Legal restrictions on franchise contracts and the relationship between the parties

Franchise relationship laws

Are there specific laws regulating the ongoing relationship between franchisor and franchisee after the franchise contract comes into effect?

There is no franchise-specific law, but there is court practice and related specific legislation that must be heeded during the length of the relationship. These include the Sale of Goods Act on the supply of commodities and rights - which is analogously considered as applicable to services - and the statutes mentioned in question 11.

Operational compliance

What mechanisms are commonly incorporated in agreements to ensure operational compliance and standards?

The mechanisms for making sure that operational compliance and standards are adhered to cover, generally, detailed reporting requirements imposed on the franchisee, monitoring of franchisee’s business and audit of finances, payment of royalties, etc. Field surveys, ad hoc quality control inspections and financial audits are either carried out by visiting the network or simply wirelessly. Visiting the network is typically performed by either the franchisor’s staff, a proxy, an independent third party specialising in network conformity assessment services or independent auditors, furnished with mobile tools, solutions and applications for reporting according to predesigned and agreed programmes, including checklists, paperless records and video or photographic proof. As far as is known, digital operation manuals with integrated reporting and monitoring solutions are coming within many industries.

Amendment of operational terms

May the franchisor unilaterally change operational terms and standards during the franchise relationship?

During the franchise relationship, the franchisor must not unilaterally change operational terms or standards except where such change is a must, that is, be compelled by circumstances beyond the control of the franchisor, such as scarcity of raw materials or components, where the change is founded on legislative factors or where the parties have so agreed. Accordingly, it is a top priority to see to it the degree to which the franchisor shall be permitted, unilaterally, to change operational terms and standards is thoroughly detailed in the franchise agreement.

Other laws affecting franchise relations

Do other laws affect the franchise relationship?

Yes - whether directly or indirectly, a number of other statutes affect the franchise relationship. These include the Consumer Protection Act, the Employment Contracts Act, the Damages Act, the Product Liability Act and, should parties seeking settlement of a dispute have elected for arbitration in lieu of ordinary court procedures, the Arbitration Act.

Policy affecting franchise relations

Do other government or trade association policies affect the franchise relationship?

There are currently no government initiatives that significantly affect franchising relationships, except for plans to, within a few years, streamline corporate taxation, lower the corporate income tax rate and increase the tax on dividends where they are not tax-exempt.

Regarding trade association policies, the importance of the FFA’s board of ethics as an authority capable of formulating good franchising practice in the future is expected to grow.

Termination by franchisor

In what circumstances may a franchisor terminate a franchise relationship? What are the specific legal restrictions on a franchisor’s ability to terminate a franchise relationship?

Where the franchise agreement is for a fixed period, there ought to be very good cause for the franchisor to terminate the agreement and, in particular, to terminate it without notice. Whether or not the agreement is for a fixed period, much will depend on the contents of the contract and the justified expectations of both parties. If the franchisee proves not to be loyal to the network, this is a good cause for termination. This would also be the case if the franchisee, at the conclusion of the agreement, has deceived the franchisor regarding any essential issue, such as their skills, education, personal qualities or financial resources, has breached material contract provisions constantly or repeatedly or has severely violated the interests of the franchisor resulting in a justified loss of trust. If the franchisee either becomes unable to perform the expected duties or is seriously hampered in performing them due to any other specified circumstance, this will also be seen as a good cause.

Franchise agreements frequently contain elaborate grounds for termination, such as non-payment of licence fees, royalties and other monies due to the franchisor, in order to enable the franchisor to rescind the agreement if need be. It is, however, important to note the franchisee’s right to challenge the fairness of the provisions, even late in the day. If the franchisee becomes bankrupt, the general rule is that the principle of continuation of agreements precludes discontinuation of the contract.

Termination by franchisee

In what circumstances may a franchisee terminate a franchise relationship?

Unless there is a good cause, the termination without notice will not be deemed justified. The threshold for terminating an agreement for a fixed period is much higher. This said, termination with notice is likely to be regarded as justified if the franchisor has neglected core duties such as guidance, training, the duty of supply of commodities the franchisee may be bound to acquire for his or her business, the duty of updating the operating manual or similar instructions, or is favouring or siding with fellow franchisees at the terminating franchisee’s expense. Termination without notice is normally seen as justified if the franchisor:

  • at the conclusion of the agreement has deceived the franchisee regarding any essential issue, such as the alleged success of any pilot unit or their capabilities for guidance or training;
  • has breached material contract provisions constantly or repeatedly; or
  • has severely violated the interests of the franchisee, resulting in a justified loss of trust.
Renewal

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

Renewals of franchise agreements are subject to agreed procedure, if any, otherwise they are effected without formalities.

Refusal to renew

May a franchisor refuse to renew the franchise agreement with a franchisee? If yes, in what circumstances may a franchisor refuse to renew?

The franchisor can refuse to renew the agreement if it was made for a fixed term and there is no provision to the effect that the franchisee has an option to renew it. Where there is an option clause, it is frequently contingent on the franchisee meeting certain conditions; if these are not met, the franchisor may refuse to renew the agreement.

Transfer restrictions

May a franchisor restrict a franchisee’s ability to transfer its franchise or restrict transfers of ownership interests in a franchisee entity?

It is acceptable to contractually restrict a franchisee’s ability to transfer its franchise and such a restriction is, in general, enforceable. The same is true of restrictions of transfers of ownership interests in the franchisee’s entity. However, an overly strict or long-lasting prohibition may be considered unreasonable.

Fees

Are there laws or regulations affecting the nature, amount or payment of fees?

Should a franchisee (or sub-franchisor), exceptionally, be deemed an associated enterprise in the sense of the transfer pricing regime in order to avoid tax consequences, the arm’s-length principle and documentation regime must be complied with.

Usury

Are there restrictions on the amount of interest that can be charged on overdue payments?

The transfer pricing standards referred to in questions 5 and 37 also apply to interest. There is no restriction on the amount of interest that may be charged unless it is deemed to be unreasonable or to amount to usury. Nevertheless, any provision related to the amount of interest is deemed a term of the contract and, therefore, the rules of the Contracts Act regarding adjustment may be applicable.

Foreign exchange controls

Are there laws or regulations restricting a franchisee’s ability to make payments to a foreign franchisor in the franchisor’s domestic currency?

No. With regard to money exchange and exchange rates, see the Bank of Finland’s web page: www.bof.fi/en/suomen_pankki/faq/valuutanvaihto.htm.

Confidentiality covenant enforceability

Are confidentiality covenants in franchise agreements enforceable?

Yes, they are enforceable, though the risk of court-ordered adjustment or setting aside exists, such as if the covenant is made more extensive than need be so as to prove unreasonable.

Good-faith obligation

Is there a general legal obligation on parties to deal with each other in good faith during the term of the franchise agreement? If so, how does it affect franchise relationships?

Yes, dealing in good faith has a central position in law, though not necessarily in practice. See questions 12, 16, 20 and 24.

Franchisees as consumers

Does any law treat franchisees as consumers for the purposes of consumer protection or other legislation?

No. Consumer protection protects consumers only where goods or services are acquired primarily for a purpose other than business or trade.

Language of the agreement

Must disclosure documents and franchise agreements be in the language of your country?

No, they can be in any language understood by the parties, unless the network is bound by the EFF Code of Ethics: in this case the documents may be in either Finnish or Swedish, both of which are official domestic languages.

Restrictions on franchisees

Describe the types of restrictions placed on the franchisees in franchise contracts.

Duration

In practice, there are no restrictions.

Exclusive territories

Exclusivity can be provided by means of restricting active - but not passive - sales outside the contract territory.

Restrictions on sources from whom a franchisee may purchase or lease products

From a competition law viewpoint, the franchisor is free to impose on its franchisee an obligation to purchase the contracted products exclusively from the franchisor or from other entrepreneurs designated by the franchisor, provided that the obligation does not exceed five years in length.

Restrictions on customers the franchisee may serve

Generally, the franchisor is free to impose on the franchisee an obligation not to sell contract products to resellers outside the network, subject to the condition that the franchisee is free to effectuate cross-supplies to or from other members of the network at any level and the franchisee is not prohibited from active sales to end users wherever they are located.

Prices franchisees charge their customers

Antitrust law prohibits price fixing, whether direct or indirect. All horizontal agreements on prices and on other trading conditions are prohibited.

Prohibitions on franchisees soliciting other franchisees’ employees

There is no express statutory law on non-poaching agreements restricting another, such as a franchisee, from soliciting employees of another franchisee. However, it is advisable to take heed of the fact the franchisee so restricted may invoke the power of any court to adjust contract terms (see below). Given the fact that in this field there is very little case law, there is a measurable risk the court will deem such restriction unreasonable or, at worst, the franchisee so restricted fits into the direction and supervision of the franchisor so as to jeopardise the independence of the franchisee as an entrepreneur and, accordingly, increase the risk that he or she be regarded as an employee of the franchisor (see question 6).

Non-competition restrictions

According to the general rule, provisions that are essential in order to protect the franchisor do not constitute restrictions of competition. The more important the transfer of know-how, the more likely it is that the restraints create efficiencies or are indispensable to protect the know-how, and that the vertical restraints fulfil the conditions of the EC Treaty. A non-compete obligation on products purchased by the franchisee falls outside the scope of the prohibition where the obligation is necessary in order to maintain the common identity and reputation of the franchised network. In such cases, the duration of the non-compete obligation is irrelevant, as long as it does not exceed the duration of the franchise agreement itself. All the same, to be effective after the expiration of the contract, the non-compete obligation must be related to the contract products and must not only be indispensable to protect know-how transferred by the franchisor, but must also be limited to both a duration of not more than one year and to the premises or land from which the franchisee has operated during the contract period. In any case, in order not to forfeit the benefit of the block exemption, the 30 per cent market share threshold must not be exceeded. Nevertheless, under the Contracts Act, a non-compete clause may be considered to be either too restrictive or to unreasonably limit the freedom of the franchisee and, therefore, be regarded as non-binding. Accordingly, there is good reason to give much thought to whether a non-compete clause is required and, if so, to its scope and duration.

Governing law

Generally, a franchise agreement can be subject, in part or in whole, to the law of a foreign country. Nevertheless, the choice of foreign law - whether or not it is accompanied by the choice of a foreign tribunal - does not necessarily prejudice the application of domestic mandatory rules from which no derogation can be made.

Dispute resolution

Finnish law acknowledges contracts on jurisdiction unless there is exclusive jurisdiction. By means of a jurisdiction clause, parties may elect to have any, all, or just certain disputes resolved, whether exclusively or not, in some other jurisdiction or by a certain court, whether in Finland or abroad. Nevertheless, one should bear in mind the fact that, with the exception of jurisdictions covered by the Brussels and Lugano Conventions and EU Regulation 1215/2012, the recognition and enforcement of foreign judgments does meet obstacles. Therefore, commercial arbitration is much in favour. See question 47.

Court’s power to adjust contract terms

The overarching stipulation that any contract term that is held to be unfair, or the application of which is deemed to lead to an unfair result, may be adjusted or set aside. Further, pursuant to the Act on Regulating Contracts Terms between Entrepreneurs, the Market Court may adjudicate a prohibition and a conditional fine should a franchise contract be deemed unfair to the franchisee.

Competition law

Describe the aspects of competition law in your country that are relevant to the typical franchisor. How are they enforced?

Competition rules on vertical restraints and in particular on selective distribution may be of some concern to the typical franchisor. The National Competition Restrictions Act prohibits and exempts agreements, decisions or practices by means of similar wording to the Treaty on the Functioning of the European Union. The guidelines of the European Commission are applied in respect of the interpretation of vertical restraints, whether challenged on the basis of the national statute or the basis of the EU block exemption regulation. Where competition restrictions affect trade between the EU member states, EU antitrust law is directly applied. The agency responsible for enforcement is the Finnish Competition Authority (FCA, www.kilpailuvirasto.fi). Abuse of the antitrust rules may, unless deemed minor or unjustified with regard to safeguarding competition, lead to the Market Court (on proposal by the FCA) imposing a competition infringement. In addition, the abuser may be liable for damages, whether through tort or contract.

Courts and dispute resolution

Describe the court system. What types of dispute resolution procedures are available relevant to franchising?

The competent courts in civil and commercial matters are, ordinarily, the civil courts that are the courts of first instance (the district and circuit courts), the courts of appeal and - as a last resort - the Supreme Court. Leave to the Supreme Court is only rarely granted. Consequently, the number of cases actually handled by the Supreme Court is low and the number of Supreme Court precedents containing the word franchise can be counted on the fingers of one hand.

However, the Market Court - being a special court assigned competence regarding, for example, disputes on restrictions of competition, unfair competition, public procurement, disputes brought forward by the ombudsman for consumers and certain disputes between traders - plays an increasingly important role. Alternatively, franchisors and franchisees can agree to submit all or certain disputes to arbitration.

Arbitration – advantages for franchisors

Describe the principal advantages and disadvantages of arbitration for foreign franchisors considering doing business in your jurisdiction.

The main advantages are the finality and enforcement of the award, whether Finnish or foreign (subject to the provisions of the New York Convention 1958); and if the parties so agree, confidentiality, in contrast to the publicity involved in court procedures, flexibility as to the procedures, and the fact that arbitrators deal in terms of ‘market economy’: they have to work at their highest level in order to ensure they gain future cases. All the same, such elaborate rules on procedural matters in connection with litigation could be perceived as a disadvantage: the lengthy hearings, difficulty in appointing the right individuals for the tribunal, the fact that the outcome cannot be appealed against and, finally, the cost. The arbitrators’ expenses must be covered by the interested parties and not by the taxpayer, as is generally the case in litigation.

National treatment

In what respects, if at all, are foreign franchisors treated differently from domestic franchisors?

Legally, there is no difference. In practice, foreign franchisors are probably treated better, not least because of the respect gained by a concept that has been successful in foreign markets.