31 January 1992

Doc. 6560

1403-29/1/92-4-E

Report

on franchising

(Rapporteur: Mr Stig GUSTAFSSON, Sweden, Soc. Dem.)

Problem

      Although franchising has become widespread in Europe there is no specific legislation on it. There are however reasons to provide legal protection to the franchisee as he is normally the weakest party in the franchising contract. European legislation in this field may be especially helpful for Eastern European countries which have only started to familiarise themselves with the system of franchising.

Proposed measures

      The drawing up of European legislation, or harmonisation at European level of franchising legislation is in the interest of all parties concerned, as well as that of the general public.

I. DRAFT RECOMMENDATION

1.       Franchising - by which is meant the right to sell, against payment, goods or services under a certain name or designation supplied by someone else - is becoming increasingly common in Council of Europe member states, and is already spreading rapidly in Central and Eastern Europe and in the developing world.

2.       Although such an agreement will often benefit both the franchisor (the brand name's owner) and the franchisee (the person or company using the brand name), sometimes it may also be unfair to the latter by submitting him or her to excessive financial and other obligations vis-à-vis the franchisor, or by not providing for sufficient legal and social protection.

3.       While legislation is already extensive in countries where the phenomenon is of long standing, such as in the United States, in many Council of Europe member countries - and in particular in the reforming countries of Central and Eastern Europe - it is either non-existent or at an embryonic stage.

4.       Among the issues that need to be settled to ensure fair and equitable franchising agreements are, for instance, whether the franchisee should be considered as an employee (with the resulting labour legislation safeguards) or as self-employed (or something in-between the two); to what extent ordinary contract laws should extend also to franchising agreements, for instance as regards clauses restricting sources of supply, the freedom to sell (including possible consequences for consumers), or the cancellation of contract; and the right of franchisees to negotiate with the franchisor, independently or jointly.

5.       The International Institute for the Unification of Private Law

(UNIDROIT) in Rome has been studying the franchising contract since 1985. Its work may lead to the adoption of a guide to franchise agreements but does not rule out the possibility of preparing a convention or uniform law.

6.       The Assembly, considering the above recommends that the Committee of Ministers study the legal, social and economic aspects of franchising in Europe in co-operation with the International Institute for the Unification of Private Law (UNIDROIT).

7.       It also invites member governments to draw up, and harmonise at European level, legislation on franchising, in the interest of all parties concerned, as well as that of the general public.

II. EXPLANATORY MEMORANDUM

by Mr Stig Gustafsson

1.       My task of writing this report is very much facilitated by the fact that there exists an excellent expert study prepared by Ms Lena Peters, research officer at the International Institute for the Unification of Private Law (UNIDROIT) in Rome, which she drew up at the request of the Committee on Legal Affairs and Human Rights and which she presented to the Committee at its meeting of 20 January 19921 . From this expert study it appears that franchising, which originated in the United States, has now become widespread in the industrialised Western World. It is an economical phenomenon but it has also important and interesting legal aspects. Jurists would call it a mixed contract or a sui generis agreement which combines elements of other forms of legal agreements. The definitions given imply that franchising may take various forms. The question is whether it requires specific legislation or whether the existing legislation on sales, lease, labour contract, intellectual and industrial proprerty etc., is adequate.

2.       In the franchising contract there are two parties, the franchisor and the franchisee. Theoretically, therefore, there is an equality of arms as the parties are free to enter into an agreement and to determine its conditions. However, in practice, the franchisor is normally a large and experienced multi-national commercial or industrial firm whereas the franchisee usually is a small businessman, shopkeeper, restaurateur, garageholder and so on. The contracts are often too one-sided to the advantage of the franchisor. This is such an important aspect of franchising that it is necessary to draw up legislation in order to protect the small entrepreneur - the franchisee, who may have to pay too much for the goods produced or the services rendered by the franchisor but, above all, a sudden termination of the contract by the franchisor may be fatal to his business and entail his going bankrupt. It is of prime importance to a franchisee to have a guarantee that the franchisor is able to fulfil his duties laid down in the contract, and to be really informed bout the financial and legal position of the enterprise, advertising of the product, market research, education of the franchisee and his employees etc. These are covered in "disclosure" legislation which exists in Canada, France and the United States of America. In labour relations the employee may be backed by strong trade unions in his relations with the employer who look after his interests when negociating collective labour and wage agreements. The franchisee, however, normally does not have such professional backing.

3.       In addition the "business format" which the contract imposes on the franchisee may not be well adapted to local circumstances or gradually become outworn. Finally the fees or royalties which the franchisee must pay to the franchisor may be too high. There is therefore good reason to look into the question whether legislation may be necessary to protect the franchisee without doing injustice to the franchisor.

4.       Among Council of Europe member States France is the only country to have adopted legislation on franchising. The act of 1989 and its application decree of 19912 are typical laws on disclosure which do not enter into the detail and legal characteristics of the franchising contract. Thus the franchisor is obliged to provide full information on his enterprise, on the franchising agreement, on its financial and legal position, as well as on other franchisees in the chain. American and Canadian law is basically disclosure law too. In Sweden a parliamentary Commission investigated the need of specific legislation on franchising. In its report of 1987 a draft bill on franchising was proposed which laid particular emphasis on the question of industrial relatioins in the franchising relationship. The discussions are still going on and the draft bill is now being revised.

5.       As franchising is known and practiced in Council of Europe member States for some thirty years - and therefore is not really an entirely new phenomenon anymore - one may wonder why there is no legislation on it in Council of Europe member States (with the exception of the recent disclosure legislation in France I just mentioned). The following answers may be given:

i.       franchising is too complex and too varied to be covered by specific legislation,

ii.       it is already covered by existing legislation and there is therefore no need for any specific legislation in the field,

iii.       there is no need for any specififc legislation as there are hardly any legal problems known to have cropped up in franchisor-franchisee relationships.

6.       Given the importance and the international character of many franchising agreements we may welcome the fact that the Internatioinal Institute for the Unification of Private Law (UNIDROIT) in Rome took up the question in 1985 and proposals to continue its work will be laid before its Governing Council in June 1992. UNIDROITS's work, for the moment, is concentrating on the elaboration of a guide to franchise agreements and their terms but the elaboration of a convention or uniform law is not to be ruled out a priori.

7.       In conclusion the Assembly may fully support the work of UNIDROIT in the field of franchising and express the wish that it may lead to concrete results in a not too distant future.

8.       The Council of Europe should also include franchising in its intergovernmental work programme and study the legal, social and economic aspects of franchising in Europe in close co-operation with UNIDROIT. It is believed that European legislation or harmonisation at European level of franchising legislation would be in the interest of all parties concerned, as well as that of the general public. Such European legislation may especially be helpful for Eastern European countries which have only started to familiarise themselves with the

system of franchising.

Reporting committee: Committee on Legal Affairs and Human Rights.

Budgetary implications for the Assembly: None.

Reference to committee: Doc. 6384, Reference No. 1717 of 11 March 1991.

Draft recommendation: unanimously adopted by the committee on 20 January 1992.

Members of the committee: Lord Kirkhill (Chairman), Mr Altug (Vice-Chairman), Mrs Ekman (Vice-Chairwoman), MM. Akçali, Amaral, Arnalds, Bindig, Brincat, Collette, Colombo, Columberg, De Decker, Espersen,

Esteves, Fodor (Alternate: Tabajdi), Fuhrmann, Ghalanos (Alternate: Matsis), Gundersen, Stig Gustafsson, Hyland, Jansson, Karcsay (Alternate: Hörcsik), Mrs Lentz-Cornette, MM. Meimarakis, Negri, Nunez

(Alternate: Barrionuevo), Oehry, Petitpierre (Alternate: Mrs Haller), Pontillon, Posluch, Rodotà, Rokofyllos, Ruiz (Alternate: Cuatrecasas), von Schmude, Schwimmer, Sir Dudley Smith, Mrs Soutendijk-van Appeldoorn, Mrs Staels-Dompas, MM. Stoffelen, Vogel, Ward, Worms.

N.B.: The names of the members who took part in the vote are underlined.

Secretaries to the committee: Mr Plate and Ms Coin.

1 ¹       AS/Jur (43) 17, available on request from the Secretariat.

2 ²       The text of the law and of the decree is reproduced in French on pages 8 and 9 (English version) of AS/Jur (43) 17.