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1. A uniform model for international trade

When negotiating franchising contracts abroad, one of the main difficulties faced by parties engaged in international trade is the lack of uniform rules for such contracts.

Since there is no internationally agreed uniform legislation on franchising (as opposed, for example, to the case of international sales contracts), parties must rely on national laws and regulations applicable to franchising, when such laws and regulations exist, which: (i) do not take into account the specific need of international trade (since they have been enacted in primis for domestic agreements), and (ii) may differ substantially from one country to another. Some principles are established at the international level (especially within the European Union), but they refer mainly to antitrust aspects of the contract (i.e., validity of certain restrictive clauses) and do not cover specifically the rights and obligations of the parties under the franchising contract.

Stipulations agreed by the parties have the utmost importance in determining the legal status of the contract, and should therefore be very carefully drafted.

Many associations, either national or international, have proven to be quite active in promoting franchises, studying their different aspects and establishing codes of ethics. These codes should be considered carefully by franchisors and franchisees when determining their respective rights and obligations.

This model franchise contract aims to provide those who are considering entering into a franchise contract with a set of clauses that can guide the parties in preparing their own franchise contract.

The model follows the traditional ICC approach in seeking to strike a fair balance between the interests of the franchisor and those of the franchisee, taking into account the core obligations of an international franchising contract.

Large undertakings that already use franchising as means for distribution of products and/or services will already have their own practices and their own model forms of franchising contracts. Often, they prefer to entrust the appointment of franchises within a specific territory to an independent or associated company which will act as the master-franchisee. This master-franchisee will be entitled to enter into franchise agreements with respect to a specific territory. These sub-licence agreements will usually be entered into with local companies which have experience of local business conditions.

However, as a result of the evolution of means of communication and distribution methods, the use of franchising is no longer restricted to major multinational companies. Small undertakings which have acquired valuable experience at a local level sometimes use their initial place of operation of business as a launch pad for international expansion through the franchising of a system.

This ICC Model International Franchising contract will contribute to the promotion of franchising operations generally by putting at the disposal of these small undertakings a unique and useful model form.

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2. Precautions for use of the model form

This ICC Model International Franchising Contract has been elaborated taking into account the most commonly encountered clauses in franchise agreements, and therefore may be used as a checklist of the core obligations of a cross-border franchise contract.

The drafting group has chosen to explain more specifically some stipulations of the contract to enable the parties to fully understand the scope of their commitments.

The working group has also tried to work out a single solution on every issue. However, this has not been always possible.

In some cases, alternatives have been suggested. Such alternative solutions have been presented side by side under the letters A and B in order to point out that only one of them can apply. Parties should be very careful in expressly deciding which alternative to choose.

In any event, the model form provides in Article 33.8 that, if the parties do not make a choice by cancelling one alternative, one of them will automatically apply.

In addition, there are clauses which will apply only when the parties have expressly decided to incorporate them in their contract by ticking the respective box on the left side of the clause.

There are also a number of points at which the parties must insert their requirements (definition of the territory, products, minimum target, stocks, etc.). Some of these points have been incorporated in the Annexes to this document, which the parties can complete and, where necessary, modify during the life of the contract, without making changes to the basic text of the agreement. Before signing the contract the parties should complete the Annexes and, if appropriate, delete the parts they do not need, then initial each page in order to check and make completely clear which amendments they have agreed or which alternative solutions they have chosen. The Annexes have been drafted throughout so that even when the parties do not fill in some blanks a solution can be found within the contract.

In addition, there are a number of points at which the parties must insert data, regarding for example percentages or amounts. Finally, there are some clauses specifying periods of time, which periods the parties may choose to modify, depending on the circumstances of their particular transaction.

3. Scope of application: only distribution franchises

This model form is intended to apply to international franchise contracts. This model may also be used as a basis for drafting domestic franchise contracts provided the necessary adaptations are made.

Franchising is usually defined as an agreement whereby the franchisor grants the franchisee, in exchange for direct or indirect financial compensation, the right to exploit a package of industrial or intellectual property rights relating mainly to know-how and commercial symbols, and to receive continuing commercial or technical assistance for the duration of the contract.

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There are many possibilities for internationalization of a franchise system. The traditional approach consists in the franchisor creating a wholly owned company or in appointing a master franchise in another country, which will organize a domestic franchising network. Another possibility is to directly appoint franchisees in another country; such cross-border direct franchising is the subject matter of this model contract.

Franchise agreements may regard distribution of goods or supply of services. In distribution franchise agreements the franchisee is granted the right to market the products manufactured or supplied by the franchisor or by a supplier designated by the franchisor, under the franchisor’s trademark according to the franchisor’s commercial know-how and with its commercial assistance. In service franchise agreements, the franchisee is granted the right to provide services (e.g. restaurants, hotels etc.) developed by the franchisor, under the franchisor’s trademark according to the franchisor’s commercial know-how and with its commercial assistance.

This model form deals exclusively with distribution franchise agreements and does not cover service franchise agreements.

4. Core elements of franchising

The core elements of a franchise contract can be narrowed to the following components of the franchise relationship.

For the franchisor:

- the licensing of know-how embodied in operational manuals and continuously updated, with a training support system;

- the licensing of trademarks and symbols; and

- the provision of assistance regarding distribution and management.

For the franchisee:

- the franchisor’s exercise of reasonable quality controls over the franchisee to protect its intellectual property rights;

- the payment of initial and ongoing fees in exchange for the right to use these intangible assets;

- the participation in training courses organized by the franchisor;

- the use of franchisor’s trademarks and symbols;

- the strict compliance with the franchisor’s commercial standards; and

- the information given to the franchisor concerning any difficulty which may appear or improvements which may seem suitable.

For both parties, a franchising agreement provides:

- a system to resolve disputes, including the service of notice of defaults and opportunities to cure.

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The model franchise contract includes alternative clauses for the provisions and commentaries that address each of the key areas in order to favour the legitimate interests of franchisor and franchisee.

5. The need for uniform standards of operation

A well-planned franchising program will include operational and training methods and manuals establishing quality control guidelines, as well as a carefully assembled field support staff to educate franchisees and enforce the franchisor’s quality control guidelines. A system that does not maintain and enforce an effective quality control strategy is not likely to survive in the competitive marketplace.

It may be provided that, if the franchisee fails to reach an adequate standard after the initial training, the franchisor has the right to terminate the franchise agreement upon refunding the initial fee less its expenses.

There are many methods a franchisor may use to ensure certain levels of quality are maintained and to help distinguish the franchisor’s products and services from those of its competitors. These methods are generally put into practice using (1) provisions within the franchise agreement; (2) operation manuals setting forth uniform policies, procedures, and specifications that must be followed by all franchisees; (3) initial and ongoing training programs; (4) product controls; (5) approved supplier programs; and (6) field support personnel to establish, ensure, and maintain quality control.

Special care should be taken in setting forth the rules and uniform standards of operation. Such rules and standards must be (1) carefully planned and developed by the franchisor; (2) clearly articulated by the franchisor to the franchisees both initially and on an ongoing basis through training programs; (3) regarded by the network of franchisees as being reasonable; (4) consistently applied; and (5) rigidly enforced by the franchisor, typically through its field support staff. Obviously, the development of uniform standards is of little utility unless there are systems in place for monitoring and enforcing these standards.

Compliance with quality control standards requires mutual respect by and among the franchisor and all of its franchisees. The franchisor must be reasonable and resist the temptation to interfere with the franchisee’s operation of the business. The franchisee must understand that reasonable standards are in the best interests of all franchisees in the network.

6. Applicable law

This model form has been based on the assumption that it will not be governed by a specific national law, but only by the provisions of the contract itself and the principles of law generally recognised in international trade as applicable to franchising contracts (also called “lex mercatoria”). The purpose of this solution is that the rules of this model form can be applied in a uniform way to franchisors and franchisees of different countries, without giving one party the advantage, and the other party the disadvantage, of applying one party’s national law or the law of a third country.

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Of course this solution, while avoiding the particularities of national laws, gives a wider discretionary power to those who have to decide in case of dispute (national courts or arbitrators), since it is based (at least for matters not expressly governed by the contract clauses) on very general principles.

The task force is of the opinion that the possible disadvantage resulting from the application of rather flexible and general rules is counterbalanced by the greater certainty of a uniform set of contractual rules and by the reference to a set of general rules on contracts, like the Unidroit Principles of International Commercial Contracts¹, which offer a reasonably foreseeable legal framework for most issues which may arise.

As concerns the Unidroit Principles, it should be taken into account that according to Article 31.A they apply only to the extent they do not conflict with general principles and trade usage, since Article 31.A puts the various sources incorporated by reference in the following hierarchical order: contract clauses, general principles, trade usages, and the Unidroit Principles². In any case, if the parties wish to have their contract governed by a specific national law, they can use the alternative set forth in Article 31.B. In such case they should check carefully whether any provisions of this model form violate mandatory provisions of the national law they have chosen³. The choice of submitting the contract to a national law is preferable if parties submit the contract to the jurisdiction of ordinary courts instead of arbitration, since it is unlikely that national courts would accept to consider general principles, “lex mercatoria” and the like as the governing law of the contract.

7. Mandatory rules of the franchisee’s country

If the parties have submitted the contract to a law other than that of the franchisee’s country, parties should check whether possible mandatory rules of the franchisee’s country may nevertheless be applicable.

If the above rules are “simply” mandatory, the choice of a foreign law will in principle be effective and the rules of the law chosen by the parties will apply instead of those of the franchisee’s country.

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If, on the contrary, the legislator of the franchisee’s country has enacted “internationally” mandatory rules regarding the franchise contracts with foreign franchisors, i.e. rules that must be respected even if the contract is submitted to a foreign law, parties should carefully consider this issue.

In fact in such a case contractual clauses which do not conform to the internationally mandatory rules of the franchisee’s country will not be effective in that country (and will in principle be disregarded by the local authorities⁴). And even if the disputes are submitted to a jurisdiction outside the franchisee’s country it is not excluded that the court (or arbitral tribunal) may consider internationally mandatory rules of the franchisee’s country.

If the contract is submitted to the law of the franchisee (e.g. through a choice made under Article 31.1B), all mandatory rules of that law (and not only those which are “internationally” mandatory) will apply, and will prevail over contrary contractual provisions.

It is therefore important to be informed, before drafting and negotiating the contract, about mandatory rules of the laws which may be applicable in the specific case.

This introduction cannot give a general view of mandatory rules around the world regarding franchise contracts. We will limit ourselves to some categories of rules which are of special interest in this respect, such as:

1. disclosure and registration laws;
2. antitrust laws; and
3. rules protecting the franchisee in its relationship with the franchisor, which will be dealt with in the next paragraphs.

8. Disclosure and registration laws

One of the risks incurred by franchisees when dealing with unfair franchisors is that of being induced to sign franchise contracts and pay an entry fee on the basis of representations and promises which are not true or which hide information that would have been relevant for evaluating the suitability of the proposed deal.

This is why a number of national legislators have enacted specific laws on disclosure which require the franchisor to disclose in advance certain information to a prospective franchisee. In some cases the law also requires franchisors to register in a special registry as a condition for operating on the market.

9. Antitrust rules

Franchise agreements, like many other distribution agreements, often contain clauses capable of restricting competition which may in certain cases conflict with antitrust rules, such as resale price maintenance, non-compete obligations, etc.

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It is not possible in this context to deal with the various national antitrust laws.

However, it has been decided to make an exception for the rules of competition of the European community, since they cover a very wide area comprising 27 countries.

Article 101 of the Treaty on the Functioning of the European Union - TFEU (previously Article 85 and Article 81 of the EC Treaty) applies to vertical agreements that prevent, restrict or distort competition.

Article 101(1) prohibits agreements which restrict or distort competition, while Article 101(3) allows for the exemption of such agreements provided that they have sufficient efficiency benefits.

The Commission Regulation (EC) N° 330/2010 of 20 April 2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices (J.O. L 102, of 23 April 2010, page 1) (hereinafter referred to as Regulation 330/2010) exempts vertical agreements (including franchising agreements) which comply with the requirements of the Regulation.

It should however be considered that the Court of Justice stated, in the Pronuptia case⁵, that certain restrictive clauses contained in franchising agreements do not fall under the prohibition of Article 101(1) and may therefore be considered lawful, without needing to be exempted under Article 101(3).

Regulation 330/2010 does not contain special rules for franchising. However, it contains some specific prescriptions for selective distribution agreements which apparently also apply to franchising agreements which are organized as a selective distribution network⁶.

With respect to franchising agreements which may produce effects within the EU it is in any case advisable to comply with the criteria established in Regulation 330/2010. The main clauses to consider are the following:

Resale price maintenance. Clauses which require the franchisee the respect of resale prices are clearly prohibited. The only possible exception regards maximum resale prices. Recommended prices are admitted, provided the franchisee remains actually free to determine its resale price.

Territorial exclusivity. Clauses which grant the franchisee an exclusive territory are automatically exempted by Regulation 330/2010 by virtue of the principle that all clauses which are not prohibited are exempted. The territorial exclusivity means only that the franchisor agrees not to appoint other franchisees (or resellers) in the territory granted to the franchisee, but it does not imply a protection of the franchisee against parallel sales. If the franchising network is selective, franchisees are free to sell even actively in the territories of other franchisees (provided sales are made out of their shop), while in the case of non-selective franchising networks, the franchisees can be protected against active sales of other members of the network.

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Non-compete obligations during the life of the contract. Non-compete obligations of the franchisee consisting in the obligation to refrain from competitive activities (like establishing sale outlets of its own or with competing networks) and not to sell competing products in the franchised shop, in principle fall under Article 5.1(a) of Regulation 330/2010, which provides for a time-limit of five years. However, when the franchising contract implies the grant of IPR rights (as will normally be the case), the time limit will not apply.

Post-term non-compete obligation. Article 5.3(d) of Regulation 330/2010 expressly admits a non-compete obligation for one year after termination of the agreement, provided such obligation is indispensable to protect the know-how transferred by the supplier to the buyer.

Obligation to sell only out of the franchised store. This obligation is expressly permitted, in the context of selective distribution, by virtue of Article 4(c). Consequently, in case the rules on selective distribution apply, the franchisee may be obliged to sell out of its place of establishment⁷.

It is in any case important to underline that under the block exemption the franchisee may be obliged to sell “out of ” while under the Pronuptia judgment it may be obliged to sell “in” the shop. It could therefore be argued that a clause imposing upon the franchisee a prohibition to sell outside the shop (e.g. through the Internet) must be considered as not falling under Article 101(1), by virtue of the Pronuptia judgment, but it is clear that this position is not shared by the European Commission.

Territorial limitations which may be imposed upon the franchisee. As regards this aspect, it is essential to decide whether the rules on selective distribution apply or not. If the franchising network is an “open” network, where the distributors are free to sell the products to traders not belonging to the network, one should refer to the general rules applicable to exclusive distribution. In this case:

- the franchisor may impose upon the franchisee a prohibition to make active sales in the territory of other franchisees or reserved to the franchisor, provided such territories are exclusively allocated to other franchisees or to the franchisor;

- the franchisor may require the franchisee to purchase the contractual products exclusively from franchisor or from other undertakings designated by it (thus excluding the possibility of purchasing from other franchisees), provided the 5 years’ time-limit of Article 5.1(a) is respected; and

- the franchisor may not prohibit sales by the franchisee to other franchisees (since this would amount to as a restriction of the customers to which the buyer may sell, in breach of Article 4(b)).

If the franchise network is a “selective” one, where the franchisees have the obligation not to sell the contractual products to traders who do not belong to the franchised network, the following rules will apply:

- the franchisee must refrain from selling the products to unauthorized distributors within the territory reserved by the franchisor to operate the system;

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- the franchisee must be free to effect cross-supplies to or from other franchisees, at any level;

- the franchisee must be free to effect active and passive sales to end-users, wherever they are established; and

- the franchisee may be obliged to sell only out of the franchised store.

Internet sales. The European Commission considers sales through the Internet as “passive sales”, which implies that limitations of the right to sell through Internet will be considered as a hardcore restriction which excludes the benefit of the block exemption. The franchisor may impose quality standards for the use of the Internet, especially if its trademarks are used, but extreme caution must be used in such context.

10. Rules protecting the franchisee

Apart from the disclosure laws, national legislators only exceptionally deal with the contents of the franchise contract by stating specific rules⁸.

However, several pieces of domestic legislation contain rules that may be applied directly or by analogy to franchise contracts.

So, for example, under several national laws (e.g. Germany, Austria), although there is no specific law on disclosure regarding franchise contracts, disclosure obligations arise from the general rules on pre-contractual relations.

Furthermore, when the prospective franchisee is not a businessperson it may be that under certain circumstances the courts will apply rules regarding dealings with consumers (e.g. as regards the right of withdrawal from the contract).

Finally, the courts may in some exceptional cases find a way to grant the franchisee a goodwill indemnity or similar remuneration in case of contract termination⁹(or refusal to renew the contract).

11. Resolution of disputes

Since the model form is a set of uniform contractual rules, avoiding (as far as possible) the direct application of conflicting domestic legislations, it is appropriate that possible disputes be solved by a uniform dispute resolution system organized on an international level.

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From this point of view the best solution appears to be international com mercial arbitration (see particularly Article 32.A), which permits a truly international approach and avoids the risk of differentiation which would arise in case of re course to domestic courts.

However, the parties may also have recourse to national courts by choosing Article 30.2.B. As said before, this solution should be avoided if reference is made to “lex mercatoria”, general principles, etc.

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SUMMARY

Article 1: Definitions

Article 2: Good faith and fair dealing

Article 3: Grant of the franchise

Article 4: Scope of the agreement - main obligations of the parties

Article 5: Legal status of the Franchisee

Article 6: Premises

Article 7: Territorial exclusivity

Article 8: Use of the Internet

Article 9: Non-competition obligation

Article 10: Provision of Know-how

Article 11: Manual

Article 12: Changes to the System

Article 13: Training of the Franchisee

Article 14: Assistance of the Franchisee

Article 15: Operation of the Business

Article 16: Advertising

Article 17: Obligation of confidentiality

Article 18: Obligation to maintain an insurance policy

Article 19: Franchisor’s representations and obligations regarding IP Rights

Article 20: Franchisee’s representations and obligations regarding IP Rights

Article 21: Franchisor’s obligations regarding the supply of the Products

Article 22: Franchisee’s obligations regarding the resale of the Products

Article 23: Fees

Article 24: Terms of payment and security

Article 25: Term and renewal

Article 26: Grounds for immediate termination

Article 27: Effects/obligations upon termination

Article 28: No goodwill indemnity

Article 29: Transfer of the Contract by the Franchisor

Article 30: Transfer of the Contract by the Franchisee

Article 31: Applicable law

Article 32: Resolution of disputes

Article 33: Final clauses

Annex 1: IP Rights

Annex 2: Premises

Annex 3: Products

Annex 4: Territory

Annex 5: Initial Training

Annex 6: Index

Annex 7: General conditions of sale

Annex 8: Summary of the Manual

Annex 9: Minimum sales requirements

Appendix I: ICC Force Majeure Clause 2003

Appendix II: Unidroit Principles 2010

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ICC MODEL INTERNATIONAL FRANCHISING CONTRACT

For international, direct/unit, business format franchises

BETWEEN

.................................................................................................... (Company)

having its registered office at ........................................................................

hereby represented by ..................................................................................

hereinafter referred to as the “Franchisor”

AND

.................................................................................................... (Company)

having its registered office at .......................................................................

hereby represented by ................................................................................

. hereinafter referred to as the “Franchisee”

PREAMBLE

WHEREAS the Franchisor, as a result of extensive investments and practical business experience, has developed and owns a proprietary system (as defined in Article 1 and referred to as the “System”) relating to the operation of the business of marketing ___________¹⁰.

WHEREAS such business is carried on under trade names/trademarks as set forth in Annex 1.

WHEREAS the Franchisor has built up a reputation and goodwill in such trade names/trademarks.

WHEREAS the Franchisor is willing to grant the Franchisee the right to and license to use the System, together with such trade names, trademarks and other IP rights as are designated in this Contract (and which may hereafter be designated by the Franchisor in writing) as part of the System upon and subject to the terms and conditions set forth herein.

WHEREAS, the Franchisee desires to operate a business using the System and the IP rights and to obtain a license from the Franchisor for that purpose, as well as to receive the assistance provided by the Franchisor in connection therewith upon and subject to the terms and conditions set forth herein.

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The preamble usually contains a series of «Recitals» which provide the par ties as well as the reader with some background on the evolution of the franchisor’s systems and the business format. In this preamble, the parties should describe themselves precisely, indicate among others the field of franchisor ’s expertise and state the reasons for their collaboration.

The parties should also generally indicate information they have communicated to each other before entering the franchising contract, including information regarding the organization of the franchisor ’s distribution n network; they shall include precise information in a detailed annex in addition to the documents transmitted by the franchisor to the franchisee. As pursuant to the law in certain countries, including France and the United States, the franchisor is under the obligation to communicate to the franchisee detailed information often several weeks before the parties finalize the franchise contract. It is highly recommended that the par ties get confirmation from a national legal advisor that all information required by the law of the country where the franchise will be effective as well as the governing law chosen by the parties has indeed been transmitted within the time-period set forth by these laws.

NOW, THEREFORE, the parties, hereby agree as follows:

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