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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:

-

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:

(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;

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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:

(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 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:

(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

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.