Franchising. Definitie, werkwijze, in- en externe aansprakelijkheid van der Heiden, A.J.J.

Transcription

1 UvA-DARE (Digital Academic Repository) Franchising. Definitie, werkwijze, in- en externe aansprakelijkheid van der Heiden, A.J.J. Link to publication Citation for published version (APA): van der Heiden, A. J. J. (1999). Franchising. Definitie, werkwijze, in- en externe aansprakelijkheid Deventer: Kluwer General rights It is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), other than for strictly personal, individual use, unless the work is under an open content license (like Creative Commons). Disclaimer/Complaints regulations If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library: or a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible. UvA-DARE is a service provided by the library of the University of Amsterdam ( Download date: 31 Dec 2018

2 Summary In practice, there is a wide range of juridical and actual franchising formats, as a result of which the concept 'franchising' is rather vague. For a better understanding, the first chapter gives an etymological review of the word franchising; this is followed by a few observations on its historical development. From a linguistic point of view, the word franchising emphasizes the free, independent character of the parties involved, i.e. the franchisor and the franchisee. From the history of franchising it appears that at the beginning of the twentieth century entrepreneurs tried to resist the rapid development of traditional and voluntary chains by using franchise formulas. In doing so, however, it was important that franchisors were in a position to protect the image of their company in terms of intellectual and industrial rights, which had only just become possible as a result of new legislation and case law. After World War II, the number of franchise formulas gradually increased. However, despite the social and economic relevance of the topic, no EC country has yet developed legislation specifically dealing with franchising. The subject of this study - business format franchising - is described in Chapter 2. In this format, franchisees are virtually completely integrated into the franchise system and, as a result of detailed franchise contracts, the difference between franchising and other nominate or innominate juridical institutions is the smallest. The franchisor acts as a central organization and will have drawn up an efficient assignment of tasks, with which the franchisees have to comply. Consequently, the parties to a franchise contract are not entirely 'free' in the original linguistic sense of the word, because they are economically interdependent. This study had four aims. The first was to make a contribution towards resolving a (legal) uncertainty by defining unambiguously the concept 'franchising'. On the basis of the concepts most often encountered in franchise agreements, a model was drawn up, incorporating 173 test points and taking into account the distinctive characteristics of franchising and the typical rights and obligations mentioned in Chapter 3. Seventy-seven definitions/working descriptions of franchising are analyzed in Chapters 4 and 5. Not only is the frequency recorded with which certain concepts are used, but also groups of concepts are commented upon, so that a picture may be drawn of a franchise chain in different stages of its development. A provisional working description, together with comments, is included in Chapter 6. It should be noted that most authors call franchising a form of cooperation. As the objectives of the parties to a franchise contract are not always analogous, the second aim of this study was to ascertain whether it is indeed a matter of cooperation in a legal sense, and if so, to what extent this cooperation differs from known (in)nominate cooperation agreements. In order to answer this question, the concepts 'company', 'cooperation between companies' and - more specifically - 'cooperation in franchising' are analyzed in greater detail in Chapter 7. On the basis of this research, and using the working description as frame of

3 reference, the following five characteristics of franchising are formulated. Franchising involves: 1. legally independent parties (the franchisor and franchisee/s) who 2. for considerations (paid by the franchisee/s) 3. are allowed and obliged to make use of a franchise-operating system, 4. as a result of which a chain with a common image is formed 5. in which the franchisor provides advice and support on commercial and technical matters (the right to issue instructions). In Chapters 8 and 9, the common ground between franchise agreements and legal forms is discussed, including (in)nominate cooperation agreements. From the comparative research carried out it appears that the five characteristics of franchising do not appear simultaneously in the legal (cooperation) forms studied. In particular the characteristic feature of cooperation in a legal sense tends to be lacking: the affectio societas (i.e. bringing something into the community, for the sake of sharing the resultant gain on an equal basis), like in personal associations. Neither is the conducting of one business under one common name intended, which means that franchising should not be considered as being a general partnership. Nor does franchising meet the requirements of the legal group concept: there are no parent-subsidiary relationships. It also does not concern equity interests within the meaning of Article 2:24c of the Civil Code. Differences with economic groups and concerns are even more complicated, as franchise chains also form an entity in which legal persons and/or partnerships are linked organizationally with a view to sustained participation in the market at large. Thus, franchising meets the requirements of the economic group. Just like concerns, franchise chains may be considered as forming one economic entity in which separate legal entities have been united; where production and/or sales are concerned, these separate legal entities are dependent to a significant degree on mutual supplies and provision of services. Franchise agreements overlap with agencies, especially when franchisees are engaged in entering into agreements in the name of and chargeable to the account of the franchisor or third parties, such as in the case of mortgage broking and brokerage in general. Franchisees appear to be acting on behalf of the franchisor rather than for themselves, so that third parties may assume in all fairness that adequate authorization has been given. Where the comparison with innominate agreements is concerned, franchise agreements resemble the consortium, for instance when the legal relationships are limited to mutual coordination of activities. As a rule, however, there is no intention to conduct business jointly, and consequently the features typical of partnerships are absent. Licensing agreements form a part of franchise agreements as regards the exchange of know-how, the shared use of trade name, trademarks, models and designs. Also exclusive and selective distribution agreements, and exclusive purchase agreements form part of franchise agreements. In fact, franchising is a species of the genus distribution agreements. Sales concession, at least the modern version, has also ground in common with franchising, as both the concession grantor and the franchisor aim to ensure their distribution through independent intermediaries, who take over the investment 422

4 risk, independently promote sales and guarantee the sales quotas. Although often implicit, the franchise parties intend to form a cartel (especially price, condition and territorial cartels). Service merchandising is to my mind a specific form of (shop-in-shop) franchising. Under certain circumstances, franchising also resembles the syndicate. In that case, it is a matter of the allocation of orders. Franchising is regarded as a synthesis of the voluntary and the traditional chain. Parties strive to form a chain consisting of legally independent entrepreneurs/participants, using reproducible formulas with regard to the product range. Franchisees are more tied than participants in voluntary chains but less tied than branch managers, although in practice nuances can be observed as a result of which the differences are smaller than they appear. The concept 'form of cooperation' used in the working description is falsified, at least within the meaning of the law of legal persons and company law. Based on the above, franchising may be defined as follows: a form of participation, aimed at continuity, in which legally independent (legal) persons (the franchisees) are, based on a written agreement with a third party (the franchisor), allowed and obliged to make use of a franchise operating system against payment of a financial consideration, in order to form a chain for the sales of certain goods and/or the rendering of certain services, offered under a common trade name and/or trade/distinguishing marks and employing common operational and technical methods and other intellectual and industrial rights of which the franchisor is the sole owner. The franchisor will provide the franchisees with advice (know-how) and support on commercial and technical matters, in order to ensure uniform presentation and goods and services of equal quality. Chapter 10 deals with internal liability and also discusses the relationship between franchisor and franchisee/s, between franchisees, and between parties to the franchise contract and third parties associated with the franchise chain. The will of the parties and the principle of reasonableness and fairness determine the legal relationship. The chain as such creates a special relationship, first of all because the different franchise agreements are, as regards content, virtually the same, secondly because of the uniform image, and thirdly, due to the central, predominant role played by the franchisor. In his decisions and actions, the franchisor should not allow himself to be guided only by the rights and interests of the franchisor's BV" as, at the same time, he bears responsibility for the franchisees, who are part of the franchise chain, that is, the company run by the franchisor. The legal tie between the franchisor and the franchisee/s consists of interconnected legal relationships: linked agreements, ruled by the requirements of reasonableness and fairness in accordance with Articles 2:8 and 2:9 of the Civil Code. The franchisor is obliged to manage the chain according to the 1 A BV is a private company with limited liability. 423

5 principles of proper management, and failure to do so may lead, thanks to more stern requirements of due care, to liability for damages. The franchisor is, as it were, co-policy-maker of the franchisee's BV, although in general it is not a matter of effective replacement. If, however, the former's actual influence is so great that the management of the franchisee's BV does not weigh up all interests involved independently and, based on this, sets out its own policy, but instead pursues the policy imposed by the franchisor, it is the latter who is liable for damages caused by the policy. It is important that franchisors make known the standard against which they test their management tasks. The franchisor's actions may be tested against this same standard, taking the requirements of reasonableness and fairness and the standard of due care into account. A franchising party who performs his tasks in such a manner that no reasonably thinking franchisor/franchisee would consider the performance adequate is liable for the consequences. Manifestly improper management leads to attributable shortcoming, especially if the defaulting party has taken no measures to avert the consequences of the shortcoming. If decisions are taken without adequate preparation, it is a question of serious reproach. At all times a franchisor needs to test his actions against the European Code of Ethics on Franchising and the EC regulation. Manifestly improper management may also result in an unlawful act, when the criteria as set out in Article 6:162 of the Civil Code have been met. In that case though, it will have to concern an instance of gross negligence in the sense of intention verging on negligence. The standard of due care will then play a significant role and, inter alia, the code of ethics will serve as guideline for setting the standard. External liability is dealt with in Chapter 11. Here the notion is upheld that between parties to a franchise contract and third parties having dealings with the franchise chain, there exists a derived legal relation coloured by the criteria of reasonableness and fairness. Attributable shortcoming caused by the franchisor and/or franchisee may result in them committing an unlawful act against a third party. A distinction is made between general, specific and the piercing of liability. Where general liability is concerned, parties to the franchise contract can mislead the public by acting as an entity. If one of the participants in a franchise chain commits an unlawful act, it may be attributed as such to the organization (e.g. unfair competition, restrictions on competition and/or misuse of the law of legal persons). As for specific liability, one may think of strict liability for franchisees in the capacity of (non-)employees, which is particularly applicable if franchisors advise and instruct franchisees to render certain services. Finally, if the franchisor's annual accounts are misleading, third parties may recover damages from the franchisor. This is especially true if the franchisor gives a too promising presentation of the facts by not stating reservations for and/or obligations to franchisees in the annual accounts. In Chapter 11 it is also argued that for piercing of liability from franchisee to franchisor, the latter must have committed an unlawful act and/or an attributa- 424

6 ble shortcoming. One may think of the semblance of authorization to represent and of breach of confidence, especially when the franchisor because of his special, inside position could have anticipated that a third party would suffer damages as a result of the acts or omissions of a franchisee and he, despite this foreseeability, did not exercise due care to either prevent or limit the damages suffered by this third party. When intensive interference from the franchisor with the franchisee has led to the withdrawal of assets from a franchisee's BV, it may be a question of abuse of power, or consequently an unlawful act. In the case of identification, the fact that franchisors and franchisees have a different identity is passed over. In the case law of the Supreme Court this juridical institution has hardly been developed. In the lower courts, identification is accepted more easily, especially when it clearly concerns a central organization, allowing third parties to assume they are dealing with an organization forming one juridical entity. In this respect, the phrase 'piercing the franchise veil' has been used. Chapter 12 deals with rules and regulations, legislation and jurisprudence. The EC regulation on the subject of franchising states only the minimum requirements franchise agreements should meet. Under the code of ethics, the mutual relationship is regulated so as to become a more equal relationship, stating at least a number of rights and obligations which are to be incorporated in the agreement. Far-reaching obligations to provide information have been included in the Full Disclosure Act and the French Loi Doubin. From the jurisprudence discussed in Chapter 12 it appears that judges tend to protect the most vulnerable party in franchise relations, i.e. the franchisee. The jurisprudence has been organized based on the seven groups in which the definitions have been tested. During the setting-up and testing phase, the franchisor must take care to protect his intellectual and industrial rights to a maximum. Failure to do so may curb the development of the chain, especially when those rights conflict with the rights of third parties. During the recruitment and selection phase, franchisors have to comply with strict requirements concerning due care and disclosure of information, in order to prevent franchisees from entering into franchise agreements on the basis of wrong assessments of the facts, as, during the pre-contractual phase, they entirely depend on the information provided by the franchisor. In addition, the franchisor may lay down objective criteria of a qualitative nature which the franchisees have to meet. These criteria for selection must be disclosed in advance. Dutch judges place exacting demands on franchisors as regards obligations to disclose and investigate when it comes to supplying franchisees with forecasts and other operating prospects. Also in the administration of justice, the provision of advice and support by franchisors to franchisees is considered a characteristic feature of the franchise relationship. Franchisors must support franchisees in a professional manner in many different ways, e.g. sales training, know-how, legal matters, marketing, advertising, accounting procedures, etc. and should warn them of teething troubles. 425

7 With regard to inspection and the right to issue instructions, it has been considered that a franchisor may demand that his franchisees are accountable to him. Franchisors must be able to check whether franchisees meet their obligations and handle the franchisor's interests correctly. When terminating a franchise agreement, the requirements of reasonableness and fairness demand that the party ending the contract must take any reasonable interests of the other party into account, whilst the actual circumstances of the case carry a lot of weight. In general, non-competition clauses tend to be interpreted restrictively, in the sense that franchisees are not allowed to infringe on the intention of the franchise agreement. The clause will usually forbid the running of a shop according to the franchise concept. In the last chapter a proposal for a franchise law, consisting of five chapters, is formulated. The first chapter contains a general article defining the franchise agreement. Next, in the second chapter, there are three articles on the realization of the agreement, including the franchisor's obligation to provide information, the form requirements the agreement has to meet and the conditions under which the agreement may be altered. The third chapter concerns the contents and the fulfilment of the agreement, dealing with such topics as sound 'franchisorship', the duration of the agreement and renewal of the agreement. Three articles are incorporated on demarcation of territory, purchase commitment and price fixing. Two articles concern the franchisor's right of inspection and right to issue instructions and the manner in which the parties have to account for their actions. Another two articles deal with the transfer of the franchise chain and/or outlet in whatever form. The fourth chapter discusses the relationship with third parties, such as stating the names of franchisees, as a result of which they cannot be considered as being agents. The franchise council is also discussed in this chapter. Last to be treated is the termination of franchise agreements, i.e. cancellation, urgent cause and dissolution, including compensation and goodwill payments. Finally, the post-contractual clause concerns the non-competition clause. The purpose of the proposal is to offer franchisors, franchisees and consumers minimal protection without violating the flexibility of franchise relations, instead of a detailed regulation of the rights and obligations of the parties to a franchise agreement. 426