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Doc. 6578
1403-14/2/92-8-E
O P I N I O N
on franchising1
(Rapporteur: Mr ROWE, United Kingdom, Conservative)
1. Introduction
1. If the Committee on Economic Affairs and Development has been asked to give an opinion on the succinct and yet comprehensive report on franchising prepared by the Committee on Legal Affairs and Human Rights, it is both because of the economic importance of the phenomenon and because of the more fundamental question of whether legislation is needed in this particular type of business activity.
2. Franchising is defined by the Committee on Legal Affairs and Human Rights as the "right [by the 'franchisee', or franchise-taker] to sell, against payment, goods or services under a certain name or designation supplied by someone else [the 'franchisor' or franchise-giver]".
3. In the United States, where the system originated some 40 years ago, franchising now accounts for about 35% of the sale of all goods and services, and is growing by about 10% per year, while in Canada the corresponding figures are reported to be 45% and 40%, respectively. Although franchising is still less prevalent in Council of Europe member states, it is nevertheless noteworthy. Five per cent of France's retail sales are estimated to be through franchising, with a 6% annual growth rate. In the United Kingdom estimates vary from 10% of total retail sales to between 3 and 4%. In the Netherlands the number of franchising chains have grown from 174 to 320 between 1981 and 1991, and that of franchisees from 4 000 to 11 000.
2. Fair or not?
4. The reason for this rapid development is no doubt that it offers both parties to the agreement - the franchisor and the franchisee - certain advantages. The former collects an entry fee and royalties from sales in exchange for the use of his brand name. He does not have to make an investment, and he will not lose anything should the operation fall. The franchisee for his part benefits from the goodwill presumably associated with the brand name, and can also share in the special "know-how" of the franchisor. Finally, to the extent the consumer attaches importance to buying the goods or service carrying a particular brand name - and can be assured of the particular quality associated with it - then he, too, presumably stands to profit.
5. If the legislator in some countries - notably the United States, Canada and France - has seen fit to regulate some aspects of franchising, it is notably to protect the franchisee. For instance, are entry fees and royalties excessive, and can the latter be raised at will by the franchisor? If excessive, will that affect the salaries and working conditions the franchisee offers to his own employees? Is the franchisee's position as an independent business person in some cases so undermined by a de facto "iron rule" by the franchisor that he is in reality an employee, but without the latter's social protection? If the franchising operation does not succeed commercially because of a lack of freedom of initiative of the franchisee, is it then fair that the entire loss should be borne by the franchisee and none by the franchisor? May a franchise agreement be terminated at any time, perhaps with immediate effect, and what should be the rules for renewal?
3. A need for legislation?
6. All the above is, then, basically about ensuring a certain equilibrium between franchisor and franchisee. But is this best achieved through special legislation? Or should existing legislation -general contract law, commercial or agency law, fair practices laws etc. - only be supplemented so as to cover also franchising? Or is it better not to take any legislative action and instead rely on the self-regulatory efforts of professional associations?
7. Your Rapporteur believes that we still know too little about both the national and, increasingly, international aspects of franchising, and that the Council of Europe's Committee of Ministers should therefore be asked to study, as suggested in the report submitted by the Committee on Legal Affairs and Human Rights the "legal, social and economic aspects of franchising in Europe", whether in co-operation with the Rome-based Unidroit (International Institute for the Unification of Private Law) or other competent bodies, such as professional associations.
8. Such a study should clarify the extent and nature of any problems encountered in the sector, and how they vary from country to country. On this basis - and presuming that a pattern can be discerned throughout Council of Europe member states - an effort should be made to establish a set of safeguards against malpractice, possibly in the form of a Council of Europe convention. The latter might well be drawn up in co-operation with OECD, as has usefully been done with joint conventions in the economic field.
9. A convention of this kind could subsequently inspire legislation in the member states, or it may be used by professional organisations (national or international) as a basis for a code of conduct for the industry. Codes of conduct should be such as to ensure the high standards expected by all the three parties involved, ie the consumer, the franchisee and the franchisor. Codes exist in some countries, such as the United Kingdom, and have proven highly successful in guiding the contracting parties toward fair agreements. Furthermore, banks can play a constructive role by making loans to their franchisor clients conditional upon the latters' belonging to a trade association and subscribing to its code of conduct.
4. Central and Eastern Europe
10. One additional consideration would argue in favour of Council of Europe action in this field, namely the opening up of Central and Eastern Europe to free enterprise. On the one hand franchising permits a rapid spread of company-specific know-how to would-be entrepreneurs in the region. For instance, out of approximately 2 000 franchising outlets opened up in Germany in 1991, close to 900 were in the so-called "new Länder". On the other hand there is a particular risk that people who are unfamiliar with free market principles and without sufficient legal safeguards, may be exploited through unfair agreements - especially since many of the countries in Central and Eastern Europe do not yet have a functioning commercial legislation. These countries are thus particularly likely to welcome a Council of Europe initiative of the kind mentioned.
11. In conclusion, the Committee on Economic Affairs and Development
suggests the following amendments to the draft recommendation presented by the Committee on Legal Affairs and Human Rights (Doc. 6560):
- at the end of paragraph 6, add the following text: "... and that it thereby pay particular attention to the special situation prevailing in Central and Eastern Europe;"
- add the following new paragraph 8: "Finally, the Assembly recommends that member governments, in the meantime, work in favour of the voluntary adoption of appropriate codes of conduct by professional associations, at national and international level."
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Reporting committee: Committee on Legal Affairs and Human Rights.
Committee for opinion: Committee on Economic Affairs and Development.
Reference to committee: Doc. 6384 and Reference No. 1717 of 11 March 1991.
Opinion: Approved by the committee on 6 February 1992.