Author(s):S Ganotra

A Global analysis of franchise agreement

“Isolation is not possible. Globalization is inevitable and beneficial.”

Introduction

Do you wish to establish an attractive business model to distribute goods and services globally? Does your company have a brand image in the market and hopes to expand? Do you have a unique trend and wish to generate profits? If there is an affirmative answer to any of the questions as mentioned earlier, then franchising is the best option you can avail to earn worldwide popularity with a handful of resources and a large number of profits. With a booming international economy and changes in cross-border corporate transactions, entrepreneurs around the world are looking to establish their brands in foreign countries. If you are one of those entrepreneurs, this article will prove to be much more than a legal aspect of franchise agreements.

The business structure of major companies around the globe is rapidly transforming with a clear objective of expansion all over the world. The franchise is a unique method primarily used in service industries and a mechanism for transferring business structure via arm’s length with a handful of resources. It turns out to be a manifestation for exploiting collaboration between the commitment of franchisee and management expertise of franchisor. For a franchise model to survive the country requires a legal environment providing an organized framework to benefit all stakeholders, however, there is no unanimity in all nations concerning the legitimate model. Having a glance of history, we can see a discernible trend of regulation in significant jurisdictions post adaption of the franchise model, most of the countries are willing to change the legal environment for a franchise system to breathe. Whereas, some countries are still reluctant and rely merely on the underlying rules and regulations regulating the other business activities in general.

The franchising model has benefitted from the trend towards the globalization of markets henceforth; the new global panorama post adaption of franchise model is seen as an icon of western-based globalization. Now, considering the overall international standards in mind, this article focuses on the elements of franchising, the legal framework and its enforcement in the primary jurisdiction in the world.

UAE

UAE has the robust and dynamic markets in the world, and it is bursting with new foreign business arrangements, where franchises are bountiful. At present in UAE, franchises are operating in various sectors but mostly in fast foods, soft-drink bottling, beauty products, restaurants, and apparel. Franchise in UAE gets regulated with a range of civil and commercial laws depending upon the terms of the contract, as there is no specific franchising law in the country. There are multifarious laws which apply to franchise arrangements such as Federal Law Number 13 of 1981 (as amended) concerning Organization of Commercial Agencies, Federal Law Number 5 of 1985 on Civil Transactions, Federal Law Number 18 of 1993 on Commercial Transactions.

Apart from the aforementioned, UAE intellectual property laws for trademark, copyright, and patents, Federal Law Number 8 of 1980 on labor laws(as amended). However, the major challenge faced by UAE courts while treating a franchise as an agency is the arbitrability of the franchise dispute. Further, there are two types of franchise agreements that exist in the country, registered and unregistered, where the former contracts are those registered with the UAE Ministry of Economy and the latter are not. A dispute arising out of a certified franchise agreement provides exclusive jurisdiction to local courts under Commercial Agency Law, on the contrary, a dispute arising out of unregistered arrangement is not valid nor entertained in the court. The Agency law favors franchisees over franchisors and therefore international brands before coming to UAE must consider the need for registering the agreement. Registration could provide the ability for both franchisor and franchisee to prevent parallel trading of goods and has evidentiary value in the issue of trademark infringement. Further, the court faces several types of a dispute between parties, either from the registered or unregistered agreement, where termination of registered agency agreement is usually tricky, rest others include, misrepresentation, breach of contract, the appointment of another agent post-termination of contract.

Practically considerable amount of unregistered agreements exists, and courts on many occasions have entertained cases whereby applying substantive provisions of Federal Law Number 18 of 1993 concerning the Commercial Transactions. Under the registered agreements, the law provides higher protection to the 'franchisees', referring to Article 8 of the Commercial Agency law, where the Principal can only terminate the agreement on the Justifiable cause, whereas, under unregistered contracts, the deal gets treated as a contract.

The United Kingdom

In 1960, Dyno-rod was the first franchise network launched in the UK since then, franchising has framed its roots and flourished as a proven method for expanding business in the market. British Franchising Association (BFA) regulates franchise system in the country by its codes and ethics due to the absence of specific franchise laws. Subsequently, BFA code only applies to BFA members but UK High Court changed its opinion overtime in Re Drivetime Recruitment Ltd Re DST Ltd. [i], a case where winding up of a franchise whose franchisor was not a member of BFA, the court recognized the significance of BFA code while analyzing the behavior of franchisors in general. Further, BFA code imposes obligations on both parties and does not explicitly favors one.

Apart from the BFA code, the U.K. Competition Act of 1968 regulates all kinds of agreements in the country inclusive of franchise agreements. However, the primary concern among the franchisors is the prohibition from entering into contracts imposed by the Competition Act itself. Primarily, franchisors are prohibited from entering into agreements with an objective of distortion and prevention of Competition Act; secondly, any agreement exempted under European Union (EU) law and exempted under UK law. EU rules apply in the UK per Article 101 of the act, where European Commission has issued a block exemption for vertical agreements that have the effect of exempting specific rules and regulations if it satisfies particular criteria.

Although no specific franchise law exists in the country, there is particular other legislation which the courts refer while assessing the dispute between franchisors and franchise being, Trading Scheme Act, 1996, Data Protection Act of 1998, Unfair Contract Term Act 1977 and The Bribery Act 2010.Court entertain several kinds of issues between the parties which includes, enforcement of post-termination non-compete covenants, breach of contract, misrepresentation and more.

The United States

The Leader of Global Franchising Industry and the icon for most countries franchise system is still holding the same position in the global market. Franchising in the U.S. is regulated either by federal laws or state laws. The Federal Franchise Rule implemented by U.S. Federal Trade Commission (FTC) applies all over the country, and the latter are various state laws apply only to specific events where a sale of a franchise was made in the state, business located in the state or franchisee resides in the state.

Apart from the primary law, there are three general categories of statutes regulating franchise in the country being disclosure law, registration laws, and related laws. These three categories prevent the most common types of violations under franchise agreement such as offering and selling of unregistered franchise, failing to make required disclosures, making misrepresentations in the contract and improper terminating of agreements. The federal Franchise rule does not provide a specific provision for registration of franchise; however, various states require that franchises must be registered before offered in the market. Subsequently, state laws also impose various other restrictions on franchise relations including, Good faith and reasonableness, marketing fees, non-waiver, encroachment, etc.

The eBay Inc. v. MercExchange LLC happens to be one of the significant cases in the history of franchising in the United States. The case addresses the post-termination enforcement of trademarks rights, the court opined in favor of franchisor’s right for terminating the use of trademarks post-completion of agreement and court may pass preliminary injunctions for preventing the usage of the same.

India

Franchise sector in India is at a nascent stage. Somewhat similar to most other countries there are no specific regulations that regulate the franchise law in the Indian sub-continent. Franchise agreements are therefore contractual and governed by various other statues and legislations which determine the type of relationship between the franchisor and franchisee. For instance, Indian Contract Act 1872, Monopolies and Restrictive Trade Practice Act 1969, Competition Act 2000, Transfer of Property Act 1882, Consumer Protection Act 1986, Intellectual Property Laws, Indian Taxation Act 1961 and Foreign Exchange Management Act 1999. Additionally, it is pertinent for the investor before entering the Indian market that any proposed investment must abide by the rules of FDI policy released semi-annually by Department of Industrial Policy and Promotion (the DIPP).

The franchisors and franchisees intend to create a contractual relation, however, sometimes the relationship between the party could be considered an agency if the franchisee is allowed to enter into contracts with the third party. Further, issues relating to franchise agreements may include termination of contract, misrepresentation, breach of contract and more. However, the court does not address the issue of adverse covenant post-termination, per section 27 of the Contract Act such post-termination negative covenant is void-ab-initio. Additionally, the court does not favor either party, as the relationship between franchisor and franchisee are contractual, however, about the principal-agent relationship, the law is more favorable towards the agent.

The Apex court has always tried its level best to resolve the dispute with utmost care. Subsequently, Supreme court of India in Gujarat Bottling Co. Ltd. v. Coca-Cola Co. Ltd.[ii]emphasized on an essential aspect of a franchise agreement, the disclosure of know-how and trade secrets to the franchisee. The court was of the opinion that franchisee must take adequate steps to protect the franchisor’s confidentiality from other businesses in the markets and franchisor has the right to impose a negative covenant for prevention of disclosure of trade secrets in the market.

Saudi Arabia

Kingdom of Saudi Arabia is open for franchise agreements with few legal restrictions. Saudi law does not create a distinction between foreign franchisor or franchisee and Saudi franchisor. The country does not have a specific franchise law. However, Ministerial Order Number 1012 of 17/09/1412 (corresponding to 22 March 1992), issued by Ministry of Commerce and Industry, brought franchising under the similar purview of commercial agency regulations. The commercial agency regulations set out the rules which govern the relationship between the principal (franchisor) and agent (franchisee). Further, like UAE there are two types of agreement exist in the country registered and unregistered, where the former is the one registered in the Commercial Agencies Register at MOCI(Ministry of Commerce and Industry) within six months, and latter is the one which is not. Additionally, entities failing to register the agreements can still enforce franchise agreements but, will not avail the protection under Agency law.

Now, considering the mandatory provisions, the Sharia law will apply to all franchise agreements and parties are at autonomy to structure the contract. The law deals with issues like termination where the contract will be terminated per the terms, and there is no minimum term for a franchise agreement. Restrictive covenants are lawfully enforceable in the Kingdom where the franchisor has the right to restrict a franchisee from competing with the franchisor, dispute resolution, autonomy of party to stipulate the dispute resolution mechanism and where parties have not opted for arbitration the matter will be resolved by the court having jurisdiction.

Conclusion

With the wave of globalization having hit business structure of major companies around the globe, franchising seems to be an attractive and lucrative option for foreign brands to expand globally. The future of franchising is bright and clear; however, it is recommended to consult a lawyer before entering into franchise agreements due to dissimilarities of laws in countries.