Invalidity of the franchise agreement
When cooperating under a franchise agreement, there are the situations, when one of the parties to the agreement delays the registration process due to various reasons. In some cases, this may be “beneficial” to both a right holder and a user, depending on the peculiarities of their cooperation.
The representatives of the right holder turn to us, explain the situation the essence of which is that after receiving a franchise fee, but realizing that the user's activity does not meet some of their expectations, they are trying to “withdraw from this agreement” and declare proudly that granting the right to the registration under the agreement has not been filed.
The same refers to the user, who after receiving the materials of the franchise and starting his activity, he also finds himself disappointed that this activity is labour intensive and not so profitable commercially. And a “trump card” is also played here, the essence of which is that the agreement has not been filed for the registration.
In this situation, the parties to the agreement often believe that the agreement “simply does not exist” in the absence of the registration; and nothing threatens them, if they simply stop the interaction without explaining the reasons, while using freely the concepts “invalidity” and “nullity” of the signed agreement.
Let us investigate whether it is so, and how important the absence of the registration of the agreement in this situation is.
According to Article 1027 of the Civil Code of the Russian Federation:
“Under a franchise agreement, one party (a right holder) is obliged to grant to another party (a user) for remuneration, for a period or without indicating a period, the right to use in the user's business activity a complex of the exclusive rights belonging to the right holder, including the right to a trademark and a service mark, as well as the rights to other subject matters of the exclusive rights stipulated by the agreement, in particular to a commercial designation and a manufacturing secret (know-how).”
Article 1028 of the Civil Code of the Russian Federation concerns the form and the registration of a franchise agreement:
“1. The franchising agreement must be concluded in writing.
2. Granting the right to use in the use’s business activity the complex of the exclusive rights belonging to the right holder under a franchise agreement is subject to the state registration with the Federal Executive Authority on Intellectual Property. In case of the failure to observe the requirement for the state registration, granting the right to use shall be deemed to have failed to take place.”
In accordance with Paragraph 1 of Article 166 of the Civil Code of the Russian Federation, the transaction shall be invalid on the grounds established by the law, by virtue of its recognition as such by the court (a voidable transaction) or independently of such recognition (a void transaction).
The party to the transaction and, in the cases stipulated by the law, another person, shall be entitled to claim for the application of the consequences of invalidity of the void transaction (Paragraph 3 of Article 166 of the Civil Code of the Russian Federation).
On the basis of Paragraph 1 of Article 168 of the Civil Code of the Russian Federation, except for the cases stipulated by Paragraph 2 of the said Article or by other law, the transaction that violates the requirements of the law or other legal act shall be voidable, unless it follows from the law that other consequences of the violation that are not related to invalidity of the transaction shall be applied.
Analyzing the above norms in the aggregate, it can be noted that the failure to observe exactly the form of the agreement, and not the fact of the absence of the registration of the granted right thereto, entails the fact of invalidity of the transaction.
In support of this, the examples from numerous judicial practices can be cited:
Thus, according to Decision of the Supreme Court of the Russian Federation No. 309-ES17-3250 of 13.06.2017, the plaintiff being a user under a franchise agreement, filed a statement of claim with the arbitration court on invalidating the franchise agreement, on the application of the consequences of invalidity of the void transaction in a form of the defendant's return of the franchise fee paid and the interest for the use of other person's money funds on the basis of Paragraph 1 of Article 395 of the Civil Code of the Russian Federation.
When adopting the judicial acts challenged by the applicant, the court was guided by the provisions of Articles 421, 422, Paragraph 1 of Article 432, Paragraph 1 of Article 1102, Article 1103, Paragraph 1 of Article 1027, Articles 1028, 1103 of the Civil Code of the Russian Federation and proceeded from the lack of the legal grounds for invalidating the agreement.
The court pointed out that the franchise agreement was signed by the parties without disagreements, any correspondence indicating to the existence of such disagreements was not represented, the plaintiff had paid a franchise fee under the franchise agreement in the amount of 400,000 roubles after than a month after the conclusion of the agreement, what justified on the absence of uncertainty between the parties, while negotiating the conditions of the agreement, and the absence of the registration of the franchise agreement did not entail invalidity of the agreement.
The legal consequence of the absence of the registration of the franchise agreement shall be not invalidity of this agreement, but the recognition that granting the right has failed to take place (Paragraph 2 of Article 1028 of the Civil Code of the Russian Federation).
Analyzing Resolution of the Intellectual Property Court No. A41-51039/2017 of 23.08.2018 in the case, where the user company also filed a statement of claim against the right holder on the recognition of the franchise agreement as invalid, the recovery of unjust enrichment and the interest for the use of other person's money funds. One of the plaintiff’s arguments was the ground that the grant of right under the agreement had not been registered.
When considering the appeal petition, the Court of Appeal noted that during the fulfillment of the agreement, no disputes regarding its fulfillment had arisen between the parties, the plaintiff had fulfilled the obligations regarding the payment of a franchise fee and the royalties under the disputed agreement, and therefore, he had approved it by his actions.
The Court of Appeal also stated that the plaintiff had used fully the complex of the exclusive rights granted to him extracting profit from this from the date of the conclusion of the agreement till the date of its termination.
Regarding the plaintiff’s argument on the agreement’s nullity due to the absence of its state registration, the Court of Appeal pointed out with reference to Paragraph 2 of Article 1028 of the Civil Code of the Russian Federation that, in accordance with the current legislation, a franchise agreement was invalid only if its form was not observed; the absence of the state registration of the agreement should not be a ground for the recognition of such transaction as invalid.
The Court of Appeal also noted that the franchise fee paid by the plaintiff could not be recognized as the defendant’s unjust enrichment; the plaintiff was entitled to claim the fulfillment by the defendant of the obligation to grant the respective rights, and in the case of the failure to fulfill those obligations, he was entitled to claim damages from him on the basis of Articles 15 and 393 of the Civil Code of the Russian Federation. However, since proceeding from the grounds of the claim, the losses arisen due to the defendant’s failure to fulfill the obligations under the franchise agreement, which is not recognized as invalid according to the established procedure, there are no grounds for damages.
Thus, it can be summarized that the absence of the registration will not constitute the ground for the recognition of the franchise agreement as invalid. The parties to the agreement should not expect that the fact of the registration is much more significant than the fact of signing the agreement. Also, in order to avoid the situations, where the user under the concluded agreement has to face the consequences of a rash conclusion, one can be advised not to rely on the possibility of “delaying the registration,” trying to make sure that the right granted to him is commercially attractive, but he should receive and analyze all the necessary information in advance, long before signing the above document, taking into account the experience of the fellow-users and he should approach the beginning of the cooperation with a sober awareness of the possible risks and the legal consequences of the concluded agreement.