The past 12 months have seen a great deal of franchise investment into the African continent, North, South, East, West and Central Africa are all attracting a great deal of attention from franchisors. The regulatory regimes can be challenging and procedures time-consuming and expensive. Accessing knowledgeable legal advice on franchising can be a challenge.
Chapter written by Melissa Murray
The Gulf Cooperation Council (GCC) countries comprise six distinct nations, each with similar but distinct legal systems. For example, while Dubai (part of the UAE) has a legal system that has many similarities with Western nations, Saudi Arabia has a legal system firmly based on shariah law. However, there is such a degree of commonality in the way these jurisdictions approach franchising that they can sensibly be dealt with together.
There are no franchise-specific laws in any of the GCC countries, although there has been talk of Abu Dhabi possibly adopting one in the future.
There is a restriction on direct foreign investment in all GCC countries and as the region is often granted by foreign franchisors as a single territory, this has an obvious impact upon the way in which franchisors and their developers or master franchisees structure their approach to the region.
All of the GCC countries have commercial agency laws that can apply to foreign franchises entering the market, with substantial negative consequences from the franchisor’s point of view.
Argentina is an increasingly vibrant economy and franchising is making headway there. There are no franchise-specific regulations, but the usual civil law approach is evident in the way that the courts deal with franchising.
Australia has one of the most developed franchising laws in the world in the form of the Federal Trade Practices (Industry Codes – Franchising) Regulations 1998, which is prescribed as a mandatory industry code by the Competition and Consumer Act 2010 (Cth). Since 2008, this federal law has applied not only to domestic Australian franchises but also to foreign franchises entering the Australian market.
In addition to imposing mandatory pre-contractual disclosure requirements, misleading and deceptive conduct and unconscionable behaviour are also prohibited and there is currently a proposal that a statutory good faith obligation be imposed upon both franchisors and franchisees.
Australia’s legal system has its roots in English common law and these are still evident in its jurisprudence, but the state and federal laws are steadily developing into a legal system that has much in common with US law.
Austrian law closely resembles that of Germany in respect of its impact upon franchising and so good faith is of great importance.
This Caribbean island state has a legal system with its origins in English law and does not have franchise-specific regulations.
Canada does not have national franchise legislation. Many Canadian provinces have adopted franchise-specific laws. Unfortunately each province has adopted slightly differing laws, introducing additional red tape and uncertainty for franchisors entering Canada.
Chile is seeing an increasing amount of growth in the franchise sector but does not have a franchise-specific law. The concept of duty of good faith is used to impose both a degree of pre-contractual disclosure and a restraint upon how franchisors exercise their contractual rights.
China’s franchising law was adopted in a hurry to satisfy the conditions imposed upon China as regards its accession to the World Trade Organization. As a result, it was not as well considered as it might have been, and has since been amended several times.
The law imposes pre-contractual disclosure, registration and mandatory terms, and the registration process can be challenging and time-consuming. Chinese law also imposes a duty of good faith upon franchise relationships.
As China is a signatory to the New York Convention, foreign arbitration in international franchise agreements tends to be the norm. There is a growing body of Chinese jurisprudence about franchising, but there is yet to be any real evidence of consistency between the various courts.
The Czech Republic does not have any franchise-specific regulations and instead relies upon its Commercial Code to deal with issues such as pre-contractual misrepresentations and the like.
Like the other Nordic members of the EU, Denmark has a civil legal system that is markedly less interventionist than the German-influenced systems.
It does not have a franchise-specific law.
The Napoleonic Code has had a substantial impact upon the law of other EU Member States.
France was the first European country to adopt a franchise-specific law – the Doubin Law – although paradoxically, it does not actually use the word franchising. Although its requirement for pre-contractual disclosure has many similarities to the United States’ franchise laws, it is distinct from them.
Concepts such as good faith impact upon the franchisor–franchisee relationship especially as the French judiciary has over recent years taken a more interventionist approach to commercial relationships.
Article 101 of the TFEU shapes French antitrust law.
Although Germany does not have any franchise-specific laws, it is probably one of the most heavily regulated franchise markets in the world. The application of the doctrine of good faith on both pre-contractual negotiations (culpa in contrahendo) and the franchise relationship itself can have a severe impact upon the franchisor’s ability to exercise its contractual rights against franchisees. Added to this is a tendency of the German courts to treat franchisees as consumers and a willingness in some circumstances to view individual franchisees as ‘hidden employees’, who are able to take advantage of employment rights.
Greece does not have franchise-specific laws. The law that has most impact upon franchising is the competition law, which reflects the approach of TFEU 101, the EU antitrust law.
Although a part of China, Hong Kong is a Special Administrative Region and has its own distinct legal system, which still has its roots in English common law. It has no franchise-specific law and, like the English legal system, puts great store in the concept of caveat emptor while being reluctant to imply any duty of good faith into the franchise relationship.
Unlike many former Soviet Bloc EU Member States, Hungary has resisted the temptation to specifically regulate franchising.
Its civil system still retains some vestiges of its Soviet past, but generally reflects EU directives and regulations. An overriding duty of good faith is imposed by the Hungarian Civil Code on franchising, but the courts do not look to jurisprudence on agency and distribution cases for guidance by analogy, as is the case in some civil jurisdictions.
Indian law is heavily based upon English law and exhibits the traditional English doctrine of caveat emptor in its approach to pre-contractual dealings between franchisors and other franchisees. Likewise, it is loath to imply a duty of good faith on to the franchise relationship.
However, the Indian legal system is exceptionally slow and franchisors are often sceptical as regards the courts’ impartiality. As a result foreign law and jurisdiction is the norm in international franchise agreements with arbitration being preferred to litigation because of India being a signatory to the New York Convention and the difficulty in enforcing foreign court judgments. However, there was some uncertainty about the status of foreign arbitration until the 2012 Balco decision.
There are some restrictions upon the ability of foreign parties to acquire more than 49 per cent equity interest of Indian companies and although royalties can now be paid without limit and approval, certain other payments still require the approval of the Reserve Bank of India.
Indonesia is a large and growing market in which franchising is well established. However, it has what are among the most complex and difficult franchise regulations in the world. They impose significant obligations on both franchisors and franchisees, and the local content requirement can be very difficult to comply with.
Iran has no franchise law and the legal environment is fairly benign for franchisors. However, despite having been partially lifted for non-US companies, the international sanctions have a significant impact upon the way franchisors must structure their market entry.
Italy adopted its franchise law in 2004 after some 15 years of toing and froing within the legislature. It imposes mandatory pre-contractual disclosure and various mandatory clauses.
The law had originally required that all foreign franchisors operate a pilot in Italy before they could franchise their concept there. However, this was received badly by franchisors and it was soon changed so that it did not become a barrier to foreign franchisors establishing their brand in Italy. As a Member State of the EU, Italy’s approach to vertical restraints reflects Article 101 of the TFEU.
The Japan Franchise Association is active but has little influence on the regulatory framework. Antitrust law has an impact upon franchising and the Fair Trade Commission has a good deal of influence over the way in which franchising is regulated on a day-to-day basis.
Kazakhstan has a sophisticated and in parts complex franchise law, which needs to be carefully considered before executing a franchise agreement in the country.
Korea has a challenging franchise law that delivers an unusually high level of protection for franchisees.
The Malaysian franchise law is somewhat complicated and regulates not only franchisors, but also franchise brokers.
Although there is no franchise-specific law in Mexico, franchises are regulated by the Industrial Property Law. This imposes a duty of pre-contractual disclosure upon franchisors and requires certain mandatory provisions included in the franchise agreement.
Franchise agreements are also generally registered with the Mexican Institute of Industrial Property to enable the franchisor to protect its trademarks.
There is also a limited duty of good faith imposed upon parties to a franchise agreement.
The Netherlands’ mercantilist traditions and favourable tax regime means that it has a legal system that is supportive of international trade. A civil law system, influenced by both the French and German civil law traditions and a Member State of the EU, its laws reflect the tendency to imply an obligation of good faith into franchise relationships. It does not have a franchise-specific law.
After considering whether it should adopt franchise-specific regulations, New Zealand decided that it would not follow the example of its Australian neighbour and that its common law was sufficiently adaptable to deal with the legal issues that arise as a result of franchising.
This dynamic but challenging market has a difficult regulatory environment. Franchise agreements have to be approved by governmental agency the National Office for Technology Acquisition and Promotion (NOTAP).
Poland has no franchise-specific law and applies a relatively light touch to its regulation.
There is no franchise law in Portugal and the EU competition law regime has a substantial impact upon the content of franchise agreements there.
Russia has a specific trademark-based franchise law, which requires registration of franchise agreements with the Federal Service for Intellectual Property (Rospatent). This can cause some difficulties in practice for franchisors.
The impact of shariah law on franchising is very marked, and standard agreements usually need substantial amendment before they are suitable for use in the country.
The origin of Singapore’s commercial success lies in its geographical position and its entrepôt trade. It has a legal system with its roots firmly planted in both English common law and its international outlook. As a trading nation its laws promote international trade and the concept of caveat emptor is a fundamental part of its approach to common law.
There is no franchise-specific law in Singapore and it does not generally imply a duty of good faith into contractual relationships.
After some 20 years of considering whether to regulate franchising, Sweden adopted a pre-contractual disclosure law in 2006, although its lack of real penalties for non-compliance probably restricts its impact. Like all EU Member States, Article 101 of the TFEU has a substantial impact upon the way that vertical restraints are dealt with.
There is no franchise-specific legislation in Turkey but the antitrust law can pose some challenges for franchisors entering the market.
Ukraine does not have a franchise-specific law and it falls to the Civil Code and Commercial Code to regulate it. Legal uncertainty about registration of franchises has been settled by the passing of new procedural rules on registration of concession agreements, which came into effect in April 2015.
The United Kingdom is the cradle of common law and yet it is also a Member State of the EU, which has a legal system dominated by civil law concepts such as good faith.
As a result, the law in the United Kingdom is undergoing constant change as the influence of civil law concepts becomes more and more marked. Its competition law is based on Article 101 of the TFEU.
Scotland has its own legal system, which, although very similar to that of England and Wales as regards corporate and commercial matters, is very different in respect of real estate.
There is no franchise-specific law in the United Kingdom and it is generally one of the more ‘pro-franchisor’ jurisdictions. Because of its colonial past and mercantilist traditions, English law is highly developed as regards international trade. As a result, English law is often adopted as the governing law in the international agreements of non-UK franchisors.
and Avi Strauss
The United States is the birthplace of franchise regulation, the first such law being passed in California in the early 1970s. A complex network of both state and federal laws that imposes a cocktail of pre-contractual disclosure, registration and mandatory term requirements has led to many foreign franchisors believing that the law has become a near insuperable barrier to market entry. It is certainly a complex and ever-changing jurisdiction as regards franchise law, but with appropriate legal support it is far from impregnable.
1 Mark Abell is a partner at Bird & Bird LLP.