Italy: The guarantor in the franchise agreement: criteria for drafting the co-obligation and guarantee clause

published on 15 February 2024 | reading time approx. 4 minutes

In franchise agreements, it is customary for the franchisor to require the franchisee's partners to join the franchise agreement as joint and several guarantors with the franchisee. For such clauses to be valid and suitable to protect the franchisor’s interests, however, it is important that they meet certain statutory requirements.

In practice, franchise agreements often contain clauses by means of which the franchisee’s partners jointly and severally assume with the latter the liability for its obligations and, thus, the role of guarantors. This practice occurs especially when the franchisee is a newly incorporated company. The function of such a provision is twofold: the franchisor obtains a guarantee as to the proper fulfilment of the clauses considered most sensitive, such as the payment of fees or those relating to the protection of intellectual property, but at the same time a greater involvement and adherence of the franchisee’s corporate structure to the entrepreneurial initiative is encouraged. The guarantee may cover all contractual clauses or be limited only to the most relevant ones, while the liability of the guarantors may be unlimited in amount or provide for a cap.

Having said that, when drafting the clause extending the obligations under the contract to the franchisee to the guarantor, it is important to consider certain aspects.

Indeed, for a contractual term to be valid, it must have neither generic nor indeterminable content. In other words, the object of the obligation must be sufficiently clear and determined or, in any event, determinable. Moreover, in the case of clauses containing future obligations, an indication of the maximum amount guaranteed is necessary in order not to incur nullity. On these principles and on the subject of the validity of such contractual clauses, the Court of Milan recently intervened in a dispute followed by our firm in favour of an important international franchisor.

In the case at issue, the courts confirmed the validity of the contractual clause by which the franchisee’s guarantors acquired all rights and obligations under the franchise agreement vis-à-vis the franchisor, considering it not only sufficiently clear but specifically also free of future obligations.

In the two legal proceedings – concerning the non-payment of certain sums by the franchisee and the consequent payment injunction issued by the franchisor – the franchisee had in fact objected to the forfeiture of the creditor’s right to demand fulfilment by the guarantors due to the lapse of the six-month term provided for in Article 1957, paragraph 1 of the Civil Code, as well as the nullity of the clause of the licence agreement providing for the inseparable connection between the liability of the affiliated company for the obligations assumed towards the franchisor and the joint and several liability of the guarantors as majority shareholders of the affiliated company.

In fact, the court hearing the case held that the objection of forfeiture of the surety pursuant to Article 1957 of the Civil Code was unfounded because the franchise agreement provided for the guarantor to be jointly and severally liable with the franchisee, a joint stock company of which it was at the same time a shareholder.

According to the court, therefore, the franchise agreement sanctioned the inseparable connection between the liability of the franchisee company for its obligations towards the franchisor and the joint and several liability of the guarantors as, precisely, majority shareholders of the franchisee. Consequently, in view of the fact that the rule of Article 1957 of the Civil Code can also be derogated from, even implicitly, the Court confirmed that in the case at hand, the clause contained in the affiliation contract implied the parties' intention to commit the guarantor-partner as a guarantor with no time limit for the fulfilment of the affiliated company's obligations, in derogation of the rule of Article 1957 of the Civil Code.

Furthermore, the Court also declared unfounded the plea of invalidity of the aforesaid clause of the licence agreement from the point of view of its vagueness and indefiniteness, since the clause refers to obligations specifically provided for in the same agreement.

In this respect, the Court pointed out that in the case at hand, the franchisor had invoked the joint and several liability of the guarantors by virtue of a contractual clause relating to the franchisee's breach of obligations to pay amounts determined or in any event determinable on the basis of the franchise agreement. Therefore, the Court concluded that there were no prospective obligations for which a problem of nullity of the clause arose because of the failure to indicate the maximum amount guaranteed pursuant to Article 2938 of the Civil Code.

Therefore, in the last case dealt with by the Milan Judge, the franchisee’s partners were held to be jointly and severally liable with the franchisee for the franchisee's obligations under the franchise agreement, since the obligations described in the franchise agreement indicated with sufficient clarity the obligations under which the franchisee’s liability and, consequently, the joint and several liability of the franchisees operated.