PREAMBLE
The International Institute for the Unification of
Private Law (UNIDROIT),
Recognising that franchising is playing an ever
greater role in a wide range of national economies,
Being mindful of the fact that in the legislative
process, State legislators may wish to consider a number of different elements,
including
" whether it is clear that there is a problem,
what its nature is, and
what action, if any, is necessary;
" whether prospective investors are more likely
to protect themselves against fraud if they have access to truthful, important
information in advance of their assent to any franchise agreement;
" whether the nation's economic and social
interests are best served by legally requiring a balance of information between
the parties to a franchise agreement;
" whether there is a pattern of abusive conduct,
or whether this conduct is isolated or limited to particular industries;
" the nature of the evidence of abuse;
" whether existing laws address the concerns and
whether they are adequately applied;
" whether an effective system of self-regulation
exists;
" the financial burden the new legislation will
place upon franchisors and investors as compared to the benefits of legally
required disclosure;
" whether the proposed legislation inhibits or
facilitates entry to franchisors, and its effect on job-creation and
investment;
" the views of interested organisations,
including national franchise associations;
Recalling that State legislators may want to adapt
suggested provisions, especially with regard to the enumerated disclosure
items,
in response to specific circumstances of, or
established methods of legislation in, each State;
Recalling that the text of the Model Law is
accompanied by an Explanatory Report which, with a view to assisting
legislators,
explains the purpose of the provisions;
nding that experiences with disclosure legislation has
on the whole been positive;
is pleased to place the Model Franchise Disclosure Law
and the Explanatory Report thereto presented in this document and prepared by a
Committee of Governmental Experts convened by UNIDROIT at the disposal of the
international community as an example that is not compulsory for States
legislators and as an instrument intended to be a recommendation for States
that have decided to adopt franchise specific legislation.
MODEL FRANCHISE DISCLOSURE LAW
ARTICLE 1
(SCOPE OF APPLICATION)
(1) This law applies to franchises to be
granted or renewed for the operation of one or more franchised businesses
within the {State adopting this law}.
(2) Except as otherwise expressly
provided in this law it is not concerned with the validity of the franchise
agreement or any of its provisions.
ARTICLE 2
(DEFINITIONS)
(DEFINITIONS)
For the purposes of this law:
affiliate of the franchisee means a natural or legal
person who directly or indirectly controls or is controlled by the franchisee,
or is controlled by another party who controls the franchisee;
affiliate of the franchisor means a natural or legal
person who directly or indirectly controls or is controlled by the franchisor,
or is controlled by another party who controls the franchisor;
development agreement means an agreement under which a
franchisor in exchange for direct or indirect financial compensation grants to
another party the right to acquire more than one franchise of the same
franchise system;
disclosure document means a document containing the
information required under this law;
franchise means the rights granted by a party (the
franchisor) authorising and requiring another party (the franchisee), in
exchange for direct or indirect financial compensation, to engage in the
business of selling goods or services on its own behalf under a system
designated by the franchisor which includes know-how and assistance, prescribes
in substantial part the manner in which the franchised business is to be
operated, includes significant and continuing operational control by the
franchisor, and is substantially associated with a trademark, service mark,
trade name or logotype designated by the franchisor. It includes:
(A) the rights granted by a franchisor to a
sub-franchisor under a master franchise agreement;
(B) the rights granted by a sub-franchisor to a
sub-franchisee under a sub-franchise agreement;
(C) the rights granted by a franchisor to a party
under a development agreement.
For the purposes of this definition "direct or
indirect financial compensation" shall not include the payment of a bona
fide wholesale price for goods intended for resale;
franchise agreement means the agreement under which a
franchise is granted;
franchised business means the business conducted by
the franchisee under a franchise agreement;
franchisee includes a sub-franchisee in its
relationship with the subfranchisor and the sub-franchisor in its relationship
with the franchisor;
franchisor includes the sub-franchisor in its
relationship with its subfranchisees;
master franchise means the right granted by a
franchisor to another party (the sub-franchisor) to grant franchises to third
parties (the subfranchisees);
material change in the information required to be
disclosed means a change which can reasonably be expected to have a significant
effect on the prospective franchisee's decision to acquire the franchise;
material fact means any information that can
reasonably be expected to have a significant effect on the prospective
franchisee's decision to acquire the franchise;
misrepresentation means a statement of fact that the
person making the statement knew or ought to have known to be untrue at the
time the statement was made;
omission means the failure to state a fact of which
the person making the statement was aware at the time the statement ought to
have been made;
State includes the territorial units making up a State
which has two or more territorial units, whether or not possessing different
systems of law applicable in relation to the matters dealt with in this law;
and
sub-franchise agreement means a franchise agreement
concluded by a sub-franchisor and a sub-franchisee pursuant to a master
franchise.
ARTICLE 3
(DELIVERY OF DISCLOSURE DOCUMENT)
(1) 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 earlier of (A) the signing
by the prospective franchisee of any agreement relating to the franchise, with
the exception of agreements relating to confidentiality of information
delivered or to be delivered by the franchisor; or
(B) the payment to the franchisor or an affiliate of
the franchisor by the prospective franchisee of any fees relating to the
acquisition of a franchise that are not refundable or the refunding of which is
subject to such conditions as to render them not refundable, with the exception
of a security (bond or deposit) given on the conclusion of a confidentiality
agreement.
(2) The disclosure document must be updated within {X}
days of the end of the franchisor's fiscal year. Where there has been a
material change in the information required to be disclosed under Article 6,
notice in writing of such change should be delivered to the prospective
franchisee as soon as practicable before either of the events described in
Sub-Paragraphs (1)(A) or (1)(B) has occurred.
ARTICLE 4
(FORMAT OF DISCLOSURE DOCUMENT)
(1) Disclosure must be provided in writing.
(2) The franchisor may use any format for the
disclosure document, provided that the information contained therein is
presented as a single document at one time and meets the requirements imposed
by this law.
ARTICLE 5
(EXEMPTIONS FROM OBLIGATION TO DISCLOSE)
No disclosure document is required:
(A) in case of the grant of a franchise to a person
who has been an officer or director of the franchisor or of an affiliate of the
franchisor for at least one year immediately before the signing of the
franchise agreement;
(B) in case of the assignment or other transfer of a
franchisee's rights and obligations under an existing franchise agreement,
where the assignee or transferee is bound by substantially the same terms as
the assignor or transferor, and the franchisor has not had a significant role
in the transaction other than approval of the transfer.
(C) in case of the grant of a franchise to sell goods
or services to a natural or legal person who has been engaged in the same or a
similar business for the previous two years, if the sales of the franchise, as
reasonably anticipated by the parties at the time the franchise agreement is
entered into, will not during the first year of the relationship exceed 20% of
the total aggregate sales of the combined business of the franchisee and its
affiliates;
(D) in case of the grant of a franchise pursuant to
which the prospective franchisee commits to a total financial requirement under
the franchise agreement in excess of {X};
(E) in case of the grant of a franchise to a
prospective franchisee who together with its affiliates has a net worth in
excess of {Y} or turnover in excess of {Z}; or
(F) in case of the renewal or extension of a franchise
on the same conditions.
ARTICLE 6
(INFORMATION TO BE DISCLOSED)
(1) In the disclosure document the franchisor shall
provide the following information:
(A) the legal name, legal form and legal address of
the franchisor and the address of the principal place of business of the
franchisor;
(B) the trademark, trade name, business name or
similar name, under which the franchisor carries on or intends to carry on business
in the State in which the prospective franchisee will operate the franchise
business;
(C) the address of the franchisor's principal place of
business in the State where the prospective franchisee is located;
(D) a description of the franchise to be operated by
the prospective franchisee;
(E) a description of the business experience of the
franchisor and its affiliates granting franchises under substantially the same
trade name, including:
(i) the length of time during which each
has run a business of the type to be operated by the prospective franchisee;
and
(ii) the length of time during which each
has granted franchises for the same type of business as that to be operated by
the prospective franchisee;
(F) the names, business addresses, positions held, and
business experience of any person who has senior management responsibilities
for the franchisor's business operations in relation to the franchise;
(G) any criminal convictions or any finding of
liability in a civil action or arbitration involving franchises or other
businesses relating to fraud, misrepresentation, or similar acts or practices
of:
(i) the franchisor; and
(ii) any affiliate of the franchisor who
is engaged in franchising for the previous five years, and whether any such
action is pending against the franchisor or its subsidiary, and the court or
other citation of any of the above;
(H) any bankruptcy, insolvency or comparable
proceeding involving the franchisor and its affiliate(s) for the previous five
years and the court citation thereof;
(I) the total number of franchisees and company-owned
outlets of the franchisor and of affiliates of the franchisor granting
franchises under substantially the same trade name;
(J) the names, business addresses and business phone
numbers of the franchisees, and of the franchisees of any affiliates of the
franchisor which are granting franchises under substantially the same trade
name whose outlets are located nearest to the proposed outlet of the
prospective franchisee, but in any event of not more than {X} franchisees, in
the State of the franchisee and/or contiguous States, or, if there are no
contiguous States, the State of the franchisor;
(K) information about the franchisees of the
franchisor and about franchisees of affiliates of the franchisor that grant
franchises under substantially the same trade name that have ceased to be
franchisees during the three fiscal years before the one during which the
franchise agreement is entered into, with an indication of the reasons for
which the franchisees have ceased to be franchisees of the franchisor;
(L) the following information regarding the
franchisor's intellectual property to be licensed to the franchisee, in
particular trademarks, patents, copyright and software:
(i) the registration and/or the
application for registration, if any,
(ii) the name of the owner of the
intellectual property rights and/or the name of the applicant, if any;
(iii) the date on which the registration
of the intellectual property rights licensed expires; and (iv) litigation or
other legal proceedings, if any, which could have a material effect on the
franchisee's legal right, exclusive or nonexclusive, to use the intellectual
property under the franchise agreement in the State in which the franchised
business is to be operated;
(M) information on the categories of goods and/or
services that the franchisee is required to purchase or lease, indicating
(i) whether any of these have to be
purchased or leased from the franchisor, affiliates of the franchisor or from a
supplier designated by the franchisor;
(ii) whether the franchisee has the right
to recommend other suppliers for approval by the franchisor; and (iii) whether
any revenue or other benefit that may be directly or indirectly received by the
franchisor or any of the affiliates of the franchisor from any supplier of
goods and/or services to the franchisee, such as rebates, bonuses, or
incentives with regard to
those goods and/or services, shall be passed on to the
prospective franchisee or, if not, whether a price mark-up will be made by the
franchisor or the supplier recommended by the franchisor;
(N) financial matters, including:
(i) (a) an estimate of the prospective
franchisee's total initial investment;
(b) financing offered or
arranged by the franchisor, if any;
(c) the financial
statements of the franchisor and when available audited or otherwise
independently verified financial
statements, including balance sheets and statements of
profit and loss, for the previous three years. Franchisors, the creation
of which goes back less than three years, are under an
obligation to disclose the same documents prepared since they began their
activity;
(ii) (a) If information is provided to
the prospective franchisee by or on behalf of the franchisor concerning the
historical or projected financial performance of outlets owned by the
franchisor, its affiliates or franchisees, the information must:
(aa) have a
reasonable basis at the time it is made;
(bb) include the
material assumptions underlying its preparation and presentation;
(cc) state whether
it is based on actual results of existing outlets;
(dd) state whether
it is based on franchisor-owned and/or franchisee-owned outlets; and
(ee) indicate the
percentage of those outlets that meet or exceed each range or result.
(b) If the financial
information referred to in the preceding subparagraph is provided, the
franchisor must state that the levels of performance of the prospective
franchisee's outlet may differ from those contained in the information provided
by the franchisor.
(O) a description of:
(i) the state of the general market of
the products or services that are the subject of the contract;
(ii) the state of the local market of the
products or services that are the subject of the contract;
(iii) the prospects for development of
the market; and
(P) anything else necessary to prevent any statement
in the document from being misleading to a reasonable prospective franchisee.
(2) The following
information shall also be included in the disclosure document. However, where
the information is contained in the franchise agreement, the franchisor may in
the disclosure document merely make reference to the relevant section of the
franchise agreement. Where the following items of information are not included
in the proposed franchise agreement, that fact shall be stated in the
disclosure document :
(A) the term and conditions of renewal of the
franchise, if any;
(B) a description of the initial and on-going training
programmes;
(C) the extent of exclusive rights to be granted, if
any, including exclusive rights relating to territory and/or to customers and
also information on any reservation by the franchisor of the right (i) to use,
or to license the use of, the trademarks covered by the franchise agreement;
(ii) to sell or distribute the goods
and/or services authorised for sale by the franchisee directly or indirectly
through the same or any other channel of distribution, whether under the
trademarks covered by the agreement or any other trademark;
(D) the conditions under which the franchise agreement
may be terminated by the franchisor and the effects of such termination;
(E) the conditions under which the franchise agreement
may be terminated by the franchisee and the effects of such termination;
(F) the limitations imposed on the franchisee, if any,
in relation to territory and/or to customers;
(G) in-term and post-term non-compete covenants;
(H) the initial franchise fee, whether any portion of
the fee is refundable, and the terms and conditions under which a refund will
be granted;
(I) other fees and payments, including any gross-up of
royalties imposed by the franchisor in order to offset withholding tax;
(J) restrictions or conditions imposed on the
franchisee in relation to the goods and/or services that the franchisee may
sell;
(K) the conditions for the assignment or other
transfer of the franchise; and
(L) any forum selection or choice of law provisions,
and any selected dispute resolution processes.
(3) Where the
franchise is a master franchise, the sub-franchisor must, in addition to the
items specified in paragraphs (1) and (2), disclose to the prospective sub-franchisee
the information on the franchisor that it has received under paragraphs (1)(A),
(E), (H), and (2)(C) and (F) of this article, as well as inform the prospective
sub-franchisee of the situation of the sub-franchise agreements in case of termination
of the master franchise agreement and of the content of the master franchise
agreement.
ARTICLE 7
(ACKNOWLEDGEMENT OF RECEIPT OF DISCLOSURE DOCUMENT)
The prospective franchisee shall at the request of the
franchisor acknowledge in writing the receipt of the disclosure document.
ARTICLE 8
(REMEDIES)
(REMEDIES)
(1) If the disclosure document or notice of material
change:
(A) has not been delivered within the period of time
established in Article 3;
(B) contains a misrepresentation of a material fact;
or
(C) makes an omission of a material fact; then the
franchisee may on 30 days prior written notice to the franchisor terminate the
franchise agreement and/or claim against the franchisor for damages suffered
from the conduct described in (A),
(B) and (C), unless the franchisee had the information
required to be disclosed through other means, did not rely on the
misrepresentation, or termination is a disproportionate remedy in the
circumstances.
(2) The remedies granted to the franchisee pursuant to
this article must be exercised no later than the earlier of:
(A) one year after the act or omission constituting
the breach upon which the right to terminate is based;
(B) three years after the act or omission constituting
the breach upon which the right to claim for damages suffered is based;
(C) one year after the franchisee becomes aware of
facts or circumstances reasonably indicating that it may have a right to claim
for damages suffered; or
(D) within 90 days of the delivery to the franchisee
of a written notice providing details of the breach accompanied by the
franchisor's then current disclosure document.
(3) The rights provided by paragraph (1) of this
Article do not derogate from any other right the franchisee may have under the
applicable law.
(4) All matters regarding termination and damages,
which have not been expressly regulated in this article, shall be governed by
the applicable law.
ARTICLE 9
(TEMPORAL SCOPE OF APPLICATION)
(TEMPORAL SCOPE OF APPLICATION)
This law applies whenever a franchise agreement is
entered into or renewed after the law enters into force.
ARTICLE 10
(WAIVERS)
Any waiver by a franchisee of a right given by this
law is void.
