Legal Updates

A material part of a franchise agreement is added value of the chain to the franchisee and in lack of which the agreement may be terminated

October 2, 2019

Franchisees of a chain of fruit and vegetable retailers canceled the franchise agreement, contending, inter alia, that the chain breached its commitment to provide them with a franchise support, including professional training, employee training, professional advice on business management and more.
The Court held that the franchisees were entitled to terminate the agreement and the chain is to repay the franchise fee. Economic logic justifies contracting with a chain in a franchise mechanism only when the chain offers added value - operational, conceptual or proprietary - that justifies the franchisee's business independence restriction and franchise fee payment. Added value may be a unique work method, a reputation that the franchisee enjoys or a unique product that only a chain franchisee can sell. A chain that does not offer added value to its franchisees is in fact becoming unnecessary and unjustified, because instead of improving the franchisee’s work and lowering costs, it adds another layer to the supply chain - the chain's headquarters - and may even raise prices and damage the franchisee's operational efficiency. Here, the chain agreed to providing a franchise support but was not even able to do so - it has no professional support system for the marketing, promotion or the professional-operational fields, nor does it have a uniform and clear book of procedures. Therefore, the franchisees were entitled to terminate the franchise agreement.