Are there any franchise specific laws governing the ongoing relationship between franchisor and franchisee? If so, please describe them, including any terms that are required to be included within the franchise agreement.
Franchise & Licensing
Law 18/03 regulates to some extent and in depth the contractual relationship between the franchisor and the franchisee. The main provisions to be considered and included within the franchise agreement are:
i) Forms of franchising (article 38) – i) Distribution, when the franchisee undertakes to sell certain products manufactured or distributed by the franchisor, through an establishment with the image and name of the franchisor; ii) Services, when the franchisee renders a service with the trademark and technique of the franchisor; iii) Production/Industrial, when the franchisee manufactures, in accordance with the instructions of the franchisor, certain products manufactured under the franchisor’s trademark;
ii) Written form (article 39) – Franchising agreements needs to be mandatorily executed in writing, otherwise it will be deemed null and void;
iii) Exclusivity clause (article 40) – Unless otherwise agreed in writing between parties, the franchisee cannot undertake activities which are in competition to the ones carried out by the franchisor; which in its turn cannot use other franchisees for the same activity within the same area or circle of clients.
iv) Obligations and duties of the parties (articles 43 to 46) – the franchisee is required to i) to adopt and use the products and/or services presented by the franchisor; ii) to pay, as agreed, for the services rendered by the franchisor; iii) keep a secret on all the information that is transmitted by the franchisor, including on the manufacturing processes and know-how, during all the period of the contract and beyond its term; iv) not compete with the franchisor, namely after contract has expired, when a non-competing agreement has been entered into (which maximum acceptable period is 2 years); v) perform its activity under the guidelines of the franchisor and with the exhibition of the franchisor’s distinctive signs. In addition, it might be agreed between parties to include the obligation of the franchisee to buy to the franchisor the products it distributes, and the duty to comply with several obligations in terms of supply, prices and accounting organization (article 43, 2 and 3).
The franchisor must also comply with certain obligations such as: i) give the franchisee license to explore the franchisor’s distinctive signs, manufacturing processes and know-how, in the agreed terms; ii) supply the franchisee the agreed products/services; iii) provide technical assistance to the franchisee for the performance of its activity; iii) improve its methods, know-how and processes, patented or secret, and transmit the innovations to the franchisee; iv) support the franchisee, namely in terms of training, publicity, studies and projects.
Law 18/03 provides in article 46, to certain “rights of the franchisee” (which can be understood as additional obligations of the franchisor) and which refer to: i) use of trademarks, names and signs of the franchisor; ii) use of any other distinctive signs of the franchisor, including, if applicable, decoration and colours of the premises, as well as staff’s clothing/outfit; iii) use, if applicable, of the franchisor’s know-how; and iv) use of the franchisor’s technical assistance.
Finally, article 47 provides additional obligations of the franchisor, which must be observed when the franchisee carries out its activity: i) the franchisor (other than the franchisee’s specific liability) is liable, towards the consumers, for the quality (or lack thereof) of the supplied products and the services rendered; ii) the franchisor also has the right (within reasonable terms) to inspect the establishment and the performance of the activities by the franchisee; iii) the franchisor has the obligation to indemnify the franchisee for any damages caused as consequence of defective performance.
The franchise-specific legislation in each of the six disclosure provinces imposes a duty of fair dealing (which includes a duty to act in good faith and in a commercially reasonable manner) on all parties to a franchise agreement. This duty applies in respect of both the performance and enforcement of the franchise agreement and applies throughout the term of the franchise agreement.
In addition, each provincial franchise statute contains a right of franchisees to associate with one another and a corresponding prohibition on franchisors interfering with such right.
There are no franchise specific laws governing the ongoing relation between franchisor and franchisee.
There is no legislation that makes express provisions for franchising in Denmark. This means that every aspect of franchising is regulated by the general rules of law.
The Contracts Act and general principles of contract law apply to franchise agreements. The overall principle in Danish contract law is the principle of freedom of contract (i.e., the parties are free to decide the contents of their agreement). However, the drafting (or carrying out) of a franchise agreement may be regulated by various mandatory rules. In particular, certain statutory rules such as the Competition Act, the Marketing Practices Act, the Business Lease Act, the Product Liability Act, the Salaried Employees Act and the Act on Interest on Overdue Payments may restrict the parties’ room for manoeuvre.
Among the rules to be considered in the Contracts Act when drafting (or carrying out) a franchise agreement is the general clause in Section 36. Section 36 stipulates: "An agreement may be amended or set aside, in whole or in part, if its enforcement would be unreasonable or contrary to principles of fair conduct. The same applies to other legal transactions".
Danish courts are reluctant to apply Section 36 on commercial agreements, but it may be applied where there is an evident discrepancy between the parties’ bargaining positions. Where the franchise agreement is silent, the parties’ relationship may be regulated by general principles applicable to commercial relationships. Such principles may be found in the Sale of Goods Act as well as in the Commission Act and the Commercial Agents Act. However, the principle regarding payment of compensation for goodwill at termination in the Commercial Agents Act will only apply by analogy in very exceptional cases.
Case law is also a relevant source of law in relation to franchising, especially where an earlier decision has been made in the superior courts. Possible precedents may be found primarily in various law reports. However, not many precedents relating to franchising have been published. This may be because many franchise agreements refer disputes to be settled by arbitration and not by the ordinary courts.
Furthermore, the Danish Franchise Association has adopted a Code of Ethics based on the European Code of Ethics for Franchising adopted by the European Franchise Federation, which is binding for its members. The Code of Ethics may be taken into account when determining the existence of general principles applying to franchise agreements.
There are no mandatory clauses required in franchise agreements according to Danish law.
Chapter 35 of the Civil Code of the Republic of Azerbaijan, devoted to franchising, mostly covers the ongoing relationship between franchisor and franchisee in Azerbaijan.
As previously indicated above, we do not have a comprehensive Egyptian franchise law regulating the relationship between the franchisor and franchisee. However, some Egyptian scholars and legislators have adopted the idea of characterizing a franchise agreement as being essentially a technological transfer agreement, thus subjecting this agreement to the mandatory provisions stated under the chapter on technology transfer in the Egyptian Commercial Law, inter ilia the obligatory choice of the Egyptian Law, being the governing law, and the Egyptian Courts being the courts having jurisdiction to examine any disputes that may arise out of the franchise agreement. Furthermore, should the parties agree to resort to arbitration to resolve a dispute, said arbitration must be held in Egypt.
Unlike the above mentioned approach, there is another perspective amongst the legislators, which we agree with, and that is that the franchise agreements are in fact distinct from technology transfer agreements, in several aspects inter ilia; technology transfer agreements, Article (75) of the Egyptian Commercial Law protects the licensee and limits the control of the licensor stating that “Any contractual term or condition that may impose restrictions on the licensee’s freedom to use the transferred technology may be null. This shall, particularly, apply to the conditions imposing any of the following obligations on the licensee: 1) obliging the licensee to accept and pay for the improvements introduce by the licensor, 2) prohibiting the licensee to amend the technology in a way that matches the local requirements, Also prohibiting the acquisition of another technology similar to or competing with the technology subject of the contract 3) using specific trademarks to distinguish the commodities for which the technology was used in their production, 4) limiting the volume of the production, its price, the method of its distribution or its export. 5) participation of the licensor in running the establishment of the licensee, or his interference in choosing the permanent workers in it. 6) purchase of the raw material, equipment, machines or spare parts for operating the technology, from the licensor alone, or from the establishment exclusively specified by the licensor. 7) restricting the sale of production, or the delegation for its sale, exclusively to the licensor or the persons defined thereby…” In light of this Article, any condition that will be included in the technology transfer agreement obliging the licensee to comply with business plan or business scheme applied by the licensor or to use a specific trademark, may be nulled in addition in case of occurrence of any of the events mentioned under the above article. In contrast, franchising is a tool for expanding the business of the franchisor in a way that complies with the franchisor’s plans with respect to the business, marketing and operation, Hence, the franchisee runs the franchised business under the supervision and assistance of the franchisor.
Therefore, we are of the view that the ongoing relationship between franchisor and franchisee in the franchise transaction is subject to the provisions of the Egyptian Civil Code.
French law does not provide a specific statutory regime for franchising. Instead, French franchise law derives mainly from case-law, with the relevant aspects of contract and commercial law applied from the French Civil Code and Commercial Code. The following apply to franchising activity in France:
- Article L. 330-3, Commercial Code. For more information see Question 4.
- Articles L. 420-1 et seq. of the Commercial Code. For more information see Question 10.
- Commission Regulation (EU) no. 330/2010 of 20 April 2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices (‘Block Exemption Regulation’). For more information see Question 10.
Case law is also relevant, particularly with respect to ‘know-how’ as there is no codified definition of this term.
To be characterized as a franchise agreement, there must exist: i) a trade mark license; ii) the communication of specific know-how; and iii) assistance provided to the franchisee by the franchisor. Thus, these same terms should be included in the franchise agreement.
Particularly relevant to the ongoing relationship is the franchisor’s duty to transfer of know-how and provide assistance to the franchisee, which should be done throughout the business relationship.
There are no franchise specific laws in Greece governing the ongoing relationship between franchisor and franchisee, the parties enjoying wide discretion in determining their rights and obligations and setting out the terms of their relationship.
Greek laws which are relevant to franchise agreements are, indicatively, the following:
- The general provisions of the Greek Civil Code and the Greek Commercial Code.
- Presidential Decree 219/1991 on commercial agency agreements (implementing EC Council Directive 86/653)
- Law 3959/2011 on the protection of free competition and EU block exemption regulations (including in particular Commission Regulation 330/2010 on vertical restraints)
- Compulsory Law 146/1914 on unfair competition
- Law 4072/2012 on trade marks
- Law 1733/1987 on transfer of technology, inventions, technological innovations
- Law 2121/1993 on intellectual property
The relationship between the franchisor and the franchisee will mainly be governed by the provisions of the relevant franchise agreement, while franchise agreements are governed by the IPL and the general rules of contracts contained in the Commercial Code and the general principles applicable to agreements, including the contractual freedom, which are applicable to the ongoing relationship between the parties as foreseen in the Federal Civil Code.
The Federal Consumer Protection Law may also be applicable to franchise agreements in certain manner, since it protects consumers and regulates the activities of providers selling goods and rendering services to the consumers, as explained in more detail in response to question 12. Its provisions include certain restrictions regarding the use of the consumers’ information, advertisements, promotions, offers, services, credit transactions, real estate transactions, warranties and adhesion contracts, among others.
The Federal Economic Competition could also result applicable to the relationship between the franchisee and the franchisor regarding some restrictions on the general principles of contractual freedom derived from monopolistic practices under such law, as further described in response to question 10.
Finally, another applicable legal statute is the Federal Law for Personal Data Protection Possessed by Private Persons, which protects personal data held by private persons in order to regulate the treatment of such data and ensure the right to privacy, and which content is further described in response to question 31.
According to article 142 Bis of the IPL, franchise agreements must be in writing and include the following minimum provisions:
(i) the geographical zone in which the franchisee shall mainly perform the activities that are the subject matter of the agreement;
(ii) the location, minimum size and investment characteristics of infrastructure relating to the premises in which the franchisee shall carry out the activities deriving from the agreement;
(iii) if applicable, the policies of inventories, marketing and advertising, as well as the provisions relating to the merchandise supply and the engagement with suppliers;
(iv) the policies, procedures and terms for any reimbursement, financing and other considerations in charge of the parties;
(v) the criteria and methods applicable to determining the franchisee’s commissions and profit margins;
(vi) the characteristics of the technical and operational training of the franchisee’s personnel, as well as the method or manner in which the franchisor shall provide technical assistance to the franchisee;
(vii) the criteria, methods and procedures of supervision, information, evaluation and grading of the performance and quality of the services under the respective responsibility of the franchisor and the franchisee;
(viii) the terms and conditions of any sub-franchise, in the event it is agreed by the parties;
(ix) termination causes under the franchise agreement;
(x) events under which the parties may review and, if this happens, mutually agree to amend the terms or conditions of the franchise agreement;
(xi) if applicable, provisions regarding the franchisee’s obligation to sell its assets to the franchisor or the franchisor’s designated representative, upon the termination of the franchise agreement; and
(xii) if applicable, provisions regarding the franchisee’s obligation to sell or transfer the shares of its company to the franchisor or to make the franchisor a partner of such company.
Yes, certain clauses of the Regulations on Commercial Franchise Operations (2007), the Administrative Measures on Filing of Commercial Franchise (2011) and the Measures on Information Disclosure of Commercial Franchise (2012) govern the ongoing relationship between franchisor and franchisee. For example, (1) the franchisor and franchisee shall include as a term of the franchise contract, the ability of the franchisee to terminate the contract unilaterally upon the lapse of a fixed term after the franchise contract is concluded; (2) the franchisor shall provide the franchisee with an operating manual for franchise operations and provide continual operational guidance, technical support, business training and other support services to the franchisee pursuant to the agreed contents and methods; (3) where a franchisor collects advertising and promotion expenses from a franchisee, the franchisor shall use the funds collected pursuant to the stipulated uses under the contract.
There is no specific franchise law in Peru. However, the general principles of contract law stated in the Peruvian Civil Code will apply relating to their effects, interpretation, termination, as well as the requirement to exercise rights and perform duties in good faith.
There are no franchise-specific laws governing the ongoing relationship between franchisor and franchisee in the Philippines. Their relationship is governed by the franchise agreement which is subject to the Civil Code provisions on obligations and contracts.
However, a “franchise agreement” that is in the nature of a “technology transfer arrangement” under the IP Code must include the mandatory provisions and exclude the prohibited provisions enumerated in Section 88 and 87, respectively, thereof. Non-compliance with either provision renders the technology transfer arrangement unenforceable, unless a request for exemption is made and granted by the Documentation, Information and Technology Transfer Bureau (“DITTB”) of the Intellectual Property Office (“IPO”).
The ongoing relationship between franchisor and franchisee is specifically regulated by Chapter 54 of Part II of the Russian Civil Code. Further, the general provisions of the Russian Civil Code, especially those that govern general aspects of contract law and obligations (Part I), intellectual property and licensing (Part IV), as well as real estate and property law (Parts I and II), may apply to franchising. Franchise relations may also be affected by local laws regarding consumer law and competition, advertising and data protection, tax and currency control.
Franchise agreements may contain various terms and conditions depending on the transaction specifics and negotiations. As required by law and practically crucial, franchise agreements will typically address the following material terms and essentials applicable to Russia-targeted deals:
- parties (ie, corporate names and addresses);
- subject matter (ie, trademark registration numbers and descriptions of other licensed IP rights);
- licensed products (ie, goods or services for which the trademarks are protected and licensed);
- scope of rights (ie, permitted manners of IP use and distribution of licensed goods or services, as well as the sphere of commercial activities);
- duties and covenants (eg, compliance with standards and manuals, product quality assurance, confidentiality and non-disclosure, site selection and approval);
- consideration (eg, franchise entrance fees, royalties);
- type of franchise (eg, exclusive or non-exclusive);
- term (ie, term of protection of licensed IP rights or certain specific period);
- territory (ie, the whole of Russia, specific regions, cities, streets);
- sub-franchising (eg, permitted or prohibited);
- franchise renewal (ie, possible or not, the franchisee’s right of first refusal);
- termination (eg, mutual or unilateral, for cause or convenience);
- post-termination (ie, franchisee obligations and liabilities following termination);
- miscellaneous (eg, governing law, jurisdiction); and
- signatures (ie, names and titles of signees).
There are no specific laws.
Franchise registration and disclosure laws are only one element of the regulatory scheme governing franchising in the United States. 23 U.S. jurisdictions (Alaska, Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, South Dakota, Virginia, Washington, Wisconsin, the District of Columbia, the U.S. Virgin Islands and Puerto Rico), have enacted “franchise relationship” statutes to regulate ongoing franchisor conduct in relationships with franchisees.
Each franchise relationship statute varies from the others in material ways and there are no uniform standards. The general thrust of the statutes, however, is to prohibit certain practices that are considered to be “unfair” or “unjust”. Thus, most of the states and territories with franchise relationship laws limit a franchisor’s right to do one or more of the following: (i) terminate or fail to renew a franchise without good cause; (ii) interfere with the right of free association among franchise owners; (iii) disapprove the transfer of a franchise without good cause; (iv) discriminate among similarly situated franchisees regarding charges, royalties and other fees; and, (v) place new facilities too close to existing franchises.
Where a franchise registration state also features a relationship law and/or otherwise governs the continuing relationship between the franchisor and franchisee, it will require that certain provisions be included and/or others excluded from a franchisor’s franchise agreement. These changes are often effected through a series of state-specific addenda to the franchise agreement that are approved by each respective state and applicable to residents of and/or franchised businesses to be located in such states. By way of example, many state registration laws prohibit franchisors from requiring its franchisees to consent to venue for litigation outside of such state. So, if a franchisor designates New York as the venue for all litigation under its standard form of franchise agreement, the State of Minnesota may nevertheless require the franchisor to strike such provision for Minnesota franchisees and instead include the following language “Minn. Stat. §80C.21 and Minn. Rule 2860.4400J prohibit Franchisor from requiring litigation to be conducted outside Minnesota. In addition, nothing in the disclosure document or agreement can abrogate or reduce any of Franchisee's rights as provided for in Minnesota Statutes, Chapter 80C, or Franchisee's rights to any procedure, forum or remedies provided for by the laws of the jurisdiction.”
There are no franchise specific laws governing an ongoing relationship between franchisor and franchisee in Norway, henche there are no specific terms and conditions which are mandatory to include in franchise agreements. Ordinary contract law and principles apply to franchise agreements.
Although mainly a disclosure legislation, the Franchise Law contains some mandatory rules governing the ongoing relationship between franchisor and franchisee and namely:
- Article 3.1 of the Franchise Law provides that franchise agreement must be in writing, if not it will be null and void and that its duration must not be less than three years.
- Article 3.4 of the Franchise Law sets forth a number of items which must be expressly contained in the agreement (although if the law does not interfere with their contents): the initial investment and costs; the terms of calculation of the royalties; the specification of the know-how and other services performed by franchisor in terms of technical and commercial assistance, outlet set-up and training; the terms for the renewal, termination and assignment of the agreement.
Apart from the above, the ongoing relationships is regulated by the general provision of the Italian Civil Code.
There are no franchise specific laws that govern the on-going relationship between franchisor and franchisee.
There are, however, a range of generally applicable laws that will apply to franchise agreements, such as contract, intellectual property, real estate and competition (anti-trust).
In addition, the Fair Trading Act 1973 and the Trading Schemes Act 1996, which relate to "pyramid selling" schemes, potentially apply to multiple-layer franchise arrangements, i.e. where there are three or more "levels". This is most common in a master franchise structure where there is a franchisor, a master franchisee and sub-franchisees.
The Trading Schemes Regulations 1997, a piece of secondary legislation issued under the Trading Schemes Act 1996, applies to network arrangements and contains onerous pre-sales advertising requirements, a cooling-off period, and the right for a member to withdraw on short notice. The Trading Schemes Regulations do not apply where either the franchise operates as a single-tier trading scheme (franchisor and one level of franchisees below it) or all of the franchisees are VAT-registered at all times (Trading Schemes (Exclusion) Regulations 1997).
It is, therefore, essential that appropriate provisions are included in the franchise agreement to ensure that the exemptions apply to protect the network.
Franchise agreements are not subject to any statutory controls or regulation in Lebanon, but rather they are subject to the general rules governing commercial relationships in Lebanon including: the Code of Commerce; the Code of Obligations and Contracts; the Income Tax Law; Consumer Protection Law; and Trademark, Industrial Design and Unfair Competition Law. Accordingly, there are no franchise specific laws governing the ongoing relationship between franchisor and franchisee.