Recent Trends in Franchise Relationship Laws
5. Countries in which Franchise Relationship Laws Exist
Franchise relationship regulation takes on numerous forms varying from jurisdiction to jurisdiction.[14] Countries such as the United States of America[15], Canada[16], Australia, China, South Africa, Malaysia, Russia, Ukraine, Romania, Lithuania, Belarus, Moldova, Macau, South Korea, and Vietnam all offer comprehensive regulatory regimes. These countries have enacted either franchise-specific or consumer protection legislation which embody explicit laws governing the franchise relationship. Other countries, such as, Mexico, France, Japan, Italy, Albania, Tunisia, Estonia, Georgia, Indonesia, Venezuela, Moldova, Saudi Arabia, and the Province of Quebec in Canada can be classified as minimalist regulatory regimes.[17] For the most part, the laws and principles applicable to the ongoing franchise relationship in these countries and the Province of Quebec arise out of their respective Civil Codes.[18]
6. Recent Trends of Franchise Relationship Laws
The last decade has witnessed an explosion of franchise laws and regulations. In the Asia-Pacific region alone,[19] with the exception of Malaysia (1998), Kyrgyzstan (1998), and Macau (1999), all the franchise laws and regulations were adopted or significantly amended after 2000, including countries and regions such as China (2007), Japan (2002), South Korea (2008), Taiwan (2003), Vietnam (2008), Australia (2010), Indonesia (2005), and Kazakhstan (2002). This growth of franchise laws and regulations is also seen in Europe (Belgium, Italy, Romania, Spain, Sweden), the Americas (several Canadian provinces,[20] Mexico, and the U.S. FTC Franchise Rule), and elsewhere (for example, South Africa). With a few notable exceptions (the U.S. FTC Franchise Rule, Taiwan, Belgium, Spain and Sweden), these new franchise laws and regulations have opted to both require pre-contractual disclosure and regulate the franchise relationship.
Why have so many jurisdictions adopted relationship laws as of late? With the franchise business model penetrating more and more business communities worldwide, perhaps governments have recognized that the successful regulation of franchising must be supported by two pillars – information disclosure before the execution of the franchise agreement, and certain minimum requirements as to the franchisor’s and the franchisee’s conduct in carrying out the franchise agreement. Franchise agreements, remember, are both relational contracts and contracts of adhesion, and as such, necessarily feature a disparity in the exercise of discretion and a degree of incompleteness. Broadly stated, relationship laws aim to ensure the franchise agreement is administered, enforced, and carried out in good faith, although what constitutes “good faith” is, regrettably, not always clear. More specifically, on the franchisor side, relationship laws enhance ongoing protection to franchisors with respect to quality control and confidentiality. For the franchisees, relationship laws offer them additional protection from practices such as unjust termination or refusal to comply with the renewal provisions.
On the other hand, it is notable that other than provisions of general application contained in Civil Codes no major country has adopted a “relationship only” franchise law in quite a while. Russia, being one of the few “relationship only” countries, recently amended its franchise law, and interestingly the amendments appear to be drafted in the franchisor’s benefit.
7. Relationship Laws and the Aspects of the Relationship they Address
7.1 The Duty of Good Faith and Fair Dealing
Simply put, the duty of good faith and fair dealing is a positive obligation on the franchisor and franchisee to deal with each other honestly, fairly, and in good faith, so as to not destroy the right of the other to receive the benefits of the agreement. It requires the franchisor to act with due regard for the reasonable interests of the franchisee, and exercise its discretion honestly, fairly, and reasonably. Put another way, the duty of good faith requires that the franchisor, in exercising its contractual discretion, must do so “reasonably and with proper motive, and may not do so arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties.”[21] Where a party to a franchise agreement breaches the duty, the other party has a right of action for damages. Depending on the jurisdiction, the right will apply to the performance and enforcement of the agreement and may in some instances extend to the exercise of any right under the agreement.[22] The duty has made its way into various pieces of franchise legislation worldwide, and in civil law jurisdictions it applies to the franchise relationship by virtue of the fact that a franchise agreement is a type of commercial contract governed by the country’s Civil Code.
In the Canadian Provinces with franchise legislation, with the exception of the Province of Alberta, the duty of fair dealing includes not only the duty to act in good faith but also that the duty be exercised in accordance with reasonable commercial standards. Phrasing the duty in this way has broadened the application of good faith to franchise agreements and includes any ancillary agreement relating to the franchise. In the remaining Canadian Provinces, the duty is applied to the franchise relationship as an implied contractual covenant. In the United States, states like Arkansas, Hawaii, Iowa, Minnesota, and Washington all require a duty of good faith. Other states view the duty as an implied covenant, which only applies when the contractual language is not clear on any particular issue. In Estonia, the Law of Obligations Act[23] provides for both principles of good faith and reasonableness. In determining whether a contractual provision is reasonable or if it is a breach of the principle of good faith, the Estonian practice is to consider the nature of the contractual obligation, the purpose of the agreement, the usages and practices in the relevant field of activity, and any other circumstances.
The duty of good faith in China can be found in both the People’s Republic of China Civil Code[24] and the Regulation on the Administration of Commercial Franchises[25]. Article 4 of the latter provides that the principles of free will, fairness, honesty, and good faith shall be followed in franchise activities. Malaysia’s Franchise Act 1998[26] similarly imposes a positive obligation on both franchisor and franchisee to act in an honest and lawful manner endeavouring to pursue the best franchise business practice of the time and place. In considering whether parties have acted in good faith, the Malaysian practice will look to whether there were unreasonable overvaluation of fees and prices, unnecessary and unreasonable conduct in relation to risks, and conduct not reasonably necessary for the protection of legitimate business interests. In South Africa, the duty is embodied in the recently enacted Consumer Protection Act.[27] Under the legislation, franchisees are explicitly included in the definition of consumers and are given a variety of rights akin to acting in good faith; for example, the right to equality, fair and responsible marketing, honest dealing, and fair agreements. The South African legislation goes even further to expressly prohibit unfair, unreasonable, or unjust contract terms. In South Korea, the Fair Franchise Transactions Act imposes a principle of good faith on both the franchisor and franchisee in the performance of their respective duties. The Macau Commercial Code recognizes a contractual duty of good faith and fair dealing and both Japan and Taiwan imply a duty of good faith into most franchise agreements. Lastly, in Australia recommendations have been made to introduce legislation requiring a duty of good faith in franchising. These recommendations, however, have yet to be adopted and at present the duty is imposed as a principle of common law.
7.2 The Duty to Provide Support
The duty to provide support takes different forms depending on the franchise relationship. In most jurisdictions it is governed solely by the franchise agreement and generally includes things such as providing initial instructions and training to the franchisee, continuing on-site operational guidance, technical support, and operations and other manuals. Countries, for example, like South Korea, China, Australia, Estonia, Lithuania, Russia, Ukraine, Belarus, Moldova, and Malaysia have all chosen to include this duty in their respective franchise legislation. Article 5 of South Korea’s Fair Franchise Transactions Act requires a franchisor to provide, among other things, education and training, continuing advice, and support. In China, Article 14 of the Regulation on the Administration of Commercial Franchises provides that a franchisor shall provide its franchisees with an operations brochure and continued business guidance, technical support, and training. Regulation 15 of Australia’s Franchising Code of Conduct[28], entitled Franchisor’s Obligations, requires the franchisor to provide training both prior and during the operation of the franchised business. Similarly, Chapter 19 of Estonia’s Law of Obligations Act places an obligation on the franchisor to provide the franchisee with instructions and permanent assistance. In Lithuania, franchisors must provide continuous technical and consulting assistance to the user and assist in training his or her employees. Similar wording is found in Chapter 54 of Russia’s Civil Code.[29] With respect to Ukraine and Belarus, the duty is found in chapters 76[30] and 53[31] of their respective Civil Codes. In Moldova, the duty is found in both chapter XXI of the Civil Code[32] and article 9 of The Law of the Republic of Moldova on Franchising and requires the franchisor to support the franchisee through training and information.[33] Lastly, in Malaysia, this duty includes providing the franchisee with materials and services, training, marketing, and business or technical assistance.