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0Образование. Наука. Научные кадры. 2024. № 2. С. 96—105. Education. Science. Scientific personnel. 2024;(2):96—105.
ЧАСТНО-ПРАВОВЫЕ(ЦИВИЛИСТИЧЕСКИЕ) НАУКИ
Научная статья УДК 347.45
https://doi.org/10.24412/2073-3305-2024-2-96-105 NIION: 2007-0062-2/24-076
EDN: https://elibrary.ru/GIXOKC MOSURED: 77/27-004-2024-02-276
Сравнительные вопросы франчайзинга
Намсрай Баттулга
Печский университета, Печ, Венгрия, namsrai.nas@gmail.com
Аннотация. В статье изложены прошлые и настоящие представления, а также прогрессивные этапы современного франчайзинга. Рассмотрены история возникновения франшизы и тенденции развития современной франшизы, ее правовая и концептуальная основа.
Ключевые слова: договорное право, франшиза, коммерция, асимметрия
Для цитирования: Баттулга Н. Сравнительные вопросы франчайзинга // Образование. Наука. Научные кадры. 2024. № 2. С. 96-105. https://doi.org/10.24412/2073-3305-2024-2-96-105. EDN: https://elibrary.ru/GIXOKC.
PRIVATE LEGAL (CIVILITY) SCIENCES
Original article
Comparative franchising issues
Namsrai Battulga
University of Prncs, Prncs, Hungary, namsrai.nas@gmail.com
Abstract. The paper covers an examination of past and present perceptions and progressive stages of modern franchising. Therefore, the history of how the franchise originated and the trends of the contemporary franchise, its legal and conceptual ground are considered.
Keywords: contract law, franchise, commerce, asymmetry
For citation: Battulga N. Comparative franchising issues // Obrazovaniye. Nauka. Nauchnyye kadry = Education. Science. Scientific personnel. 2024;(2):96-105. (In Engl.). https://doi.org/10.24412/2073-3305-2024-2-96-105. EDN: https://elibrary.ru/GIXOKC.
1. The Origin of the Worldwide Franchise and Legislative History
Franchises as arrangements can be traced back to medieval times when the Crown granted persons the right to operate businesses or collect taxes in designated regions. The development of franchising has historical roots starting in England before making its way to America. However, the early forms of franchises were quite different from the modern franchising models1.
The former franchise concept expressed an administrative process of licensing and an effective system for introducing intellectual property to the market, and both definitions were co-existent in
1 Gurnick, D., The First Franchise, Franchise Law Journal, 2021, Volume 40, p. 631.
© Баттулга Н., 2024
past times2. The main reason for the progress of the franchise business began with the lack of capital of intellectual creators and innovators and was related to product and service models that would not be effective until they were taught how to use them.
In medieval England, guilds and trade associations served as early forms of business organizations. Craftsmen and merchants formed guilds to regulate trade practices, ensure quality standards and protect their interests. These organizations exhibited elements of a collective business model, where members shared common practices and
2 The word Franchise or "Chartres de Franchise" comes from the old French language meaning exclusive or privileged. The earliest franchise is believed to be a printing press model invented by German inventor Johannes of Gutenberg in 1491, after which specialized franchises sprung up across Europe.
standards. During the reign of Queen Elizabeth, I the Statute of Artificers was enacted in 1563. This statute aimed to regulate and control apprenticeship and the activities of craftsmen. It established a system where master craftsmen could take on apprentices and pass on their skills, creating a hierarchical relationship resembling a precursor to franchising3.
The earliest example of the franchise is the Hudson's Bay Company, founded in 1670 in Canada, and was operating as a fur trading company under a royal charter granted by King Charles II of England4. Following, the franchise license in Australia under royal privilege was granted by Governor Macquarie in 1809. Nevertheless, these were not structured as a franchise system, which is a business model where individuals or entities are granted the right to operate under the brand and a parent company5.
As European settlers arrived in North America, business relationships akin to early franchising began to emerge. Merchants and producers established distributorship agreements with individuals in different colonies. These agreements allowed local entrepreneurs to distribute and sell goods on behalf of the producers, sharing profits in return. In the United States, trademark and product franchising developed when the 'Singer' sewing machine company was formed in 1851. Gradually, local municipalities started granting franchises to utility companies for water, gas, and electricity6. The next stage in the renewal of franchising came around the turn of the 20th century when oil refinery companies and automobile manufacturers began to grant the right to sell their products. Moreover, international franchising such as chain restaurants, hotels, fast food, and consumer goods services had their beginnings in the 1960s7.
3 Bosshardt, W., Lopus, S., Business in the Middle Ages, Social Education, 2013, Volume 77, p. 64.
4 "See" in https://www.hbcheritage.ca/history/company-stories/a-brief-history-of-hbc
5 While Governor Lachlan Macquarie, who served as the Governor of New South Wales from 1809 to 1821, made significant contributions to the development of the colony during his tenure, there is no credible historical record of him granting franchise licenses as part of a business model similar to modern franchising.
6 Shelley, M., Morton, H., Control in Franchising and the Common Law, Franchise Law Journal, 2000, Volume 19. p. 119.
7 Competition Policy and Vertical Restraints, OECD, 1993,
p. 117.
In the mid-20th century, franchise legislation began to emerge in response to the rapid growth and expansion of franchising as a business model. The purpose of the legislation was to address concerns related to the fairness and protection of both franchisors and franchisees. The lack of legal arrangements for franchise agreements has led to disputes over licenses and compensation. Hence, the first U.S. Federal Trade Commission Franchise Rule8 was originally adopted in 1978. The establishment of franchise legislation was driven by a recognition of the power imbalance between franchisors and franchisees, to provide a legal framework that protected the interests of both parties.
After that, Australia, Canada, France, and Spain among other 30 countries, have enacted disclosure laws. For instance, France introduced franchise legislation, known as the 'Doubin' law9 in 1989. The law is essentially a consumer protection act that requires a franchisor to provide certain information to a franchisee candidate. Similar legislation has been implemented in Belgium, Italy, and Sweden10. Enactments aimed to ensure that potential franchisees had access to accurate information about the franchisor and the terms of the franchise agreement before entering into a contractual relationship. This typically involved the requirement for franchisors to provide a Uniform Franchise Offering Circular or Franchise Disclosure Document to prospective franchisees.
Franchise agreements, which were considered an illegal form of business in Europe, were recognized after the Pronuptia case11 in 1987, which led to the passage of a series of acts regulating franchising relationships in 1989. With this legislative change, the focus on franchising was still considered high in terms of contractual risk. In addition to laws, rules of conduct and regulations issued by international and regional franchise associations play an important role in regulating franchise business communications. Therefore, there is a tendency to become a member of the
8 "See also", The Federal Automobile Dealer Franchise Act. Public Law 1026, U.S.C.A
9 Mellerio, R., Franchise Law Review: France, 2021, p. 254.
10 Goodhardt, J., How to Franchise in France, 2019, in https://www.global-franchise.com/news/how-to-fran-chise-in-france.
11 Judgment of the Court of 28 January 1986. Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis. Bundesgerichtshof — Germany. Competition — Franchise agreements. Case 161/84.
European Franchise Association and the World Franchise Council and follow their code of conduct.
Western economic development has influenced franchising expansion in post-socialist and Asian countries which transitioned from centrally planned economies to market-oriented systems. Nonetheless, franchise legislation in the countries still depends on the specific legal and economic reforms that each country has undergone.
Nowadays, any jurisdiction seeks to establish certain standards and fairness in franchise agreements. It can be described as preventing franchisors from including overly one-sided terms that might disadvantage franchisees. Therefore, franchise law often included provisions emphasizing the need for good faith and fair dealing between contract parties.
2. Comprehension of the Franchising
Franchising means a statutory right or privilege granted to a person or group. Franchising is a business model that has been converting dozens of intangible assets into tangible in the history of mankind. Thus, it covers a wide range of institutional aspects of law and economics.
"Franchise" and "franchising" are related terms, but they refer to different aspects of the same business model. A franchise refers to the legal and commercial relationship between the owner of a trademark, brand, or business system (the franchisor) and an individual or entity (the franchisee) that is granted the right to operate a business using that trademark or brand. In essence, a franchise is a specific instance or unit of the overall business system.
Franchising is the broader business model or method of distribution that involves the licensing of a business concept, brand, or trademark to multiple individuals or entities. It's a strategy used by the franchisor to expand its business without taking on the full operational and financial responsibilities of opening and managing each location.
The origin of the term franchise means privilege and discount, while the name of the firm is a franchise system with a special business concept, internationally recognized in the field of production, service, and trade, and can prove its successful operation in the market. Franchising requires comprehensive issues including the rental of an intellectual property license, and the restriction of parallel competition on the market, which distinguishes it from distributor trade and other affiliate business, respectively. The subject of the franchise contract is mainly intellectual property
including management system and marketing technology, and thus it is distinguished from the contract of other assets ownership.
2.1. Intellectual Property
The historical connections between intellectual property and franchises have deepened and diversified as both concepts have evolved. Intellectual property has become a vital component of the franchise model, contributing significantly to the identity, success, and legal structure of franchise systems.
In the early days of franchising, intellectual property played a role in branding and identifying the source of goods or services. Trademarks and trade names were among the initial forms of intellectual property used to distinguish one franchise from another. Trademarks became a crucial aspect of franchise systems for establishing brand recognition and consumer trust. Franchisors sought legal protection for their trademarks to prevent unauthorized use and to maintain consistency across their franchise network.
As franchises evolved, the scope of intellectual property within franchise systems expanded to include trade secrets, copyrights, and patents. Franchisors developed proprietary business methods, licensing, operating manuals, and marketing strategies, all of which became integral to the overall intellectual property portfolio of a franchise.
While licenses and franchises share common elements such as the granting of rights and financial considerations, the key differences lie in the comprehensiveness of the business relationship, the level of control and support provided, and the association with an established brand and business model. Understanding these distinctions is crucial for businesses when deciding between a licensing arrangement and a franchise model based on their specific needs and objectives.
Therefore, the activity of "leasing" a trademark should be called franchising, and the system that defines the entire relationship between the parties and the conditions related to running the business by the franchisor's requirements should be called franchising. Moreover, in international legal practice, a license is a payment for the right to use a specific trademark. Unlike franchisors, franchisors focus more on monitoring the activities of franchisees and are more interested in monitoring license usage and collecting fees than influencing business operations. On the other hand, every franchise is licensed, but not every license is a franchise.
Franchising is the consistent and sustainable adherence to the company's brand promise and is characterized by the duplication of standard documents, as it focuses on the reuse of business dignity. Hence, the franchise agreement shall also specify the conditions related to the use of trademarks or brand names. For instance, the franchisee has the right to use the brand name in a certain field and is responsible for equipping its stores and service facilities per the standard requirements set by the franchisor. It is also necessary for the franchisor to meet the day-today needs of the franchisee to manage their independent business, which is subject to the requirement to constantly encounter the necessity of the brand standards.
Article 8 of the Paris Convention for the Protection of Industrial Property states that in all member states of the Union, the name of an enterprise, regardless of whether it is included in the trademark system, is protected without the need to apply. A commercial name is used by an entrepreneur as a business card for his business, to prevent confusion among business partners, to maintain his reputation among consumers, and to gain their trust. Since the trade name generates economic benefits, it is considered a property right and is included in legal relations through inheritance, gift, and transfer.
2.2. Competition
Monopoly refers to the existence of a single supplier in the same market, and cartel refers to the conspiracy between companies to stop competition. The main purpose of competition law is to protect the interests of consumers, who are compositors of the market. One of the important topics of communication regulated by modern competition law is the process of market sharing under franchise agreements. By signing an agreement with the franchisor, the franchisee will receive permission to carry out production and services alone in a certain territory according to the contract, and it will be possible to maintain the balance of future profits. It is not considered direct anti-competitive conduct, such as cartels, or abuse of dominance.
2.3. Business Modelling
A franchisee is very similar to an independent distributor who has a lot of freedom in how to run the business. A distributor under the strict control of the supplier and manufacturer begins to resemble a franchise. Although, a distributor only buys the product and sells it at a value-added price. To
distinguish distribution and licensing rights from franchising, the main object of the contract should be considered. Distributors know their local markets and customers well and have business relationships with many companies' suppliers and manufacturers12. Regarding the types of franchising agreements, single or multi-unit on-area development and master franchises can be established. Among these contractual options, for example, the master franchisee has the advantage of not only having the right to open several branches under his ownership but also selling the right to open a franchise in that area to other entrepreneurs.
For entrepreneurs and investors, it is believed that getting the right to represent an internationally known brand and introducing its goods and services to the local market is less risky and costly than starting a new business. It is also concluded among economists that it will develop steadily and bring real value and growth to the economy by reducing risks. For instance, compared to a new entrepreneur, a franchise business has a lower risk of failure and can easily calculate a margin. The business model is based on proven methods, equipment, raw materials, training, advertising, and established accounting systems.
Franchise business is advantageous in many ways, but to fulfill the obligations under the contract, the parties have to adhere to severe requirements and guidelines, strictly follow established business methods and culture, and have special conditions. Therefore, before signing a franchise agreement and investing, the franchisee should decide in advance which classification of franchise will choose from the following options. It includes:
Management franchising — the owner of the franchise, based on career and work experience, provides consulting services for business format and operations, trains, monitors the business, mediates services, and costs management.
Production franchise — establishes a factory in the authorized territory under the franchise agreement and supplies products developed by the franchisor's trademark, patent, know-how, technique, technology, design, and production standards, or communicates indirectly with the end user.
The product trademark franchise — the business of selling franchise commodities using commercial names, licenses, sales networks, and marketing.
12 Guide To International Master Franchise Arrange-
ments, UNIDROIT, 2019, p. 8.
Business format franchise — Adoption and use of products and services, trademarks, and comprehensive programs under a business model.
Investment franchising is the implementation of large-scale projects that require a huge amount of investment, and the franchisee either hires a management team himself or entrusts the operation to a franchisee to get a return on finance.
Job franchising — a type of franchising is usually used for small businesses that require a small investment. Franchisees typically have a limited inventory of products and services such as travel agencies, coffee trucks, event planning, childcare services, etc.
Conversion Franchise — the reshaping of a company engaged in business in a particular field to franchising a well-known brand in its field. This allows the franchisee to leverage the brand name, marketing and advertising programs, training systems, and customer service standards to increase profitability. As a pre-existing business, the franchisee can collect royalties and re-open branches in a very short period. Industries that widely use convertible franchising include real estate agents.
Social franchising. Recently, the concept of social franchising has been discussed. It is an option for international credit, aid, and voluntary organizations' franchising activities13. The main goal of social franchising is not to make a profit, but to reach many people, especially in the community, to solve specific social problems. For this, regulations are needed to support the implementation of franchising opportunities with low risk.
3. Basic Theories Related to Franchise Relationship
3.1. Asymmetry of the Franchise Agreement
The concept of equal rights among contract parties depends on the context of the agreement and the principles underlying it. In many cases, particularly in legal agreements or contracts, there is an expectation that parties will have equal rights and obligations to ensure fairness and balance.
In contractual agreements, for instance, each party typically has the right to expect certain outcomes or benefits as outlined in the agreement, as well as the responsibility to fulfill certain
13 Micro-franchise networks may positively influence the social development of a country by improving healthcare services and alleviating poverty. "See also", Christensen, J., Parsons, H., & Fairbourne, J., Micro-franchising as an Employment Incubator, 2007.
obligations. These rights and responsibilities should be fairly distributed among the parties involved. However, the notion of equal rights can vary depending on the specific circumstances of the agreement. In some cases, parties may negotiate different levels of rights and responsibilities based on factors such as bargaining power, expertise, resources, or specific needs and interests.
Ultimately, the key is to ensure that agreements are entered into voluntarily and that the rights and obligations of all parties are clearly defined, understood, and respected. Fairness and transparency are essential elements in creating agreements that uphold the principles of equality and mutual benefit.
De facto, principles of equality are slightly different for franchise contracts. This is because the results of the contract cannot be achieved without the strict supervision and advice of the franchise license holder. Asymmetry is a distinguishing characteristic of franchise contracts against other types of contracts. Limitations and control from the franchisor are necessary for the proper protection of intellectual property rights and the operation procedure of the entire system. Asymmetric contracts differ from the competing categories of adhesion, exploitative, and other contract categories14.
Should franchise agreements be inherently asymmetric? Does this conflict with the right of the parties to the contract to be equal? The question arises as to whether the law of contracts or the agreement of the parties gives special rights to one party, or whether the law of competition and intellectual property makes the contract unequal.
Also, the asymmetry of the contract means that the franchisor has the power to set high contract terms and conditions, control goods, and services, demand a profit share, manage training, advertising, and brand name, and strictly determine product ingredients. It is imperative to assess the asymmetry of dispute resolution forms, i.e., crosscountry franchise disputes, and the asymmetry of post-contractual restraints of competition, i.e., regulations prohibiting former franchisees from engaging in the same type of activity. In the context of franchise contracts, several legal theories and principles come into play. These theories aim to address the unique dynamics of the franchisor-franchisee relationship, ensuring fairness, equity, and adherence to legal standards.
14 Tajti, T., Franchise, and Contract Asymmetry: A Common Trans-Atlantic Agenda. Loyola of Los Angeles International and Comparative Law Review, 2015, Volume 37, p. 252.
3.2. Game theory
A franchise runs according to Nash's Equilibrium theory. Every player can achieve the desired outcome by not deviating from their initial strategy and the market can be shared. For this purpose, the franchisor provides an amount of assistance to the franchisee in starting and managing the business activities.
For franchisees who have received a license, it is clear that they play by the rules of the franchisor and cannot change the business format on their initiative, update the brand, trademark, know-how, or marketing plan only according to a pre-developed platform. It starts with the principle of maintaining the basic business strategy and not changing the market experience15. A franchise agreement does not mean that one party agrees to the strict terms of the other party, but respects the business format and experience or reputation that provides a real opportunity for profitability.
On condition the theorem of Coase is that negotiation is costless and there are no wealth effects, the outcome of contracting is property rights and determined solely by efficiency16. It requires that the property rights should be defined by its source and ownership who has the right to transfer. For instance, without a license, there is no franchisor, and a patent certificate is not money but it can be turned into a tool for a franchise contract or investment.
The basic premise of Coase's theory is that it is justified if the benefits outweigh the difficulties. For instance, while taking steps to limit competition through franchise agreements may seem risky to the market, the positives outweigh them.
The formulation and principles of the above theorem, as the economic fundament of the franchise model, demonstrate that intangibles can be capitalized and profit comes from them despite vertical restraints or issues of competition imbalance. Consequently, the franchise agreement is about the legal transfer of property rights, the introduction of intellectual capital into the market, and its legal protection. On the other hand, a franchisee is not just a lessee of know-how and trademarks, but a payer party of the business model. Training and supply logistics provided by
15 Nash, J., Non-Cooperative Games, 1950, p. 14.
16 Coase, R., Problem of Social Cost, The Journal of Law and Economics, 1960, Volume 3, p. 10; Bertrand, E., The three roles of the Coase theorem in Coase's works, 2019. https://hal.science/hal-02409115/document
the franchisor, and profit planning, are all together elements from intellectual property (Bertrand, 2019).
Moreover, agency theory focuses on the relationship between principals and agents. In the franchise market, the party's relationship is a principal-agent dynamic. The challenge is to align the interests of both parties and mitigate the agency problems that may arise, such as the potential for shirking or moral hazard (Ross, 1973). Besides, institutional theory examines how organizations conform to and are influenced by societal norms, rules, and values. In the franchise market, institutional factors such as legal frameworks, regulatory environments, and cultural expectations can shape the behavior of franchisors and franchisees. Compliance with these institutional norms is essential for success in the franchise industry (Meyer and Rowan, 1970).
Theories related to market entry and expansion strategies, such as the Uppsala Model and the Born Global Theory, are applied to understand how franchises enter new markets. Franchisors often choose between different entry modes and expansion strategies based on factors like market knowledge, risk tolerance, and resource availability (Johanson and Vahlne, 1977).
Transaction cost economics explores how firms make decisions about whether to produce goods or services internally or to transact in the market. In the context of franchising, it can explain why some businesses choose to franchise rather than maintain centralized ownership. Franchising can be seen as a way to reduce transaction costs related to monitoring and coordinating operations (Oliver Williamson, 1981). Furthermore, the resource-based view suggests that a firm's competitive advantage is determined by its unique and valuable resources. In the franchise market, successful franchisors often possess intangible assets such as brand reputation, standardized business processes, and support systems. This view helps to understand why certain franchises thrive based on the resources they bring to the table (Wernerfelt, 1984).
Also, network theory explores the relationships and interactions between entities within a network. In the franchise market, this theory can be applied to understand the connections between franchisors, franchisees, suppliers, and customers. Network relationships can impact the flow of information, resources, and support within the franchise system (Johanson & Mattsson 1988).
4. International Franchise Regulations
4.1. International Norms
International franchise regulations are governed by generally accepted principles of transnational trade unless expressly provided for in the laws of that country. Global arrangements are aimed at not favoring or disadvantaging both the franchisor and the franchisee in different countries. In other words, in case of a dispute, or in case of a dispute with a regulatory nature that is not specified in the law of that country, it is decided by international regulatory procedure, avoiding the peculiarities of the laws of any country. For example, the principles of International Commercial Contracts Unidroit Principles can be mentioned. UNIDROIT is an intergovernmental organization that aims to unify international law (Private law) by issuing unified rules, international conventions, model laws, and guidelines. There are recommendations and directions (guide) that reflect the regulation of the Master Franchise Agreement issued by UNIDROIT in 2007 and other agreements related to it.
The Master Franchise Agreement has provisions of consent, agreement, and the right to use the licensed assets, trademarks, copyrights, insurance policy, the direct relationship of the contract or the term of the contract, financial relationship or revenue schedule, the source of supply, the source of income of the franchise transferor and subfranchise. For instance, the transferor's source of income, payment, obligation to provide information, training, manuals, materials, assistance, use of advertising materials and other services, and trial period are regulated respectively.
International franchise agreements are governed by each country's specific laws, regulations, and rules. For example, in the Global Franchise Regulation report issued in 2019, the European Union in 2018 The European General Data Protection Regulation, Trade secrets and EU Vertical Block Exemption acts, Australia in 2017 Fair Business and Consumer Law, France in 2016 Labor Law, Germany Franchise Act the law on writing, New Zealand Department of Economic Development, Science and Innovation Rejects Proposal to Exempt Franchises from Cartel Legislation, Korea has highlighted the Law on Franchise.
Countries that do not have specific laws governing franchising regulate the franchisor's rights and obligations under Civil Law, Commercial Law, Intellectual Property Law, Consumer Protection Law, Commercial Law, and Competition
Law. Compared to other popular contract law topics, the international franchise industry is relatively uncodified, but it is growing rapidly in a way of modeling.
In 2000, the International Chamber of Commerce developed the Model international franchising contract, which became an important document defining the rights and obligations of franchisors and franchisees, legal and competition questions, and customer protection at the international level.
Subsequently, with the adoption of the Model Franchise Disclosure Law in 2002, the parties were able to determine the scope of information to be disclosed before signing the contract. In addition to the direct use of contracting parties doing business at the international level, these documents continue to be a source for updating the laws of countries.
The scope of laws governing franchise relations is defined by international trade, investment, contract, intellectual property, license, competition, corporate, tax, labor, and data legal documents, which makes it difficult to regulate with one law. Therefore, UNIDROIT issued a Guide to international master franchise arrangements in 2007 and WIPO published Managing Intellectual Property Issues in Franchising in 2019.
4.2. Model Franchise Disclosure Law
Model franchise disclosure law applies to franchises to be granted or renewed for the operation of one or more franchised businesses within the country. if there is a willingness to convert the existing franchise regulations in civil or other laws into an individual law in line with common international standards it can be inspired by model law. Includes it:
For delivery of the Disclosure Document, a franchisor must give every prospective franchisee a disclosure document, to which the proposed franchise agreement must be attached, at least fourteen days before the signing by the prospective franchisee. The disclosure document must be updated within fixed days of the end of the franchisor's fiscal year. Information to be disclosed in the disclosure document contains broad reports or types of documents and, the prospective franchisee shall at the request of the franchisor acknowledge in writing the receipt of the disclosure document17.
17 Model Franchise Disclosure Law, 2002, Article 3, in https:/ /www.unidroit.org/instruments/franchising/ model-law/
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If the disclosure document or notice of material change has not been delivered within the period, contains a misrepresentation of a material fact, or makes an omission of a material fact then the franchisee may on 30 days' prior written notice to the franchisor terminate the agreement. Therefore, the Model Law ensures that the prospective franchisees who intend to invest in franchising receive material information about franchise offerings, thus permitting them to make an informed investment decision.
Model law emphasizes that state legislators who consider the Model Law when drafting franchise legislation should however consider that some disclosure requirements may discourage foreign investors from expanding into their market. Therefore, legislators should weigh the interests of both the franchisor and the franchisee when considering whether to adopt any specific disclosure requirement. Model laws are more flexible than international conventions. In this case, the intention is from the beginning to permit States to make the changes they consider to be necessary to cater to the specific needs of the country. A further advantage is that it is possible to include in a model law several provisions that the experts preparing the law deem to constitute the most appropriate solution to a specific problem.
By the Model law, there is the definition that in master franchising the franchisor grants the sub-franchisor the right not only to operate franchise outlets itself but also to grant subfranchises to sub-franchisees in the territory the franchisor has granted it the right to develop. The sub-franchisor therefore to all intents and purposes acts as a franchisor in that territory.
4.3. Guide to International Master Franchise Arrangements
The guide gave a basic and crucial definition of franchise. For instance, according to the term of the guide, franchising is often divided into industrial, distribution, and service franchises. The form of franchising known as business format franchising is increasingly coming to symbolize franchising as a whole. In business format franchising a franchisor has elaborated and tested a specific business procedure, be it for the distribution of goods or the supplying of services, which it then proceeds to grant franchisees the right to use. Regarding master franchise agreements the franchisor grants another person, the sub-franchisor, the right, which in most cases will be exclusive, to grant franchises to sub-franchisees within a certain territory and/or to open franchise outlets itself.
The guide provides an overview of the general terms and elements of franchise agreements, classifications, international regulatory compliance, market impacts, risk assessment, settlement, financial management, intellectual property, franchise principles, system organization, subfranchise, products and services, supply, marketing planning, compensation, insurance, and examples of contract documents were included in the guide18.
As defined legal barriers of franchising by the Guide: The legal environment in the host country is of considerable importance in determining which vehicle is the most appropriate. For franchising to function there must be in place a general legislation on commercial contracts, an adequate company law, intellectual property legislation, and an effective enforcement of the rights guaranteed by this legislation. If the existence of certain legislation is a pre-condition for the effective functioning of franchising, other legal factors may determine whether or not franchising is appropriate. It includes:
Several different legal systems are normally grouped under the term "civil law legal systems". These are the descendants of Roman law, such as the French, Italian, and Spanish legal systems, and the legal systems that have drawn inspiration from them, for example, Latin American and several North African legal systems; the Germanic systems that are derived from German law (Germany, Austria, Switzerland) and the legal systems inspired by them, such as the Japanese and the Eastern European systems, and also the Scandinavian legal systems which, however, constitute a separate grouping.
Except for the Scandinavian legal systems, a characteristic of the legal systems of the civil law tradition is the systematic codification of different areas of law (civil law, commercial law, or criminal law). The result is a body of law that is organized systematically and which often contains a detailed regulation of several subject matters that in other legal systems are left to the determination of the parties. A number of these provisions are mandatory and may therefore not be derogated from, whereas others are non-mandatory, with the result that their subject matter may be determined and regulated by the parties.
As a large number of issues are regulated by the legislative instruments, there is less need for
18 Zeidman, F., The UNIDROIT Guide to International Master Franchise Arrangements: An Introduction and a Perspective, 1998, p. 748. https://www.unidroit.org/ english/publications/review/articles/1998-4-zeidman-e.pdf
the contracts to enter into great detail except where the parties feel that a certain amount of detail is necessary or desirable. This may be of considerable importance as courts will in some jurisdictions have the power to interpret contracts and to modify the terms of the agreement if they are considered to be unfair. Furthermore, if an item that is dealt with in the non-mandatory provisions of the codes is not provided for more specifically in the contract, the provisions of the codes will apply. The mandatory provisions of the codes will always apply no matter what is laid down in the contract.
The Common Law Legal Systems What first strikes a lawyer educated in the civil law tradition when confronted with a contract from a common law jurisdiction is its length. The great detail with which provisions are drafted is unheard of in civil law jurisdictions. The reason for this great detail is to be found in the strict adherence of courts to the word of the statutes. This has created a need for contracts to be extremely detailed to cover every possible contingency19.
As emphasized in the Guide, a franchise system that is expanding abroad will in most cases need to be modified before it enters the foreign market, as it will be necessary for it to adapt to the local conditions of the prospective host country. The franchise agreement and the ancillary documents will consequently also need to be adapted by the franchisor to cover the local requirements of the prospective host country.
5. From Contractual Law to Commercial Law Approach
The requirement of transparency for the contracting parties means setting up separate or specific franchise legislation, while another goal is to develop franchise rules from a commercial legal perspective. In the long run, Franchise law may have to tendency contain commercial law typology.
Commercial law differs from civil law in that it is the law governing enterprises and business communications in private law. Thus, law changes more frequently than "code civil" because it creates innovative and smart systems to improve the competitiveness of enterprises and businesses in many countries.
Although not a few countries have separate franchise laws, most countries regulate franchise relationships piecemeal due to the difficulty of regulating the relationship in a unified manner. In particular, there is a need to enrich and clarify
19 Guide To International Master Franchise Arrangements, UNIDROIT, 2019, p. 211.
the norms that comprehensively coordinate business relations between traders, i.e., B2B and B2C communication. The Civil Code mainly regulates B2C, C2B, or C2C relationships between entrepreneurs and consumers. However, the principles of protecting B2B business goals between for-profit entrepreneurs, freedom of contract parties, easy, quick, and cost-effective negotiation, trust protection, and accountability are not sufficiently implemented.
In regards to legal entities, registration number, the direction of activity, registered capital, personal information of the managing the franchisor's company, financial report, professional experience, and distribution network information, regulations related to the general and local introduction of the market and the perspective of market development should also be regulated by way of commercial rules. Nevertheless, additional issues outside of the main franchise agreement, such as product packaging, employees' clothing, and the interior of service premises, can be resolved by agreement between the parties rather than being strictly regulated by laws.
The final question is jurisdictional matters of international franchising. The issue of parallel proceedings and their negative consequences is based on the idea that two courts cannot decide the same case and therefore one of them should refuse. The appropriate theoretical grounds for refusing overlapped proceedings are expressed by the concepts of "forum non-conveniens" and "lis alibi pendens".
Forum "non-conveniens" means an inappropriate forum and is commonly used in common law countries. The main content is not to solve the same case in two courts at the same time but to determine the appropriate court. However, "Lis alibi pendens" is a regulation widely used in countries with a continental legal system. If a case is filed in two different courts at the same time, the court that filed the case first has jurisdiction. It is an arrangement based on the idea that the courts of a country have exclusive jurisdiction, and if there is exclusive jurisdiction, that court will review it.
6. Conclusion
Nowadays, the franchise is a question of international law, while being an innovative business structure rapidly expanding in interstate economic sectors. The relationship between contract law and franchise is integral, as franchise agreements form the legal framework governing the relationship between the franchisor and the
franchisee. Contract law principles are crucial in establishing, interpreting, and enforcing the terms and conditions of franchise agreements.
Compared to traditional contractual arrangements, franchises are sensitive to accepting sole legal form and the agreement players are mainly interested in following private transnational rules and forum selection, rather than just one country's regulations and jurisdiction.
Under economic integration, the franchise framework changed from a licensing system to a special type of agreement in contract law and thus became an issue of commercial law. The former understanding of franchises was to regulate competition and support private investment by concluding concession agreements among the state and enterprises, however, over time, franchising contemporary models of Business-to-Business B2B and Business-to-Customer B2C concepts emerged.
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Информация об авторе Намсрай Баттулга — аспирант юридического факультета Печского университета (Венгрия).
Information about the author Namsray Battulga — Ph.D. Candidate at the Faculty of Law, University of Рйсб, Hungary.
Статья поступила в редакцию 10.04.2024; одобрена после рецензирования 15.05.2024; принята к публикации 10.06.2024.
The article was submitted 10.04.2024; approved after reviewing 15.05.2024; accepted for publication 10.06.2024.
