Unidroit Model Franchise Disclosure Law
Done at: Rome
Date enacted: 2002-09-25
In force: -
Content
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:
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whether it is clear that there is a problem, what its nature is, and what action, if any, is necessary; |
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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; |
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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; |
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whether there is a pattern of abusive conduct, or whether this conduct is isolated or limited to particular industries; |
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the nature of the evidence of abuse; |
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whether existing laws address the concerns and whether they are adequately applied; |
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whether an effective system of self-regulation exists; |
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the financial burden the new legislation will place upon franchisors and investors as compared to the benefits of legallyrequired disclosure; |
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whether the proposed legislation inhibits or facilitates entry to franchisors, and its effect on job-creation and investment; and |
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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;
Finding 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
For the purposes of this law:
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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; |
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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; |
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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; |
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disclosure document means a document containing the information required under this law; |
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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:
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; |
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franchise agreement means the agreement under which a franchise is granted; |
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franchised business means the business conducted by the franchisee under a franchise agreement; |
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franchisee includes a sub-franchisee in its relationship with the subfranchisor and the sub-franchisor in its relationship with the franchisor; |
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franchisor includes the sub-franchisor in its relationship with its subfranchisees; |
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master franchisemeans the right granted by a franchisor to another party (the sub-franchisor) to grant franchises to third parties (the subfranchisees); |
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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; |
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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; |
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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; |
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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; |
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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 |
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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:
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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
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Disclosure must be provided in writing. |
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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; |
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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. |
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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; |
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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]; |
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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 |
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in case of the renewal or extension of a franchise on the same conditions. |
Article 6
Information to be disclosed
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In the disclosure document the franchisor shall provide the following information:
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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 :
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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 subfranchisee 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
1. |
If the disclosure document or notice of material change:
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. |
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2. |
The remedies granted to the franchisee pursuant to this article must be exercised no later than the earlier of:
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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. |
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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
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.