Franchising

From Max-EuP 2012

by Knut Benjamin Pißler

1. Object and goal

Franchising is one specific form of distribution (sales (forms of distribution), in which the franchisor grants the franchisee, in exchange for financial consideration, the right to exploit a franchise for the purpose of marketing specified goods and/or services. Herein a franchise means a bundle of industrial or intellectual property rights relating to trade marks, trade names, shop signs, utility models, designs, copyrights, know-how or patents. The franchisee exploits these industrial or intellectual property rights for the resale of goods or the provision of services to end-users within the distribution system as defined by the franchisor. The parties to the franchise agreement remain independent but collaborate in the commercialization of a product. The collaboration by the franchisor implies permanent assistance, which is considered to be a characteristic feature of a franchise agreement. The franchisor provides a range of services and assistance consistent with the image of the distribution system so that the outlet of the franchisee can be identified as being a part thereof. Based on his experience, the franchisor is obligated to inform the franchisee as to the best way of running the system in order to enable the franchisee to develop the franchise in optimal conditions. The assistance and services include, inter alia, advertising by or under the supervision of the franchisor, the management of the business and the training of the franchisee and his staff. The franchisor has a right of control and is therefore entitled to receive all information relating to the progress of the franchising business which will enable the franchisor to evaluate its own obligations and the maintenance of the identity and reputation of the network. The franchisee must comply with the franchisor’s plans and designs for the business premises and with instructions and standards for operating the business.

Franchising resembles to some extent distributorship agreements, because the distributors as well as the franchisees (unlike commercial agents and commission agents) conduct their business fully on their own behalf. However, the elements of recognition, reputation and originality (of the product, the services and the commercial formula), which are the principal reasons for the franchisee entering into the franchise agreement, are a distinguishing feature of franchising in comparison with distributorship agreements.

From a civil law perspective, the main task is to curtail the typically very strong bargaining power of the franchisor and the consequential danger of placing unfair burdens on the franchisee. The protection of the franchisee is especially necessary in subordinate franchising, empirically the most common type of franchising, while protection is generally not required in partnership franchising, where the franchisor and franchisee typically collaborate on equal standing without superiority of the franchisor in either pursuing and developing the marketing or in managing the distribution system. With regard to subordinate franchising, protection against the termination of the franchising agreement by the franchisor, protection of investments by the franchisee and regulation of the procedure to liquidate the franchise relationship are the primary issues. Here, the question commonly arises whether the rules for protecting commercial agents apply by way of analogy. Moreover, questions on competition law regularly arise with regard to vertical restraints in franchising agreements: the interests of the parties in applying such vertical restraints must be weighed against the general need to keep distribution markets open. Franchising networks typically reduce intrabrand competition (competition among distributors of the same brand of product) by means of homogenizing the different distributors of one franchisor, but at the same time such networks strengthen the interbrand competition between different franchising systems. Until 31 December 1999, franchise agreements were subject to a specific block exemption regulation of the EU (Reg 4087/88) (block exemption regulations). Since 1 January 2000, the vertical restraints block exemption regulation (Reg 2790/ 1999) is applicable to franchise agreements (vertical agreements in EU competition law). The Regulation has been in effect since 31 July 2010.

2. Trends of international legal development

A crisis in the United States at the end of the 1960s, provoked by dubious franchisors, resulted in a wave of codification and the establishment of franchising law. The primary aim of these regulations was to protect the franchisee from fraudulent and unsuitable franchisors by means of disclosure requirements regarding the necessary investment amount and the prospects of success as well as (in certain states) the official registration and supervision of public franchise offerings (so-called uniform franchise offering circulars). Furthermore the regulations aimed to safeguard the financially dependent franchisees in case of termination or the non-renewal of franchising agreements. Last but not least, the franchising laws included certain regulations regarding vertical restraints imposed on franchisees.

In Europe, France established pre-contractual disclosure requirements for franchising agreements in the Loi Doubin, promulgated on 31 December 1989, supplemented by a Décret, dated 4 April 1991, which resembles the disclosure laws in the United States. The French regulation requires that a draft of the franchising agreement and further information be disclosed 20 days before the signature of the agreement. An infringement of the disclosure obligation is punished with a fine. Regarding the civil law consequences of infringement, the franchising agreement is regarded as null and void. Furthermore, the franchisee has the right to claim damages. Instead of entitling the franchisee with a claim for indemnity, the French regulation grants the franchisee in certain cases (namely, disregard of the contractual period of notice to terminate the contract (rupture brusque) or abusive termination of the contract (rupture abusive)) a claim for damages.

On 15 January 1996, Spain promulgated a law (Ley 7/1996) that requires the registration of franchisors who operate in Spain. The corresponding register was established on 13 November 1998 with the promulgation of the Regulation (Real Decreto) 2485/1998. The register requires the annual registration of opening and closure of one’s own business and a franchised business. Additionally, the law has introduced pre-contractual disclosure requirements for the franchisors. As in France, no later than 20 days before the signature of the franchise agreement, the franchisor has to provide the franchisee with the essential terms of the agreement and other information required to ensure that the franchisee is able to decide freely and with knowledge on the aim of the integration in the franchising network. The provisions do not stipulate sanctions, but the general rules of Spanish civil law apply, whereby the contract can be annulled and compensation can be claimed on the ground that disclosure obligations were disregarded in accordance with Arts 1266 ff Código civil. The Spanish courts grant indemnity only in the case of an abusive termination of the contract or if the termination of the contract places the franchisor in the position of taking inappropriate advantage of the work of the franchisee.

Italy promulgated a law on franchising on 21 April 2004 (legge 6 May 2004, n 129). The law defines franchising, provides for a minimum content of franchise agreements and stipulates the pre-contractual disclosure requirements of the franchisors. 30 days before the signature of the franchise agreement, the franchisor has to furnish the franchisee with a copy of the complete franchise agreement as well as with further information which is comprehensively specified in a regulation (regolamento) dated 2 September 2005. The infringement of the disclosure obligations grants the franchisee the right to nullify the franchise agreement and to claim damages in accordance with Art 1439 Codice civile. The franchisor has to allow the franchisee a minimum period for the payment of the franchise fee, which must not be shorter than three years. Italian law does not provide for special protection of the franchisee in the case of the termination of the franchise agreement.

In Belgium, a law on pre-contractual disclosure obligations of franchisors entered into force on 1 February 2006. The law stipulates that the franchisor has to provide the franchisee with information on the essential content of the franchise agreement, the franchise system and corresponding documents no less than one month before the signing of the franchise agreement. The franchisor may not claim any fees for performing these obligations before the franchise agreement is signed. The infringement of the disclosure obligations allows the franchisee to nullify the agreement within two years after its signing. The franchisee may also nullify specific clauses in the agreement if he is not informed about their content. Ambiguity in the interpretation of particular clauses in the agreement is to be borne by the franchisor. The pre-contractual disclosure obligations are mandatory and not subject to the party autonomy. Furthermore, the law stipulates that Belgian law is applicable to the agreement and that Belgian courts shall have jurisdiction on disputes arising therefrom if the franchisee conducts his major activities in Belgium. In case the franchise agreement falls within the scope of the Belgian law on the termination of distribution agreements of 13 April 1971, the agreement may be subject to protection against termination and the franchisee may claim indemnity.

In Germany there are no special provisions on franchising. The disclosure obligations of the franchisor arise from the general principles of the law of obligations concerning the pre-contractual fiduciary relationship of the parties typically occurring in contracts for the performance of a recurring obligation and contracts requiring the safeguarding of another person’s interests. German courts have assumed that each party has the obligation to disclose all circumstances that hold foreseeable and distinctive significance for the conclusion of the agreement at the time of the negotiation. The infringement of pre-contractual disclosure obligations grants the franchisee the right to nullify the agreement and claim damages (nullification in accordance with § 123(1) Bürgerliches Gesetzbuch (BGB), termination of contract and claim for damages based on culpa in contrahendo in accordance with §§ 311(2), 241(2), 280 BGB, based on intentionally inflicted damage contrary to public policy in accordance with § 826 BGB or based on fraud in accordance with § 823(2) BGB in conjunction with § 263(1) StGB). During the existence of the contractual relationship, the franchisor has the further obligation to take into consideration the interests of the franchisee that merit protection. German courts hold this obligation as primarily arising from the fact that the franchisee invests time and money in a long-term commitment, but also because both parties restrain their economic freedom by entering into the franchise agreement (BGH 23 July 1997, BGHZ 136, 299 (Benetton I)): The franchisee restricts his merchandise assortment to the products of the franchisor while the franchisor decides to distribute his products through self-employed entrepreneurs. In Germany, the analogous application of the regulations for the protection of commercial agents in cases of the termination of the franchise agreement depends on whether the cooperative relationship assumed by the franchisee is clearly focused on the interests of the franchisor, a situation which is typically present in subordinate franchising.

3. Model laws and codes of conduct

Franchising is not regulated by any international uniform law. However, due to globalization there are drafts of legislative texts which are designed for possible adoption in various states or for application in business transactions between different states. This is true for a draft of a model law of the International Institute for the Unification of Private Law (UNIDROIT) of 2002 and the model contracts provided by the International Chamber of Commerce (ICC). The UNIDROIT model law deals only with the pre-contractual disclosure obligations of the franchisor. It contains neither regulations regarding the relationship between the franchisor and the franchisee nor any rules concerning the termination of the franchise agreement. The UNIDROIT model law requires disclosure of relevant information by the franchisor at least 14 days before the signing of the franchise agreement or the payment of any fees relating to the acquisition of a franchise. The UNIDROIT model law incorporates a comprehensive list of information to be disclosed by the franchisor. The non-performance of the disclosure obligations gives the franchisee the right to terminate the franchise agreement and to claim damages caused by the non-performance of the obligations. However, the UNIDROIT model law does not stipulate whether the agreement is void ex tunc or ex nunc, under what pre-requisites the claim for damages is to be granted or whether the claim for damages includes expectation interests.

Additionally, in 1972 the European Franchise Federation (EFF), in coordination with the European Commission, drafted a code of conduct that was subsequently revised and is currently available in a version dating from 5 December 2003. The code of conduct is concerned with the terminology of franchising, general duties assumed by the parties individually and collectively and, in particular, special duties of the franchisor in acquiring and selecting the franchisees.

4. Uniform law

In the Draft Common Frame of Reference (DCFR), it is proposed that the law of franchising be unified as one part of the law of distribution. The scope of application of the rules on franchising in the DCFR is quite broad as it includes forms of distribution where there is no support by the franchisor of the franchisee. Besides the general pre-contractual information duty in Art IV.E.-2:202 DCFR, which is applicable to all forms of distribution agreements, Art IV.E.-4:102 DCFR contains the information duties that apply specifically to franchising. Regarding the non-performance of these duties, the DCFR refers to the avoidance of the contract in accordance with Art II.-7:201 DCFR and to the claim for damages in accordance with Art II.-7:214 DCFR. Regulations on the protection of the franchisee in the case of termination of the contract are included in the Articles, which apply to all forms of distribution. Deviating from the laws of the Member States, Art IV.E.-4:206 DCFR provides for an obligation of the franchisor to warn the franchisee of an anticipated decrease in the supply capacity; an obligation which is also stipulated in Art 4(2) (b) of Dir 86/653 relating to self-employed commercial agents.

Literature

Aldo Frignani, ‘Italy’ and Gérard Sautereau, ‘France’ in Martin Mendelsohn (ed), Franchising in Europe (1993) 215; Oliver Gast and Günter Erdmann, ‘Offenlegungspflichten bei Franchiseverträgen im deutsch-französischen Vergleich’ (1997) RIW 822; Fernando Martínez Sanz, ‘Franchising in Spanien—über Scheinselbständigkeit, Registrierung und vorvertragliche Informationspflichten’ (1999) 7 ZEuP 91; Geert Bogaert and Ulrich Lohmann, Commercial Agency and Distribution Agreements (2000); Reiner Schulze (ed), Franchising im Europäischen Privatrecht (2001); Michael Martinek and Stefan Habermeier, ‘Der Franchisevertrag’ in Michael Martinik, Franz-Jörg Semler and Stefan Habermeier (eds), Handbuch des Vertriebsrechts (2nd edn, 2003) 467; Stefan Feuerriegel, Die vorvertragliche Phase im Franchising—Eine rechtsvergleichende Untersuchung des deutschen und spanischen Rechts (2004); Isabella Catania, ‘Der Franchisevertrag in Italien’ (2005) RIW 285; Martin W Hesselink, Jacobien W Rutgers, Odavia Bueno Díaz, Manola Scotton and Muriel Veldman, Principles of European Law: Commercial Agency, Franchise and Distribution Contracts (2006); Jan Patrick Gieslerand, Jürgen Nauschütt, Franchiserecht (2nd edn, 2007); Georg Schäfer, Die Pflicht des Franchisegebers zu vorvertraglicher Aufklärung (2007).

Retrieved from Franchising – Max-EuP 2012 on 27 January 2022.

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