Wednesday 9 July 2008

After bankruptcy: what happens to the Italian business format franchise?

Although, once a business format is successfully trialled, a franchise contract runs a heavily reduced risk of encountering an episode of bankruptcy on either side, this event can still occur. The Italian Bankruptcy Law (267/1942) divides business contracts into three categories:
* contracts that terminate on an adjudication of bankruptcy;

* contracts to which the bankruptcy trustee automatically succeeds the bankrupt because continued performance is to the creditors' advantage;

* contracts that are suspended until the bankruptcy trustee decides whether to terminate or continue them.
Franchise agreements, despite their ubiquity, are not however mentioned -- an oversight that was not addressed when the Franchising Law was revised in 2004. This means that their regulation on bankruptcy must be handled by analogising them to one of the three categories mentioned above.

In intellectual property terms, franchise agreements can span a number of elements of the contractual relationship:
* the use of trade marks and other signs belonging to the franchisor;

* the transfer of the franchisor's know-how to the franchisee;

* the sale by the franchisee of products and services and

* the payment by the franchisee of agreed royalties or fees.
The diverse nature of these provisions makes franchise agreements comparable to several types of contract, such as licence, agency, distribution, supply and commission agreements.

Some commentators consider the franchise relationship to be one of personal trust, which automatically terminates in the event of either party's bankruptcy, in the same manner as agency and commission agreements. Case law from the Court of Turin in January 1995 however construed the franchise as a supply agreement in which the franchisor supplied services, rather than goods. On this basis it was regulated by the provisions of the Bankruptcy Law that provide for the suspension of performance of mutual obligations until the bankruptcy trustee decides whether to terminate or continue the contract. This ruling has however been questioned on practical grounds.

Ultimately each case will be decided on its own facts and its own merits. Parties are advised to stipulate the consequences of bankruptcy in advance, to avoid undertainties and undesired consequences [source: Marco De Leo and Beatrice Masi, of Rinaldi e Associati, writing in International Law Office].

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