Most franchise agreements in Sweden contain an arbitration clause. When entering into a settlement agreement a franchisor must ensure that the arbitration clause in the franchise agreement explicitly covers the settlement agreement. The easiest way to do this is to put an arbitration clause into the settlement agreement.
Franchise and lease agreements are different, but are usually bound together in an agreement bundle and signed simultaneously by the franchisor/landlord and the franchisee/tenant. These two agreements usually each contain a provision explicitly stating that they are dependent on each other. However, two sets of rules collide – the non-right of the franchisee to compensation according to the franchise agreement and the right of the tenant to compensation under tenant law.
Buying a company that is the franchisor of a franchise network raises particular questions that must be considered during due diligence, including in regards to IP rights, franchise agreements and systems, legal disputes, financial results and growth potential and franchisor management. The answers to these questions will have a significant impact on the final purchase price of a franchise network.
When the franchising business model began to expand in Sweden during the 1970s the trade unions expressed concern that employers could use it as a method to circumvent mandatory labour laws or existing collective agreements. This concern was raised in particular when an employer laid off its employees but kept them working according to a franchise agreement, under which they continued to perform the same tasks as they had performed as employees.
Recent court rulings underline the importance of a clear business model and communication between franchisor and franchisee. A confusing message to franchisees and to the business market could be used by a third party against the franchisor in order to oblige the franchisor to meet an agreement entered into between a franchisee and the third party.
A recent decision indicates that in a royalty dispute between parties where the franchisee is the seller and the franchisor is the receiver of a royalty based on that sale, it is the franchisee which must provide evidence in support of its sales and royalty statement. Failing this, the franchisor's royalty claim will prevail.
An international franchisor petitioned to a Swedish appellate court that the court should confirm and declare an arbitration award made by the International Centre for Dispute Resolution in New York enforceable in Sweden. The Swedish franchisee contested the petition and argued that the appellate court should not confirm the award and declare it not enforceable in Sweden.
In 1992 the Supreme Court established that it is reasonable to include an arbitration clause in a franchise agreement. However, the court opened the door for future cases by stating that if a franchisee can show in a specific case that its position equates to that of a consumer, the ruling could be different. The issue was tested again in 2012 before an appellate court, but the court concurred that the arbitration clause was reasonable.
A cornerstone of many franchise systems is that the franchisor supplies products to the franchisee, which in turn sells them to its customers. Cases involving suppliers and wholesalers thus have a bearing on franchise systems and on the agreements governing such systems. An appellate court has decided a dispute between a supplier and a wholesaler that is of interest to franchisors which sell products to franchisees.
Most franchisors enter into agreements where the franchisee is a legal entity in which the owner cannot be personally liable for debts. Franchisors demand that franchisee owners sign a personal guarantee in which each owner personally guarantees that the franchisee will meet all of its obligations under the franchise agreement. An appellate court recently had the opportunity to scrutinise such personal guarantees.
There is no specific law in Sweden that governs the rights and obligations of parties to franchise agreements. Consequently, judges must make decisions based on the wording of individual franchise agreements and on general contract and commercial principles. A 2009 Supreme Court ruling regarding a distribution contract in which a judge considered laws and precedents outside Sweden could have a bearing on franchise disputes.
Since 2006 a disclosure law in Sweden has set out six points of which a franchisor must timely inform a potential franchisee, in writing, before the signing of a franchise agreement. The sixth point says that the franchisor must inform the franchisee that the franchise agreement contains an arbitration clause and point out the implications of such a clause.
The Law on the Duty of a Franchisor to Provide Information regulates the information that a franchisor or master franchisee must disclose, within a reasonable timeframe, before a potential franchisee or a sub-franchisee signs a franchise agreement. This update describes the provisions of the law and their implications for franchises.