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The unilateral termination of a franchise agreement

April 09,2019

An issue on the possibility of a unilateral termination of a franchise agreement becomes relevant to a right holder, when a cooperation within the framework of the agreement has not met the expectations and does not bring the expected results, as well as when the user does not fulfill the conditions of the agreement. At the same time, it is not uncommon that the agreement itself does not contain a specific wording and does not imply the possibility of the unilateral termination with the notification of another party during a certain period. What is to be done in this situation?

In one of the articles we have been considering the situation with the unilateral termination of a license agreement, in the case of the franchise agreement the possibility of such termination has its own specifics.

The ways to cease the franchise agreement are also different. First of all, they depend on the fact whether the period of its validity is specified in the agreement. If the agreement is concluded without specifying the period, then the general rule shall be applied, according to which any party to the agreement shall be entitled to withdraw from it at the party’s own discretion. The withdrawal from the agreement is a unilateral transaction; therefore, in this case it is not about an agreement of the parties. Moreover, the legislator does not require another party’s consent to the termination of the agreement. At the same time, he/she indicates that such withdrawal shall be a lawful action, if the party withdrawing from the agreement notifies the counterparty on its decision in advance. If the period for such notification is not stipulated in the agreement itself, then the rule set forth in Paragraph 1 of Article 1037 of the Civil Code of the Russian Federation establishing a 6-month period shall be applied. This period is necessary to prevent the possible losses related to the termination of the agreement. The condition of the agreement about a period, which is shorter than 6 months, shall be null and void. The exclusion of the possibility of the unilateral withdrawal by either party from a permanent agreement shall also entail the nullity of this condition. Granting the right to the unilateral withdrawal is due to the need to provide the parties to the agreement, the validity of which is not limited by a certain period, the possibilities for terminating it (apart from reaching an agreement between them), if one of the parties loses an interest in the further fulfillment of the agreement.
The termination of the agreement shall be executed in writing and registered in Rospatent.

When filing the documents for the registration of the termination, the initiating party shall enclose a proof of the written notification to another party. If the cessation of the obligation requires an additional settlement of the relations connected with the distribution of the losses, with the sub franchise agreement, then it is more expedient to do this through a bilateral agreement. In the absence of an agreement regarding this issue, the settlement of the disputes shall be carried out through the legal proceedings. In this case, the appropriate entries will be made in the Register on the basis of the court decision that has entered into legal force.

Paragraph 1 of Article 1037of the Civil Code of the Russian Federation also stipulates a mechanism for the termination of a different framework of the agreement – by specifying a period. In this case, the initiating party of the early cessation shall come up with a proposal, and another party shall be entitled to agree with the proposal or refuse from it. If in the first case, it involves the termination by way of an agreement of the parties, then in the second case, it is possible to settle the conflict by going to court.

According to unnumbered paragraph 2 of Paragraph 1 of Article 1037 of the Civil Code of the Russian Federation, each of the parties to the franchise agreement concluded for a certain period or without specifying the period of its validity shall be entitled to withdraw from the agreement at any time, having notified another party not later than prior to thirty days, if the agreement stipulates a possibility of its cessation by way of paying the sum of money established as an amount of compensation.

However, what if the amount of compensation is not stipulated?

Some violations of the agreement by the user allow the right holder achieving the cessation of the franchise agreement by the unilateral withdrawal without paying the amount of compensation (Paragraph 1 prim of Article 1037 of the Civil Code of the Russian Federation).

 These are the cases where the user:

  • has not paid remuneration in time;
  • has flagrantly violated the instruction of the right holder regarding the use of the transferred rights in accordance with the conditions of the agreement;
  • has committed a violation of the conditions regarding the quality of the products and/or services.

At the same time, it is important to know that the withdrawal is possible only when two conditions are fulfilled simultaneously:

  1. The right holder has sent the user a notification that instructs to remedy the violation.
  2. The user has not remedied the violation within a reasonable period or, within a year from the moment of sending the notification letter, he has committed the same.

The reasonable period shall be the one that is sufficient to remedy particular violations. The right holder may offer it in the notification, in the case of a dispute, the final decision as to whether the period has been reasonable shall be made by the court.

Regardless of the reasons, the fact that the agreement is terminated or its effect is ceased requires the registration with Rospatent, in accordance with Paragraph 2 of Article 1028 of the Civil Code of the Russian Federation. In the case of the termination pursuant to an extrajudicial procedure, the documents confirming the fact that another party has been notified on the termination shall be filed. If the agreement is ceased on the basis of a court decision, the registration shall be done on the basis of that court decision after its entry into force.

Article 54 of the Civil Code of the Russian Federation has a special basis for the cessation of the franchise agreement, taking into account a special nature of the said agreement: the cessation of the rights vested to the right holder to a company name and a commercial designation without replacing them with new similar rights. If such cessation occurs due to the fault of the right holder, then he shall be obliged, at the request of the user, to reimburse the losses incurred by the latter in accordance with the early termination of the agreement. When changing the commercial designation, the trademark, the user shall be entitled to claim the termination of the agreement, as well as the recovery of the losses caused by the early termination, or an adequate reduction of the remuneration due to the right holder. Upon the cessation of the franchise agreement regarding the commercial designation, as well as the trademark, its effect shall be ceased regarding other subject matters of the exclusive rights (any other subject matters stipulated in the agreement), including those not subject to the state registration, for example a manufacturing secret (know-how). A franchise agreement can not be transformed automatically into a license agreement, since, despite the fact that it includes the elements of the license agreements, along with these elements there are other framework features in the agreement, in particular, the ones related to the business nature of the agreement, which are inseparably connected with the exclusive the right to the trademarks and which lose their importance, when it is ceased. In case of the cessation of the rights to other subject matters, including with the replacement of them to the similar rights, the user shall be entitled not to prolong the agreement under new conditions (a new subject of the agreement), but to claim the termination of the agreement and reimbursement for the losses or, in the case of the prolongation, to claim an adequate reduction of the remuneration due to the right holder.

The condition on granting the user the right to use in his business activities the exclusive right to the company name or the commercial designation of the right holder shall refer to the essential conditions of the franchise agreement. The cessation of the right belonging to the right holder means that starting from this moment, there is not the said essential condition in the franchise agreement, without which it can not be recognized as a valid agreement. Therefore, it is quite logical that in this case the agreement is considered to be ceased.

Автор материала

Natalya Nazarova
Agreement’s Lawyer