Once the Agency agreement has terminated by the Principal, the Agent usually decides to claim for some indemnities or compensations. These include damages indemnities and goodwill (clientele) compensation.

In order to claim them it is very important to consider the limitation period in which both can be demanded. We have observed that agents usually take too long to decide whether or not claiming for such compensations, they start negotiations with their principals to find a solution to their conflict, sometimes they are re-negotiating their position for a new agreement, area or conditions; or sometimes they simply consider that there is no rush to proceed.

In similar terms as in the EC Directive on Agency Agreements (art. 17.5), the Spanish Agency Act (art. 31) expressly foresees a limitation period of one year from the termination of the agreement in order to claim both the damages indemnity and the goodwill compensation.

This means that after the expiration of such term, no claim will be admitted by our Courts. And in contracts ruled by Spanish law and submitted to arbitral procedures, the agent also risks finding his claim dismissed after that period. This duration cannot be modified by the parties in their agreement, but they can take some actions to extend it.

This limitation has, therefore, important consequences. Of course, there could be an infinite number of situations and we do not intend to cover all of them, but in case the Agency agreement terminates, the following ideas can be useful:

• The one-year period starts from the day the agreement was terminated. This date should also be considered carefully if there was not a formal termination letter.

• One year, according to the Spanish Civil code, implies that the period terminates the exact day one calendar year after (from date to date, for example, May 1 to May 1 next year) or the following day if that day does not exist (for instance, February 29^th to March 1 next year).

• In general terms, the starting of this one-year period is the termination day and not the date in which the letter was sent or received or when the Principal urges the Agent to fulfil his obligations. The previous notice period (if any) shall be respected if included in the termination notice.

• In case the letter contains an immediate termination, that day will be the starting date, even if the procedure reveals that the Principal should have given a termination notice.

• Generally, this applies to each agency agreement. This means that in case of successive and not connected agreements (for instance, the first one ends and the second one starts 10 months later), the termination period will be considered for each separate agreement. Nevertheless, linked agency agreements (agreements with a specific duration that work one immediately after the previous one) are usually considered as one agreement.

• Some activities of the Agent can interrupt this one-year period, re-starting a new one. For instance (some have been accepted by the case-law, others are expressly mentioned in different pieces of legislation):

1. An extra-judicial claim sent by the Agent or by someone in his behalf claiming for the goodwill indemnity, even if the compensation is incorrectly qualified as employment dismissal instead of commercial agency compensation.
2. Claiming the goodwill compensation as a labour indemnity before the labour courts when it was not clear the sort of relationship between the parties.
3. Starting a conciliation procedure before a First Instance Court
4. Starting a mediation procedure (when done by both parties or by one of them enforcing the mediation clause in the contract) will also interrupt the term during the mediation procedure from the moment in which the request for mediation has been received by the mediator or deposited at the mediation institution.
5. The acceptance by the Principal of the debt or the goodwill compensation when asking the clients list.

• Other actions by the Agent could have different results depending on the circumstances and some have not been accepted as valid to interrupt this limitation period:

1. A claim started by the Agent before a non-competent court, will depend on the circumstances.
2. A criminal prosecution does not interrupt the one-year period
3. The starting of the preliminary procedure (diligencias preliminaries) has neither been accepted to interrupt the one-year period.

Therefore, as a conclusion, in the drafting phase of the agreement it seems to be a good idea to consider a mediation clause. This will grant the parties an additional and useful tool to solve their conflicts and a possible way to obtain extra time in case the courts will be called to intervene.

And when an agency agreement terminates (with or without mediation clause), our recommendation for the Agent is immediately submitting the case to a legal local advisor. When the Agent has, for example, received a promise for a new agreement and he is still discussing on it, or he is still negotiating the termination, it is advisable to be careful and to take the necessary actions at least to interrupt the lapse of the one-year period and not to lose the possibility of a future claim. A simple letter carefully drafted could be very useful for the Agent’s interests.

A final remark for Distribution Agreements. Although for some aspects, particularly the goodwill compensation, Spanish Supreme Court has admitted the analogy with Agency agreements, this is not the case for the limitation period of one year to claim it. The distributor claiming for the goodwill indemnity will not be limited to one year after the contract terminated. In cases like these, it is convenient, however, to have precise advice on the type of contract we are facing, since the border between the agency and the distribution is not always clear.

Even Abogados has defended a foreign manufacturer distributing its products in Spain with a local agent/distributor. The agent/distributor (based in Spain) sued our foreign client (the Manufacturer) claiming for the goodwill indemnity foreseen in Article 28 of the Spanish Agency Act. First Instance Court has accepted our arguments basically due to the lack of evidences produced by the plaintiff. Our intention is not to discuss about the burden of proof as general legal principle but to expose some clues in order to better prepare a similar procedure.

The facts

Mr “A” (the Agent) and the Manufacturer had a non-written agreement since long time ago. In 2000 the agent/distributor (a company owned by Mr “A”) and the Manufacturer signed a written contract transforming and substituting the old relationship.

After a period of more than five years, the Manufacturer gave a previous notice to terminate this contract. The agent/distributor then claimed the goodwill (clientele) indemnity as a consequence of this termination.

The debate

One of the discussion elements (quite frequent) was to determine if we faced an agency or a distribution agreement. The problem in this case was probably more a theoretical tan a real one due to the fact that although goodwill indemnity is expressly foreseen at the Agency Act, it is also admitted by analogy in distribution agreements. The question was, therefore, to justify its applicability. Let’s assume (as in the Court judgement) that it was an agency agreement.

Article 28 of the Agency Act (in similar terms to Article 17 of the EC Directive 86/653 of December, 18^th) states that an agent is entitled to an indemnity for customers he brought to the principal (the Manufacturer in our case) or with whom significantly increased the volume of business and provided the principal continues to derive substantial benefits and the payment of this indemnity is equitable due to special circumstances. The amount of the indemnity may not exceed the agent’s average annual remuneration over the preceding five years.

The conclusions

Goodwill indemnity benefits the agent but it is also his responsibility to prove to the Court the necessary elements in order to obtain it. In our case, First Instance Court has rejected this indemnity due to the complete absence of evidences of the main elements. The judge has stated clearly the following:

1. No invoices related to dues-but-not-paid commissions have been showed during the procedure.
2. The plaintiff (the Agent) has not proved to which services these invoices were due, the invoiced company, the commissions’ rate applied, the date from which they were due, if the activity had been correctly ended, if the sales were related to machinery or to spare parts…
3. A document called “accounting statement” (estado de cuentas) has been prepared by the plaintiff himself but has expressly been contested by the defendant (the Manufacturer): this does not show his current situation.
4. The judge did not accept the goodwill (clientele) indemnity because no invoices attesting the collection of commissions have been presented, or have been produced in foreign languages without translation into Spanish.
5. The only references to these invoices made by the accounting expert in his report to the Court are not enough considering that he does not include them in the report.
6. The “clients” included in such clientele were not proved neither it was the existing commercial relationship.
7. There is a complete lack of evidence concerning the increasing of profits that will still benefit the Manufacturer in the future or receive from possible new clients.
8. Concerning the indemnity for the budgets prepared by the agent at the end of the relationship but not still accepted by the Manufacturer these were not proved, including the alleged orders sent by the Manufacturer.
9. The previous relationship with the agent (Mr. “A”) has nothing to do with the current situation, nothing is said about the clients presented by him, his contractual relationship was substituted by the agreement with the new company, and in case of goodwill indemnity, if applicable, this was to be calculated on the basis of the five previous years without considering the previous relationship.
10. The only documents produced by the plaintiff were the signed agreement and a report prepared by an expert but which does not seem to be very trustable considering that the expert modified his conclusions during the trial.

Franchise activity: Definitive suspension of the Spanish National Franchisors Register

According to Spanish Retail Act (article 62.2) all franchisors that intend to develop in Spain the franchise activity must communicate to the Franchisors’ Register the starting of their activity within three months.

Such Register is regulated by Royal Decree 201/2010 (February 26) which also foresees the information to disclose, the obligation to update it within three months of any modification and inform, during each month of January, about any closing or opening of premises in the previous year. The information should be disclosed electronically.

This said, during 2018 there have been some technical difficulties at the Register provoking the provisional suspension of such disclosure obligations. During that period, the Register did not admit any notification regarding franchisors.

From June 2018, nevertheless, the Minister of Economy, Industry and Competitiveness has decided to definitively suspend the activity of the Franchisors’ Register. This decision has been adopted with the intention of supporting companies in the franchise sector and to cancel as many obstacles as possible in the development of the commercial activity. Therefore, franchisors are no longer able to disclose such information to the Register and information on Franchisors is not longer available.

The decision does not affect, however, other mandatory obligations such as the disclosure information to the potential franchisees at least 20 days before the signature of the agreement, the pre-agreement or before any payment made.

Official information (in Spanish) can be found at the website: https://sede.micinn.gob.es/solicitudFranquiciadores/

Relationships in which people intervene will lead, sooner or later, to major or minor conflicts. In business relationships, companies try to minimize in their contracts (when they sign them) what can happen in case of discrepancies. But, even if these are essential, it would be naive to think that a contract will give us the solution to any conflict. No matter how many eventualities have been foreseen, the management of the conflict will always go further. How to act, then? How to be prepared when the discrepancies begin? I will present some guidelines from our experience managing and helping to avoid and to resolve conflicts. And although I’m going to focus on those that occur between companies (or among the people of those companies), what I will say could be extrapolated to almost any type of difference.

1. Identify that you are facing a potential conflict

A conflict arises when there are expectations that are not met: the agent seems not to respond as expected, the entrepreneur does not provide what was promised, the product stops covering expectations, the service is no longer adequate. Or we simply want to change the supplier, replace the distributor… the list is endless.

In any of these situations the conflict is just around the corner and, although it is necessary to realize it as soon as possible, it is not always perceived with clarity. Any discrepancy is possible source of conflict and the first thing necessary is to verify where we are and its severity. The steps we will take immediately after will depend on this verification and the time it occurs.

2. Do not react impulsively

In a situation of potential conflict, the most usual is to react: grab the contract and try to see where I am right, what can I argue to reaffirm my position, how to impute responsibility to the other party. But when we react impulsively we renounce our capacity for conviction and persuasion. For many reasons that we think we have, a relationship or a contract have multiple interpretations and nuances that can vary the conclusions and the results.

When a manufacturer of bakery products decided to change their distribution system (potential conflict), he sent all his wholesalers a letter “resolving the commercial relationship” that they maintained (reaction). With a letter of just over two lines, he dug his own judicial grave since the judges considered that what was resolved was a distribution contract and not the annual price conditions that applied, and recognized the wholesalers a goodwill (clientele) compensation.

When a footwear manufacturer, in a change of commercial strategy (potential conflict), unilaterally resolved a long-term agency contract by imputing a supposed inactivity of the agent in his country (reaction), he did not take into account that in other comparable countries the situation was identical and that the decrease in sales was due more to the generalized crisis than to the poor performance of the agent. The alleged resolution for fair cause was not admitted and he had to pay compensation.

When another manufacturer of components for boats was not satisfied with the performance of his agent (potential conflict), he simply decided to sell his products through another representative (reaction) without taking into account the exclusivity granted to the first one and without having warned him properly.

All these reactions are understandable, but none was sufficiently thought out and in all cases we have had headaches as lawyers when defending them before judges and courts. An advice and previous strategies would have avoided many difficulties, would have saved much time and money to the parties and would have had a result without a doubt much more satisfactory.

3. Seek advice immediately

Although nobody better than you knows your business, nobody better than someone external can help you to manage with an adequate perspective the conflicts that are arising.

We have all certainly negotiated and we all feel legitimized to do so, but we are not always able to identify confluent interests or to manage the emotions (our own and those of others) that any conflict entails. External aid is essential, and the sooner you get there, the better.

If the footwear manufacturer imputes to the agent his loss of confidence in the product and a poor performance in the territory and on that basis he decides to terminate the contract, the temptation of the “injured agent” is to respond to the principal with sales figures, arguments, explanations about the clients, to impute the principal’s internal disorganization… Those answers and that information, even though they may be true, could turn to the agent if, for example, he admits something that he later regrets, he gives information that the entrepreneur did not have or he recognizes his weaknesses. And that happens almost always! In addition, it is very frequent that in this phase the parties involved are the ones in the conflict acting on their own, without any objective help, and committing, most of the time, more errors than are desirable.

However, from our experience, we have observed that an external consultant to the relationship and with sufficient competence in the matter discussed, in the potential litigation and its possibilities, and with the skills to negotiate objectively, can suggest a strategy, help to understand the interests that exist, how to approach them better and which method of solution is best suited

4. Design an action strategy

Indeed, facing any potential conflict, in any situation of discrepancy, as insignificant it may seem initially, the vision in the medium or long term from the first moment in which it originates is crucial. It does not do any good to react if it is not within the framework of a properly strategy designed in advance.

I like to remember those letters that were sent demanding a debt of 1,000 and to which the alleged debtor replied that they were not 1,000 but 900 offering a recognition of the debt that, otherwise, would have been more difficult to prove.

A response to a letter in which we are accused of a breach may be the best or the worst ideas depending on what the next steps are. What are the true interests beyond the concrete position at that time? Should I continue to maintain the commercial relationship? If it is not adequate, is it possible to reform it? Is it still viable? Am I interested in resolving the conflict as soon as possible to continue dedicating myself to my productive / commercial activity? What perspective of time, money, energy, reputation … entails embarking on a judicial / arbitral process? What alternative ways are there? These are some of the questions that every person has to ask themselves in order to strategically solve the conflict.

5. Do not threaten, act with a head.

Normally when the conflict has begun or when it is in its early stages, it is usual to threaten to go to court (warnings of the type “we will have no choice but”, “we will be forced to” are the formulas that hide such reaction). This is usually a bad idea. First, because threatening —depending on how it is done— could even be a crime. But, in addition and above all, because it usually closes more doors than it opens.

The solution to the conflict may come, indeed, from a judge (or arbitrator) who imposes it, but it is not the only way and probably, if we follow this path, it will not leave anyone happy. The negotiation assisted from the beginning by a professional that helps to alleviate the emotional burden and to know alternatives, or the mediation (the intervention of a neutral professional that helps to understand interests and bring positions of the parties so that they themselves, with the mediator’s help, can find a solution) are almost always better solutions. The threat will put the other party on a defensive position and in a sort of way it constrains us to comply with what is threatened so as not to show weakness. However, the action framed in a strategy according to our interests (negotiated or mediated), will place us in the best way of solution.

6. And do not let the conflict grow: talk and listen.

And if “threatening” with legal actions adds blockage to an already difficult situation, talking (and “talking” is usually always better than “writing”) clears the way even more. And together with “talking” nothing better than “listening” and to do it actively. It is shown that in most conversations, discussions or even negotiations, we act more aware of what we want to say, how to counterargument or convince, instead of really understand what the other party proposes or of trying to look for common spaces.

Conflicts are not always definitive (ending the commercial relationship), and very often they are merely circumstantial or partial (unpaid bills, undelivered products, erroneous executions, lack of accountability). In these states, it is much easier to establish new bases or conditions, to find out where the discrepancies are and to solve still minor conflicts, or preventing them from becoming more complex. The help of a loyal advisor who understands the interests to safeguard and collaborates in the determination of the steps to take, is, again, essential. I would dare to say that, on principle, you have to distrust who advises you to go directly to the litigation or confrontation.

Quite often the purchase/resell commercial relationships between a manufacturer and its retailors is carried out without signing a contract, but with subsequent orders: the manufacturer receives it, then he sends the products, the retailor pays and then he resells to the final customer.

In Spain, as it is known, there is not a “distribution contracts Act”, but courts have accepted a certain analogy with the agency agreement. In a certain way, courts say that agency and distribution are not the same sort of agreements, though some consequences of the agency can apply by analogy to the distribution. This is, for example, goodwill compensation (clientele) in case of contract termination.

Therefore, it is quite usual that when a company continuously buys products from a manufacturer to resell them, its intention is to consider this a “distribution contract”. And why? Mainly because of the goodwill compensation (clientele): this compensation does not apply to the supply contracts, but it is possible in a distribution agreement precisely because of that analogy. And if the manufacturer-retailor relationship has lasted several years, the amount of this compensation can be of some importance (until the annual average of gross margins over the past five years).

But beware, because not all the continuous supply contracts can be considered to be a “distribution contract”. You should ask for advice in each particular case. In Spain, a distribution contract requires something more than a series of purchase and resale of products. The following list will help you to verify whether a particular commercial relationship is closer to a continuous supply agreement or to a distribution one with the possibility, in this case, of claiming the mentioned goodwill compensation:

1. In a supply agreement products are purchased for resale. Its purpose is the resale with a margin without any further conditions.

2. These agreements are usually a succession of orders, with delivery conditions (billing and payment) normally agreed.

3. The distribution agreement, however, involves a “more intense” in the business relationship that does not exist in the mere succession of sales transactions.

4. The distribution agreement involves the mutual cooperation between manufacturer and distributor for distributing a product and is intended to be stable over the time.

5. The distribution agreement gives greater trade integration of the reseller in the distribution network of the manufacturer, and the manufacturer influences more the commercial management of the distributor than with a mere reseller.

6. In the distribution contracts there are usually additional conditions relating to the purchase and resale agreements not limited to the pricing and payment conditions. These may be, amongst others, covenants on minimum periodic purchases, volume discounts, resale areas, exclusivity, prohibition for the sale of competing products, support obligations to end customers, repurchase of non-resold goods.

7. The distribution contracts can also provide other agreements relating to the operation of the business relationship: investments by the distributor, how to place orders, goods transportation, storage and maintenance of stocks, covenants not to compete, compensation for non-compliance, payments and guarantees to ensure compliance, etc .;

8. Finally, distribution contracts usually include agreements for the use of the manufacturer’s trademark (license) with the obligation for the on manufacturer to advertise or to provide special labelling or packaging, etc. and a certain uniformity for distributors (obligations related to the affixing of the trademark, harmonized image, etc.).

In conclusion: if you want to end a relationship of this kind whose nature is unclear, you should analyse the above list to, at least, have an initial idea of ​​what can be claimed or not. In any case, unfortunately this is not an automatic list and it is wise to ask for specific and expert advice before taking any decision.

Note. In preparing this post I have followed some judgments of Spanish courts which may be useful to consult if you want additional information: AP Salamanca 330/2001 of 29 June; TS (Civil Chamber, Section 1) 70/2004 of 5 February; TS 332/2009 of May 18; AP Madrid (Section 11th) 736/2010 of 30 September; AP 553/2010 of 5 October Barcelona; AP Zamora (Section 1) 100/2015 of June 8.

When considering signing a franchise agreement, you should know well what it is. Our experience advising in Spain to domestic and foreign franchisors and franchisees, evidences many problems that could have been prevented by following some simple recommendation and seeking the prior expert advice. Note that as a prospective franchisee you are before an important decision. Much of what will happen later in the way you manage your business and interact with the franchisor depends on the decisions you take at this time. Please seek the advice with an independent expert. You will only get great benefits.

Based on these ideas, we present an outline of what seems more relevant. If you want to deepen, it is available a more detailed and updated explanation which can be downloaded free here (* please see the legal disclaimer at the end of the post *).

1. What is a franchise and what to consider in advance.

Before signing a franchise agreement, please note:

a). The franchising is a commercial form for the sale of products or services that involves the transfer of a successful formula. This includes knowledge, technical or marketing assistance and the use of a trademark (which is usually called “know-how”).

b). Before signing any contract, or before handing over any money, it is imperative that the franchisee receives a pre-contractual information on the essential elements of the franchise. This should include data from the franchisor, the franchise, the market concerned, the network of stores, etc. It may contain further economic information that shall be verified. The attached document has further details.

c). The franchisor must be registered in the Franchisors’ Registry. As a potential franchisee you can verify it here.

2. What requires a franchise

When signing a franchise agreement and while negotiating please take into account the following:

a). Apart from trade and economic issues, the potential franchisee should consider:

– That the pre-contractual information received is complete. Sometimes, we have observed that supplied information is standardized without any particularity and without meeting the legal requirements.

– The franchisee is registered in the Register of Franchisors. There you can see his experience, the number of shops run and any other relevant information.

– That the trademark is duly registered on behalf of the franchisor or, at least, that he has the faculty to transfer it to third parties (the franchisee). For Spanish and EU brands you can consult for free the availability of a specific trademark at the Spanish Patent and Trademark Office.

b). The franchise agreement is a complex contract which includes multiple obligations and rights of the parties. It is usually previously drafted by the franchisor and quite frequently it is not possible to introduce many changes. It is highly recommended therefore to be analysed in detail by an expert to know what obligations are agreed. It is not advisable to sign forms or pre-established drafts you can find in the Internet: they will not reflect your real interests because they have not taken into account your concrete situation.

c). In many cases, moreover, there will be a master franchise agreement or master franchisee: the person you will sign with. This is frequent in contracts with foreign brands and also requires special care because this will involve both the brand owner as the manager of exploiting the franchise in our country (Master Franchise).

3. What it is not a franchise agreement.

It may occur that you are considering signing a contract called “Franchise” but that does not meet the minimum conditions to be such an agreement. Note the following:

a). It is not a real franchise agreement (even if the agreement receives that name) the mere authorization to use a trademark. And this is also valid, even if the establishments with a certain similarity.

b). It is not a franchise agreement the mere exploitation of a business idea. The franchise agreement requires something more: a set of elements such as know-how, a business plan, a commercial or technical assistance, a common brand, etc.

c). Beware of those who want to exploit an idea that has not been previously experienced by themselves in a business. If they have not previously verified that idea, it is difficult to convey any “know-how”.

d). And finally, there is not a franchise agreement when there is only an authorisation by the manufacturer to sell their products. This is also true, even if this authorization is an exclusive one.

LEGAL DISCLAIMER. This scheme is presented to help you as a first approach. Please do not rely on it alone to make decisions because it is not a full legal advice for you. The use of attachment is free. It is reproduced with permission by Law Business Research Ltd. It was first published by Getting the Deal Through: Franchise 2016. If you want additional information visit www.gettingthedealthrough.com.

The Provincial High Court of Murcia (Audiencia Provincial) in a Judgement of June 24th 2013 and following previous resolutions of the Supreme Court, has confirmed that in case of a distribution agreement with indefinite duration, the indemnity for damages needs the termination in an unexpected way. The general rule for this kind of indefinite agreements permits the parties to freely and unilaterally terminate the agreement with no reason but giving a previous notice even when the agreement does not foresee it. The absence of this previous notice can be seen as an abuse of right or an unfair behaviour and although the termination of the agreement would be valid, the indemnity for damages could be demanded.

Also in this sense, the Provincial High Court of Barcelona (Audiencia Provincial) in a Judgement of April 30th 2013 has also analysed the situation in a distribution agreement for indefinite duration. In that case, the parties had agreed a previous notice term in order to terminate the agreement that the Principal had respected. Nevertheless, the Court has stated that such notice was given only apparently because once the notice was sent, the principal took immediately the necessary steps in order to substitute the distributor. This behaviour has been considered contrary to the good faith and implied the, de facto, breaching of the contractual obligations and the damages indemnity.

DISTRIBUTION AGREEMENTS. GOODWILL (CLIENTELE) INDEMNITY: ACCEPTANCE, ANALOGY WITH AGENCY AGREEMENTS AND NEED OF EVIDENCES

The Provincial High Court of Zaragoza (Audiencia Provincial) in a Judgement of June 18th 2013 has confirmed that the goodwill indemnity (clientele) responds to an idea of material justice in order to compensate the damaged party at the occasion of the termination of a contractual relationship in which it has been developed an activity in benefit of the principal and the creation of a fond de commerce that will be lost for the Distributor but will continue to benefit the Principal.

The duration of the distribution agreement is essential. Considering this duration and depending on the economic market concerned, the mere existence of the agreement could even have an incidence in the survival of the distributor’s company. In fact, these circumstances imply that it could be difficult to know who has generated the clientele and the fond de commerce: this will not only depend on the activity of the Distributor but also on the quality of the products, the speed with the replacements, commercial warranties, advertisings, circumstances that are usually are more connected to the Principal activity than the Distributor’s.

In distribution agreements the analogy with agency agreements has been accepted for goodwill compensation as inspiring principles. But obviously, such compensation is only acceptable when there is a loss of such clientele and fond de commerce as a consequence of the termination of the agreement and a subsequent benefit for the Principal. Nevertheless, this analogy cannot be applied automatically and particularly when there has been a default by the distributor. The case law is also clear when it requires that a plaintiff who seeks compensation for clientele should prove and quantify the effective contribution of customers and the potential use by the Principal.

I have recently renewed my membership in my gym in Madrid. It belonged to a well-known franchise network but, surprisingly, when I came to pay my subscription there was a difference: same premises, same employees, same company, but different brand. The manager explained to me that they decided not to renew the franchise agreement but just to change the name and keep the clients.

The problem. When I was training, my brain was thinking about the situation and then I realized about the importance of “non-competition” clauses, and the possibility of goodwill compensation in franchise agreements. Then I decided to write this post.

My thoughts.

As we know, in a franchise agreement franchisees receive the know-how of the franchisor (a business model) and pay royalties in exchange. The know-how includes the possibility to use the trademark together with other elements necessary for the operating of the business. With all these elements, Franchisees usually get the opportunity to easily enter in a determinate market with controlled expenses and with the support and assistance of the Franchisor. The problem, in fact, can arise after the expiration of the franchise agreement: can the Franchisee continue with a different brand but exactly for the same business and in the same place? Can Franchisee or Franchisor ask for clientele compensation to the other party?

Under Spanish law, it will be possible to include a non-competition clause avoiding Franchisee to continue with the same or competitor activities in the same premises after the termination of the agreement. In fact, these clauses are quite common: in their absence it would be quite easy for the Franchisee (as my gym did) to just change the logo and external appearance of the premises and to still benefit the whole clientele. With the non-competition clauses the Franchisor will have the opportunity to re-open the activity within the same area or region with a new Franchisee and without the competition of the old Franchisee.

Would it be possible to claim for a goodwill compensation (clientele) in case of termination of the agreement? And if so, who will be entitled to ask for it? The question arises considering the goodwill indemnity existing in the Spanish legislation (as well as other EU jurisdiction implementing the EU Directive on Commercial Agents) in case of termination of the Agency agreements. In general terms, Agents will be entitled to receive a goodwill compensation for the clientele created to the Principal. In Spain, due to the analogical application of the Agency Act to Distribution agreements, the goodwill compensation has also been granted to Distributors for the clientele created to the Providers. Could this also be applicable in case of Franchise agreements? But what happen if the clientele benefits not the Franchisor but the Franchisee like in the case of my gym?

The possible solution.

The solution is not evident: first, because the acceptance of the goodwill indemnity is not unanimous in franchise agreements and, second, because courts have not examined the goodwill compensation in favor of Franchisors but Franchisees.

Some courts have accepted the exclusion of the goodwill indemnity by the parties in the agreement, but others have considered (by analogy with the Agency regulations) that the goodwill compensation remunerates the benefits the clientele is producing in the Franchisor and, for that reason, it is not incompatible with the loss of profits indemnity (lucro cesante). Could these arguments be used by the Franchisor to ask the Franchisee a compensation for the clientele this one is still benefitting after the termination of the agreement?

The answer will be clearly “no” in case the agreement expressly excludes it. The law makes no provision on goodwill compensation in franchise agreements so parties are free to decide that no compensation will be due.

On the other hand, if the agreement permits the Franchisee to still operate in the market, or does not expressly avoid doing so, the solution could be different and not so evident. In these cases, in my opinion, no reason should exist to avoid the Franchisor to claim the goodwill compensation (or, at least, to carefully review the concrete situation in order to understand if it is possible or not), although it is not expressly mentioned in the law (and, of course, if the parties have expressly foreseen it in the agreement). Like in my gym, Franchisee will still benefit of the know-how and goodwill (including clientele) created as a consequence of its participation in a franchise network under the brand of the Franchisor so I see no reason to compensate the Franchisor -as we do with Agents or Franchisees- if the other party takes advantages of the termination. I am aware that the analogy could be complicated (we will need to justify the similarity with the Agency agreements and with the reason for such compensation, and also to consider that the beneficiary of the compensation has always been the Franchisee and not the Franchisor), but Franchisors should not exclude this possibility in a case-by-case basis.

My recommendation.

This said, my recommendation is not to let aside automatically the possibility of such goodwill compensation for the Franchisors in cases similar to my gym (or other service providers franchises), and, in any case, to take it into account when negotiating and drafting your franchise agreements.