The defense of the franchisee against the refusal to transfer the franchise agreement

Legal Insight

November 2024

By Marilena Giannika, Trainee Lawyer

Summary: A franchise agreement binds two independent businesses, where the franchisor grants the franchisee the right to exploit a "franchising package" for financial consideration. Transferring such an agreement requires the consent of the franchisor, the transferor, and the transferee, due to its personal nature. This article explores how to address a franchisor's refusal to consent to a transfer, either by proving abusive exercise of rights (Civil Code Art. 281) or by invoking a breach of contractual terms if explicit criteria for transfer exist.

1. Introduction

A franchise agreement is a cooperative contract between two legally independent businesses. The franchisor grants the franchisee the right to exploit a franchising package, consisting of intellectual or industrial property rights (e.g., trademarks, distinctive features), know-how, and management methods, in exchange for direct or indirect financial compensation. The goal is to sell specific products or services to end users.

Through these agreements, a franchise system creates a unified network of outlets with common branding and uniform products, giving customers the impression of a single enterprise.

2. Legal Framework Under Greek Law and Court Practice

In Greek law, franchise agreements are not expressly regulated. They are generally categorized as mixed contracts, combining elements of leasing, service agreements, and agency contracts.

Greek jurisprudence tends to consider franchise agreements as mixed contracts, which means that they involve features from multiple contract types. Courts determine the dominant contractual type and apply supplementary rules from other relevant legal frameworks.

Despite the absence of explicit legal provisions, commercial practice has developed standard clauses that govern the rights and obligations of franchisors and franchisees. These repeated contractual terms have led to the establishment of a semi-standardized contractual framework for franchise agreements.

3. Transfer of a Franchise Agreement and Franchisor Refusal

A franchise agreement’s personal nature requires the consent of the franchisor, the transferor, and the transferee for any transfer to occur. While the law does not prohibit changes to the identity of the contracting party, this tripartite agreement is necessary due to the intensely personal nature of franchise agreements.

The absence of legislative regulation increases the importance of clearly defining the rights and obligations of the parties during contract negotiations. Franchise agreements typically include clauses covering the possibility and criteria for transferring the agreement.

If the franchisor refuses to consent to a transfer, the franchisee can challenge this refusal on two grounds:

Abuse of rights under Civil Code Art. 281 – The refusal is deemed arbitrary or malicious.

Breach of contractual terms – Specific transfer criteria outlined in the contract are violated.

4. Franchisee Remedies

The franchisee has specific defenses depending on whether the transferability of the agreement is contractually defined:

A. Proving Abuse of Rights (Civil Code Art. 281)

If transferability is not explicitly addressed in the agreement, the franchisee must demonstrate that the franchisor’s refusal is abusive or malicious. Greek courts have accepted that malice, though difficult to prove, can be inferred when the franchisor’s actions lack legitimate justification or benefit.

B. Proving Breach of Contractual Obligations

When transfer criteria are explicitly included in the agreement, the franchisee must prove that the proposed transferee meets these conditions. Examples of such criteria include:

• Financial stability.
• Business experience.
• Compliance with franchise principles.
• Ability to uphold the reputation of the brand.

The burden of proof lies with the franchisee, who must provide evidence demonstrating that the transferee satisfies the stipulated requirements.

Conclusion

Given the personal nature of franchise agreements, careful negotiation of the contract terms is essential to address potential issues related to transferability. Franchisees have legal recourse to challenge a franchisor’s refusal, either through the general principle of abuse of rights or by proving breach of specific contractual provisions. These remedies safeguard the franchisee's interests while maintaining the integrity of the franchising system.