Italy: franchising contracts and minimum duration of three years
Silvia Bortolotti
Studio legale Bortolotti, Mathis & Associati, Turin
The Italian Supreme Court has finally confirmed an important principle, previously expressed by some lower courts, which remedies a probable mistake made when approving Law 129/2004 ( the ‘Italian Franchising Law’).
Article 3.3 of Law 129/2004 provides that franchise contracts must have a minimum duration of three years in order to allow the franchisee to amortise the investment made; however, this provision only refers to the case of a contract concluded for a fixed term.
The rule in fact provides:
‘"If the contract is for a fixed term, the franchisor shall in any event guarantee the franchisee a minimum duration sufficient to amortise the investment, and in any event not less than three years. This is without prejudice to the hypothesis of early termination due to the default of one of the parties.’
From the outset, issues were raised by scholarship. In fact, if the purpose of the rule is to protect the franchisee, guaranteeing them a minimum period of time to amortise their investment, it is not clear why a franchisee who has entered into an open-ended contract should not benefit from the same protection.
Although it is true that in practice most franchise contracts are concluded for a fixed term (and thus fall within the protection provided by the legislator), there are also contracts concluded for an indefinite term and in any event, as mentioned above, the rationale for this differentiation is not understandable.
In such circumstances, some lower courts have expressed the view that this principle is also applicable to contracts concluded for an indefinite term. In particular, the Court of Appeal of Milan (the ‘Court’), in judgment No 749 of 10/3/2020, has ruled in favour of such extension, justifying such choice with the aim of preventing franchisors from opting for an indefinite duration in order to circumvent the protection granted by the rule to franchisees and, at the same time, to avoid unequal treatment between franchisees. In the case at hand, the Court has therefore condemned the franchisor, who had terminated the contract before the end of the three-year period without justified reason, to compensate the franchisee for the damage.
Subsequently, again the Court (judgment No 3528 of 3/12/2021) in the context of an indefinite term contract, after the franchisor had terminated the contract with 90 days' notice in accordance with the contract, upheld the first instance judgment that had deemed the termination unlawful due to breach of the principles of fairness and good faith, in view of the investments made by the franchisee and the further negative consequences that the withdrawal had caused him. In particular, on this point, the Court stated that:
‘If, therefore, the legislature held that the minimum time datum of three years was necessary for the purpose of amortising the specific investments in the fixed-term franchise contract, this means that in the indefinite term franchise relationship – where there is a presumption of a longer duration of the contractual relationship - it must be possible to hold a congruous time datum not only for the purpose of amortisation, but also in order to ensure the physiological profitability of any business activity.’
In this context, the Court of Cassation finally intervened, with judgment No 11737 of 2 May 2024, which, on the appeal against the judgment of the Court of Appeal of Milan No 749/2020 cited above, confirmed the decision of that Court on the point, reaffirming that:
‘[...] as in the case of a fixed-term franchise, even in the case of an indefinite term franchise contract, such as the one at issue in this case, it is contrary to good faith, and ultimately abusive and arbitrary, for the franchisor to terminate the contract before the expiry of the minimum duration of at least three years, given that this period constitutes the minimum time period sufficient for the franchisee to amortise the investment.’
The Supreme Court, therefore, through the application of the general principle of good faith and fair dealing applicable to all contracts, has finally filled a gap in Law 129/2004, with an interpretation that appears entirely reasonable, in view of the ratio of the rule, as well as from the point of view of equity.