Recent Trends in Franchise Relationship Laws

7.12 Dispute Resolution

Some jurisdictions, such as the Canadian Provinces with franchise legislation, several of the U.S. states, Australia, South Africa, and Italy impose certain requirements concerning dispute resolution.  For example, the Canadian Provinces with franchise legislation, several state registration statutes, and the South African Consumer Protection Act all provide for specific jurisdiction rights which can be read into every franchise agreement.  With respect to the venue for dispute resolution, both the States of Michigan and Washington require arbitration or litigation to be conducted outside the state.  More generally, the United States Federal Arbitration Act[40] pre-empts any restriction on the right to arbitrate imposed in state legislation, although recently some franchise arbitration provisions have come under attack for being “unconscionable” under the state laws.[41]  In Italy, the franchisor and franchisee may choose their jurisdiction and arbitral tribunal.  The parties may also agree that any disagreement must go through the relevant Chamber of Commerce and Industry prior to proceeding to court or arbitration.

The franchise legislation in Australia, South Korea, and the Provinces of New Brunswick and Manitoba provide for mediation as an option for dispute resolution.  In Australia, for example, Part 4 of the Franchising Code of Conduct provides a dispute resolution scheme for parties to a franchise agreement.  Where the franchisor and franchisee are unable to resolve a dispute within three weeks, either party may refer the matter to mediation.  When a party refers a matter to mediation the process becomes mandatory.  In South Korea, Article 16 of the Fair Franchise Transactions Act provides for the establishment of a Franchise Dispute Mediation Council (the “Council”) under the control of the Korea Fair Trade Mediation Agency.  The Council mediates disputes over franchise transactions as requested by the Fair Trade Commission or by the parties in dispute.  The Council may advise the parties in dispute to settle the matters between themselves or may prepare and present a dispute mediation proposal.  Contrast this to the Province of New Brunswick which allows a party to decline mediation if that party is of the opinion that the dispute is not suitable for mediation.  In New Brunswick the mediation process is governed by Mediation Regulation – Franchises Act.[42]  Lastly, in the Province of Manitoba if the franchise agreement provides that disputes may be referred to or resolved by mediation or arbitration, the disclosure document must include information about mediation procedures and arbitration proceedings.  Mediation can be beneficial to both franchisor and franchisee even in jurisdictions without specific mediation provisions and is a proven cost-effective way to resolve franchising disputes.

7.13 Discrimination and Encroachment

Relationship laws dealing with discrimination generally prohibit a franchisor from discriminating between franchisees in the charges for royalties, goods, services, equipment, rentals, advertising services, or in any other business dealing, unless such discrimination is based on reasonable distinction and is not arbitrary.  Discrimination among franchisees is expressly prohibited in several states in the U.S., South Korea, and Malaysia.  Encroachment happens when a franchisor directly or indirectly (e.g., through another franchisee) provides products and/or services into the territory assigned to the franchisee, where such activities are not explicitly prohibited in their franchise agreements.  Some states in the United States prohibit encroachment of the franchisee’s trade area but will look to whether or not the franchisee was granted any form of exclusivity.  In Russia encroachment is prohibited under the Civil Code.  In South Korea, encroachment is prohibited under Article 5, items to be observed by franchisor.  In Canada, both discrimination and encroachment likely fall within the duty of good faith and fair dealing.

7.14 Liability

Some jurisdictions, such as Russia, Ukraine, Belarus, Italy, and the Provinces of Alberta and Ontario have included provisions in their legislation dealing with the liability of the franchisor for claims made by third parties against the franchisee.  For example, in Russia the franchisor will bear subsidiary liability for claims relating to inconsistencies in the quality of goods sold by the franchisee, and joint liability for claims relating to the manufacturing of the products.  Similar provisions are found in both the Belarusian and Ukrainian Civil Codes.  In Italy and Canada, a franchisor may be held vicariously liable for the negligent acts of its franchisee where the consumer thinks it is dealing with a branch of the franchisor and not with an independent party.[43]

7.15 Language Requirements

Generally, relationship laws do not have express language requirements.  Only four jurisdictions have explicit language requirements, namely, Italy, Vietnam, Indonesia, and the Province of Quebec.  In Quebec, however, while the Charter of the French Language[44] compels the use of the French language, parties can agree in writing that another language be used.  The practical reality, however, is that using the language of the jurisdiction (alongside with the franchisor’s native language) is often necessary to comply with the disclosure requirements, to obtain government registration or approval, or to enforce the contract in the franchisee’s jurisdiction when the time comes.  Further, drafting franchise agreements in the language of the jurisdiction is prudent due to an inability, in most instances, to otherwise enforce the contract.