Explanation of the rules related to commercial partnership
You’ve established a business offering products and/or services and you’d like to create your own franchise network for expansion, but you’re unsure how to proceed or where to begin. In this article, we explain what the law provides in this matter and offer legal advice, guiding you step by step in setting up your franchise((We will particularly focus on the provisions regarding pre-contractual information within the framework of commercial partnership agreements (Title 2 of Book X of the Economic Law Code), which also apply to franchises.)).
What is a franchise ?
The definition based on a franchise contract stems from a previous ruling of the Court of Justice of the European Communities dated January 28, 1986 ((C.J.C.E., January 28, 1986, Pronuptia of Paris GmbH c. Pronuption Irmgard Schillgallis, case n° 161/84, Rec., p. 353.)). According to this ruling, the franchise contract is characterized by the combination of three elements :
- Transfer of know-how ;
- Right to operate under a common brand shared by the entire franchise network ;
- Provision of technical and commercial assistance from the franchisor to the franchisees.
Franchising is generally perceived as a form of commercial partnership, involving a system for marketing products and/or services that will be granted for exploitation to one or more entities (the « franchisees »), independent and distinct both financially and legally separate from the franchisor (the company granting the right to operate), in accordance with the concept developed by him, in exchange for financial contributions benefiting the franchisor.
The « concept» in question is characterized by a know-how, an original method of operation specific to the franchisor, developed over its experience. The transmission of this concept often includes the authorization to operate under the trade name and/or trademark of the franchisor’s company, as well as any other possible intellectual property rights. Know-how transfers are practically manifested by the delivery of an operational manual containing the franchisor’s know-how to the franchisee ((P. Demolin, « Pre-contractual information and the Arbitration Commission – Commentary on the Law of April 2, 2014, inserting Title II of Book X of the Economic Law Code,» Coll. The files of the Journal des Tribunaux, no. 95, Brussels, Larcier, 2014, p. 43 ; Voy. also : P. et V. Demolin, Le contrat de franchise, Coll. The files of the Journal des Tribunaux, Bruxelles, Larcier, 2011, pp. 11 à 18.))».
Through the franchise contract, the franchisee is therefore authorized to operate the franchisor’s concept in exchange for financial compensation, while the franchisor is obligated to provide both commercial and technical((This assistance is indeed one of the characteristic elements of a franchise. In its absence, the contract may be subject to requalification ; Ibidem, p. 44.)) to the franchisee throughout the duration of the contract.
What are the essential legal documents for creating a franchise ?
In Belgian law, the franchise contract itself is not subject to specific regulations. In practice, by analogy, the regime concerning commercial partnership agreements is applied, as franchising is considered a form of commercial partnership ((Title 2 of Book X of the Economix Law Code from the Law of April 2, 2014.)).
- Franchise Agreement
Naturally, how can one contemplate a collaboration between the franchisor and the prospective franchisee without drafting a contract setting the rules of the game.
In this contract, the franchisor must establish the conditions related to setting up a franchise: the obligations of the franchisee and those to which the franchisor commits, the amount of financial compensation, the duration of the franchise contract, the franchisor’s ability to exercise a purchase option, etc.
- Pre-contractual Information Document (« PID »)
Before embarking on the venture, prospective franchisees will need to know about the operating method, market position, know-how, and history of the franchisor.
The legislation requires thatat least one (1) month before the conclusion of the aforementioned franchise contract , the franchisor provides the prospective franchisee with the draft franchise contract and the « specific document », known as the pre-contractual information document ((Article X.27 of the Code of Economic Law.)).
This pre-contractual information document is divided into two parts (details of which can be found in article X.28 of the CDE) :
- the first outlines the essential contractual provisions of the franchise agreement ((Art. X.28, §1, 1° of the Code of Economic Law indicates, in particular: the obligations of the parties, the remuneration granted to the franchisor, the duration of the franchise agreement, the conditions of notice and termination of the agreement, the right of pre-emption (purchase option), non-competition clauses, etc., provided that these clauses are, of course, provided for in the draft franchise agreement.)) ;
- The second consists more of a socio-economic analysis of the business and therefore gives an idea of the viability and profitability of the business((Art. X.28, §1, 2° of the Code of Economic Law specifies, in particular: the nature of the activities, the franchisor’s experience, intellectual property rights where applicable, the history, state and prospects of the market, the costs and investments to which the franchisee is committed, etc.)).
This last socio-economic section is very important so that the prospective franchisee can form an opinion on the operation of the business formula. This section contains an analysis of the viability/feasibility of the franchise project, taking into account, in particular, the attractiveness of the business in the market and the competition (or lack of competition) in the sector and in the target market.
It should also be noted that the possibility of renewing or amending a franchise agreement is provided for in article X.29 of the Code of Economic Law.
In practice, the following steps must be taken :
- Propose a franchise contract project ;
- Provide a pre-contractual information document containing the information referred to in Article X.28((For further information on its content, see P. Demolin, op. cit., p. 59.)) ;
- These pieces of information must be transmitted to the prospective franchisee at least one (1) month before the franchise contract is signed.
Sanctions
The transmission of this information is essential for the launch of a franchise since the prospective franchisee can only rely on the information provided by the franchisor to form an opinion regarding the development of the contemplated franchise.
Action for nullity of a contract((Voy. : P. Moineau, « Nullité du contrat de franchise pour violation des règles d’information précontractuelle : quand et avec quelles conséquences ? », R.D.C.-T.B.G., 2017/9, pp. 1022-1027.)). The consequence of not complying with any of the provisions mentioned above, namely Article X.27 and X.28, allows the franchisee to invoke the nullity of the franchise contract within two years of its conclusion((rt. X.30, alinea 1er, of the Code of Economic Law.)) !
Examples: the draft contract and/or the pre-contractual information document were not communicated, the one-month period between the contract signing and the transmission of the pre-contractual information document was not respected, etc.
Action for nullity of a contractual clause. Furthermore, if the pre-contractual information document does not include one of the pieces of information mentioned in Article X.28, §1, 1°, which refers to the first part containing the essential provisions of the franchise contract, the franchisee can invoke the nullity of the relevant provisions of the franchise contract((Ibidem, alinea 2)). Note that this nullity is only provided for in case of absence of the aforementioned information, not in case of erroneous or incomplete information.
Defect of consent or quasi-tortious fault. Moreover, if this document does not include one of the pieces of information referred to in Article X.28, §1, 2°, which concerns the second part containing socio-economic information, or if one of these pieces of information is missing, incomplete, or inaccurate, or if any data from the first part of Article X.28, 1°, is itself incomplete or inaccurate, the franchisee can also invoke rules regarding defects of consent or quasi-tortious fault, without prejudice to what has been provided in the preceding paragraphs of Article X.28((Ibidem, alinea 3)).
Examples: erroneous profitability forecasts, incomplete information regarding expenses and investments borne by the franchisee, etc.
Additional point not to forget: Confidentiality Clause
Don’t forget to insert a confidentiality clause as an annex to the pre-contractual information document ! Even though the law requires confidentiality(( Art. X.31 du Code of Economic Law.)) of the parties regarding « information obtained for the purpose of concluding a commercial partnership agreement », as the proverb says, one can never be too cautious ! Furthermore, a confidentiality clause will allow you to establish potential sanctions in case of breaches of confidentiality.
Establishing a franchise network : a complex operation
In practice, establishing your franchise network requires more than just legal documents : you’ll need to think about training prospective franchisees, monitoring how the franchise is being operated in the field, organizing meetings with your franchise network, monitoring the network’s evolution, etc.
However, your first legal security is the proper management and complete drafting of contractual documents. The sanctions for non-compliance with pre-contractual information provisions can have serious consequences.
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Are you ready to launch and establish your franchise network ? We can help you draft contracts and pre-contractual information documents ! info@lex4u.com
Adeline Balza, Frédéric Dechamps & Nathan Vanhelleputte – Lawyers
