The European Franchise Federation ("EFF") recently adopted a new version of the European Code of Ethics for Franchising ("Code of Ethics"), the first update for 13 years. The British Franchise Association ("BFA") and the EFF's other accredited national franchise association are now in the process of interpreting and adopting the updated Code of Ethics into their national equivalent codes.
In this article, we consider some of the key aspects of the updated Code of Ethics and what this means for franchising businesses that are members or prospective members of the BFA. Even if your business is not a member of the BFA or another national association, these changes are noteworthy as they serve as a useful barometer for the current mood across the industry in Europe and likely direction of travel in the coming years.
The EFF is the non-profit international association set up in 1972 to govern and oversee the franchising industry in Europe. The Code of Ethics is designed to promote ethical franchising in Europe and provides the franchise industry’s foundation for voluntary self-regulation. The updates to the Code of Ethics follow a process of bottom-up industry-specific consultation, negotiation and agreement by the franchise stakeholders/companies and members of their respective national franchise associations.
The BFA is the EFF's accredited national franchise association for the UK and the BFA voted in favour of adopting the latest version of the Code of Ethics at its Annual General Meeting on 8 December 2016. The BFA is now working on updating its national Code of Ethics accordingly,
Despite being part of a single market, there is a lack of harmonisation in the way in which member states regulate franchising in the EU. Some stakeholders are of the opinion that franchising is failing to fulfil its full potential in the EU and this is due, at least in part, to the lack of a homogenous approach to regulation, the adverse impact of EU competition law on franchised brands and a failure of self-regulation to adequately promote, educate and support franchising at a member state level. On the other side of the debate are those who remain in favour of self-regulation, pointing to high rates of satisfaction among franchisees, the continual (albeit slow) growth in franchising's share of EU GDP and low failure rates.
Advocates of these opposing views came together recently at a workshop hosted by the European Parliament, following the publication of a report into the state of franchising in the EU, which was commissioned by the European Parliament's Internal Market and Consumer Protection Committee. The report recommended the introduction of a new EU Directive for franchising which, if implemented, would effectively do away with the self-regulatory approach that has prevailed for the last 5 decades. After 13 years, the Code of Ethics was arguably due an update in any event, but the timing of the updates is important to those who continue to advocate the status quo of self-regulation.
At a national level, the BFA has responded to criticisms made by UK Government in the wake of the recent "Pubs Code" in 2016 by looking to introduce a mandatory arbitration scheme to deal with disputes between BFA franchisor and franchisee members.
Good faith and fair dealing
There is clear recognition in the Code of Ethics that the franchisor/franchisee relationship should be underpinned by the principles of good faith & fair dealings. Both are expressly included in the preamble to the Code of Ethics, which emphasises the importance of franchisor-franchisee relations based on fairness, transparency and loyalty, each of which contribute to confidence in the relationship. Furthermore both franchisor and franchisee:
must commit to resolving complaints, grievances and disputes with good faith and goodwill through fair and reasonable direct communication and negotiation;
where appropriate and where they have failed to resolve a dispute through direct negotiation, must seek in good faith mediation and/or arbitration to resolve the dispute.
The English law of contract is well known for not having a general duty of good faith and the approach to dealing with good faith situations in case law has been piecemeal, in line with the general development of common law. One of the main reasons advanced for this is the uncertainty which would arise if a general duty of good faith was imported into contracts generally. English law is at odds with other common law jurisdictions which have been moving towards recognising a general duty of good faith, and in the last few years similar arguments have been advanced in the English Courts, albeit with very limited success. The fact that the Code of Ethics is embracing the general principle of good faith and fair dealing should cause BFA members to pause for thought - they should consider carefully what this concept means in the performance of their franchised systems and take steps to reflect this understanding and the limits of this concept in their respective franchise agreements.
With regards to dispute resolution, the BFA intends to introduce mandatory arbitration as a condition of membership and it is currently drafting the arbitration scheme rules, although the scheme has yet to be formally adopted. This is a significant issue for BFA members and prospective members to consider carefully, as once adopted the scheme will limit a franchisor's or franchisee's access to the English courts.
Obligations for franchisors
The Code of Ethics sets out a list of obligations for franchisors. The reality is that most of these obligations are not new ones and were present in the previous version of the Code of Ethics, such as the obligation for franchisors to have tested a pilot concept for at least one year and provide franchisees with initial and ongoing training. There are, however, some new requirements, such as those obliging a franchisor to:
guarantee the right to use the know-how transferred and/or made available to the franchisee, which know-how it is the franchisor's responsibility to maintain and develop. Interestingly, know-how is also defined in the Code of Ethics as a body of non-patented practical information, resulting from experience and testing by the Franchisor, which is secret, substantial and identifiable. This is an interesting addition to the Code of Ethics, particularly in light of recent case law in key franchise jurisdictions such as Canada, where franchisees have successfully sued their franchisor for failing to protect their businesses from innovative competitors;
in the pre-contractual, contractual and post-contractual phases of their relationship with franchisees, to use all reasonable means to prevent any wrongful usage of or, in particular, the transmission of know-how to, competing networks so as to avoid prejudice to the interests of the network. In the new age of cyber-crime, it is increasingly important for franchisors to ensure that they are investing in appropriate safeguards to protect trade secrets and confidential information;
offer to their franchisees an unqualified right to sell or transfer their business as a going concern; and
to inform prospective and individual franchisees of their internet communication and/or sales policy. It is no longer acceptable for some franchisors to hide behind the opaque pretence of "prior written consent" before a franchisee is allowed to participate in online activities. Franchisors must develop and communicate transparent policies in this regard and also seek to safeguard the interests of the network in the development of their online sales policy.
It's not all one way traffic - obligations for franchisees
The Code of Ethics also imposes various obligations on franchisees. Many were present in the previous Code of Ethics although there are new requirements including that franchisees shall:
accept the obligation to collaborate loyally with the Franchisor in ensuring the success of the network which the franchisee has joined as an informed and fully independent entrepreneur. This is an important addition to the Code of Ethics because it emphasises the fact that although the relationship between franchisor and franchisee is of paramount importance to the success of a franchise, any prospective franchisee is independent from the franchisor as a separate legal entity and in turn it must take a significant degree of responsibility for the success of its business;
be responsible for the human and financial means that it engages in its franchise business and is responsible as an independent entrepreneur with regard to third parties and B2B and B2C customers; and
act loyally towards each of the other franchisees of the network. This addition emphasises the importance of each franchisee's individual role in preserving the strength of the network by acting together, such as through sharing ideas that might enhance the franchised system.
The updated Code of Ethics aims to address some of the perceived imbalances and inequities in the franchise relationship and bring self-regulation into the digital age. However, although the BFA's interpretation of the Code of Ethics may include some variations from the EFF's text, much of the BFA's existing Code of Ethics and its practices are already in line with these updates.
Given the 13 year wait and the rapid advances which have been made in the way in businesses sell their products and services during this time, it is arguable that the updated Code of Ethics does not go far enough, either in bringing more clarity to issues it has sought to address and also pre-empting how franchising might change in the next 13 years or more.
It remains to be seen whether the voices calling for the regulation of franchising will grow louder, but if the self-regulatory system is to survive, we suspect that that we may not have to wait so long for the next round of updates.
Please do get in touch with your usual franchising contact at Fieldfisher if you would like to discuss any of these issues more.