Franchising – Italy.

Facts

A company was excluded from the Bank of Italy's invitation to tender for a contract to supply leased photocopiers and related maintenance services because it did not apply for the required authorization for subcontracting in relation to certain services.

The company filed a petition with the competent administrative authority (ie, the Lazio Regional Administrative Court), stating that it did not require authorization for the subcontract because the maintenance services in question would be carried out under a franchising agreement; therefore, the company argued that its service provider was a franchisee, not a subcontractor. The court upheld the company's claim on these grounds.

The Bank of Italy and the company which had been awarded the contract appealed separately to the Council of State.

Decision

On February 9 2006 the Council of State rejected the first instance decision and allowed the appeals. It held that, under public contract law, a franchising relationship must be regarded as a subcontract if the contractor intends to entrust franchisees with certain services rather than supplying them itself. Therefore, the contractor must seek authorization for the subcontract.

The Council of State held that an agreement is deemed to be a subcontract if it is executed between a contractor and a third party and provides for certain contractual requirements to be fulfilled not by the contractor and its organization, but by separate legal entities.

Article 1 of Law 129/2004 provides, among other things, that a franchising agreement is a contract for the cooperation of two legal entities which remain fully independent from an economic and legal perspective. In light of this, the Council of State concluded that if a franchisor in a public tender states that certain contractual requirements will be fulfilled by its franchisees, the franchising agreement is effectively a form of subcontract, as franchisees are legally and economically independent third parties.

Comment

This decision confirms that franchisors and franchisees are independent entities for the purpose of the award of public contracts. A franchisor which intends to participate in a public tender and plans to supply certain services or perform certain contractual obligations through one or more franchisees must be aware that the franchisees will be deemed to be subcontractors for the purpose of the tender and must be prepared for the contractual consequences.

"International Law Office"