Laws and agencies regulating the offer and sale of franchises

Legal definition

What is the legal definition of a franchise?

There is no statutory definition for a franchise. The Finnish Franchising Association (FFA) defines a franchise arrangement as a right conveyed by one undertaking to another. While, generally, product distribution and trade name franchise arrangements are not regarded as franchising, on the one hand the main feature of the business format franchise is the licence extended to the franchisee by means of a written standard contract against the payment of an upfront fee or running royalties or both, submission to continuing supervision and reporting and undertaking not to transfer the franchise to any third person to use, within a certain exclusive territory, the franchisor’s business format (this being characterised by the trademark, brands, commercial signs, business features of the network and the know-how contained in the manual of the franchisor) and on the other hand, initial and continuing training as well as the technical and commercial back-up services of the franchisor. From the viewpoint of the method of franchising, whether international or domestic, the general notion encompasses the master franchise agreement, the unit franchise agreement and the (master) development agreement.

Franchise laws and agencies

Which laws and government agencies regulate the offer and sale of franchises?

There is no special legislation in this field, but there are a number of statutory regulations that must be heeded. The most important of these are the Contracts Act, the Unfair Business Practices Act, the Trademarks Act and the Competition Restrictions Act.

No government agency regulates the offering or sale of franchises, nor is there any regime for registering or recording franchise contracts. It is advisable to have a trademark licence recorded.

Principal franchise requirements

Describe the relevant requirements of these laws and agencies.

From the Contracts Act it may be inferred that there is a legal doctrine imposing on contractual parties a mutual duty of loyalty. This is widely acknowledged in case law. Accordingly, there is a kind of general contractual good faith and fair dealing requirement to avoid misrepresentations inducing the opposite party to enter into a contract. In some circumstances, silence may amount to a misrepresentation. Accordingly, the franchisor should, as a general rule, endeavour to disclose any and all matters that may affect the potential franchisee’s decision to accept the franchise. The content and scope of this duty depends on the merits of the case, bearing in mind the potential franchisee’s knowledge and experience. On the other hand, the franchisee is also generally under a duty of care, prompting it to obtain (through its own initiative) available information, such as information on general market conditions and their impact on the business being contemplated.

The Unfair Business Practices Act prohibits any conduct violating good business practice. In particular, it prohibits the use of untrue or misleading representations regarding a business, whether one’s own or another, that are apt to either affect the demand for or supply of a product or to cause harm to somebody else’s business. The Trademarks Act covers the national trademark law and the Competition Restrictions Act sets boundaries regarding actions considered to restrict competition.

Exemptions

What are the exemptions and exclusions from any franchise laws and regulations?

There is no special legislation in this field, but there are a number of statutory regulations that must be heeded. The most important of these are the Contracts Act, the Unfair Business Practices Act, the Trademarks Act and the Competition Restrictions Act.

No government agency regulates the offering or sale of franchises, nor is there any regime for registering or recording franchise contracts. It is advisable to have a trademark licence recorded.

Franchisor eligibility

Does any law or regulation create a requirement that must be met before a franchisor may offer franchises?

No, there is no law or regulation on this matter. Nevertheless, pursuant to the FFA’s Code of Ethics, before setting up a franchise network the franchisor should have used the business concept successfully and for a reasonable time and in at least one unit.

Franchisee and supplier selection

Are there any laws, regulations or government policies that restrict the manner in which a franchisor recruits franchisees or selects its or its franchisees’ suppliers?

In respect of recruitment of franchisees, apart from the deterrent effect of what qualifies as fraud as well as a number of other delinquencies pursuant to the Penal Code, there are none except for the general rule under the Unfair Business Practice Act, and, of course, the general rule admitting the competent court to adjust the contract. In other words, should the court deem a contract term unfair or should the application of the term lead to an unfair result (eg, because of changed circumstances) the term may be adjusted or set aside. There are no requirements in respect of the manner in which a franchisor selects its or its franchisees’ suppliers.

Pre-contractual disclosure

What is the compliance procedure for making pre-contractual disclosure in your country? How often must the disclosures be updated?

The compliance procedure founded on the principle of good faith and fair dealing requires full and accurate written disclosure of all information material relating to the franchise relationship within a reasonable time prior to the execution of those documents. As the above principle is continuous by nature, disclosures need to be updated whenever circumstances change. This notwithstanding, in Finland, there is no such statutory prescribed presale due diligence process containing, for instance, a formal franchise disclosure document to be given to those interested in buying a franchise as there is in many countries, such as in neighbouring Sweden with which otherwise Finland has so much in common.

Pre-sale disclosure to sub-franchisees

In the case of a sub-franchising structure, who must make pre-sale disclosures to sub-franchisees? If the sub-franchisor must provide disclosure, what must be disclosed concerning the franchisor and the contractual or other relationship between the franchisor and the sub-franchisor?

The sub-franchisor (the master franchisee) is responsible for making disclosures.

From the Contracts Act it may be inferred that there is a legal doctrine imposing on contractual parties a mutual duty of loyalty. This is widely acknowledged in case law. Accordingly, there is a kind of general contractual good faith and fair dealing requirement to avoid misrepresentations inducing the opposite party to enter into a contract. In some circumstances, silence may amount to a misrepresentation. Accordingly, the franchisor should, as a general rule, endeavour to disclose any and all matters that may affect the potential franchisee’s decision to accept the franchise. The content and scope of this duty depends on the merits of the case, bearing in mind the potential franchisee’s knowledge and experience. On the other hand, the franchisee is also generally under a duty of care, prompting it to obtain (through its own initiative) available information, such as information on general market conditions and their impact on the business being contemplated.

The Unfair Business Practices Act prohibits any conduct violating good business practice. In particular, it prohibits the use of untrue or misleading representations regarding a business, whether one’s own or another, that are apt to either affect the demand for or supply of a product or to cause harm to somebody else’s business. The Trademarks Act covers the national trademark law and the Competition Restrictions Act sets boundaries regarding actions considered to restrict competition.

Due diligence

What due diligence should the parties undertake before entering a franchise relationship?

Adequate due diligence in respect of certain business considerations, legal matters and the potential local partner will provide clues as to the likely success of the franchise. The business and legal considerations include whether the local costs, such as for labour, lay-offs, environmental regulatory compliance, rents and leases and commuting, will prove too high for recouping the investment within some reasonable time. The same is true as to the costs of accountants, audit and business administration, not to speak of legal services and the cost of dispute resolution. For those franchises that rely heavily on local supply chains, the question is whether affordable suppliers are available, such as on the notorious Finnish duopoly market for groceries and daily consumer goods. Other questions concern whether, in particular in the metropolitan area of Helsinki, the traffic policy, resulting in harmful unforeseeable jams, will impact the franchisor, and whether the composition of the product (eg, both the legality and the legal restrictions as to products such as tobacco, alcohol and opiates) or offering of service (eg, healthcare, elderly care, education, kindergarten, etc, licensed or at least strictly supervised services) will prove suitable or profitable. How have competing brands performed? Is there, at the very particular spot of the outlet, adequate logistical infrastructure to support the franchisor’s business operations? What attitude will the local zoning and building supervising authorities (who, from time to time, have exhibited corruptive, niggling and outright mean tendencies) take in respect of the design of the outlets, necessary parking spots, etc?

Among the legal matters, apart from vetting the legal environment in respect of the industry, both present and future, it is important to make sure the principal trademark, including brands, trade dresses and signs, are adequately protected by IPRs. In respect of the local partner, be it a potential franchisee, master franchisee, area representative or area developer, a background check of him or her as well as any officer, is a critical portion of the franchisor’s due diligence. In general, this check includes a trade history search, bankruptcy records, review of criminal and civil records (including lawsuits pending and general business reputation), assets and credit reports. Moreover, you may wish to ensure there are no third-party arrangements or liabilities that may pose hazards, and that the financial status of the potential partner will remain satisfactory.

What must be disclosed

What information must the disclosure document contain?

Although there is no prescribed formal franchise disclosure document to be given to those interested in buying a franchise, the sale of a franchise requires full and accurate written disclosure of all information material, including the draft franchise agreement. Despite the lack of any express statutory duties regarding the agreement’s essential minimum terms, it should contain the terms and conditions set forth in section 5.4 of the Code of Ethics of the European Franchise Federation (EFF; see www.eff-franchise.com/77/regulation.htm). In particular, it is important to refrain from quoting any inaccurate profit estimates and to disclose data on any unprofitable experience of franchising.

Continuing disclosure

Is there any obligation for continuing disclosure?

Since the principle of good faith and fair dealing is continuous by nature, disclosures need to be updated whenever circumstances change.

Disclosure requirements – enforcement

How do the relevant government agencies enforce the disclosure requirements?

No government agency enforces disclosure requirements. In practice, it is up to the franchisee to ensure that his or her rights will not be encroached upon.

Disclosure violations – relief for franchisees

What actions can franchisees take to obtain relief for violations of disclosure requirements? What are the legal remedies for such violations? How are damages calculated? If the franchisee can cancel or rescind the franchise contract, is the franchisee also entitled to reimbursement or damages?

An action may be brought before the Market Court due to violation of the requirements to provide true and sufficient information if it is founded on a charge of unfair business practice. This court may, however, merely prohibit the franchisor’s action and reinforce its judgment by means of a conditional fine. Any claim for damages – whether contractual, such as those based on breach of contract, or in tort, such as infringement of the disclosure requirements – must be instituted by an action before the competent ordinary court. Cease-and-desist orders, sequestration and a variety of precautionary remedies are also available. In extreme situations, the Penal Code spells out fraud as well as a number of other offences for the purpose of deterring the production of any false information. Court practice shows cases of criminal charge and conviction for fraud and other felonies, such as quoting untrue profit estimates and non-disclosure of unprofitable experience of franchising. In cases of tort the main fault is negligence; in the case of contracts the liability is strict and is vicarious in respect of lack of care of employees, agents and subcontractors. The starting point is the principle of full compensation: the franchisee has to be put in the position in which it would have been, had the franchisor fulfilled its duties. In the event of the franchisee being entitled to rescind the franchise contract, it is likely that the not-yet-amortised expenditure will be recoverable, as well as the estimated loss of future profits from the unit. But where termination would have been permitted, damages are likely to be restricted to the loss of profits merely for the length of the period of notice.

Disclosure violations – apportionment of liability

In the case of sub-franchising, how is liability for disclosure violations shared between franchisor and sub-franchisor? Are individual officers, directors and employees of the franchisor or the sub-franchisor exposed to liability? If so, what liability?

Although the sub-franchisor is responsible for disclosure with respect to his or her franchisees, the sub-franchisor may have recourse to the franchisor for untrue or misleading information furnished by the franchisor. As far as they are acting within the powers of the entity, individual officers, directors and employees are not exposed to liability, except where directors can be held liable for negligence on company legal grounds.

General rules on offer and sale

In addition to any laws or government agencies that specifically regulate offering and selling franchises, what are the general principles of law that affect the offer and sale of franchises? What other regulations or government agencies or industry codes of conduct may affect the offer and sale of franchises?

Finnish contract law contains important principles such as freedom of contract, freedom of form and the principle that a contract based on the consent of the parties is binding and must be negotiated and executed in good faith. Accordingly, the principle of culpa in contrahendo (obligations in negotiation) is emphasised. The guiding force is loyalty between the parties: each party ought to deal loyally with the other, paying attention to the other party’s advantage as well.

The franchise networks that are members of the FFA have established a certain self-regulation by their commitment to comply with the FFA Code of Ethics, which constitutes a set of standards similar to those of the EFF and, accordingly, deals to a considerable extent with matters relating to the offer and sale of franchises. The member networks have undertaken to furnish the potential franchisee, well in advance of the signature of a binding agreement, with ‘any written information capable of being furnished on the franchising relationship between the parties’. The standards on recruitment and advertising are similar to those of the EFF. The same is true where a franchisor imposes a pre-contract on a potential franchisee.

General rules on pre-sale disclosure

Other than franchise-specific rules on what disclosures a franchisor should make to a potential franchisee or a franchisee should make to a sub-franchisee regarding predecessors, litigation, trademarks, fees, etc, are there any general rules on pre-sale disclosure that might apply to such transactions?

From the Contracts Act it may be inferred that there is a legal doctrine imposing on contractual parties a mutual duty of loyalty. This is widely acknowledged in case law. Accordingly, there is a kind of general contractual good faith and fair dealing requirement to avoid misrepresentations inducing the opposite party to enter into a contract. In some circumstances, silence may amount to a misrepresentation. Accordingly, the franchisor should, as a general rule, endeavour to disclose any and all matters that may affect the potential franchisee’s decision to accept the franchise. The content and scope of this duty depends on the merits of the case, bearing in mind the potential franchisee’s knowledge and experience. On the other hand, the franchisee is also generally under a duty of care, prompting it to obtain (through its own initiative) available information, such as information on general market conditions and their impact on the business being contemplated.

The Unfair Business Practices Act prohibits any conduct violating good business practice. In particular, it prohibits the use of untrue or misleading representations regarding a business, whether one’s own or another, that are apt to either affect the demand for or supply of a product or to cause harm to somebody else’s business. The Trademarks Act covers the national trademark law and the Competition Restrictions Act sets boundaries regarding actions considered to restrict competition.

Finnish contract law contains important principles such as freedom of contract, freedom of form and the principle that a contract based on the consent of the parties is binding and must be negotiated and executed in good faith. Accordingly, the principle of culpa in contrahendo (obligations in negotiation) is emphasised. The guiding force is loyalty between the parties: each party ought to deal loyally with the other, paying attention to the other party’s advantage as well.

The franchise networks that are members of the FFA have established a certain self-regulation by their commitment to comply with the FFA Code of Ethics, which constitutes a set of standards similar to those of the EFF and, accordingly, deals to a considerable extent with matters relating to the offer and sale of franchises. The member networks have undertaken to furnish the potential franchisee, well in advance of the signature of a binding agreement, with ‘any written information capable of being furnished on the franchising relationship between the parties’. The standards on recruitment and advertising are similar to those of the EFF. The same is true where a franchisor imposes a pre-contract on a potential franchisee.

Fraudulent sale

What actions may franchisees take if a franchisor engages in fraudulent or deceptive practices in connection with the offer and sale of franchises? How does this protection differ from the protection provided under franchise sales disclosure laws?

The franchisee may request a pretrial investigation as to whether the franchisor has committed fraudulent practices, merely a marketing offence or an unfair competition offence. A conviction may result in a fine or imprisonment. Damages, including reimbursement for expenditure, may be recovered at criminal or civil proceedings.

Law stated date

Correct on

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6 May 2020.