Within the framework of franchising, the franchisor usually transfers to the franchisee a company with a pronounced organizational structure at a high technological level. The franchisee is a legally independent entrepreneur who uses and exploits the franchise package for his independently managed business. As a rule, these are successful business concepts which are passed on by the franchisor to the franchisee by means of a licence agreement. The franchise package is primarily an organized sales concept for goods and services. The subject matter of this package is, in particular, sales and distribution methods, goods or trade marks, trade names, trade marks, business designations in word and image, business formats, branch systems, Copyright rights, technical know‑how and experience (so‑called know‑how) as well as patent rights.
Concept of Franchising
The Franchising primarily involves the integration of the franchisee into the franchisor’s distribution system. This integration consists of the (permanent) technical and organizational support of the franchisee, which is achieved in particular through the training of staff, the equipment of the business and advice in organizational, technical, entrepreneurial and economic areas. The aim is to achieve a high degree of conformity with the franchising concept.
From an economic point of view, franchising is a system for the sale and distribution of products or services to the end consumer, i.e. a structured and organized marketing and distribution concept by which certain products and services are to be sold and distributed on the market for profit through the merger of two or more legally independent companies. At the same time, it aims, in the mutual interest, to build a close distribution network with a specific trade name or a particular brand, in which the franchisee makes use of the franchisor’s experience and is integrated from the formation of his company into an already existing customer network.
Despite integration into the franchisor’s distribution system, the franchisee remains an independent trader and acts in his own name, on his own account and at his own risk. This distinguishes the franchisee significantly from the commercial agent. The franchisee must make his status clear in order to prevent the appearance of representation of the franchisor. Otherwise the franchisor may be held liable.
The Franchise Agreement
On the basis of a so‑called franchise agreement, a cooperative long‑term and framework obligation, the companies thus connected appear as a unit on the market. The purpose of this connection is the production and distribution of certain goods or services to the end consumer. The franchise agreement manifests the assumption of mutual obligations and is regularly concluded for consideration.
The franchise agreement is thus a contract oriented towards mutual economic advantages with many structures from the field of marketing. The performance of the contract depends significantly on the activities of the franchisee himself. The latter uses the identifying features of the products and services, as well as the franchisor’s experience, in order to distribute the contractually specified products or services on the market. By being integrated into the franchisor’s distribution network, the franchisee is obliged to follow the franchisor’s instructions with regard to sales methods and the set‑up and management of the business, to distribute certain types of product determined or approved by the franchisor and, finally, to participate actively in the franchisor’s advertising campaign.
Characteristic of the franchise agreement are in particular:
- the permanent trade‑related cooperation between two economically independent business entities,
- the integration of the franchisee into the franchisor’s distribution system,
- the transfer to the franchisee of the use and exploitation of the franchise package, mithin the provision of bundled services of intangible assets in the form of industrial or intellectual property,
- a constantly renewable know‑how enriched by new experience, with main focuses in the areas of marketing, merchandising, supply and distribution of products and services, advertising, contacts, training, administrative organisation and management, and the set‑up and equipment of the business,
- the permanent support and advice of the franchisee,
- the operation and management of the company according to the franchising system, the trade mark and the patent of the franchisor, and
- the payment of remuneration by the franchisee.
Forms of Franchising
The franchise agreement, as a contract typical of commerce, appears in various forms, as a rule as a distribution or service franchise. The distribution franchise concerns the use and exploitation of the franchisor’s distribution system for the purpose of trading contractually specified products in the franchisee’s own business premises.
Sub‑types of the distribution franchise are, on the one hand, the franchising of the manufacturer‑franchisor, where only the products of the franchisor may be sold, and, on the other hand, the franchising of the distributing franchisor, where the franchisor, at its own discretion, determines the products and commissions third parties to manufacture the products according to characteristics and specifications laid down by it. It is also common in the latter case that the franchisor acquires the products on the basis of its own agreement with the manufacturer.
In service franchising, the franchisee uses the franchisor’s distribution system for the purpose of providing contractually specified services on the basis of the sales methods specified by the franchisor in its own business premises.
In addition, there is manufacturer franchising, in which the franchisee manufactures or modifies products in accordance with the franchisor’s specifications and then sells them under the franchisor’s brand.
Greek law also recognises so‑called mixed franchising. Here, the distribution of products is combined with the provision of services.
Greek law also distinguishes between the following:
- Financing or Management Franchising: The franchisor finances the franchisee and transfers the management of a company from the franchise network to the latter.
- Partial Franchising: The franchisee uses the business premises of a third party, where products of the network are distributed.
- Partnership Franchising: The franchisor is proportionally involved as a shareholder in the companies of its franchisees.
- Combination Franchising: Two or more franchisors cooperate in one business premise, from which each distributes its own products or services.
- Conversion Franchising: The franchisee introduces a company that already had a similar or identical business object before being integrated into the franchisor’s distribution network.
- Multi‑Unit Franchising: The franchisor grants the franchisee the right to open and operate business establishments in another location as well.
- Multi‑Franchisor Franchising: A franchisee concludes franchise agreements with several franchisors.
- Subordinate Franchising: The franchisee is subject to the control and instructions of the franchisor in corporate policy.
- Co‑equal Franchising: Characterized by an equal cooperation between the franchisor and the franchisee.
Legal Nature of the Franchise Agreement
The franchise agreement is a mixed contract designed as a continuing obligation. The characteristic performance of the contract is the provision of services and the transfer of intangible assets, even if purchase or sale for the purpose of resale has been agreed.
The duration of the obligation, which governs the commercial cooperation of the contracting parties, can be concluded for an indefinite or a fixed period.
The franchise agreement is also to be understood as a framework agreement because, in this agreement, the assumption of certain mutual obligations for the achievement of an overarching economic purpose is established. The franchisor’s obligations to transfer the use of technical know‑how and to support the franchisee are matched by the franchisee’s obligation to accept and implement the organizational structures and principles of the distribution system. Furthermore, the franchisee is obliged not to trade and distribute competitors’ products, as well as to take all necessary measures to fulfil mutual interests. In addition, the franchisee is obliged to participate in the franchisor’s advertising campaign and, ultimately, not to carry out any ancillary activities in the same location that contravene the non‑competition clause.
Often, for the implementation of these obligations under the franchise agreement, the conclusion of further (implementing) agreements is required, which can be adapted to the respective needs of the franchising. In this sense, in certain forms of franchising—for example, the sale of products manufactured or selected by the franchisor—the franchisee must additionally conclude a separate purchase agreement with the franchisor for the acquisition of the relevant products before distributing them through the network. The purchase agreements with the franchisor constitute such special agreements based on the framework franchise agreement.
Form of the Agreement
The franchise agreement is not subject to a requirement of written form; it can also be concluded orally.
Content of the Agreement
In the franchise agreement, in addition to the mutual obligations of the contracting parties, in particular the products and services to be distributed are clearly defined. Other contents of the agreement are, inter alia, the individual sales and distribution methods, the delimitation of the location, guide prices, the term of the obligation, any extension options, grounds and periods for termination, and post‑contractual obligations.
Obligations of the Franchisor and the Franchisee
a) The franchise agreement is characterized by a special trust relationship, resulting in duties of mutual loyalty arising as early as the pre‑contractual stage. Before concluding the contract, the franchisor has, in particular, a duty of information regarding the franchising (sales concept).
b) The following are generally the duties of the Franchisor:
- Transfer of the specially offered rights of use
- Transferability and granting of licenses
- Integration of the franchisee into the distribution system and service organization
- Training and events
- Principle of equality between the franchisees
- Supply of the franchisee with the products or services or other intangible assets for integration into the distribution network
- The permanent support and advice for the operation of the franchise business in organizational, technical, and financial matters
- Equipment and technical setup of the franchise operation
- Maintenance and servicing of all operating systems and technical facilities
- Location and territorial protection, possibly an exclusivity agreement
- Specifications for the equipment and operation of the franchise business
- Franchise Manual
- Advertising
c) Duties of the Franchisee:
- Payment of a so‑called entry fee for the transfer of rights and uses
- Payment of fees (franchise fees), in individual cases also a share of the profit
- The promotion of the distribution of the franchisor’s products and services with the deployment of the best possible personal effort (instruction-bound sales promotion obligation)
- The implementation of the sales concept and use of the distribution system
- Duties of loyalty and observance of sourcing obligations
- Protection of the franchisor’s interests
- Compliance with the franchisor’s rights to issue instructions and control, in particular allowing control by the franchisor
- Confidentiality and non-disclosure obligation
- Non‑competition clause
- Reporting obligations regarding the operation and the sales system
The franchisee is furthermore obliged to respect the territorial protection of other franchisees and not to offer and distribute the products assigned to him at those locations (Art. 4 b of Regulation 2790/1999). Furthermore, he may not solicit customers outside his own location (Art. 4 of Regulation 2790), and must exclusively source contractually specified products determined by the franchisor. With his consent, however, products manufactured by third parties may also be distributed.
According to Greek case law, a contract clause that reserves the franchisor the right to inspect the franchisee’s bookkeeping in order to verify the financial data submitted by the franchisee is not binding, because such a clause overlaps onto third contracting parties and thus binds the franchisee excessively and therefore unlawfully. Likewise, the franchisee’s obligation to keep a customer catalogue was regarded as a restriction of free competition. However, in cases where the franchisor is entitled to a contractually agreed share of the profit, the franchisee may be obliged to submit copies of all accounting data on monthly income to the franchisor.
In addition, the franchisor has the option to oblige the franchisee, in the event of an infringement of the rights granted to him under the franchise agreement by third parties, to take legal action against the latter or even to intervene in a lawsuit brought by the franchisor against third parties (Art. 3 § 2 c) of Regulation 4087/1988 in conjunction with § 44 e) of the Commission’s Guidelines).
In the event of a breach of the outlined obligations through non‑performance or poor performance, the general law on breaches of performance applies. In Greek law, the provisions of Art. 382 et seq. of the Greek Civil Code are applicable here.
Thus, in individual cases, a contract clause may also be qualified as a violation of competition regulations, with the consequence that it is considered prohibited and therefore void pursuant to Art. 1 of Law 703/1977. Such a case is given in particular when provisions are contained in the franchise agreement that are not conducive to the purpose of the contract and thus restrict competition.
Term
According to Greek case law, a duration of 5 years has been deemed appropriate, whereas a duration of 25 years is considered to bind the franchisee excessively, constituting a violation of Art. 1 of Law 703/77.
An extension of the term of the continuing obligation is generally possible. This requires a corresponding agreement between the contracting parties, which can also be concluded tacitly. A franchise agreement concluded for a fixed term can therefore be qualified as a tacit extension for an indefinite period if it is continued after the expiry of the agreed term.
Protection of the Franchising System and Liability
The franchising system is protected against third parties, on the one hand, by the provisions of Law 2121/1993, concerning the content of the franchise manual handed over to the franchisee, and, on the other hand, by the provisions against unfair competition. Liability towards customers arises only for the franchisee from the contract. Liability in tort is also possible for the franchisor under § 823. In individual cases, the provisions of product liability under Law 2251/1994 may also apply.
Limitation of Actions
The franchisor’s claim against the franchisee for the payment of remuneration is subject to a limitation period of 20 years pursuant to Art. 249 of the Greek Civil Code.
Termination
The contract is terminated by expiry of time or notice. Termination by expiry of time occurs in fixed‑term franchise agreements.
Notice can be given for franchise agreements concluded for both an indefinite and a fixed term. Ordinary termination can be agreed upon as either fixed‑period or immediate even in indefinite‑term franchise agreements. Extraordinary termination is permissible in both cases for good cause. Good cause is given, in particular, when a breach of contract occurs.
(Status: April 2010. All information without guarantee.)