Arkady S. Lee is a Russian lawyer with extensive experience in international law. He occasionally works with Alinga in an advisory capacity.
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International Norms in Franchising
Arkady S. Lee
JurExpert.ru

 

International commercial practice defines franchising as a type of enterprise based on a mutual agreement where one party, the franchisor, transfers to another party, the franchisee, the right to use, in a certain market and for an agreed compensation, a special complex of property and non-property rights known as a "franchise" which can include brand names, trademarks and other objects of commercial and intellectual property, technical knowledge, and "know-how."

 

In Russia, the term "franchising" is used differently. In 1996, when the second part of the Civil Code of the Russian Federation (GKRF) came into force, a new legal institution was born in Russia under the title "commercial concession" (коммерческая концессия), which in fact functions as an analog of franchising. Commercial concessions are regulated by Chapter 54 of the GKRF. 

 

Franchising transactions are often trans-national. For example, a franchisor may have offices in Russia, Australia and the USA, and the franchisee may be based in Germany. In this case interactions of two sides are regulated by standards of international law which allows parties to choose applicable judicial rights and a jurisdiction for their agreement. However, in certain cases the laws of some countries would supercede regulations law chosen by the franchising parties.

 

As an example, German legislation allows the parties of a transnational contract to choose the applicable law. As a rule, the franchisor elects to use the legislation of the franchisor's host country as the applicable law. If the franchisor is based outside of Europe, and the franchisee is a German company, the contract can include a condition upon which, if franchisor's property is damaged, the case may be submitted to a German court to allow for a more expedient defense of the franchisor's rights.

 

According to German civil legislation, in certain circumstances, the franchisee has a right to bring an action against the franchisor for compensation of losses incurred due to contract termination. The legal basis for such an action is found in Article 89, Part B of the German Code of Commerce, which discusses commercial agents. Since the legal standing of the franchisee is very similar to the legal standing of a commercial agent, by analogy the above-mentioned article may be applied to the franchising relationship. Furthermore, laws on commercial agents in general have a direct effect on franchising regulations.

 

Recently the High Regional Court of Munich, analyzing the American-German agreement on commercial agents, ruled that the agreement does not nullify certain items within German legislation on an agent's compensation rights. The court ruled that in given circumstances the commercial agent has the right to take action against an American company in Germany rather than in the United States.

 

The plaintiff was a commercial agent based near Munich. The American company (defendant) was based in California. According to the contract signed in 1998, the agent sold the defendant's product in Germany and Austria. The contract stated that the applicable law was the law of the State of California, and disagreements should be submitted to a court within this state. In 2004, the American party terminated the contract. The agent demanded compensation for the resulting loss and filed a lawsuit based on Article 89, Part B of German Code of Commerce in a Munich Regional Court. The court rejected the application on the basis that it should be submitted to a court in the State of California.

 

Following the plaintiff's petition against the regional court's decision, the High Regional Court of Munich has ruled that commercial agent has a right to file a lawsuit in a German court based on the fact that the defendant has property on German territory. The court ruled that the agent's right to compensation is regulated by compulsory rules of international European law which cannot be eliminated by parties choosing another legal system. Compulsory rules of German law on compensation to commercial agents cannot be changed if a chosen applicable law denies an agent his right to demand due compensation. The court pointed out that strong doubt exists whether a California court would use compulsory rules of German legislation regarding compensation since according to the contract, parties submitted their rights to the California law.

 

Based on this decision of the High Regional Court of Munich we can draw several conclusions.

 

The court decided that there is a great possibility that compulsory rules of German legislation regarding compensation to commercial agents will not be applied by California court. Its decision is significant for agent contracts where parties choose as an applicable law a non-European legislation and submission of arguments outside of the European Union.

 

The question of whether a commercial agent will be able to enforce, in another region, a European court's decision is not considered and is an individual question in itself.

 

Right now this decision seemingly does not have a direct relationship to franchising. A German franchisee, similar to a commercial agent, would logically have the right to demand compensation on the basis of Article 89, Part B of the German Code of Commerce. However, according to German legislation, such a lawsuit can only be filed under the law concerning commercial agents (agent agreements) by analogy. Article 89, Part B is a compulsory rule of international private law only in relation to commercial agents. This is due to the fact that the article was created after a special directive was adopted by the European Union on commercial agents, which affects not all sales agents in general, but commercial agents only (Directive #86/635 of December 18th, 1986).

 

The above mentioned directive does not regulate franchising relationships directly and therefore a franchisee's demand for compensation on the basis of Article 89, Part B by analogy would not necessarily be heard in a  European court. If the parties involved determine that a contract is subordinate to a law of a non-European country, in this case the franchisee does not have the right to file a compensation lawsuit in Germany, because the court will not have the appropriate jurisdiction.

 

At the same time, even in the absence of a European court's decision on this matter, we can assume that a German court would rule that compensation should be paid to the franchisee based on German laws.

 

A study of practical applications of franchising laws in Europe can be very useful for Russian companies entering such contracts with European partners.

 

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