Changes to the European Code of Ethics for Franchising

Assignment of insurance policies and claims in insolvency

As franchise regulation is not harmonised across Europe, the European Franchise Federation (“EFF”) (a not-for profit international association based in Brussels) was established in 1972 to be the self-regulatory body for European franchising. Its members are a mixture of national franchise associations and federations across Europe including the British Franchise Association and it published the European Code of Ethics for Franchising (the “Code”) with the aim of setting the standard for and to promote, good and ethical franchising across Europe. Its members are required to adopt the Code for the benefit of their own members using their own membership rules and equivalent national franchising codes of practice.

Although the Code does not have legal authority, it represents best practice for franchising in Europe and provides the franchise industry’s foundation for voluntary self-regulation. It is also significantly influential in providing a moral code of conduct which national courts or regulatory authorities can refer to when deciding franchise matters and disputes.

The self-regulation of franchising in Europe has been largely successful but in recent years some stakeholders have challenged this position arguing that the lack of uniformity in European franchising is a significant factor in preventing franchising from fulfilling its potential within Europe. Others however remain in favour of self-regulation. The Code needed revision, having last been updated 13 years ago and the risk of greater franchise regulation being introduced at a European level helped galvanise the EFF into amending the Code last year.

Whilst not entirely a re-positioning, it is clear that there is a new emphasis on a few key elements:

  • Reference is made to its multi-stakeholders approach and the fact that it represents both franchisors and franchisees. This helps address the criticism that franchisees are under represented;
  • There is a greater emphasis on its members not only to adopt, but to promote the Code nationally and to ensure it is publically available;
  • There is a greater emphasis on the principle of good faith underpinning the franchisor-franchisee relationship. English law does not recognise a general duty of good faith and recent judicial attempts to imply a duty of good faith into franchise agreements has been rejected or confined. Therefore it will be interesting to see how this continues to develop given the greater emphasis on such a duty in the Code;
  • Franchisors are required to guarantee the franchisee’s right to use the know-how transferred or made available to them and to maintain and develop such know-how;
  • Know-how has been redefined more widely from “information which is indispensable” to information which is “significant and useful”. This reflects the practical reality of many franchise systems;
  • Franchisors are required to have operated for at least one year in the relevant market before franchising and must maintain and develop the know-how and transfer this, as well as encourage feedback from, their franchisees in order to assist in its development. In addition, the Franchisor must promote the brand;
  • Franchisors must recognise their franchisees as independent entrepreneurs and not directly or indirectly subordinate them as employees;
  • Franchisors must offer franchisees an unqualified right to sell their businesses as a going concern and also for franchisors to provide franchisees with details of their internet communication and sales policies at the outset;
  • Franchisees are also subject to additional obligations and must “collaborate loyally” with their franchisors and fellow franchisees and be responsible for their own acts and for staffing and financing their own business.

The revised Code is intended to be more all-inclusive for franchisors and franchisees and the changes represent progress but arguably the EFF could have gone further in order to bring additional clarity to particular issues and pre-empt future changes in this rapidly evolving market. 

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Nicola Broadhurst

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