Due to the advantages of franchising contracts, they have become the preferred contracts in the commercial life in Turkey as well as abroad. Franchising is a type of business model, distribution and marketing method as well as being a contractual relationship. These contracts are encountered in many different sectors such as oil companies, hotels, restaurants, transportation companies, car manufacturers, fast-food, soft drinks and clothing.
In franchising agreements, one of the two parties operates on its own behalf by using the name and reputation, which is the brand value of the other in the sector, against a certain price. In this way, the franchisee does not need time and extra effort to create a new customer environment; The franchisor earns income. In this bulletin, it is aimed to provide general information on who and how the franchising agreements are established, the mutual rights and obligations of the parties to the agreement, the enforcement and termination of the agreements.
1. Franchising Contracts and Features
Franchising agreements are not regulated in any law in Turkish law. For this reason, they are among the contracts called “innominate contracts” in law. Since the contract is not regulated in a law, its definition is made on the basis of its characteristics. In the simplest terms, franchising agreements are a framework agreement that stipulates that a business, which has gained a certain recognition by making a name in a market, uses its intellectual rights such as name, brand, know-how to another business in return for a certain fee and/or profit share. Various additional agreements are also concluded between the contracting parties for the continuation of the franchising relationship.
The franchising relationship is such a type of commercial relationship that the franchisee gets a kind of commercial concession in this relationship. This privilege it has obtained is to sell the products of the well-known business that gives it a franchise, under the same name and in the same way, or to offer its services. In this context, the franchisee is obliged to make the franchisee use its brand, business name, store signs, titles, patents, design and utility models, copyrights, business secrets such as know-how, that is, intellectual and industrial property rights. Intellectual property rights are intangible property of a business. With the franchise agreement, the franchisor transfers the use of these rights to another enterprise owner and aims to market its own products and services. Although the franchisee uses someone else’s brand and name, it offers goods and services on its own behalf and in person. The franchisee, which is no different from an independent business financially, pays a certain entrance fee to the franchisor at the beginning and in addition to this, it undertakes to pay a certain percentage of its turnover annually. These payment obligations are called “franchise entry fee” and “franchise usage fee” and are among the main elements of the contract. Franchise usage fee is called “royalty”. The royalty payments, which are made regularly every year, are paid as a percentage of the annual turnover and profit at the rate determined in the contract, and it is likened to a kind of rent payment made in return for the use of intellectual rights.
2. Rights and Obligations of the Parties in the Franchising Agreement
In the franchising agreement, the parties not only have mutual rights, but also undertake obligations to each other. First of all, if we look at the debts of the franchisor arising from this contract, the first debt that comes to mind is undoubtedly the debt of transferring the use of the intellectual rights of the business to the franchisee. The franchisor is obliged to use the intellectual property rights such as brand, business name and know-how to the other party. The franchisor’s debts are not limited to this. The franchisor has to inform, enlighten, protect and support the franchisee. The goods and services required for the business must also be delivered to the franchisee. Another competitive obligation of the franchisor is the obligation not to give franchises to anyone other than the franchisee in the same region.
In return, the franchisor must act in accordance with the instructions of the franchisor, pay the franchise entry and usage fees agreed in the contract, bear the inspections of the franchisor, receive the goods and products subject to the franchise, and do his/her job faithfully. Although the franchisor is financially independent, it is dependent on the franchisor in that it has to act in accordance with the rules and instructions of the franchisor while doing its business, and that the business activities are subject to the franchisor’s audits. However, the revenues of both businesses are not shared. The franchisee does his/her own work and his/her income belongs to him/her. This is the side that separates the franchise relationship from the retail chain. Although there are more than one business in different locations in the chains, all these businesses are owned by a single owner, and profit and loss belong to this main business.
3. Advantages of Franchise Business Model
The franchisee is largely relieved of the burdens of starting a business from scratch. Because being integrated into a ready-made system established by the franchisor minimizes the risks and disruptions to be experienced. A tried and established management system, business activity, financial order will always be easier to set up and maintain than in a brand new venture. In addition, the goods to be sold or the services to be offered by the franchisee’s business are certain, and there will be no difficulty in supplying goods and products. The customer environment of the business established by the franchise area is also ready. There is no need for extra time and effort for a certain time to pass for sales or presentation, for customers to get to know and demand the product. Since the advertising and promotion works are done by the franchisor, the franchisee does not have a job in this regard. Store design, workplace clothes, prices are also determined by the franchisor. In addition, the franchisor will contribute to the development of the business by providing training to the franchisee during the continuation of this business model, as it was at the beginning.
In return for these advantages obtained by the franchisor, the franchisor also benefits from this business relationship. The franchisor, who has the opportunity to present its goods and products to wider audiences in more places, earns income from these businesses by taking a certain profit share both at the beginning and during the continuation of the contract.
4. Form Requirement in Franchising Agreements
Since franchise agreements are not regulated in a law, a form requirement for these agreements is not regulated in our laws. Therefore, franchise agreements can be made without any form in accordance with the TCO article 12/1 rule. However, since the franchise agreement includes the transfer element of the use of intellectual rights and there are allegations of collusion, it is usually made in writing, since it is necessary to prove it. In particular, if the contract includes a trademark and patent license, it must be made in writing.
In order to explain the approach of the Supreme Court to the issue in case of disagreement between the parties regarding the existence of the contract, sample Supreme Court decisions are given below;
“In the concrete dispute, the plaintiff creditor relied on the commercial books and records and expert examination, claiming that the Franchising Agreement, which was allegedly made between the defendant third party and the defendant debtor, was collusive. However, the Court has not made any examination and evaluation regarding the claim of the plaintiff creditor in question.
That is, the defendant third party declares that there is a Franchising Agreement dated 23.02.2016 between them and the debtor company, and that they are under a debt of 500.000 TL as the franchise fee by giving 8 bonds in return for the debt, and that the prices of these bonds are paid through the bank, and as it is understood that the file presents the Franchising Agreement, bills, receipts and invoices issued by the debtor company on behalf of the third party company, these issues should be clarified in accordance with Article 31 of the CCP. While it is necessary to obtain a report from an expert (considering that the opening and closing approvals have been made) in order to determine whether there are records of the contract, invoices and payment in the commercial books of the debtor company and the defendant third party, whether the Franchising Agreement alleged to have been made between the third party and the debtor, as claimed by the claimant creditor, by evaluating the report to be received together with other evidence in the file, whether it is collusion or not, and to make a decision on the claim of remuneration according to the result, it is not correct to reject the case in writing as a result of incomplete examination and research. ” [1]
In another decision, the Supreme Court sought written evidence for the acknowledgment of the existence of a contractual relationship;
“According to the scope of the claim, defense and the entire file; Considering that although the claimant has declared that he has a franchising agreement with the defendant, he could not present a written document regarding this agreement, therefore the existence of the agreement could not be proved, and there is no contractual relationship, that in the determination made at the defendant’s workplace, the products with the trademarks belonging to the plaintiff were identified, the defendant could not base the presence of these branded products at the workplace on a valid legal reason, the defendant used exactly the same trademarks registered on behalf of the plaintiff, and the parties’ fields of activity were the same, it has been decided that the trademark right has been infringed since it clearly paves the way for the association and confusion of the defendant and plaintiff businesses before the customers, therefore, it has been decided to detect and prevent the trademark infringement, and to collect the non-pecuniary damages of 5,000,00 TL from the defendant, taking into account the social and economic conditions of the parties, the severity of the violation, and the rules of rights and affinities. ”[2]
In another decision, the Supreme Court determined that the contract between the parties was a franchising contract and emphasized the merchant’s duty of care;
“The attorney of the plaintiff claimed that contracts were signed between her/his client and the defendant company on 25.12.2012 under the name of Franchising Articles of Association, Franchise Protocol and Annex-1, that before the signing of the contracts, his client was convinced by misleading information, statements and documents that the worldwide known L….-Italy firm would be a franchisee, whereas the defendant firm did not have the authority to grant a franchise on behalf of L….-Italy. that the defendant company behaved in this direction in order to popularize its own brand, B… Coffee, that the defendant was only the distributor of coffee products in L…..-Italy, that the contract signed by his client was prepared unilaterally, that there were many unfair provisions against his/her client in its content, and that a copy of the contract was not even given to the client; and the attorney claimed and filed invalidity of the contract, protocol and annexes signed between the parties, dated 25.12.2012, as of the date of the contract, due to the fraudulent behavior of his client during the contract, the fact that the contract is collusive and contains general transaction conditions that are against the law, and that it was prepared unilaterally and imposed on his/her client and that that the mortgage placed on the immovable belonging to his/her client be removed pursuant to the contract, the return of the immovable that was transferred to the defendant by his/her client pursuant to the contract, otherwise the collection of 350.000,00 TL, which is the price, together with the commercial interest to be accrued from the date of transfer, from the defendant.
The defendant’s attorney demanded the dismissal of the case, arguing that the Intellectual and Industrial Rights Civil Court is responsible for dealing with the case, since the case contains disputes regarding the right to use the trademark, the consumption and use of the trademark, that his client is the sole seller of L….. branded coffee in Turkey, and that since 2009, he has created a cafe chain with the B… Coffee Shop concept, especially L…… branded products, that more than 40 cafes were included in this chain with franchise agreements, and that it was clearly stated in the agreements signed between the parties that a franchise was taken to operate a B… Coffee Shop by using L….. products, the plaintiff will be considered a trader and that her claims of deception and other claims are unfounded and demanded the dismissal of the case.
According to the scope of the claim, defense and file by the court; It was decided to reject the case on the grounds that the defendant’s claim that he made a franchising agreement with the plaintiff by creating a system under the name of Best System, that the plaintiff should act as a prudent businessman because he/she is a trader, that the claim that he invested with his free will and free will, taking into account all the risks, and that he was deceived only because of the marketing of L… coffee products is not valid, and that it cannot be proven that the defendant has deceived the plaintiff with the fraudulent deception. . For the reasons explained above, it was decided to APPROVE the judgment found in accordance with the procedure and the law, with the rejection of all appeals of the plaintiff’s attorney.[3]
5. Termination of Franchise Agreements and Rights
Franchising contracts can be concluded in a fixed-term manner or for an indefinite period. If the contract is made for a fixed period, it automatically expires at the end of the period. If the parties continue to enforce the contract despite the expiry of the period in the contract, then the contract will become indefinite.
Both parties have the authority to terminate the contract if there are justifiable reasons to terminate the contract, valid for both fixed-term and indefinite-term contracts. The reasons for termination with just cause are usually determined in the contract. In addition to these, if there are violations of the fundamental contract that should be considered as just cause, it is possible to terminate the contract with just cause, even if it is not written in the contract. Termination takes place when one party to the contract declares termination to the other party. The contract is terminated without the need for the other party to accept the termination. According to whether the termination is based on a just cause or not, it is necessary to determine what the mutual rights and obligations are. The party making the unjust termination shall be liable to pay the damages incurred by the other party due to the termination. Since it has an explanatory nature on the subject, it is useful to share the current Supreme Court decisions below.
“The lawsuit is about the request for the collection of material and moral compensation due to the termination of the franchising agreement concluded between the parties and has been filed by the franchisee. The plaintiff did not claim that he has a right arising from the Decree Law No. 556, and requested the collection of the franchising fee, the loss of value of the fixtures, the expenses incurred, the lost profit, the remaining product price, the overpayment made to the defendant and the moral compensation due to the unfair termination of the franchising agreement. In addition to these, demanding the expenditure made by the plaintiff in order to increase the value, quality and number of customers of the defendant’s trademark and requesting injunctive measures to prevent the transfer of the registered trademark on behalf of the defendant is not a registered industrial right claim within the scope of the Decree No. 556. In this case, while the court should go to the merits of the matter and resolve the dispute according to the general provisions, it was not correct to give a decision of non-jurisdiction on the grounds that the dispute was within the scope of the Decree Law No. 556, and it was reversed”[4]
In an event where the franchising agreement was terminated, the Supreme Court considered the defendants’ failure to fulfill their contractual obligations as a justification for selling food and beverage products that were not prepared in accordance with the methods set by the licensor. The details of the decision are as follows;
“The attorney of the plaintiff declares that the parties have agreed on the business license with the contract dated 12/05/2008 between his/her client and the defendant Y… Gıda Turizm, Ind.Trade.Co.Ltd. that The defendants have not Fulfilled their obligations, that the contract has been violated, that the contract has been violated, the contract has been terminated unilaterally, the follow-up file opened against the defendants has become final for the defendants other than the defendant, that the action for annulment of the objection against S… is continuing, and that in case the license is terminated by the licensor due to one or more violations, the licensee must pay the licensing penalty of 50.000 USD without any other conditions, Declaring that the contract was signed by the defendants A… and S… as joint and several guarantors and that no results were obtained from the applications made to the defendants; and The attorney of the plaintiff has requested the collection of 10,000 USD from the defendants for the time being in terms of the penal clause, deprived profit, positive and negative commercial damages, provided that his rights regarding the surplus are reserved, and increased his request to 50,000 USD with the amendment petition dated 28.05.2019.
According to the scope of the entire file; Since it is understood that the parties have agreed on the License (Franchising) Agreement signed between the plaintiff and the defendants, the defendants did not fulfill their contractual obligations due to the fact that the defendants sold food and beverage products that did not comply with the specifications of the …..By Dürüm System for food and beverage products other than those determined by the plaintiff company, or that were not prepared in accordance with the methods set by the licensor, the plaintiff is right in the termination of the contract, the contract is signed by the defendants A… and S…. as joint and several guarantors, therefore these defendants are responsible in accordance with the provisions of the contract, although both penal clause, negative and positive damages and deprivation of profit have been requested, the penal clause, negative-positive damage and deprivation of profit cannot be claimed together due to the termination of the contract as stated in the expert report obtained in terms of the penal clause, deprived profit, positive and negative commercial losses regulated by the contract, the Court has accepted the case and it has been decided to collect from the defendants jointly and severally with the interest paid to the highest one-year maturity deposit account opened by the State Banks in US Dollars in TL equivalent to be calculated over the Effective Selling Rate of the Central Bank of the Republic of Turkey from the date of action of USD 10,000,00 on 26/05/2009, from the date of correction of USD 40,000,00 on 13/12/2018. The judgment was upheld by the Supreme Court.”[5]
In one of its decisions, the Supreme Court made the following determinations regarding the rights and receivables arising from the franchising agreement that was terminated;
“The attorney of the plaintiff alleges that his client had to terminate the contract as per the provisions of the franchising (commercial concession) agreement signed between his client and the defendant and that his client had to terminate the contract, thus inflicting loss and loss of commercial reputation and that he has suffered a loss of commercial reputation, has demanded the termination of the contract with all the provisions of the contract, for justifiable reasons, and the collection of 24,000,00 TL deprivation of profit, 10,000,00 TL non-pecuniary damages from the defendant.
The defendant’s attorney demanded the dismissal of the case, arguing that the plaintiff did not pay its accumulated debts pursuant to the contract, that the party who did not fulfill its contractual obligations was the plaintiff, and that he had made unjust claims to avoid paying compensation.
The court decided that it was unnecessary to decide on the request for the determination of the termination of the contract, since the plaintiff informed the defendant of her will that she terminated the contract by filing a lawsuit and decided to reject the claim for compensation on the grounds that the plaintiff had no debts to the defendant as of the date of termination, the defendant was right not to fulfill his obligations arising from the contract, and the plaintiff was not in good faith.
According to the information and documents in the case file, and the fact that there is no procedural and illegal aspect in the discussion and evaluation of the evidence based on the justification of the court decision, all the appeals of the plaintiff’s attorney were not considered appropriate and the judgment was upheld.[6]
Conclusion
Franchising agreements, whose usage areas are increasing, provide a business with the opportunity to do business on its own behalf under the name of a well-known brand. Thanks to this business model, which is frequently preferred by entrepreneurs, it is possible to obtain successful results that satisfy both sides of the contract. In practice, in case of termination of the contract due to termination due to the termination of the contract, disputes may arise regarding receivables and compensation obligations, especially the legal problems that arise during the contract phase, such as the conclusion of contracts, the determination of mutual obligations and the transfer of the use of intellectual rights.
You can contact our team for legal questions and problems related to the subject.
Best Regards.
Solmaz Law and Consultancy Team.
References
Sevgi TÜRKMEN, Franchising Sözleşmelerine Uygulanacak Hukuk, İstanbul Üniversitesi Sosyal Bilimler Enstitüsü Özel Hukuk Ana Bilim Dalı, 2015, İstanbul.
8th Civil Chamber of the Supreme Court, 2018/15117 E., 2020/4343 K.
11th Civil Chamber of the Supreme Court, 2016/1707 E., 2017/4522 K.
11th Civil Chamber of the Supreme Court, E. 2018/1665, K. 2020/4805, 05.11.2020.
11th Civil Chamber of the Supreme Court, 2015/14146 E., 2016/78.
11th Civil Chamber of the Supreme Court, E.2019/4910, K.2020/2896, 15.06.2020.
11th Civil Chamber of the Supreme Court, 2015/3509 E., 2015/10334 K.
[1]8th Civil Chamber of the Supreme Court, 2018/15117 E., 2020/4343 K.
[2]11th Civil Chamber of the Supreme Court, 2016/1707 E., 2017/4522 K.
[3] 11th Civil Chamber of the Supreme Court, E. 2018/1665, K. 2020/4805, 05.11.2020.
[4]11th Civil Chamber of the Supreme Court, 2015/14146 E., 2016/78.
[5] 11th Civil Chamber of the Supreme Court, E.2019/4910, K.2020/2896, 15.06.2020.
[6] 11th Civil Chamber of the Supreme Court, 2015/3509 E., 2015/10334 K.
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