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Claim for NIS 4.7 Million Due to the Cancellation of a Franchise Agreement

posted 2 years ago

On March 1st, 2007, the “Rikushet” chain [an outdoors retail chain] entered into a franchise agreement with Nazareth Orchards Enterprises Ltd. (hereinafter: “the franchisee”) for the operation of a Rikushet store at the “Dodge Center” mall in the city of Nazareth. The shareholder and the registered manager of the franchisee company is Mr. Im’ad Salaima.

The agreement between the parties included a clause, according to which the franchisee was prohibited from operating a competing store in the area of equipment for camping, travel, soldiers, outdoors items, etc.

Another clause, which was included in the agreement between the parties, stipulated that the shareholders of the franchisee company undertake not to manage, nor to work as employees, in a similar business that competes with Rikushet.

In April 2016, Rikushet learned that a “Columbia” store was about to open in the mall. Columbia was a company that competes with Rikushet, and also deals in the field of camping, travel, etc.

In May 2016, Rikushet learned that Columbia’s franchisee in the mall, was none other than the son of Im’ad Salaima, Mr. Hisham Salaima.

On May 23rd, 2016, Rikushet’s CEO sent a text message to Im’ad. asking him: “Do you think it reasonable and OK, that Hisham, your son, is going to be a franchisee of Columbia?

Im’ad replied: “It is not reasonable, and it is not OK. I have no control over him”.

On May 31st, 2016, in an urgent meeting held by the parties in the store, Rikushet’s CEO informed Im’ad that Rikushet had decided to cancel the agreement with the franchisee company, since it had learned that Im’ad’s son was about to operate a Columbia franchise, in a manner that constituted a prohibited competition with Rikushet, and also due to the breach of the franchisee’s fiduciary duty.

Im’ad on the other hand, claimed that his son, Hisham, acted against his will, and he refused to accept the cancellation of the agreement by Rikushet. Im’ad further claimed that Rikushet was not entitled to cancel the agreement with the franchisee, as his son, Hisham, was neither a shareholder, nor a registered manager in the franchisee company.

Due to the cancellation of the franchise agreement, the franchisee company filed a claim against Rikushet, for NIS 4,743,502 (four million seven hundred and forty-three thousand, five hundred and two New Israel Shekels) at the Tel Aviv District Court, arguing that Rikushet’s cancellation of the agreement was unlawful.

The franchisee argued that it was due compensation because of loss of future profits, equipment that remained in the store, and compensation for its reputation.

Rikushet’s counterargument was that the cancellation was lawful, as Hisham’s, Im’ad’s son, actions should be ascribed to the franchisee company, as Hisham was, in effect, the manager of the franchisee company, even if he was not the company’s registered manager. Therefore, Rikushet requested that the claim be rejected.

The Court determined that, in the light of the evidence placed before it, it was indeed Hisham that, in effect, managed the store and he certainly played a significant role in managing the store. The Court determined that Hisham corresponded with Rikushet’s CEO on several topics: On the topic of assistance regarding the store’s profits, on the topic of a certain vendor who had harmed the store’s profits, on the topic of special offers, on the topic of reaching targets, etc. Hisham’s actions were not those of an employee, but rather of the active store manager, and of a person who was behind the significant decisions made by the store’s management.

Accordingly, the Court determined that, in the light of the Companies’ Law, Hisham’s actions can be ascribed to the franchisee company, and the fact that Hisham was not formally registered as the manager of the franchisee company, did not make any difference with regards to the matter before the Court.

Accordingly, the Court determined that the franchisee company violated the franchise agreement with Rikushet, a fact which granted Rikushet the right to cancel the agreement. The Court determined that the franchisee company violated the agreement due to breach of the prohibition of competition and also due to violation of the franchisee company’s fiduciary duty towards Rikushet.

Therefore, the Court rejected the franchisee company’s entire claim against Rikushet, and even ordered the franchisee company to pay Court costs and to award Rikushet the sum of NIS 30,000 (thirty thousand New Israel Shekels).

  • Case 26206 – 01 – 17, Nazareth Orchards Enterprises Company Ltd. v. Rikushet 3000 Ltd., judgment given on January 21st, 2021, in the Tel Aviv District Court.

*An appeal against the judgment was filed with the Supreme Court.

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