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 of a franchise in Norwegian law. Traditionally and unofficially the definition of franchise is:

Franchise is an operating model based on a collaboration between two independent parties (franchisor and franchisee). Against direct or indirect financial remuneration, the right to establish and operate the franchisor’s business concept is distributed. The terms of operation of the franchisee’s business as well as the cooperation between the parties are determined in a legal agreement.

Franchise laws and agencies

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

There are no laws or government agencies specifically regulating the offer and sale of franchises. Relevant laws to be taken into consideration are, inter alia: the Contracts Act, the Norwegian Sale of Goods Act, the Competition Act, the Working Environment Act, the Holiday Act, the Personal Data Act, the Norwegian Marketing Practices Act, the Tenancy Act and the Act Relating to Product Liability.

Principal franchise requirements

Describe the relevant requirements of these laws and agencies.

Regarding transfer of undertakings, the provisions in the Working Environment Act should be taken into consideration, as the rights and obligations of the former employer ensuing from the contract of employment in force at the date of transfer shall be transferred to the new employer. And while the employee may object to transfer of the employment relationship to the new employer, the transfer of an undertaking to another employer is not in itself grounds for dismissal with notice or summary dismissal from a former or new employer.

In addition to legislative requirements, the general contractual principles are widely accepted in case law and apply to parties in contractual relations. The most important principles are the non-statutory principles of culpa in contrahendo, the duty of loyalty and a duty of good faith, as well as the general principle of good business practice set out in the Norwegian Marketing Practices Act. A failure to comply with these principles, for example, by not disclosing information material to a franchisee considering to enter into a franchise relationship with the franchisor, may lead to the contract being considered partially or wholly invalid by the courts, with a subsequent entitlement to compensation or price reduction for the franchisee.

Exemptions

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

Not applicable.

Franchisor eligibility

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

There are no such requirements.

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?

There are no such restrictions.

Pre-contractual disclosure

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

There is no specific legislative compliance procedure for pre-contractual disclosure in Norway, and it is up to the parties to agree on a due diligence process and the terms for such due diligence.

Regarding transfer of undertakings, the provisions in the Working Environment Act should be taken into consideration, as the rights and obligations of the former employer ensuing from the contract of employment in force at the date of transfer shall be transferred to the new employer. And while the employee may object to transfer of the employment relationship to the new employer, the transfer of an undertaking to another employer is not in itself grounds for dismissal with notice or summary dismissal from a former or new employer.

In addition to legislative requirements, the general contractual principles are widely accepted in case law and apply to parties in contractual relations. The most important principles are the non-statutory principles of culpa in contrahendo, the duty of loyalty and a duty of good faith, as well as the general principle of good business practice set out in the Norwegian Marketing Practices Act. A failure to comply with these principles, for example, by not disclosing information material to a franchisee considering to enter into a franchise relationship with the franchisor, may lead to the contract being considered partially or wholly invalid by the courts, with a subsequent entitlement to compensation or price reduction for the franchisee.

Further to the above, the parties are bound by the general contractual principles requiring each party to provide the counterparty with relevant and necessary information before entering into a contractual relationship such as franchising. If a party fails to comply with these principles (eg, by not disclosing matters of a major importance to the counterparty such as financial risks, profitability, pending litigation or the current status of trademark registrations), the agreement may be wholly or partially invalid and the party in breach of its obligations may be held liable for losses incurred by the other party due to the nonfulfilment of the principles.

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 is responsible for presale disclosure as the contracting party to the sub-franchisee, and bound by the same principles as the franchisor and with regard to pre-contractual disclosure. Although this is not regulated by Norwegian law, it is normal to include information about the contractual relationship between the franchisor and the franchisee in the sub-franchise agreement, including a referance to the ability for the franchisee to enter into the sub-franchise agreement. 

 

Due diligence

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

It will vary from one franchise relationship to another, but there are some common recommendations. From the franchisor’s perspective, it is recommended to carry out at least a limited due diligence of the entity contemplated to become the franchisee, depending on whether the entity in question is an established business within franchising or similar. As a minimum, it is customary to carry out a limited financial due diligence of annual accounts, order books and customer base, a limited legal due diligence of the terms of the current chain agreement (if relevant) and the most important agreements of the entity. This is especially important when an entity changes from one chain to another as there may be regulation regarding this situation (ie, liability, termination and non-compete that may affect whether and when the entity may start up in the new chain). It is also recommended to undertake thorough interviews with the owner of the entity and its management (if relevant) to confirm competence and personal fit with the chain. From the franchisee’s perspective, it is most important to undertake a thorough legal and financial review of the terms of the chain agreement, especially the financial terms and obligations for the franchisee, termination clauses and non-compete restrictions, as well as estimates and budgets (if available) for the franchisee’s business going forward. The entity considering entering into a contractual relationship with a chain as franchisee should also consider asking for the option to talk with the franchise manager of the chain, other owners of franchisee entities already established in the same chain and possibly the chain board (if relevant) to get a sense of the culture and relations in the chain.

What must be disclosed

What information must the disclosure document contain?

There is no specific legislative compliance procedure for pre-contractual disclosure in Norway, and it is up to the parties to agree on a due diligence process and the terms for such due diligence. 

Regarding transfer of undertakings, the provisions in the Working Environment Act should be taken into consideration, as the rights and obligations of the former employer ensuing from the contract of employment in force at the date of transfer shall be transferred to the new employer. And while the employee may object to transfer of the employment relationship to the new employer, the transfer of an undertaking to another employer is not in itself grounds for dismissal with notice or summary dismissal from a former or new employer.

In addition to legislative requirements, the general contractual principles are widely accepted in case law and apply to parties in contractual relations. The most important principles are the non-statutory principles of culpa in contrahendo, the duty of loyalty and a duty of good faith, as well as the general principle of good business practice set out in the Norwegian Marketing Practices Act. A failure to comply with these principles, for example, by not disclosing information material to a franchisee considering to enter into a franchise relationship with the franchisor, may lead to the contract being considered partially or wholly invalid by the courts, with a subsequent entitlement to compensation or price reduction for the franchisee.

Further to the above, the parties are bound by the general contractual principles requiring each party to provide the counterparty with relevant and necessary information before entering into a contractual relationship such as franchising. If a party fails to comply with these principles (eg, by not disclosing matters of a major importance to the counterparty such as financial risks, profitability, pending litigation or the current status of trademark registrations), the agreement may be wholly or partially invalid and the party in breach of its obligations may be held liable for losses incurred by the other party due to the nonfulfilment of the principles.

Continuing disclosure

Is there any obligation for continuing disclosure?

There is no such legislative obligation, but the general contractual principles are widely accepted in case law and apply to parties in contractual relations. The most important principles are the non-statutory principles of culpa in contrahendo, the duty of loyalty and a duty of good faith, as well as the general principle of good business practice set out in the Norwegian Marketing Practices Act.  These are continuous by nature and the parties must make further disclosure as relevant throughout the franchise relationship.

Regarding transfer of undertakings, the provisions in the Working Environment Act should be taken into consideration, as the rights and obligations of the former employer ensuing from the contract of employment in force at the date of transfer shall be transferred to the new employer. And while the employee may object to transfer of the employment relationship to the new employer, the transfer of an undertaking to another employer is not in itself grounds for dismissal with notice or summary dismissal from a former or new employer.

Disclosure requirements – enforcement

How do the relevant government agencies enforce the disclosure requirements?

No government agency enforces the disclosure requirements, and it is up to the parties to ensure that their right to disclosure is met by the other party, that is, by entering into legal proceedings if necessary to resolve a question as to whether a party has acted in accordance with the general principles of loyalty and good faith.

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?

The franchisee must initiate legal proceedings to obtain relief, and must specify the basis for the claim and a calculation of the economic loss incurred due to the franchisor’s breach of the principles. Depending on the requirements in the franchise agreement, the legal proceedings will be subject to the process of the ordinary courts or arbitration.

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?

The sub-franchisor is responsible for presale disclosure as the contracting party to the sub-franchisee, and bound by the same principles as the franchisor and with regard to pre-contractual disclosure. Although this is not regulated by Norwegian law, it is normal to include information about the contractual relationship between the franchisor and the franchisee in the sub-franchise agreement, including a reference to the ability for the franchisee to enter into the sub-franchise agreement. 

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?

Regarding transfer of undertakings, the provisions in the Working Environment Act should be taken into consideration, as the rights and obligations of the former employer ensuing from the contract of employment in force at the date of transfer shall be transferred to the new employer. And while the employee may object to transfer of the employment relationship to the new employer, the transfer of an undertaking to another employer is not in itself grounds for dismissal with notice or summary dismissal from a former or new employer.

In addition to legislative requirements, the general contractual principles are widely accepted in case law and apply to parties in contractual relations. The most important principles are the non-statutory principles of culpa in contrahendo, the duty of loyalty and a duty of good faith, as well as the general principle of good business practice set out in the Norwegian Marketing Practices Act. A failure to comply with these principles, for example, by not disclosing information material to a franchisee considering to enter into a franchise relationship with the franchisor, may lead to the contract being considered partially or wholly invalid by the courts, with a subsequent entitlement to compensation or price reduction for the franchisee.

There is no specific legislative compliance procedure for pre-contractual disclosure in Norway, and it is up to the parties to agree on a due diligence process and the terms for such due diligence.

Regarding transfer of undertakings, the provisions in the Working Environment Act should be taken into consideration, as the rights and obligations of the former employer ensuing from the contract of employment in force at the date of transfer shall be transferred to the new employer. And while the employee may object to transfer of the employment relationship to the new employer, the transfer of an undertaking to another employer is not in itself grounds for dismissal with notice or summary dismissal from a former or new employer.

In addition to legislative requirements, the general contractual principles are widely accepted in case law and apply to parties in contractual relations. The most important principles are the non-statutory principles of culpa in contrahendo, the duty of loyalty and a duty of good faith, as well as the general principle of good business practice set out in the Norwegian Marketing Practices Act. A failure to comply with these principles, for example, by not disclosing information material to a franchisee considering to enter into a franchise relationship with the franchisor, may lead to the contract being considered partially or wholly invalid by the courts, with a subsequent entitlement to compensation or price reduction for the franchisee.

Further to the above, the parties are bound by the general contractual principles requiring each party to provide the counterparty with relevant and necessary information before entering into a contractual relationship such as franchising. If a party fails to comply with these principles (eg, by not disclosing matters of a major importance to the counterparty such as financial risks, profitability, pending litigation or the current status of trademark registrations), the agreement may be wholly or partially invalid and the party in breach of its obligations may be held liable for losses incurred by the other party due to the nonfulfilment of the principles.

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?

Regarding transfer of undertakings, the provisions in the Working Environment Act should be taken into consideration, as the rights and obligations of the former employer ensuing from the contract of employment in force at the date of transfer shall be transferred to the new employer. And while the employee may object to transfer of the employment relationship to the new employer, the transfer of an undertaking to another employer is not in itself grounds for dismissal with notice or summary dismissal from a former or new employer.

In addition to legislative requirements, the general contractual principles are widely accepted in case law and apply to parties in contractual relations. The most important principles are the non-statutory principles of culpa in contrahendo, the duty of loyalty and a duty of good faith, as well as the general principle of good business practice set out in the Norwegian Marketing Practices Act. A failure to comply with these principles, for example, by not disclosing information material to a franchisee considering to enter into a franchise relationship with the franchisor, may lead to the contract being considered partially or wholly invalid by the courts, with a subsequent entitlement to compensation or price reduction for the franchisee.

There is no specific legislative compliance procedure for pre-contractual disclosure in Norway, and it is up to the parties to agree on a due diligence process and the terms for such due diligence.

Regarding transfer of undertakings, the provisions in the Working Environment Act should be taken into consideration, as the rights and obligations of the former employer ensuing from the contract of employment in force at the date of transfer shall be transferred to the new employer. And while the employee may object to transfer of the employment relationship to the new employer, the transfer of an undertaking to another employer is not in itself grounds for dismissal with notice or summary dismissal from a former or new employer.

In addition to legislative requirements, the general contractual principles are widely accepted in case law and apply to parties in contractual relations. The most important principles are the non-statutory principles of culpa in contrahendo, the duty of loyalty and a duty of good faith, as well as the general principle of good business practice set out in the Norwegian Marketing Practices Act. A failure to comply with these principles, for example, by not disclosing information material to a franchisee considering to enter into a franchise relationship with the franchisor, may lead to the contract being considered partially or wholly invalid by the courts, with a subsequent entitlement to compensation or price reduction for the franchisee.

Further to the above, the parties are bound by the general contractual principles requiring each party to provide the counterparty with relevant and necessary information before entering into a contractual relationship such as franchising. If a party fails to comply with these principles (eg, by not disclosing matters of a major importance to the counterparty such as financial risks, profitability, pending litigation or the current status of trademark registrations), the agreement may be wholly or partially invalid and the party in breach of its obligations may be held liable for losses incurred by the other party due to the nonfulfilment of the principles.

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 must initiate legal proceedings to obtain relief, and must specify the basis for the claim and a calculation of the economic loss incurred due to the franchisor’s breach of the principles. Depending on the requirements in the franchise agreement, the legal proceedings will be subject to the process of the ordinary courts or arbitration.

Law stated date

Correct on

Give the date on which the above content is accurate.

29 April 2020