Recent Trends in Franchise Relationship Laws

7.3 The Cooling-off Period

The cooling-off period allows the franchisee to terminate the franchise agreement within a specified period after entering the agreement, or prior to the payment of any non-refundable money.  Some jurisdictions take the view that a cooling-off period is a necessary protection that gives a franchisee the chance to “back out” of an executed franchise agreement.  In practice, however, it is not clear how much protection the cooling-off period actually provides the franchisees, because these cooling-off periods, due to their nature, will necessarily be short in duration.  Australia, China, Malaysia, Mexico, South Africa, Russia, Belarus, and Ukraine all require some sort of cooling-off period after the execution of the franchise agreement during which the franchisee can withdraw from the relationship.  These periods range from a thirty day cooling-off period in Mexico to ten business days in South Africa, seven business days in Malaysia, and seven days in Australia.  In Russia, Belarus, and Ukraine the cooling-off period is given to both the franchisor and franchisee.  China does not specify the length of the cooling-off period; in practice, franchisors there have offered anywhere from one day or several weeks.

7.4 Minimum Term

Only three countries and one U.S. state impose a minimum term for the franchise agreement.  A minimum term ensures that the franchisee has a chance to recoup its initial investment into the franchised business.  In Malaysia, the franchise agreement must be for a minimum period of five years.  In Italy the term is three years.  The Indonesian legislation requires a minimum term of 10 years for Master Franchise Agreements.  Lastly, in both China and the State of Connecticut the term stipulated in the franchise contract shall not be less than three years.  Note, however, in China the franchisee can agree to a lesser period.

7.5 Restrictions on Termination

The circumstances in which a franchisor may terminate a franchise agreement are generally governed by the franchise agreement.  That said, some jurisdictions have enacted specific relationship laws governing the requirements for termination. For example, in Australia, Malaysia, Vietnam, and fifteen of the U.S. states termination is permissible where: (1) the franchisor has good cause as a basis for termination, i.e., where the franchisee has failed to substantially comply with the franchise agreement; or (2) the situation falls within certain circumstances as enumerated in the legislation, i.e., bankruptcy, voluntary abandonment, insolvency, fraud, criminal conviction.  With respect to the former, the franchisor must then comply with certain procedural requirements, such as providing written notice, reasons for termination, and an opportunity to cure the default.  Compare this to jurisdictions like Albania, Italy, and France where termination is allowed, with notice, where the franchisee’s breach places the franchise activity at serious risk.  Similarly, in China, Japan, and Mexico a fixed term agreement can be terminated where the purpose of the contract cannot be realised due to such things as force majeure or continuous default by the franchisee.  In Russia and Ukraine, termination is allowed in the case of insolvency or where a franchisor loses its trade-mark rights.  Lastly, with respect to Canada, the circumstances under which a franchisor may terminate are generally governed by the terms of the franchise agreement with the duty of good faith and fair dealing acting as a backdrop.

It is also worth noting that in some jurisdictions upon termination the franchisor is required to do such things as repurchase inventories, marketing materials, fixtures, and compensate for loss of goodwill.  For example, under the Wisconsin Fair Dealership Law[34] a franchisor shall repurchase all inventories sold by the franchisor to the franchisee for resale under the franchise agreement at the fair wholesale market value.  Hawaii’s Franchise Investment Act[35] offers similar buy-back protection with the added requirement that the franchisor compensate the franchisee for any loss of goodwill.  Under the California Franchise Relations Act,[36] where a franchisor terminates a franchise other than in accordance with the Act, the franchisor shall offer to repurchase the franchisee’s resalable current inventory at the lower of the fair wholesale market value or the price paid by the franchisee.  Similar statutory protections of the franchisee’s investment exist in Connecticut, Iowa, Michigan, Washington, and Minnesota.  This sort of buy-back protection is also found in the industry-specific legislation of a number of U.S. states and the Provinces of Alberta, Ontario, and Saskatchewan as discussed more fully below.

Of a similar vein, some jurisdictions have also prescribed the right of a franchisee to rescind the franchise agreement where the franchisor has failed to comply with disclosure laws. For example, in the Canadian provinces with franchise legislation where a disclosure document or statement of material change is delivered late, not at all, or fails to comply with the legislation the franchisee may rescind the franchise agreement without penalty by giving notice of cancellation to the franchisor.  In Ontario, Prince Edward Island, and New Brunswick where rescission takes place the franchisor must refund to the franchisee any money received from or on behalf of the franchisee, repurchase inventory, supplies, and equipment, and compensate the franchisee for any losses incurred in setting up the franchise.  Alberta’s franchise legislation offers similar protection to the franchisee, but does not require the franchisor to repurchase inventories.  In the United States, where a franchisor fails to comply with disclosure requirements under the FTC’s Franchise Rule, the FTC impose civil penalties, injunctive relieves, or cease-and-desist orders; to seek rescission, however, the FTC must commence a civil action against the franchisor.  At the state level, some jurisdictions offer rescission rights if the franchisor fails to comply with the disclosure requirements.  Rescission rights also exist in Belgium, Brazil, China, Italy, and Vietnam.