What is new?
The European Franchise Federation (EFF) recently adopted a new version of the European Code of Ethics for Franchising; the first update for 13 years. The British Franchise Association (BFA) and the EFF's other accredited national franchise associations are now in the process of interpreting and adopting the updated European Code of Ethics into their national equivalent codes.
This update explores some of the key aspects of the updated European Code of Ethics and what the code means for franchising businesses that are members or prospective members of the BFA. Even for businesses which are not members of the BFA, these changes are noteworthy as they serve as a useful barometer for the current mood across the industry in Europe and the likely direction of travel in the coming years.
The EFF is a non-profit international association established in 1972 to govern and oversee the franchising industry in Europe. The European Code of Ethics is designed to promote ethical franchising in Europe and provides the franchise industry's foundation for voluntary self-regulation. Updates to the code follow a process of bottom-up industry-specific consultation, negotiation and agreement by the franchise stakeholders and companies and members of their respective national franchise associations.
The BFA is the EFF's accredited national franchise association for the United Kingdom. The BFA voted in favour of adopting the latest version of the European Code of Ethics at its annual general meeting on December 8 2016. The BFA is now working on updating its national Code of Ethics accordingly.
Despite being part of a single market, there is a lack of harmonisation in the way in which member states regulate franchising in the European Union. Some stakeholders are of the opinion that franchising is failing to fulfil its full potential in the European Union. On the other side of the debate are those who remain in favour of self-regulation.
Advocates of these opposing views came together recently at a workshop hosted by the European Parliament, following the publication of a report into the state of franchising in the European Union, which was commissioned by the European Parliament's Internal Market and Consumer Protection Committee. The report recommended the introduction of a new EU directive for franchising which, if implemented, would effectively do away with the self-regulatory approach that has prevailed for the last five decades. After 13 years, the European Code of Ethics was due an update in any event, but the timing of the update is important to those who continue to advocate the status quo of self-regulation.
At a national level, the BFA has responded to criticisms made by the UK government in the wake of the recent Pubs Code in 2016 by looking to introduce a mandatory arbitration scheme to deal with disputes between BFA franchisor and franchisee members.
Good faith and fair dealing
There is clear recognition in the European Code of Ethics that the franchisor-franchisee relationship should be underpinned by the principles of good faith and fair dealing. Both are expressly included in the preamble to the code, which emphasises the importance of franchisor-franchisee relations based on fairness, transparency and loyalty, each of which contribute to confidence in the relationship. Further, both franchisor and franchisee:
- must commit to resolving complaints, grievances and disputes with good faith and goodwill through fair and reasonable direct communication and negotiation; and
- where appropriate and where they have failed to resolve a dispute through direct negotiation, must seek in good faith mediation or arbitration to resolve the dispute.
The English law of contract is well known for not having a general duty of good faith and the approach to dealing with good-faith situations in case law has been piecemeal, in line with the general development of common law. One of the main reasons advanced for this is the uncertainty which would arise if a general duty of good faith was imported into contracts generally. English law is at odds with other common law jurisdictions which have been moving towards recognising a general duty of good faith and in the last few years similar arguments have been advanced in the English courts – albeit with very limited success. The fact that the European Code of Ethics is embracing the general principle of good faith and fair dealing should cause BFA members to pause for thought – they should consider carefully what this concept means in the performance of their franchised systems and take steps to reflect this understanding and the limits of this concept in their respective franchise agreements.
With regards to dispute resolution, the BFA intends to introduce mandatory arbitration as a condition of membership and it is currently drafting the arbitration scheme rules, although the scheme has yet to be formally adopted. This is a significant issue for BFA members and prospective members to consider carefully, as once adopted the scheme will limit a franchisor's or franchisee's access to the English courts.
Obligations for franchisors
The European Code of Ethics sets out a list of obligations for franchisors. In reality, most of these obligations are not new ones and were present in the previous version of the code – such as the obligation for franchisors to have tested a pilot concept for at least one year and provide franchisees with initial and ongoing training. However, there are some new requirements, including the following obligations:
- Franchisors must guarantee the right to use the know-how transferred or made available to the franchisee and identify which know-how is the franchisor's responsibility to maintain and develop. 'Know-how' is also defined in the European Code of Ethics as a body of non-patented practical information, resulting from experience and testing by the franchisor, which is secret, substantial and identifiable. This is an important addition to the code, particularly in light of recent case law in key franchise jurisdictions such as Canada, where franchisees have successfully sued their franchisor for failing to protect their businesses from innovative competitors.
- In the pre-contractual, contractual and post-contractual phases of their relationship with franchisees, franchisors must use all reasonable means to prevent any wrongful usage of or – in particular – the transmission of know-how to competing networks so as to avoid prejudice to the interests of the network. In the new age of cyber-crime, it is increasingly important for franchisors to ensure that they are investing in appropriate safeguards to protect trade secrets and confidential information.
- Franchisors must offer to their franchisees an unqualified right to sell or transfer their business as a going concern.
- Franchisors must inform prospective and individual franchisees of their internet communication and sales policy. It is no longer acceptable for some franchisors to hide behind the opaque pretence of prior written consent before a franchisee is allowed to participate in online activities. Franchisors must develop and communicate transparent policies in this regard and also seek to safeguard the interests of the network in the development of their online sales policy.
Obligations for franchisees
The European Code of Ethics also imposes various obligations on franchisees. Many were present in the previous code although there are new requirements, which include the following:
- Franchisees must accept the obligation to collaborate loyally with the franchisor in ensuring the success of the network which the franchisee has joined as an informed and fully independent entrepreneur. This is an important addition to the code because it emphasises the fact that although the relationship between franchisor and franchisee is of paramount importance to the success of a franchise, any prospective franchisee is independent from the franchisor as a separate legal entity and in turn, must take a significant degree of responsibility for the success of its business.
- Franchisees must be responsible for the human and financial means that it engages in its franchise business and are responsible as independent entrepreneurs for third parties and business-to-business and business-to-consumer customers.
- Franchisees must act loyally towards each of the other franchisees of the network. This addition emphasises the importance of each franchisee's individual role in preserving the strength of the network by acting together, such as through sharing ideas that might enhance the franchised system.
The updated European Code of Ethics aims to address some of the perceived imbalances and inequities in the franchise relationship and bring self-regulation into the digital age. However, although the BFA's interpretation of the code may include some variations from the EFF's text, much of the BFA's existing code and its practices are already in line with these updates.
Given the 13-year wait and the rapid advances which have been made in the way in which businesses sell their products and services during this time, it is arguable that the updated European Code of Ethics does not go far enough, either in bringing more clarity to issues it has sought to address and also pre-empting how franchising might change in the next 13 years or more.
It remains to be seen whether the voices calling for the regulation of franchising will grow louder, but if the self-regulatory system is to survive, we may not have to wait another 13 years before the next round of updates.
For further information on this topic please contact Gordon Drakes or Tim Rickard at Fieldfisher LLP by telephone (+44 20 7861 4000) or email ([email protected] or [email protected]). The Fieldfisher LLP website can be accessed at www.fieldfisher.com.