Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions

Franchise agreements

Common features and contractual requirements

What are the common elements of franchise agreements in your jurisdiction? Do any requirements or restrictions on contractual provisions apply?

Freedom of contract is an important principle in Swiss contract law. Parties are free to determine the terms of a contract within the limits of law. The only terms that are deemed to be invalid are those:

  • which are impossible to implement; or
  • which are considered unlawful, immoral or against the public order (Articles 19 and 20 of the Swiss Code of Obligations).

Typical elements in franchise agreements which may be in conflict with Articles 19 and 20 of the Swiss Code of Obligations include:

  • the duration of the agreement (which are frequently long); and
  • the exclusion of franchisor liability vis-à-vis the franchisee.

As a general rule, the exclusion of such liability is not possible in case of unlawful intent or gross negligence (Article 100 of the Swiss Code of Obligations).

A typical franchise agreement has a static element, which covers the consistent aspects of the franchise and a dynamic element, which includes all aspects that the franchisor may unilaterally adapt during the term of the agreement. The latter includes:

  • guidelines;
  • handbooks;
  • IT systems; and
  • other information sources which describe the franchise concept and the know-how required to put the concept into practice.

The important elements of a franchise agreement include:

  • the subject of the franchise and rights of use;
  • the licence of IP rights;
  • the territory, exclusivity and limited territorial protection (as admissible under competition law);
  • the franchise fee (initial entry fee and ongoing fees);
  • the franchisee’s obligations to promote the sale of goods (including instructions for advertisement and marketing);
  • the requirements for the purchasing of goods and procurement;
  • the services to be provided by the franchisor (eg, know-how transfer, courses and training and counselling);
  • the franchisor’s right to give directives;
  • confidentiality obligations;
  • non-competition obligations (as admissible under competition law);
  • the franchisor’s control rights (eg, the right to perform audits);
  • reporting and accounting obligations;
  • the rules in connection with the transfer of business;
  • the contract term and renewal, contract termination rights and the consequences of termination; and
  • the choice of law clause and place of jurisdiction or arbitration clause.

Are parties to a franchise agreement subject to an implied or explicit duty of good faith?

As a general rule, each party to a franchise agreement must act in good faith in the exercise of their rights and in the performance of their obligations (Article 2(1) of the Swiss Civil Code).

Are franchise agreements subject to any formal or documentary requirements, including registration?

No. From a legal point of view, franchise agreements can be agreed orally. However, it is standard practice to sign a general written agreement which the franchisor adopts for all franchisees.

As franchise agreements are usually pre-formulated agreements (standard form contracts), the rules on general business conditions apply – this generally works to the disadvantage of the franchisor.

Due diligence

What due diligence should both parties undertake before entering into a franchising agreement?

Larger franchisors often adopt a standardised application process for potential franchisees. During this process, the potential franchisees must submit detailed information about their background, business experience in the relevant industry and financial situation. The application process will also often include personal interviews.

For a potential franchisee, it is more difficult to obtain relevant information about a franchisor. Some information may be publicly available if the franchisor is a listed company. However, the most pertinent information may not be available. The franchisee should try to get as much information about the franchising concept and the market situation as possible from the franchisor and can also ask permission to contact existing franchisees. The franchisor must provide potential franchisees with any relevant information in connection with the franchise agreement

Pre-contractual disclosure

Are franchisors subject to pre-contractual disclosure requirements? If so, do any exemptions apply? What remedies are available to franchisees in the event of breach of these requirements?

According to case law, both parties must disclose any relevant information in connection with the franchise agreement. As a general rule, the scope of a franchisor’s obligation to disclose is more extensive, as generally franchisors are more familiar with the franchise business than potential franchisees. For the potential franchisee, there is usually no alternative than to rely on the franchisor’s obligation to disclose relevant information as the details of the franchise concept and franchisor know-how is generally protected by confidentiality obligations.

The relevant information which must be disclosed by the franchisor includes:

  • the rights and obligations under the franchise agreement, but also all relevant facts about the relevant market in which the franchise will be operated;
  • the business of the franchisor;
  • the franchise concept;
  • the experiences of the franchisor with regard to the franchise concept; and
  • alternative distribution channels which the franchisor adopts to sell contractual products.

The potential franchisee is also obliged to disclose relevant information (eg, about their financial situation).  

The disclosed facts must be accurate and complete. Each party may be entitled to claim damages based on culpa in contrahendo if they can demonstrate that the pre-contractual information of the counterparty was inaccurate or incomplete. If the party would not have entered into the agreement if they had known the correct or full information, they may be entitled to rescind the agreement.

Choice of law

May the parties freely choose the governing law of the franchise agreement?

Yes, according to Article 116 of the Federal Act on Private International Law, the parties to a franchise agreement may freely choose the governing law. The choice of law must be explicit or at least clearly evident from the agreement or the circumstances.

Fees

What fees are typically charged under a franchise agreement?

There are no specific laws regarding the nature, amount or payment of a franchise fee. Typically, the franchisee must pay an initial fee for the advanced services of the franchisor (ie, for the planning and development of the system). For the rights and advantages related to the use of the system, the franchisee must usually pay ongoing fees (often a percentage of sales).

Renewal

Do franchisees have a right of renewal?

A right of renewal exists only if it was agreed to in the franchise agreement.

On what grounds may a franchisor refuse to renew?

An obligation to renew the franchise only exists if it has been agreed in the franchise agreement. The grounds on which the franchisor may refuse to renew must also be provided in the terms of the agreement.

How are renewals of franchise agreements usually effected? Do any formal or substantive requirements apply?

Unless otherwise agreed in the franchise agreement, the renewal of a franchise agreement is subject to the parties’ mutual agreement.

Termination

On what grounds may a franchisor terminate a franchise agreement? Are any remedies available to franchisees in this regard?

The parties may agree on a limited or unlimited term for the franchise agreement. With regard to ordinary termination, the parties are free to agree on the termination regime and to choose the termination period and a set termination date.

An extraordinary termination of the agreement is possible at any time and with immediate effect for so-called ‘valid reasons’. Valid reasons for an extraordinary termination exist when the continuation of the contract until the next proper termination date is unacceptable to the other party. The burden of proof that such valid reasons exist lies on the party which terminates the agreement.

It is crucial to carefully agree on the appropriate obligations after termination. Often, obligations after termination are not given sufficient attention, despite the fact that at this stage the relationship between the parties can become strained and amicable solutions are often not possible.

Click here to view the full article.