the industry at stake, in light of the importance of its sales and its international presence.
The Court concluded that the suppliers had no choice but to deal with a partner with such significant market power and this situation was likely to lead them to accept without negotiation the clauses contained in the contractual documentation of the manufacturer. This was confirmed by 28 anonymous statements produced to the debates by the Minister for Economic Affairs.
This ruling applied the economic approach decided by the Court of Cassation and followed by the Paris Court of Appeal for the characterization of the existence of a state of
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submission (Court of Cassation, 4 October 2016, nÂ° 14-28013; Court of Appeal of Paris, 26 April 2017, nÂ° 15-27865; Court of Appeal of Paris, 20 December 2017, nÂ° 13/04879).
Regarding the clause of the terms and conditions of purchase of the manufacturer which excluded the terms and conditions of sale of the suppliers, the Court pointed out that it contradicted the mandatory provisions of Article L.441-6 of the Commercial Code according to which the terms and conditions of sale constitute the basis of the negotiation.
Therefore, the Court annulled the clause (see already: Court of Appeal of Paris, 18 December 2013, RG nÂ°12/00150 and Opinions of the CEPC nÂ°04-04 and 08-06).
Regarding the advance payment program implemented by the manufacturer, the Court underlined that the Commercial Code only sets maximum payment terms and this is only a tolerance regarding the practice of supplier credit.
No automatic financial compensation can therefore be requested by the buyer (unless there is some form of consideration).
In the present case, the Court underlined that the automatic discount granted to the manufacturer in the event of an advance payment set in its standard supply agreement led to a substantial reduction of the amount paid to the suppliers without any consideration that could justify this practice.
As a consequence, the Court ruled that this significant and automatic price reduction, which was imposed by the manufacturer and not the result of a negotiation, and which was not counterbalanced in the agreement, characterized a significant imbalance between the rights and obligations of the parties and was null and void.
Authors: Floriane Cadio de Kermainguy and GrÃ©goire Toulouse
Modification of the sales periods and their duration
Law nÂ° 2019-486 of 22 May 2019 on the growth and transformation of companies
Article 16 of Act No. 2019-486 of 22 May 2019 on the growth and transformation of companies (the so-called â€œPacteâ€ Act) amended the provisions of the Commercial Code relating to sales periods and their duration. This new provision will come into force on 1st November 2019.
As previously drafted by Ordinance No. 2016-301 of 14 March 2016, Article L.310-3 of the Commercial Code provided that sales were divided into two periods of six weeks each, the start dates and times of which were set by decree (Article D.310-15-2 of the Commercial Code).
The Pacte Act modified the duration and the method of setting the start and end dates and times of sales.
As for the duration of the sales, it will from now on vary between a minimum of three weeks and a maximum of six weeks.
Regarding the start and end dates and times, they will now be fixed by a decree of the Minister for Economic Affairs. A decree of 27 May 2019 has already set a duration of four weeks for 2020 for each sales period as well as the dates and times of the start of the sales department by department (to take into account the seasonal nature of sales and the commercial operations carried out in the border regions).
Authors: Christelle Adam and GrÃ©goire Toulouse
Franchising in Germany - Franchise agreements risk being void if they unduly impair the franchiseeâ€™s freedom Franchisors typically use standard form franchise contracts â€“ for the sake of ensuring the franchise systemâ€™s homogeneity and treating all franchisees equally. Such contracts, and also handbooks, guidelines or other manuals constitute standard form contracts under German law â€“ since they are not individually negotiated by the parties but provided by the franchisor as pre-formulated contractual terms. Such standard form contracts are subject to the strict statutory requirements on standard form contracts (as stipulated in Section 305 et seqq. German Civil Code), according to which such standard form contracts shall not unreasonably disadvantage the franchisee.
Besides, franchise contracts must especially not restrict the franchiseeâ€™s economic freedom too much. Otherwise â€“ that is the worst-case risk â€“ the entire franchise contract is void, as the German Federal Court recently confirmed again:
â€œA franchise agreement is null and void in its entirety (â€¦) if the franchiseeâ€™s economic freedom is unduly impaired because of several provisions which favour the franchisor and disfavour the franchisee, without granting at least an approximately reasonable compensation (...).â€
(Decision of 11.10.2018, Case No. VII ZR 298/17, para. 17 [own translation]).
Whether such undue impairment is given shall be assessed
by an overall review of the franchise agreement and the circumstances leading to its conclusion. A critical indication for an undue impairment may be, according to the Federal Court, a provision that grants the franchisor an authority to collect debts, thus allowing the franchisor to redirect the payments directly to the franchisor.
1. This new decision, dealing with a â€œlicensing contractâ€ granting a franchise licence to act as realtor, confirms the rather restrictive, rather franchisee-friendly case law of the past.
2. To minimize the risk of invalidity, franchisors ideally observe the relevant statutory requirements on standard form contracts and the relevant case law on franchise contracts. According to the latest decision above, special care has to be taken when the franchise contract provides for the franchisorâ€™s power to collect debts.
3. On how to make price campaigns legally compliant, franchisors can check out the respective article â€œHow to make price campaigns comply with competition lawâ€, in or Franchise & Distribution Networks Newsletter #1/2019 (page 5).
Author: Benedikt RohrÃŸen
Is it the trader or the consumer who is responsible for return of defective goods? Whatâ€™s the issue?
Under the Guarantees Directive, implemented in the UK by the Consumer Rights Act 2015, if goods do not conform to the contract under which they are sold, the consumer has a range of remedies. They are entitled to elect either repair or replacement. The trader is allowed to suggest the other of those remedies if the one chosen by the consumer is impossible or disproportionate.
A remedy will be disproportionate if it imposes costs on the trader which are unreasonable compared with the alternative remedy, taking into account the value the goods would have if they did conform to the contract, and the significance of the lack of conformity together with whether the alternative remedy can be completed without significant inconvenience to the seller.
Repair or replacement must be completed within a reasonable
time and without significant inconvenience to the consumer and must be carried out free of charge.
Where the consumer is not entitled to repair or replacement or if the seller has not completed repair or replacement within a reasonable time or without significant inconvenience to the consumer, the consumer then has a right to a price reduction of to have the contract rescinded (effectively cancelled) as long as the non-conformity is more than minor.
There are some quite vague terms in this set of obligations by necessity given the vast array of potential scenarios. What is significant inconvenience in terms of how repair or replacement is carried out? What does free of charge mean? Does it mean that the consumer only has to get a refund for the cost of returns or that the trader should pay them upfront?
Whatâ€™s the development?
The CJEU has handed down judgment in a reference relating to obligations under the Sales and Guarantees Directive. The CJEU ruled on a number of points holding that:
uï¿½Whether or not the customer is obliged to return defective goods to the trader for repair or replacement or whether they should merely allow the trader to collect them, should be determined on a case by case basis.
uï¿½The main aim of the Directive is to protect consumers from financial burdens which might prevent them asserting their rights. Relevant factors in assessing how non-conforming goods should get back to the trader include whether it will be faster and easier for the trader to examine them in the consumerâ€™s home or place of business and how easy it is for the consumer to return the goods, for example how heavy or fragile they are.
uï¿½Under the Directive, defective goods must be brought into conformity with the contract free of charge and the trader must bear the cost of postage, labor and materials. The CJEU clarified that this does not necessarily require the trader to pay the consumer return costs in advance, but the consumer should not have to pay costs and wait for their refund where the shipping costs are enough of a financial burden to deter the consumer from exercising their rights.
uï¿½The CJEU also said that a consumer wishing to rescind their contract because the trader has failed to repair or replace defective goods within a reasonable time, must first have the following:
- informed the seller that the goods are non-conforming
- elected either repair or replacement
- made the goods available to the seller; it is for the seller to suggest how the consumer should make the goods available for repair or replacement.
What does this mean for you?
If you sell goods to consumers (this case was about distance sales, but it has wider relevance), these are useful points to note. There is non-binding guidance from BEIS on these elements of the CRA, including on returns policies but this is subordinate to CJEU case law (at least for now). This judgment doesnâ€™t change anything but provides some useful clarifications.
New regulatory framework for online operators? What is the White Paper?
The government is proposing a new regulatory framework which will increase the responsibilities of operators to tackle harmful content and activities online. The proposals, set out in the Online Harms White Paper, will apply to any operator which allows users to share or discover user-generated content (UGC) or interact with each other online. It therefore covers a broad range of operators including social media platforms, press publishers that host UGC, cloud hosting providers and retailers who allow users to review products online.
Under the proposals, a new statutory duty of care will be imposed on operators, which will be overseen by an independent regulator. The regulator will set out how operators can comply with that duty of care in Codes of Practice. It will include obligations proactively to monitor or scan for certain tightly defined categories of illegal content. Failure to comply with the duty of care could lead to significant fines and individual liability for senior management. The net effect is that online operators will not be able to rely solely on the safe harbour provision in the e-Commerce Directive that they are merely acting as hosts to avoid liability for certain types of harmful content.
Given the scope of the proposed new regime and the potential sanctions involved, the White Paper should be carefully considered by all online operators. It is open for consultation until 1 July 2019.
Which operators are caught?
The new regime is proposed to apply to any operator which allows users to share or discover UGC or interact with each other online. This will include social media platforms, press publishers that host UGC, public discussion forums, sites that have communities, collaboration platforms, listings sites, sites selling personalised products, retailers that allow users to review products online, cloud hosting providers, file-sharing sites, instant messaging services and search engines. It is unclear whether internet service providers are intended to be covered. There is no definition of UGC.
The new regime will apply to any operator that provides
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services to UK users, irrespective of whether the operator has a legal presence in the UK. The types of operator and service caught by the new regime forms part of the consultation exercise.
What types of harm are covered?
The overriding aim of the new regime will be to tackle online content or activity that harms individual users, particularly children, or threatens the way of life in the UK. Illegal activity and content are covered as well as behaviours which are harmful but not necessarily illegal. There is no suggestion that any new illegal acts will be created. The White Paper includes an initial list of harmful content and activities that will be covered by the new regime as well as a list of harms that will be excluded. However, the list is not exhaustive or fixed and will be updated from time-to-time.
The initial list of harms are: child sexual exploitation and abuse; sexting of indecent images of under 18 year olds; terrorist/ extremist content and activity; organised immigration crime; modern slavery; extreme and revenge pornography; harassment; cyberstalking, cyberbullying and trolling; hate crime; encouraging or assisting suicide; advocacy of self- harm; promotion of FGM; incitement of violence; sale of illegal goods/services (such as drugs and weapons); content illegally uploaded from prisons; coercive behaviour; intimidation; violent content; disinformation (but not misinformation); and access by children to pornography or inappropriate material. The types of harm covered are not part of the consultation exercise.
What harms are not covered?
The following are excluded: all harms to organizations as opposed to individuals (such as under competition law, for infringement of IP rights or fraud); harms that result directly from a breach of data protection legislation or breach of cybersecurity or hacking; and all harms suffered on the dark web. In addition, any requirements to scan or monitor for illegal content will not apply to private channels. The government is consulting on appropriate definitions for private communications and what measures should apply to these services.
What obligations are being proposed?
A new statutory duty of care will be imposed on operators to make them more responsible for the safety of their individual users and to prevent other individuals coming to harm as a direct consequence of activity or content on their services. The duty will apply to all harms covered by the new regime and will be to do what is â€˜reasonably practicableâ€™. Compliance with this duty will be overseen and enforced by an independent regulator; a new cause of action is not being provided to individuals. The following key points arise in the White Paper:
uï¿½The regulator will set out how operators can comply with
the duty of care in Codes of Practice. These will set out the systems, procedures, technologies and investment that operators will need to adopt or take to fulfil the duty of care
u The new regime will ensure effective oversight of the take- down of illegal content and will introduce specific monitoring requirements for tightly defined categories of illegal content. These categories are not made express in the White Paper but appear to relate to terrorist activity, child sexual exploitation and abuse, hate crime and serious violence.
uï¿½Operators will be required to take action appropriate to the scale and severity of the harm in question. More stringent and specific requirements will be imposed for harms that are clearly illegal. Action will be assessed by the regulator according to the size and resources of the operator and the age of those at risk of harm.
u If operators wish to fulfil the duty of care by following a different procedure to that set out in the Codes of Practice, they will have to satisfy the regulator that the chosen approach will be equally or more effective in tackling harmful content and activities.
uï¿½Operatorâ€™s terms and conditions will need to comply with the duty of care and Codes of Practice and be effectively and consistently enforced. They will need to be sufficiently clear and accessible including to children and vulnerable adults, where appropriate.
uï¿½Operators will be expected to have effective and easy-to- access user complaints and appeals procedures. The regulator will set minimum standards for these procedures. There will be a means for independent review of decisions made by operators, including potentially the power for designated bodies to make â€˜super complaintsâ€™ to the regulator to defend the needs of users. The public will also have a right to report concerns to the regulator. The regulator will not determine individual disputes but will have power to take enforcement action in appropriate circumstances.
uï¿½The regulator will have power to require annual transparency reports from operators, covering a number of issues including evidence of effective enforcement of the operatorâ€™s own terms and conditions, the processes the operator has in place for reporting harmful content and the number of reports received and how many led to action. Transparency reports will be published. Failure to provide them will result in enforcement action. The regulator will also have power to request additional information from operators such as the impact of algorithms in selecting content.
Whilst Codes of Practice will not be established until the regulator is operational, the government expects operators to take action now to tackle harmful content and activity on their services. To support early action, high level obligations on operators are set out in the White Paper, as well as some specific obligations the government expects the regulator
to include in Codes of Practice. For example, in relation to disinformation, the government expects the Code of Practice to include requirements to make content that has been disputed by reputable fact-checking services less visible to users, to use fact-checking services particularly during elections, to promote authoritative news sources, to make it clear when users are dealing with automated accounts, as well steps operators should take to sanction users who deliberately misrepresent their identity to spread and strengthen disinformation.
The government intends to publish interim codes of practice providing guidance relating to national security and the physical safety of children later this year.
What are the potential sanctions for breach of the duty of care?
The regulator will have a number of enforcement powers including the ability to impose significant civil fines and to publish public notices about the proven failure of operators to comply with standards. The government is consulting on a number of additional potential powers including disruption of business activities, ISP blocking and liability for individual senior management (which could extend to personal liability for civil fines or even criminal liability).
How will the new regime dovetail with the e-Commerce Directive?
According to the White Paper, the new framework will increase the responsibility of online operators in a way that is compatible with the e-Commerce Directive. Under that Directive, online operators that merely host (rather than create) content are protected from liability for illegal content unless and until they have notice of it (provided they act expeditiously to remove or disable access to it once on notice). Under the new regime, it will not be possible for online operators to rely solely on this safe harbour provision. In particular, they will have a duty to monitor or filter for certain content. Any Codes of Practice will have to be carefully worded to ensure that they do not amount to a general obligation to monitor, if that is possible.
Operators should carefully review the proposals and consider responding to the consultation by the 1 July 2019 deadline. Legislation will be introduced when parliamentary time allows. However, certain interim Codes of Practice will be introduced later this year.
Going forwards, operators will want to consider such things as their terms and conditions, their complaints mechanisms, how affected users are dealt with, whether their black list/filters will need to be up-dated and whether they are meeting the expectations already set out in the White Paper and, if not, how they will meet them. Taylor Wessing is able to advise on the implications of and compliance with the new proposals.
Franchisee doubts the accuracy of the forecast - no error Introduction
In franchise relations parties frequently argue about the expected turnover held out by the franchisor to the franchisee. The franchisor has a duty of care to prevent a franchisee from concluding into a franchise agreement under the influence of an error. However, this duty of care does not apply in full and is subject to certain restrictions. In previous editions of this newsletter (no. 14 and 17) reference was made to the duty of care of the franchisor. If the franchisor provides information to the franchisee containing errors, franchisor has to make the franchisee aware of these errors. The foregoing applies all the more if it concern the franchisorâ€™s own forecasts, as the franchisor will be held liable for errors due to negligence.
If the franchisee has by contrast doubts about the accuracy of the forecast issued by the franchisor, an appeal to error will be less likely. That an error is not automatically attributed to the franchisor can be explained from a legal economic perspective. The franchisor would otherwise be the victim of the carelessness, negligence, or stupidity of a franchisee who will not doubt the forecast, although reasons exists to do so.
Decision of the Court of Appeal
In a recent case before the Court of Appeal, a franchisee invoked an error in order to annul the agreement. The franchisee did not blindly trusted the figures provided, but asked questions regarding the reliability of the forecasts1. In summary, the franchisee argued that the forecasts were not based on reliable market research. The franchisee had therefore submitted an estimate of sales numbers to the franchisor in the pre contractual phase. The latter subsequently adjusted the forecasts without protest or further substantiation. Franchisee argued in this context that there was a differencebetween the forecasted sales and the sales realized by franchisee. Franchisee then concluded that the forecasts are defective.
Franchisor, in turn, argued that the forecast is not based on in-dept and sound market research. The figures are based on an Excel file that the (potential) franchisee fills in based on the local situation. Franchisee tried to convince the Court of Appeal that he relied almost blindly on the information provided in the forecasts. It turned out that this was not the case. Franchisee assessed the forecasts received, adjusted them, and consulted with his accountant.
The Court of Appeal takes the starting principle that there is no general rule under which the franchisor is obliged to inform
the franchisee about the expected turnover or profit. During the negotiations prior to the conclusion of the franchise agreement, the franchisor provided a report on the expected turnover and profit. However, it cannot be inferred from the foregoing that the franchisor was under an obligation to do so. As stated above, the franchisor can be held liable for errors in the forecasts due to negligence. The Court of Appeals recognizes that the mere fact that the forecasts have not been fulfilled, does not mean that the franchisee has been harmed financially. Furthermore, this does not mean that there is an error. Moreover, this is in keeping with earlier judgements by the Supreme Court. After all, the nature of a forecast means that it is uncertain whether the figures will actually be realized in the future. According to Dutch law, an error about future circumstances remains at the expense of the party that errors, namely the franchisee. The Court of Appeal emphasizes that a successful appeal to error does not automatically lead to the conclusion that the franchisor is liable towards the franchisee. In this regard reference can be made to newsletter no. 13. The franchisees claims are subsequently rejected. The draft bill franchise
In newsletter no. 17 and 18 I discussed the new draft bill franchise in the Netherlands. The bill states that franchise parties are obliged to provide each other all information that they know or suspect is of interest to the other. This applies prior to the conclusion of the agreement and thereafter. The foregoing is a mandatory legal provision, so that the franchise parties cannot deviate from this in the franchise agreement. The provision seems to be a positive development for the franchise agreement under Dutch law. However, it is doubtful whether this will prevent discussions regarding errors. Without prejudice to this provision, a franchisee can in the near future still question the accuracy of a forecast.
Authors: Vera Jurgens
1 Hof â€™s-Hertogenbosch 26 februari 2019, ECLI:NL:GHSHE:2019:697.
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agents who have been entrusted by the principal to negotiate or conclude business on behalf of and in the name of the principal. In contrast, distributors or franchisees usually buy the products from the principal and sell (distribute) them in their own name and on their own account as independent retailers. Therefore Article 24 HVertrG usually does not directly apply to distributors or franchisees.
However, according to settled Austrian case-law and literature (mostly in connection with service-station operators), the mandatory provisions with regards to compensation claims of the commercial agent in Article 24 HVertrG shall under certain circumstances also apply by analogy to distributors and franchisees who may not sell products on behalf of and in the name of the principal but are â€œintegrated in the sales organisation of the principal similar to a commercial agentâ€ (handelsvertreterÃ¤hnliche Eingliederung in die Vertriebsorganisation).
The most important indications for affirming an analogous application worked out and defined by the Austrian Supreme Court (Oberster Gerichtshof) are:
â€¢ non-competition clauses disadvantageous for the distributor / franchisee;
â€¢ extensive restrictions of entrepreneurial freedom of the distributor / franchisee;
â€¢ extensive approval, instruction and monitoring rights of the principal;
â€¢ resale price maintenance (distributor / franchisee bound by price fixing);
â€¢ purchase obligations of the distributor / franchisee;
â€¢ obligation of the distributor / franchisee to transfer the complete customer base to the principal upon termination.
Therefore, in order to avoid compensation claims, the principal has to â€œbalanceâ€ his agreements with Austrian franchisees or distributors by eliminating or at least reducing the risk of an analogous application of Article 24 HVertrG on the one hand and securing as many rights as possible vis-Ã -vis the franchisee or distributor on the other hand.
However, the principal still has to avoid the (frequent) mistake of eliminating the risk of an analogous application in the contract but then factually exerting such pressure on the franchisees or distributors (for example, by threatening to terminate the agreement) to comply with certain specifications which could lead to their factual integration into the sales organization of the principal, as such factual behaviour is treated equal to similar contractual arrangements in settled Austrian case-law and literature.
Author: Stefan Turic
Avoidance of compensation claims of an Austrian distributor / franchisee Austrian Supreme Court (OGH) 1Ob342/97v; 6Ob247/99p; 8Ob295/99m; 8Ob74/00s; 4Ob113/02z; 2Ob155/06t; 7Ob17/18b
In accordance with Council Directive 86/653/EEC, the Austrian Law regarding the legal status of self-employed Commercial Agents of 1993 (Handelsvertretergesetz â€“ hereinafter â€œHVertrGâ€) contains mandatory provisions with regards to compensation claims upon termination of the contractual relationship between a principal and a commercial agent.
According to Article 24 HVertrG a commercial agent is under certain circumstances (especially, if the principal terminates the relationship) entitled to claim for appropriate compensation, if and to the extent that he has brought the principal new customers or has significantly increased the volume of existing business and it is to be expected that the principal will be able to derive considerable benefits from these new customers even after termination of the contractual relationship with the commercial agent.
Article 24 HVertrG can be neither avoided nor limited to the commercial agentâ€™s detriment. In the absence of an agreement more favourable to the commercial agent, the compensation shall not exceed the annual remuneration (commission/margin) which is calculated from the average of the past five years. If the contractual relationship has lasted less than five years, the average for the entire duration of the contract shall prevail.
In practice we frequently see distribution agreements with jurisdiction clauses according to which neither Austrian law nor the law of another EU-Member State is applicable. Such choice of foreign law in principal overrides the relevant provisions of the HVertrG, including its mandatory provisions. However, according to the European Court of Justice (ECJ), the compensation claim of a commercial agent cannot be validly excluded by a choice of law clause (ECJ, 9.11.2000, C-381/98) and therefore cannot be circumvented by settling on a third country law lacking of a comparable compensation claim. Therefore Article 24 of the Austrian HVertrG regarding compensation claims of the commercial agent is mandatorily applicable to an Austrian commercial agent, unless the law of choice provides for a comparable or even more beneficial compensation claim upon termination of the commercial agentâ€™s contractual relationship.
So far, all of this regards mainly commercial agents and not necessarily franchisees or distributors. Because in principle, Article 24 HVertrG is only directly applicable to commercial
Franchise & Distribution Networks Newsletter NÂ°20 - 3rd Quarter 2019
Retail. Technology has arrived. All experts are in agreement. Regardless of which report or study we reach for, specialists have one clear common voice - we live in the age of advanced technology, which is changing retail.
Indeed, it is 2019 and we can all agree that bricks and mortar shops are still very much alive and kicking. Yet we can all agree that retail and shopping centers centered around the cash tills and loyalty programs from weekly newspapers have seen their day. In the digital age technology is designed to overcome obstacles, influence consumer needs who expect a personalized shopping experience and cater for the next generation who see their fingers do the shopping more so than their feet. The new form of shopping could be provided by Artificial Intelligence (AI), Internet of Things (IoT) and Big Data, but this is just a glimpse into the retailersâ€™ tech shopping list. Experts have also indicated top technology trends such as blockchain, bitcoin, robotics, automated shopping, mobile apps, biometrics and virtual & digital recognition will most certainly reshape retail in the very near future.
But is Polish law keeping pace with the clash in new technologies in retail? Will the ban on Sunday trading generate alternatives? Will Polandâ€™s ageing population with a desire to shop in a traditional manner also help to generate alternatives? And how about the emigration of young Poles, which is clearly proving extremely problematic for retailers attempting to recruit workers into the shops? These are questions which many are asking and yet in contrast the Polish market is particularly attractive to test, trial and introduce solutions based on mobile apps and automated shopping to overcome and address some of these issues.
The legal regulations in Poland are fundamentally similar to those in the other EU countries. In principle, there is a lack of solutions to address the pace technology is taking in the retail sector, in particular Big Data and AI. The most urgent issues focus on the introduction of the commonly accepted definition of the term itself, the ethical issues and the subjectivity of AI (i.e. the postulate creation of an electronic person) and the definition of principles of the liability, including criminal liability. Lawyers are having to run with todayâ€™s existing civil law and the contractual freedom rules, the GDPR, copyright and database rights, as well as cyber-security legislation. They are also making use of the European Parliament Resolution1 and the Communication from the European Commission Artificial Intelligence for Europe2 . In addition, the obstacles concerning the legal system have been highlighted by the action plan of the Ministry of Digital Affairs â€œAssumptions to the AI strategy
in Polandâ€ 3.
It is predicted that the use of blockchain technology in retail is expected to be extremely attractive. Quality, reliability, authenticity and product safety can be better assured. Supply chain partners could verify the products status and use â€œany time always-up-to-date performance historyâ€. The technological diversity of blockchain means that the legal context may be very different. In addition, blockchain, as a global technology which affects a wide range of legal areas, will often overlap with other jurisdictions. The blockchain regulations, especially the crypto-currency market, are not uniformly regulated in all EU countries and outside the EU. Therefore, an analysis of the legal aspects of blockchain solutions requires an individualized approach.
In Poland, there are no regulations banning crypto-assets. Trading in virtual currencies in Poland does not violate national or EU law. However, the Polish supervisory authorities have consistently stressed that blockchain and crypto-asset users are less protected than the traditional financial services users, including in the area of criminal law. In addition, there is some controversy concerning the possible obligation to pay tax (PCC) on the sale of crypto-currencies and their ability to be inherited.
While blockchain will not revolutionize retail in the immediate short term, there are enough changes just around the corner with digitizing business and minimizing the use of paper. The civil law amendment of 2016 and eIDAS, the EU Regulation which create a legal framework for the legal environment of being paperless in Poland will come to our rescue.
The retail industry can digitize its HR processes and systems, business contracts, sharing and delivering documentation, and to a large extent electronically communicating with the state authorities, which will be possible through the use of a qualified electronic signature and appropriate mobile apps.
Converting into paperless solutions will be faced by a cultural factor which will be important if it hopes to win over customers from the generation for which environmental protection and conscious resource management in the age of circular economy becomes a road to build the image of a responsible brand aspiring to gain customer loyalty.
Author: Dominika Mazur
1 European Parliament resolution containing recommendations to the Commission on civil law provisions on robotics (2015/2103 (INL)) and Report of World Commission on the Ethics of Scientific Knowledge and Technology (COMEST) on Robotics Ethics (Strasburg 16.02.2017);
2 Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions on Artificial Intelligence for Europe (Brussels, 25.4.2018 COM, 2018);
3 ZaÅ‚oÅ¼enia do strategii AI w Polsceâ€, Ministry of Digital Affairs, November 2018
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Contributors to the Newsletter: France: GrÃ©goire Toulouse, Myriam Berger, Christelle Adam, Floriance Cadio de Kermainguy, Fanny Levy Germany: Benedikt RohrÃŸen. UK: Mark Owen Austria: Stefan Turic Netherlands: Vera Jurgens, Poland : Dominika Mazur.
uDr. Benedikt RohrÃŸen Munich, Germany T: +49 (0)892 1038-0 firstname.lastname@example.org
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uVera Jurgens Eindhoven, Netherlands T: +31 (0) 88 02 43 159 firstname.lastname@example.org
uEwelina Stobiecka Warszawa, Poland T: +48 (0) 22 584 97 40 email@example.com
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