On 9 January 2019 the Court of Rotterdam made a ruling in the dispute between Domino’s Pizza Netherlands and its franchisees. The proceedings regarded the question of whether Domino’s could unilaterally decide to change the district for the franchisee with the extension of the franchise agreement. No, says the Court of Rotterdam. It is a ruling that does give food for thought.
Domino’s franchise agreement contains – as is general practice – a provision laying down the possibility to continue the agreement after the initial term. Domino’s (translated) franchise agreement states:
“Option to extend
When nearing the end of the initial term, as provided for in article 2.2, the Franchisee has the right to extend the Franchise with an additional term of ten (10) years (…)
Method of extension.
The Franchisee knows that the extended franchise agreement may incur higher Royalty Payments and higher costs for advertising and promotions than apply under this Agreement and that the terms and conditions of the extended franchise agreement may in fact differ from the terms and conditions in this Agreement. The payments, costs and terms and conditions that will be applied under the extended franchise agreement will however be equal to that used by DP as well as, in general, within the entire system (…)”
It appears that Domino’s has attempted to include in the agreement the possibility to negotiate about a new franchise agreement. That means other terms and conditions could be stipulated. The Court however considers that the agreement offers no scope for other terms and conditions in so far that they are “core stipulations”.[/vc_column_text]
The Court’s explanation of the agreement
The Court considers that this provision means that the existing franchise agreement can be extended and that Domino’s cannot unilaterally change the extended agreement. Therefore, no negotiations about a new agreement but a solid right for the franchisee to extend the existing franchise agreement.
The contractual option to change the terms and conditions in the extended agreement does not apply, according to the Court, to core stipulations. According to the Court, the allocation of a trade zone to the franchisee is a core stipulation “without which the franchise agreement cannot be closed”. A statement we do not consider to be self-evident.
The Court finds that if Domino’s had wanted the right to change the trade zone in view of an extension, they should have explicitly included this in the agreement. Since they did not, they must respect the trade zone as agreed in the initial agreement.
Implications of this ruling
This ruling illustrates the importance of thinking carefully about extensions that are agreed in advance. Agreements regarding extensions are often included as standard provisions. If an extension is agreed, then – in any event according to this ruling – it must be explicitly clarified which stipulations may change in the event of an extension. It is conceivable that provisions about royalty payments, exclusivity and the duration can be considered to be core stipulations.
A final comment. The Court appears to say that the extension should, in principle, leave the core stipulations unchanged, unless otherwise explicitly provided for in the franchise agreement. In agreements in which the royalty payments are not explicitly referred to as stipulations that may change in view of an extension, the franchisor apparently cannot, according to the Court of Rotterdam, stipulate higher royalty payments in the extended agreement. In the case of Domino’s, the change to the royalty payments – other than the allocation of the trade zone – was explicitly mentioned in the provision for extension, whereby this issue was not relevant for Domino’s.
This does however raise the question as to the status of all the extended franchise agreements from other formulas in which a higher royalty payment has been stipulated in view of an extension, but for which the initial franchise agreement did not explicitly state that the royalty payments could change in the event of an extension. In those cases, should the franchisor then pay back the royalty payments retrospectively (over a long period) to all those franchisees?
In every respect, our corporate law team has a thorough grasp of franchise. We regularly work for national and international franchisors, including international market leaders as well as smaller Dutch initiatives, for whom we act as trusted advisor.