Not all countries share the idea that ‘good faith’ must be treated as a general principal governing their contract law. Indeed, many jurisdictions take somehow pride, in being released from that. On the contrary, so called ‘continental law’ countries such as Germany, France, Spain, Italy, … are definitely oriented in considering the good faith requirement as a material rule, governing both negotiations, and implementation of a deal.
A recent case, decided by the Italian court of Benevento – judgment no. 301 of Feb 9, 2022 in re Sporte+ v Intersport Italia – may well illustrate what continental law judges appreciate in terms of fairness, in a commercial setting. The case relates to distribution of sport apparel and equipment.
As it is commonplace today, many people try to maintain, and possibly increase their physical performances by spending more and more hours working out in a gym, or outdoor. The sector boomed the past decade, and it’s doing even better since the Covid 2020 lockdown. In Italy, this fitness mania has sprung up thousands of new gym centers (somebody has calculated that there are some 8.44 facilities per 100 thousand population). The number of practitioners tends to increase in absolute terms, and every practitioner needs, or desires to have his paraphernalia (shoes, apparel, accessories, …) constantly à la mode. That’s turned out to be a bonanza for the manufacturers and distributors of fitness products and equipment; and one of the business schemes that has gain terrain is to sell it through a franchise network.
So, a franchise agreement was at a certain point negotiated, and concluded between two Italian companies operating in the sport industry. Not unlike the classic franchising pattern, the franchisee – a retailer operating in the Benevento area – was to buy and resell the franchisor’s goods, taking advantage of the latter’s renowned brand in return of royalties on the former’s turnover. The franchisees were also granted of exclusive resell rights, in their area.
Unfortunately, things went bad, and the parties faced each other in court reciprocally claiming breach of contract. One of the issues to be ascertained by the judges was concerning the franchisee’ claim to damages on account of the online competing marketing carried on by a third party, a chain of stores expressly authorized by the franchisor to do so. According to the franchisee, in fact, this would contravene his territorial exclusive rights, and as a matter of fact would take away a lot of clients thanks to its appealing low pricing.
The franchisor – a member of CISALFA GROUP and the Italian partner of the big sporting goods retailer ICC INTERSPORT Corp. (Switzerland) – objected that they were responsible for no breach of contract, since the competing activity was not theirs. The court in Benevento agreed with that reasoning (also because nothing in the agreement prevented the franchisor to market, or have marketed the contractual goods online); however, the court found the franchisor liable for not having disclosed this possibility to the franchisee, in the course of negotiations. In other terms, the franchisor, by withholding a fact that could have made the franchisee decide otherwise, had breach the good faith commandment.
It is notable, that the court came to this conclusion based on general principles of law, not on any specific requirement provided by the rules on franchising contracts[1].
As for the damages, the court remarked that the franchisee could have claimed (but they didn’t) all the costs borne, and also the profit that could have from hypothetical alternative ventures, if any. As a matter of fact, the only outcome of this judicial clash, in this respect, was that the contract was declared as terminated.
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[1] Italy adopted a bill on franchise contracts (“affiliazione commerciale”) in 2004 (law no. 129 of May 6, 2004). As for disclosure, art. 4 of law 129/04 provides for an obligation for the proposing franchisor to supply any would-be franchisee with a series of documents, including the final draft agreement and a detailed prospect of the project, 30 days at least before the day of signature. Moreover, art. 6(1) points out that “The franchisor shall at all times, with respect to the would-be franchisee, conduct itself with loyalty, fairness and good faith and shall promptly provide, to the would-be franchisee, any data and information that the would-be franchisee deems necessary or useful for the purpose of entering into the affiliation agreement”.
