Franchise: national provisions protect the franchisee

Marcello Mantelli
Lawyer in Milan and Turin


Franchise is a method of commercial retail distribution of goods or services using points of sale managed by legally independent companies (the franchisees). The sale points are strictly integrated from the economic point of view with the supplier company (franchisor). These arise outwardly with uniform modalities generating a common image to the full benefit of the franchisor which appears as a unique commercial chain towards the final purchasers.

The sale points of the network in franchise typically offer products of a single franchisor (single-brand stores). But there are even further variants as the multi-brand franchise in which, under the trademark of the franchisor, products of other suppliers are being sold as well (as an example item of clothing provided by the franchisor and fashion accessories provided by third parties) and the franchising of services (as an example, of real estate mediation, fitness).

The difference

The franchise differs from the selective distribution due to the fact that this latter works through a closed network of retailers. In such network the products can then be sold only by the network’s members which are selected by the supplier according to their abilities and characteristics. A typical example is the one of upscale beauty products sold only through qualified and trained staff.

Within the network of selective distribution, it is then not normally expected neither the employment of the same trademark nor the payment of royalties which is instead a typical element of franchise.

The contract

With the franchise contract the franchisor allows to the franchisee the right to employ a set of rights on the industrial or intellectual property related to trademarks, trade names, insignia, copyrights, know how (usually contained within a operational textbook) and to receive the related technical and commercial assistance for the marketing of products.

A meaningful aspect of franchise is then the one of the insertions of the franchisee within a system composed of a plurality of affiliates based on a certain territory.

Among the typical provisions of the contract is reminded of the obligation to conform to a certain décor, layout of the premises/places and other characteristics (as an example the localisation of the sale point within an area appreciated by the franchisor). The franchisee pays to the franchisor a fix entry in exchange of the right to enter the network.

He also pays periodic royalties calculated on the volume of bargains generated as consideration for the assistance received during the contract.

Further expenditures chargeable to member of the network can be represented by recurring deposits in favour of the supplier for investments in publicity and marketing.

Pros and cons for the parties

The commercial edge/advantage for the franchisor is the one of tiding the franchisee as his own customer during time becoming this, inevitably, a loyal and continuous buyer of products. The success or otherwise of the distribution carried out with such method naturally depends on the eligibility of the products and on the commercial formula designed upstream by the franchisor, on the notoriety of the trademark and on the advertising investments made.

The affiliate, instead, has very limited manoeuvre margins: on one hand he reduces his own entrepreneurial risk thanks to the formula, but, on the other hand, he sacrifices part of his independence having to undergo to numerous obligations and controls on his contractual actions. There are then no guarantees on the success of the business which may eventually reveal not to be profitable enough.

In this perspective, a way of protection to the weaker party, the franchisee, also became necessary because of the occurrence of unfair behaviours by self-styled experts in the field. For such reasons, different national legislations, among which United States, China, France, and Spain, as well as Italy (rule 129/2004), have adopted some protective provisions toward the franchisee which cover, for example, the pre-contractual phase that is the negotiation phase preceding the stipulation of the franchise contract between the parties. Note that in countries where it is not expected a specific provision on the subject the elaborations of the jurisprudence of the rules of Ius Commune protect the affiliate as the weaker party (as an example in Germany).

Operation and cases

From the operative point of view the international franchise contract is executed between two companies with place of business in two different countries and it is made up of a framework contract or normative contract, within the context of which the single sales improve themselves and which will be integrated, as far as not provided therein it, from the applicable law indicated within the contract, of rule the one of the country where the franchisor has its seat. Should it be missing the indication of the applicable law to the contract such will, in accordance with the article 4 of the Regulation (CE) n.593/2008, the law of the place of habitual residence of the franchisee.

Even the method of resolution of litigations (ordinary judge or arbitrary) is to be indicated in the contract. Should such indication be missing the competent judge will be identified according to the partners with seats within the European Union in the Regulation UE 1215/2012 on the jurisdictional competence, recognition and execution of decisions in civil and commercial matter (with the remark that it applies to disputes that have arisen after the 10 January 2015) which provides for the general criterion of competence to decide the disputes of the judge where the defendant is domiciled. Otherwise, as an alternative criterion to the previous one, the Regulation 1215 provides for the competence of the judge of the place where the services have been or should have been provided according to the franchise contract (article 7.1 letter b).

In principle, the same Regulation applies even to the disputes with partners with seats outside the European Union (to be noted that part of the Italian jurisprudence is inclined in this last scenario to the implementation of the Brussels’ Convention of 1968). Finally, it should be noted that it is frequent in commercial practice aim at expansion of the network on the foreign markets through the implementation of master franchise contract with which the franchisor allows to a foreign master franchisee the right to organize in the capacity of sub-franchisor a network within a given geographic territory.

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Marcello

Dear Aurelia, the information you have provided are not sufficient for an answer which is subject to a professional engagement. In any case, we should study the provisions of the contract and identify governing law of the contract.If it does not provide anything on governing law then conflict law shall apply (in the most part of the countries likely the governing law will be the law of the country where the agent is domiciled). best regards Marcello Mantelli

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Aurelia

I signed a contract with a fashion agency but there were no termination clauses in the contract and decided to withdraw it before one week after signature so sent them an email but after 14 days they sent me an email and asserted that because i didnt withdraw in legal deadlines i have to perform the contract and pay whole money.Noboday told me about any deadlines and nothing was in the contract!! Why did they claim such a thing?

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