Franchise disclosure items in Europe

There are six (6) European countries that have enacted a franchise disclosure law. These countries are Belgium, France, Italy, Romania, Spain and Sweden. In addition there are a number of countries that have general "good faith" type laws that can give rise to franchise disclosure obligations (Good Faith Laws). These countries are Germany, Austria, Portugal and Lithuania. The focus of this essay will be on countries with specific franchise disclosure laws. Whilst countries with Good Faith Laws rely on the general principle that parties owe to each other a duty of good faith and fair dealing during pre-contractual negotiations and do not list the items to be disclosed, countries with franchise disclosure laws provide a specific list of disclosure items. In all disclosure law countries except Italy the franchisor is required to make two distinctly different types of disclosure. Firstly, the franchisor is expected to summarise certain important contractual provisions (Contract Summaries). Secondly, the franchisor is required to make certain commercial disclosures (Commercial Disclosures). Contract Summaries With Contract Summaries the intention appears to be that the franchisor should draw attention to particular clauses contained in the franchise agreement. As franchise agreements can be sizeable documents that a non-lawyer may find difficult to follow it appears sensible to require the franchisor to highlight key rights and obligations. The corresponding disclosure can be described as a Contract Summary. The main difficulty that arises with Contract Summaries in franchise disclosure documents is the level of detail that should be given. Based on the US experience, where franchisors have repeatedly been penalised for inaccurate summaries, the safest course of action for franchisors would appear to be a repetition in full of the relevant extracts from the agreement. For example, if a disclosure of renewal conditions must be given the US approach would be to repeat in full the text of the renewal clause rather than summarise it. The disclosure document sets out in full the text already contained in the franchise agreement. Obviously, this can be unhelpful for the franchisee, as it may struggle to follow the technical legal language. On the other hand, the franchisor will not want to take the risk of abbreviating or simplifying legal matters for fear of being accused of providing an inaccurate summary. Commercial Disclosure Items The second element of European franchise disclosure laws is concerned with certain commercial aspects of the franchise. Here a range of financial and general commercial data must be made available to the franchisee to enable it to evaluate the financial and commercial risks it is taking. Very broadly speaking the disclosure items that fall into this category look at the following aspects: • the franchisor and its people • the franchise system • the existing franchise network • certain financial aspects such as the investment required and the fees payable to the franchisor • in some countries a market analysis must also be provided Whilst a summary of the franchise system and an overview of its existing distribution is easily given, the financial items and market studies can cause considerable difficulty, particularly to foreign franchisors that are not familiar with local market conditions and focal prices.