An Uncivil Code in the EU?

In the wake of the tidal wave of franchise regulation that has hit Europe, in France, Spain, Italy, Belgium, Lithuania and Estonia, there is another tidal swell rapidly approaching. Over the last 3 years, a privately financed group of European academics, working under the title, “The Study Group on a European Civil Code,” have been developing a model European Civil Code. One of the Study Group's subgroups (the “Amsterdam Team”) has drafted a chapter on Commercial Agency, Franchise and Distribution Contracts, the latest draft of which is dated January 2005.

The need for the commercial law in the EU to be harmonized has been recognized for some time by a number of organizations, not least of all the Study Group. The Study Group is a network of academics, from across the EU, conducting comparative law research in private law in the various legal jurisdictions of the member states.

The aim of The Study Group is “to produce a set of codified principles for the core areas of European private law (patrimonial law)… the principles [of] which … will represent more than a mere restatement of the existing law in the various EU jurisdictions from the standpoint of the predominant trends among the diverse legal regimes … [and] … seek to formulate principles which constitute the most suitable private law rules for Europe-wide application.”

The principles which the Study Group intends to present will take the form of “a draft codification for the jurisdictions of the European Union, complete with comments and illustrations explaining the provisions and how they apply and notes setting out their foundation in, derivation from or deviation from the existing laws.”

The Study Group boldly states that it desires to make a contribution to political debate by producing a possible legislative text. “The political case for a pan-European codification of patrimonial law or lesser measures (which might represent intermediate steps) is best tested against the background of an actual draft text which might form the basis for legislation,” the group has stated. It describes itself as being composed of experts who work “with the benefit of and from the standpoint of current legal science.”

The day-to-day work of The Study Group is undertaken by a number of working teams concentrating on different areas of law. The Amsterdam Team focuses on Commercial Agency, Franchise and Distribution Law.

Political Influence of the Study Group

The Study Group's work took a political turn when, in 1989 and again in 1994, the European Parliament summoned the legal academic community to bring its expertise to bear in the creation of a European Code of Private Law. Against the background of these two Parliamentary resolutions, the Dutch Ministry of Justice organized a conference in The Hague in 1997 under the banner “Towards a Civil Code,” at which the idea of a proposal created in a vacuum by legal technocrats, free from the constraints of representing national interests and accommodating political expediency, gained support. In 1999, the European Council met in Tampere, Finland, and agreed that the establishment of a Common Frame of Reference (“CFR”) was desirable and agreed to fund research into the need for a European Civil Code, to be funded by the Parliament's Directorate-General for Research. Following that report, a hearing took place before the Parliament's Committee on Legal Affairs and the Internal Market in November 2000, which favorably received the Study Group's report and commenced an initiative to create a CFR. This has involved seeking input from all those interested in the subject, which in turn confirmed that there were indeed problems.

In April 2004, a joint European Parliament and Commission conference was held at which Robert Madelin, director general, DG Health and Consumer Protection, European Commission, recalled that at Lisbon the EU had “set itself the goal of making its economy the most competitive and dynamic knowledge-based economy in the world” and that “in order to achieve this, [it] need[s] to create an economic environment underpinned by legal certainty and security … [and] to address the obstacles which prevent businesses and consumers from making the most of the internal market.”

Madelin described the CFR as “a kind of European contract law toolkit” which would draw together in one place best solutions based on the common principles underpinning national contract laws. The “tools” could be used as required to fix a particular problem. He stated that “the beauty is that the tools will be designed to work together and can be used again next time a similar problem arises.” The meeting supported the need for CFRs, and the Commission committed itself to an open and consultative approach to contract law.

On Dec. 15, 2004, the first conference of the network of stakeholder experts on the Common Frame of Reference, known as CFR-net, took place in Brussels. The network brings together business, professional and consumer interests (industry, trade, services, financial services, legal practitioners, judges, notaries, arbitrators, consumer organizations), and its members to contribute feedback based on their practical experience in the preparation of the CFR. Three or four CFR-net meetings are planned each year to drive the initiative forward.

Current Draft's Impact on Franchising

The current draft's section about franchising deals with a number of issues that affect not only franchising but also commercial agency and distribution and, indeed, most other types of long-term agreements. Why these three types of contract have been carved out of the general category of long-term contracts is not clear, particularly when the rules for long-term contracts in general have not been established.

For commercial agency, distribution, and franchise contracts, the CFR proposes an indemnity for goodwill for each party whose business volume has been increased by the other party ' even when the contract was terminated for non-performance of one party. Also, the principal, supplier, and franchisor are obligated to repurchase the other party's stock at the end of the contract. Both of these obligations are (unlike the commercial agent's entitlement to an indemnity) optional. The CFR-net's lack of familiarity with the reality of franchising is clear from its apparent inability to differentiate between these three fundamentally different, although superficially similar, forms of business.

In addition, the draft chapter details a full set of rules for franchising that go far beyond pre-contractual disclosure.

It defines franchising as “contracts whereby one party (the franchisor) grants the other party (the franchisee), in exchange for remuneration, the right to conduct a business (franchise business) within the franchisor's network for the purposes of selling certain goods or services on the franchisee's behalf and in the franchisee's name, and whereby the franchisee has the right and the obligation to use the franchisor's trade name or trademark, the know-how and the business method.” This definition fails to capture the fundamental nature of a franchise. Unlike most or perhaps all definitions of franchising found in legislation around the world, there is no mention of either the franchisor's know-how nor the training and support that set franchising apart from mere distribution.

Pre-contractual disclosure of the following information is required. It states that the franchisee must be provided with adequate and timely information concerning:

• the franchisor's company and ex-perience;
• the relevant intellectual property rights;
• the characteristics of the relevant know-how;
• the commercial sector and the market conditions;
• the particular franchise method and its operation;
• the structure and extent of the franchise network;
• the fees, royalties or any other periodical payments; and
• the terms of the contract.

Even if failure to make full and proper disclosure does not lead to a fundamental misrepresentation, the franchisee is entitled to damages unless the franchisor had reason to believe that the information was adequate or it had been given in reasonable time.

The franchisor must grant the franchisee a right to use the intellectual property rights to the extent necessary to operate the franchise business and make reasonable efforts to ensure the undisturbed and continuous use of the intellectual property rights.

The draft provides that throughout the duration of the contract, the franchisor must provide the franchisee with the know-how that is necessary to operate the franchise business. However, surprisingly it does not oblige the franchisee to use that know-how. This is a substantial omission.

The chapter also provides that the franchisor must provide the franchisee with ongoing assistance insofar as it is necessary for the operation of the franchise business, without additional charge for the franchisee. Any further assistance reasonably requested by the franchisee must also be provided at a reasonable cost. If the franchisee is obliged or as a matter of practice required to purchase goods or services from the franchisor or a designated supplier, the franchisor must ensure that the goods or services ordered by the franchisee are supplied within a reasonable time, insofar as practicable and provided that the order is reasonable. The franchisor also must warn the franchisee, within a reasonable time, when it foresees or ought to foresee, that the franchisor's or designated supplier's ability to make the supplies will be significantly less than the franchisee had reason to expect.

During the term of the contract the franchisor is required to provide the franchisee with information concerning:

• market conditions;
• commercial results of the franchise network;
• characteristics of the goods and services;
• prices and terms for the sale of goods or services;
• any recommended prices and terms for the resale of goods or services;
• relevant communication between the franchisor and customers in the territory; and
• advertising campaigns.

The franchisor must make reasonable efforts to promote and maintain the reputation of the franchise network and must design and coordinate the appropriate advertising campaigns aiming at the promotion of the franchise network. All of this must be done without any additional charge.

The franchisee has a number of obligations imposed upon it, such as paying all monies due to the franchisor under the contract and informing the franchisor of any threat to its intellectual property rights. The franchisee must make reasonable efforts to operate the franchise business according to the business method of the franchisor, follow the franchisor's reasonable instructions in relation to the business method and the maintenance of the reputation of the network, and take reasonable care not to harm the franchise network. The franchisee also must allow the franchisor reasonable access to its premises so as to enable the franchisor to check that the franchisee is complying with the franchisor's business method and instructions and to audit the franchisee's accounting books.

So, it is possible that a group of well-intentioned academics with a clearly stated “big picture” aim of harmonizing civil law throughout the EU, backed by the European Commission, but with no practiced knowledge or experience of franchising whatsoever, could totally transform the regulation of franchising in Europe. It is still possible (although one cannot say yet how likely), that the so-called “toolbox” may become more than that and form the basis of European Directives or regulations that bind all EU member states.

The European Franchise Federation (“EFF”) clearly has to ensure that the voice of practical experience is heard in the CFR-net and The Study Group to ensure that any proposals are considered, measured and practical, and will further facilitate the successful growth of franchising in the EU. The challenge is that the members of the EFF do not seem to share a common view of whether or not franchising should be statutorily regulated, and if so, how.

The danger is that without the national franchise associations taking the lead in a harmonized manner, the swell of regulation may inundate European franchising and drown its potential to contribute to Europe's economy in as meaningful way as it otherwise might.

In the wake of the tidal wave of franchise regulation that has hit Europe, in France, Spain, Italy, Belgium, Lithuania and Estonia, there is another tidal swell rapidly approaching. Over the last 3 years, a privately financed group of European academics, working under the title, “The Study Group on a European Civil Code,” have been developing a model European Civil Code. One of the Study Group's subgroups (the “Amsterdam Team”) has drafted a chapter on Commercial Agency, Franchise and Distribution Contracts, the latest draft of which is dated January 2005.

The need for the commercial law in the EU to be harmonized has been recognized for some time by a number of organizations, not least of all the Study Group. The Study Group is a network of academics, from across the EU, conducting comparative law research in private law in the various legal jurisdictions of the member states.

The aim of The Study Group is “to produce a set of codified principles for the core areas of European private law (patrimonial law)… the principles [of] which … will represent more than a mere restatement of the existing law in the various EU jurisdictions from the standpoint of the predominant trends among the diverse legal regimes … [and] … seek to formulate principles which constitute the most suitable private law rules for Europe-wide application.”

The principles which the Study Group intends to present will take the form of “a draft codification for the jurisdictions of the European Union, complete with comments and illustrations explaining the provisions and how they apply and notes setting out their foundation in, derivation from or deviation from the existing laws.”

The Study Group boldly states that it desires to make a contribution to political debate by producing a possible legislative text. “The political case for a pan-European codification of patrimonial law or lesser measures (which might represent intermediate steps) is best tested against the background of an actual draft text which might form the basis for legislation,” the group has stated. It describes itself as being composed of experts who work “with the benefit of and from the standpoint of current legal science.”

The day-to-day work of The Study Group is undertaken by a number of working teams concentrating on different areas of law. The Amsterdam Team focuses on Commercial Agency, Franchise and Distribution Law.

Political Influence of the Study Group

The Study Group's work took a political turn when, in 1989 and again in 1994, the European Parliament summoned the legal academic community to bring its expertise to bear in the creation of a European Code of Private Law. Against the background of these two Parliamentary resolutions, the Dutch Ministry of Justice organized a conference in The Hague in 1997 under the banner “Towards a Civil Code,” at which the idea of a proposal created in a vacuum by legal technocrats, free from the constraints of representing national interests and accommodating political expediency, gained support. In 1999, the European Council met in Tampere, Finland, and agreed that the establishment of a Common Frame of Reference (“CFR”) was desirable and agreed to fund research into the need for a European Civil Code, to be funded by the Parliament's Directorate-General for Research. Following that report, a hearing took place before the Parliament's Committee on Legal Affairs and the Internal Market in November 2000, which favorably received the Study Group's report and commenced an initiative to create a CFR. This has involved seeking input from all those interested in the subject, which in turn confirmed that there were indeed problems.

In April 2004, a joint European Parliament and Commission conference was held at which Robert Madelin, director general, DG Health and Consumer Protection, European Commission, recalled that at Lisbon the EU had “set itself the goal of making its economy the most competitive and dynamic knowledge-based economy in the world” and that “in order to achieve this, [it] need[s] to create an economic environment underpinned by legal certainty and security … [and] to address the obstacles which prevent businesses and consumers from making the most of the internal market.”

Madelin described the CFR as “a kind of European contract law toolkit” which would draw together in one place best solutions based on the common principles underpinning national contract laws. The “tools” could be used as required to fix a particular problem. He stated that “the beauty is that the tools will be designed to work together and can be used again next time a similar problem arises.” The meeting supported the need for CFRs, and the Commission committed itself to an open and consultative approach to contract law.

On Dec. 15, 2004, the first conference of the network of stakeholder experts on the Common Frame of Reference, known as CFR-net, took place in Brussels. The network brings together business, professional and consumer interests (industry, trade, services, financial services, legal practitioners, judges, notaries, arbitrators, consumer organizations), and its members to contribute feedback based on their practical experience in the preparation of the CFR. Three or four CFR-net meetings are planned each year to drive the initiative forward.

Current Draft's Impact on Franchising

The current draft's section about franchising deals with a number of issues that affect not only franchising but also commercial agency and distribution and, indeed, most other types of long-term agreements. Why these three types of contract have been carved out of the general category of long-term contracts is not clear, particularly when the rules for long-term contracts in general have not been established.

For commercial agency, distribution, and franchise contracts, the CFR proposes an indemnity for goodwill for each party whose business volume has been increased by the other party ' even when the contract was terminated for non-performance of one party. Also, the principal, supplier, and franchisor are obligated to repurchase the other party's stock at the end of the contract. Both of these obligations are (unlike the commercial agent's entitlement to an indemnity) optional. The CFR-net's lack of familiarity with the reality of franchising is clear from its apparent inability to differentiate between these three fundamentally different, although superficially similar, forms of business.

In addition, the draft chapter details a full set of rules for franchising that go far beyond pre-contractual disclosure.

It defines franchising as “contracts whereby one party (the franchisor) grants the other party (the franchisee), in exchange for remuneration, the right to conduct a business (franchise business) within the franchisor's network for the purposes of selling certain goods or services on the franchisee's behalf and in the franchisee's name, and whereby the franchisee has the right and the obligation to use the franchisor's trade name or trademark, the know-how and the business method.” This definition fails to capture the fundamental nature of a franchise. Unlike most or perhaps all definitions of franchising found in legislation around the world, there is no mention of either the franchisor's know-how nor the training and support that set franchising apart from mere distribution.

Pre-contractual disclosure of the following information is required. It states that the franchisee must be provided with adequate and timely information concerning:

• the franchisor's company and ex-perience;
• the relevant intellectual property rights;
• the characteristics of the relevant know-how;
• the commercial sector and the market conditions;
• the particular franchise method and its operation;
• the structure and extent of the franchise network;
• the fees, royalties or any other periodical payments; and
• the terms of the contract.

Even if failure to make full and proper disclosure does not lead to a fundamental misrepresentation, the franchisee is entitled to damages unless the franchisor had reason to believe that the information was adequate or it had been given in reasonable time.

The franchisor must grant the franchisee a right to use the intellectual property rights to the extent necessary to operate the franchise business and make reasonable efforts to ensure the undisturbed and continuous use of the intellectual property rights.

The draft provides that throughout the duration of the contract, the franchisor must provide the franchisee with the know-how that is necessary to operate the franchise business. However, surprisingly it does not oblige the franchisee to use that know-how. This is a substantial omission.

The chapter also provides that the franchisor must provide the franchisee with ongoing assistance insofar as it is necessary for the operation of the franchise business, without additional charge for the franchisee. Any further assistance reasonably requested by the franchisee must also be provided at a reasonable cost. If the franchisee is obliged or as a matter of practice required to purchase goods or services from the franchisor or a designated supplier, the franchisor must ensure that the goods or services ordered by the franchisee are supplied within a reasonable time, insofar as practicable and provided that the order is reasonable. The franchisor also must warn the franchisee, within a reasonable time, when it foresees or ought to foresee, that the franchisor's or designated supplier's ability to make the supplies will be significantly less than the franchisee had reason to expect.

During the term of the contract the franchisor is required to provide the franchisee with information concerning:

• market conditions;
• commercial results of the franchise network;
• characteristics of the goods and services;
• prices and terms for the sale of goods or services;
• any recommended prices and terms for the resale of goods or services;
• relevant communication between the franchisor and customers in the territory; and
• advertising campaigns.

The franchisor must make reasonable efforts to promote and maintain the reputation of the franchise network and must design and coordinate the appropriate advertising campaigns aiming at the promotion of the franchise network. All of this must be done without any additional charge.

The franchisee has a number of obligations imposed upon it, such as paying all monies due to the franchisor under the contract and informing the franchisor of any threat to its intellectual property rights. The franchisee must make reasonable efforts to operate the franchise business according to the business method of the franchisor, follow the franchisor's reasonable instructions in relation to the business method and the maintenance of the reputation of the network, and take reasonable care not to harm the franchise network. The franchisee also must allow the franchisor reasonable access to its premises so as to enable the franchisor to check that the franchisee is complying with the franchisor's business method and instructions and to audit the franchisee's accounting books.

So, it is possible that a group of well-intentioned academics with a clearly stated “big picture” aim of harmonizing civil law throughout the EU, backed by the European Commission, but with no practiced knowledge or experience of franchising whatsoever, could totally transform the regulation of franchising in Europe. It is still possible (although one cannot say yet how likely), that the so-called “toolbox” may become more than that and form the basis of European Directives or regulations that bind all EU member states.

The European Franchise Federation (“EFF”) clearly has to ensure that the voice of practical experience is heard in the CFR-net and The Study Group to ensure that any proposals are considered, measured and practical, and will further facilitate the successful growth of franchising in the EU. The challenge is that the members of the EFF do not seem to share a common view of whether or not franchising should be statutorily regulated, and if so, how.

The danger is that without the national franchise associations taking the lead in a harmonized manner, the swell of regulation may inundate European franchising and drown its potential to contribute to Europe's economy in as meaningful way as it otherwise might.