ICC Model The ICC Model International Franchising Contract is one of the series of international model business contracts developed and published by the ICC. Designed for use by non-specialists in the area who are seeking reliable guidance and an adaptable contractual framework, this model covers distribution franchise International arrangements. It helps parties overcome difficulties caused by the lack of uniform I C international rules on this important subject. C M o In keeping with the other models in the ICC series, this model seeks to balance d e the interests of the franchisor and franchisee across a range of industries, and l Franchising I n provides comprehensive notes and guidance regarding issues requiring te r n consideration by the parties. a t io The ICC Model International Franchising Contract is another important tool for n a Contract companies and attorneys engaged in international trade. It carries the authority of l F r a ICC, the organization that pioneered many of the basic rules and mechanisms at the n c h heart of international business. is in g C o n t r a c t The International Chamber of Commerce, the World Business Organization, based in Paris, is the global leader in the development of standards, rules and reference guides for international trade. ICC’s International Contracts Series ICC Model Turnkey Contract for Major Projects •ICC Short Form Model Contracts ICC Model Subcontract •ICC Model Mergers & Acquisitions Contract ICC Model International Sale Contract •ICC Model Selective Distributorship Contract ICC Model Confidentiality Agreement •ICC Model International Trademark Licence ICC Model for Technology Transfer •ICC Model Occasional Intermediary Contract ICC Model Commercial Agency Contract •ICC Model Distributorship Contract ICCModel Contract for Turnkey Supply of an Industrial Plant •ICC Force Majeure & Hardship Clause ICC Legal Handbook for Global Sourcing Contracts ICC Publication No.712E ISBN:92-842-0105-5 ICC Business Bookstore iccbooks.com ICC MODEL INTERNATIONAL FRANCHISING CONTRACT Copyright © 2011 International Chamber of Commerce All rights reserved. This collective work was initiated by ICC which holds all rights as defined by the French Code of Intellectual Property. No part of this work may be reproduced or copied in any form or by any means - graphic, electronic, or mechanical, including photocopying, scanning, recording, taping, or information retrieval systems - without written permission of ICC SERVICES, Publications, except by the purchaser of this ICC Publication No.712, for his own personal use. The software being part of the publication is subject to this provision. ICC SERVICES Publications 33-43 avenue du Président Wilson 75116 Paris France store.iccwbo.org ICC Publication No. 712E ISBN: 978-92-842-0242-3 2 ICC Model International Franchising Contract FOREWORD By Jean-Guy Carrier, Secretary General of ICC Franchising has proved over many years to be an extremely successful commercial vehicle for the distribution of products and services, making a considerable contribution to growth in business sectors that use this type of distribution channel. However, there have long been doubts about the feasibility of introducing a simple and user-friendly model contract that would reflect the diversity of franchising contracts and would encourage users to choose this type of contractual agreement. The ICC Model International Franchising Contract, first published in 2000 and now updated to reflect developments in the field, has clearly demonstrated that a franchising agreement, like agency, distributorship and intermediary agreements, can usefully be expressed in a model contract based on the most common clauses found in international franchise contracts. The current update provides a significantly expanded Introduction, providing valuable information for users on issues such as anti-trust rules and questions of laws applicable to franchises. The ICC Model International Franchising Contract proposes to candidate franchisors and franchisees flexible drafting solutions that accurately respond to business needs for legal certainty and compliance with common practice. For the sake of clarity and ease of use an explanatory commentary has been added to the contract, presenting alternative drafting solutions and identifying potential pitfalls. This model contract is intended to apply to international direct franchises, which are a rapidly expanding franchising instrument. ICC’s initiative supplements UNIDROIT’s more traditional approach on drafting international franchise contracts, which takes the form of a comprehensive guide on master franchise arrangements. The contract meets a long-felt need, as has been confirmed by ICC’s extensive consultation of all business sectors. The update of the ICC Model International Franchising Contract is the result of many months of work carried out under the auspices of the ICC Commission on International Commercial Practice, chaired by Fabio Bortolotti (Italy). The update of this model was undertaken under the leadership of Co-Chairs Fabio Bortolotti and Didier Ferrier (France), and Rapporteur Amelie Pohl (Austria). The model contract benefited from the active participation of the following other Task Force members: Horst Becker (Germany); Sylvia Bortolotti (Italy); Anders Fernlund (Sweden); Marco Hero (Germany); Michael Svendsen (Denmark); and Jaap Van Till (The Netherlands). ICC Secretariat support was provided by Emily O’Connor (France). 3 ICC Model International Franchising Contract TABLE OF CONTENTS Foreword ..............................................................................................................3 Introduction ..............................................................................................................7 Article 1: Definitions.....................................................................................................19 Article 2: Good faith and fair dealing..........................................................................20 Article 3: Grant of the franchise...................................................................................21 Article 4: Scope of the agreement - main obligations of the parties.........................21 Article 5: Legal status of the Franchisee......................................................................22 Article 6: Premises........................................................................................................23 Article 7: Territorial exclusivity.....................................................................................26 Article 8: Use of the Internet.......................................................................................26 Article 9: Non-competition obligation.........................................................................28 Article 10: Provision of Know-how................................................................................28 Article 11: Manual...........................................................................................................29 Article 12: Changes to the System.................................................................................29 Article 13: Training of the Franchisee............................................................................29 Article 14: Assistance of the Franchisee........................................................................30 Article 15: Operation of the Business............................................................................30 Article 16: Advertising.....................................................................................................31 Article 17: Obligation of confidentiality........................................................................32 Article 18: Obligation to maintain an insurance policy................................................33 Article 19: Franchisor’s representations and obligations regarding IP Rights............33 Article 20: Franchisee’s representations and obligations regarding IP Rights............34 Article 21: Franchisor’s obligations regarding the supply of the Products.................36 Article 22: Franchisee’s obligations regarding the resale of the Products..................36 Article 23: Fees................................................................................................................37 Article 24: Terms of payment and security....................................................................38 Article 25: Term and renewal.........................................................................................39 Article 26: Grounds for immediate termination...........................................................40 Article 27: Effects/obligations upon termination..........................................................41 Article 28: No goodwill indemnity.................................................................................42 Article 29: Transfer of the Contract by the Franchisor.................................................42 Article 30: Transfer of the Contract by the Franchisee.................................................42 Article 31: Applicable law...............................................................................................43 Article 32: Resolution of disputes..................................................................................43 Article 33: Final clauses..................................................................................................44 Annex 1: IP Rights.........................................................................................................45 Annex 2: Premises........................................................................................................46 Annex 3: Products.........................................................................................................48 Annex 4: Territory.........................................................................................................49 Annex 5: Initial Training...............................................................................................50 Annex 6: Index..............................................................................................................51 Annex 7: General conditions of sale............................................................................52 Annex 8: Summary of the Manual...............................................................................53 Annex 9: Minimum sales requirements......................................................................54 Appendix I: ICC Force Majeure Clause 2003..................................................................55 Appendix II:Unidroit Principles 2004..............................................................................56 4 INTRODUCTION 1. A uniform model for international trade When negotiating franchising contracts abroad, one of the main difficulties faced by parties engaged in international trade is the lack of uniform rules for such contracts. Since there is no internationally agreed uniform legislation on franchising (as opposed, for example, to the case of international sales contracts), parties must rely on national laws and regulations applicable to franchising, when such laws and regulations exist, which: (i) do not take into account the specific need of international trade (since they have been enacted in primis for domestic agreements), and (ii) may differ substantially from one country to another. Some principles are established at the international level (especially within the European Union), but they refer mainly to antitrust aspects of the contract (i.e., validity of certain restrictive clauses) and do not cover specifically the rights and obligations of the parties under the franchising contract. Stipulations agreed by the parties have the utmost importance in determining the legal status of the contract, and should therefore be very carefully drafted. Many associations, either national or international, have proven to be quite active in promoting franchises, studying their different aspects and establishing codes of ethics. These codes should be considered carefully by franchisors and franchisees when determining their respective rights and obligations. This model franchise contract aims to provide those who are considering entering into a franchise contract with a set of clauses that can guide the parties in preparing their own franchise contract. The model follows the traditional ICC approach in seeking to strike a fair balance between the interests of the franchisor and those of the franchisee, taking into account the core obligations of an international franchising contract. Large undertakings that already use franchising as means for distribution of products and/or services will already have their own practices and their own model forms of franchising contracts. Often, they prefer to entrust the appointment of franchises within a specific territory to an independent or associated company which will act as the master-franchisee. This master-franchisee will be entitled to enter into franchise agreements with respect to a specific territory. These sub-licence agreements will usually be entered into with local companies which have experience of local business conditions. However, as a result of the evolution of means of communication and distribution methods, the use of franchising is no longer restricted to major multinational companies. Small undertakings which have acquired valuable experience at a local level sometimes use their initial place of operation of business as a launch pad for international expansion through the franchising of a system. This ICC Model International Franchising contract will contribute to the promotion of franchising operations generally by putting at the disposal of these small undertakings a unique and useful model form. 5 International Chamber of Commerce 2. Precautions for use of the model form This ICC Model International Franchising Contract has been elaborated taking into account the most commonly encountered clauses in franchise agreements, and therefore may be used as a checklist of the core obligations of a cross-border franchise contract. The drafting group has chosen to explain more specifically some stipulations of the contract to enable the parties to fully understand the scope of their commitments. The working group has also tried to work out a single solution on every issue. However, this has not been always possible. In some cases, alternatives have been suggested. Such alternative solutions have been presented side by side under the letters A and B in order to point out that only one of them can apply. Parties should be very careful in expressly deciding which alternative to choose. In any event, the model form provides in Article 33.8 that, if the parties do not make a choice by cancelling one alternative, one of them will automat ically ap ply. In addition, there are clauses which will apply only when the parties have expressly decided to incorporate them in their contract by ticking the respective box on the left side of the clause. There are also a number of points at which the parties must insert their requirements (definition of the territory, products, minimum target, stocks, etc.). Some of these points have been incorporated in the Annexes to this document, which the parties can complete and, where necessary, modify during the life of the contract, without making changes to the basic text of the agreement. Before signing the contract the parties should complete the Annexes and, if appropriate, delete the parts they do not need, then initial each page in order to check and make completely clear which amendments they have agreed or which alternative solutions they have chosen. The Annexes have been drafted throughout so that even when the parties do not fill in some blanks a solution can be found within the contract. In addition, there are a number of points at which the parties must insert data, regarding for example percentages or amounts. Finally, there are some clauses specifying periods of time, which periods the parties may choose to modify, depending on the circumstances of their particular transaction. 3. Scope of application: only distribution franchises This model form is intended to apply to international franchise contracts. This model may also be used as a basis for drafting domestic franchise contracts provided the necessary adaptations are made. Franchising is usually defined as an agreement whereby the franchisor grants the franchisee, in exchange for direct or indirect financial compensation, the right to exploit a package of industrial or intellectual property rights relating mainly to know-how and commercial symbols, and to receive continuing commercial or technical assistance for the duration of the contract. 6 ICC Model International Franchising Contract There are many possibilities for internationalization of a franchise system. The traditional approach consists in the franchisor creating a wholly owned company or in appointing a master franchisee in another country, which will organize a domestic franchising network. Another possibility is to directly appoint franchisees in another country; such cross-border direct franchising is the subject matter of this model contract. Franchise agreements may regard distribution of goods or supply of services. In distribution franchise agreements the franchisee is granted the right to market the products manufactured or supplied by the franchisor or by a supplier designated by the franchisor, under the franchisor’s trademark according to the franchisor’s commercial know-how and with its commercial assistance. In service franchise agreements, the franchisee is granted the right to provide services (e.g. restaurants, hotels etc.) developed by the franchisor, under the franchisor’s trademark according to the franchisor’s commercial know-how and with its commercial assistance. This model form deals exclusively with distribution franchise agreements and does not cover service franchise agreements. 4. Core elements of franchising The core elements of a franchise contract can be narrowed to the following components of the franchise relationship. For the franchisor: - the licensing of know-how embodied in operational manuals and continuously updated, with a training support system; - the licensing of trademarks and symbols; and - the provision of assistance regarding distribution and management. For the franchisee: - the franchisor’s exercise of reasonable quality controls over the franchisee to protect its intellectual property rights; - the payment of initial and ongoing fees in exchange for the right to use these intangible assets; - the participation in training courses organized by the franchisor; - the use of franchisor’s trademarks and symbols; - the strict compliance with the franchisor’s commercial standards; and - the information given to the franchisor concerning any difficulty which may appear or improvements which may seem suitable. For both parties, a franchising agreement provides: - a system to resolve disputes, including the service of notice of defaults and opportunities to cure. 7 International Chamber of Commerce The model franchise contract includes alternative clauses for the provisions and commentaries that address each of the key areas in order to favour the legitimate interests of franchisor and franchisee. 5. The need for uniform standards of operation A well-planned franchising program will include operational and training methods and manuals establishing quality control guidelines, as well as a carefully assembled field support staff to educate franchisees and enforce the franchisor’s quality control guidelines. A system that does not maintain and enforce an effective quality control strategy is not likely to survive in the competitive marketplace. It may be provided that, if the franchisee fails to reach an adequate standard after the initial training, the franchisor has the right to terminate the franchise agreement upon refunding the initial fee less its expenses. There are many methods a franchisor may use to ensure certain levels of quality are maintained and to help distinguish the franchisor’s products and services from those of its competitors. These methods are generally put into practice using (1) provisions within the franchise agreement; (2) operation manuals setting forth uniform policies, procedures, and specifications that must be followed by all franchisees; (3) initial and ongoing training programs; (4) product controls; (5) approved supplier programs; and (6) field support personnel to establish, ensure, and maintain quality control. Special care should be taken in setting forth the rules and uniform standards of operation. Such rules and standards must be (1) carefully planned and developed by the franchisor; (2) clearly articulated by the franchisor to the franchisees both initially and on an ongoing basis through training programs; (3) regarded by the network of franchisees as being reasonable; (4) consistently applied; and (5) rigidly enforced by the franchisor, typically through its field support staff. Obviously, the development of uniform standards is of little utility unless there are systems in place for monitoring and enforcing these standards. Compliance with quality control standards requires mutual respect by and among the franchisor and all of its franchisees. The franchisor must be reasonable and resist the temptation to interfere with the franchisee’s operation of the business. The franchisee must understand that reasonable standards are in the best interests of all franchisees in the network. 6. Applicable law This model form has been based on the assumption that it will not be gov erned by a specific national law, but only by the provisions of the contract it self and the principles of law generally recognised in international trade as ap pli cable to franchising contracts (also called “lex mercatoria”). The purpose of this solution is that the rules of this model form can be applied in a uniform way to franchisors and franchisees of dif ferent countries, without giving one party the advantage, and the other party the disadvantage, of applying one party’s national law or the law of a third country. 8 ICC Model International Franchising Contract Of course this solution, while avoiding the particularities of national laws, gives a wider discretionary power to those who have to decide in case of dispute (national courts or arbitrators), since it is based (at least for matters not expressly governed by the contract clauses) on very general prin ci ples. The task force is of the opinion that the possible disadvantage resulting from the application of rather flexible and general rules is counterbalanced by the greater certainty of a uniform set of contractual rules and by the reference to a set of general rules on contracts, like the Unidroit Principles of International Commercial Contracts1, which offer a reasonably foreseeable legal framework for most issues which may arise. As concerns the Unidroit Principles, it should be taken into account that according to Article 31.A they apply only to the extent they do not conflict with general principles and trade usage, since Article 31.A puts the various sources incorporated by reference in the following hierarchical order: contract clauses, general principles, trade usages, and the Unidroit Principles2. In any case, if the parties wish to have their contract governed by a specific national law, they can use the alternative set forth in Article 31.B. In such case they should check carefully whether any provisions of this model form violate mandatory provisions of the national law they have chosen3. The choice of submitting the contract to a national law is preferable if parties submit the contract to the jurisdiction of ordinary courts instead of arbitration, since it is unlikely that national courts would accept to consider general principles, “lex mercatoria” and the like as the governing law of the contract. 7. Mandatory rules of the franchisee’s country If the parties have submitted the contract to a law other than that of the franchisee’s country, parties should check whether possible mandatory rules of the franchisee’s country may nevertheless be applicable. If the above rules are “simply” mandatory, the choice of a foreign law will in principle be effective and the rules of the law chosen by the parties will apply instead of those of the franchisee’s country. 1. The text of the Unidroit Principles 2004 can be found in Appendix II. 2. This solution takes into account that a limited number of provisions of the Unidroit Principles may not actually reflect the expectations of international trade. This may be the case with respect to certain rules which protect the disadvantaged party to an extent which goes beyond the standards which are usual in business-to-business relations: see, for instance, Article 3.10 on gross disparity (particularly as concerns the end of the sentence in paragraph 1(a), where reference is made to “the improvidence, ignorance, inexperience or lack of bargaining skill” of a party in order to justify contract avoidance) and the rules on hardship contained in Articles 6.2.1-6.2.3 (particularly with regard to the rule authorizing courts to modify the contract terms). With respect to such rules general principles of law and trade usages will prevail over the Unidroit Principles. Of course, parties may also expressly exclude the application of specific provisions of the Unidroit Principles that they consider inappropriate. 3. It should in any case be considered that, even if no choice of a national law has been made, internationally mandatory rules (i.e. rules which would be applicable independently from the applicable law: so called "lois de police") of a national law having a close connection with the contract may be applicable in certain circumstances under Article 31.2. 9