July 10 2012
A cornerstone of many franchise systems is that the franchisor supplies products to the franchisee, which in turn sells the products to its customers. The franchisor acts as a supplier and the franchisee acts as a wholesaler. Thus, court cases involving suppliers and wholesalers have a bearing on franchise systems and on the agreements governing such systems.
In 2011 the Svea Court of Appeal(1) decided a dispute between a supplier and a wholesaler that is of interest to franchisors which sell products to franchisees.
The issue was that the supplier had terminated, with immediate effect, the supplier agreement with one of its wholesalers, which had exclusive rights to sell the supplier's products within a certain territory. The reason for this termination was that the wholesaler had refused to accept the supplier's right to raise product prices during the term of the agreement. The wholesaler counter claimed that the supplier had breached the contract due to the supplier's premature termination of the agreement.
The dispute focused on the following clause in the agreement:
"The product prices are presented in Appendix 1 hereto and can be adjusted by the supplier with 30 days notice in the event of higher costs for the supplier due to rise in prices by the manufacturer, higher freight costs or changing foreign exchange rates. Other price adjustment shall first be discussed with the wholesaler".
The wholesaler argued that the supplier had no right to raise its prices based on this clause.
The wholesaler presented several arguments; however, it relied primarily on the argument that the price rises were invalid under the clause because the supplier had not first investigated the possibility of obtaining products from other suppliers at the existing price level before raising its prices. The wholesaler further argued that the supplier had been disloyal to the wholesaler because it had not made a reasonable effort to negotiate with the manufacturer (which wanted to raise its prices) in order to keep the imminent price rises as low as possible.
The supplier contested the claim that it was obliged to search for other manufacturers before raising its prices, and argued and proved that it had negotiated with the manufacturer in order to keep the price rises as low as possible. Therefore, the supplier had been loyal to the wholesaler.
The court ruled in the supplier's favour. The court found that the clause did not oblige the supplier first to investigate whether other manufacturers could sell the products at a lower price level. Additionally, no other legal circumstances supported such an obligation. The court also found that the negotiation undertaken by the supplier with the manufacturer had been sufficient to meet the duty of loyalty.
This ruling suggests that a franchisor can raise its product prices under the term of a franchise agreement, provided that a clause in the agreement explicitly gives it such a right and it can demonstrate that it has made reasonable efforts to negotiate with its suppliers to keep the price rises as low as possible. However, a franchisor has no obligations if the agreement does not state that it must first search for other suppliers in order to avoid price rises from existing suppliers.
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