Sweden is traditionally a country where most franchise disputes are resolved through arbitration. Since most arbitration awards are not publicized, case law on franchise matters is scarce.
Nevertheless, this does not mean that there is nothing happening in the Swedish franchise market. On the contrary. The Swedish franchise industry is estimated to have a total turnover of approximately SEK 277 000 000 000 and an estimated 144 000 people employed. And there have been major developments in the market the last year on initiatives from organizations active in the franchise market. Firstly, the Swedish Franchise Association has adopted mediation rules for resolving disputes between franchisor/franchisees. Secondly, the Swedish Franchisee’s Association has launched an initiative for certifying the terms in franchise agreements. This article covers both and aims to summarize the key developments within this area.
The organization that actively promotes franchising and organizes both franchisors and franchisees in Sweden is the Swedish Franchise Association (www.svenskfranchise.se). The Swedish Franchise Association is a member of the European Franchise Federation. The Swedish Franchise Association (referred to below also as the “franchise association”) is pro-active to settle disputes between franchisors and franchisees amicably, rather than having to resort to arbitration or public courts. As a means of doing so, the Franchise Association has, as of 21 October 2017, enacted mediation rules for the Franchise Association (sw: “Medlingsregler Svensk Franchise”). The following text will elaborate on these mediation rules.
The Franchisor and franchisee can refer to the mediation rules by express provision in its franchise agreement. They can also submit a request for mediation to the franchise association after a dispute has arisen. A mediation clause in the franchise agreement is binding. However, even though it is binding, the parties’ participation to the mediation is voluntary and based on the premises that both the franchisor and franchisee agree to apply the rules. This means that either one of the parties (or both) can request that the mediation procedure is terminated at any time. The mediation procedure comes with a fee, payable to the franchise association.
The mediation procedure under the rules starts when an application for mediation is submitted to the franchise association. The application should contain the basic facts about the dispute and the applicant is required to pay an administrative fee for the application. The application will be sent over to the other party to see if the other party agrees to mediation. If both parties do not agree to mediation, the request for mediation will be dismissed.
When the administrative fee has been paid, the franchise association will appoint the parties’ jointly elected mediator. If the parties have not agreed on a jointly elected mediator, the franchise association will appoint one. When a mediator has been appointed, the parties must pay the mediator’s fee in advance. If the fee is not paid, the franchise association will dismiss the case.
Principles of mediation
The procedure before the mediator is not bound by any specific rules, but rather by principles:
- the procedure shall be impartial and treat the parties equal;
- the procedure shall be speedy;
- if a party confides in the mediator, that information must not be disclosed to anyone;
- the mediation is voluntary and may be terminated by either party without cause;
- the mediation shall be carried out in such manner that each party is given the opportunity to put forth its case.
The mediator determines the details of the procedure together with the parties.
Purpose of mediation
The main purpose of the mediation is that the parties put aside their differences on the dispute and enter into a settlement agreement. There are also other reasons for ending the mediation procedure under the rules, for example if the mediator does not think it is meaningful to continue the mediation.
The current fee for mediation is SEK 55 000, whereby each party pays half.
The mediation initiative by the Swedish Franchise Association is an exciting development in resolving franchise disputes in Sweden. Costs of arbitration and counsel have skyrocketed over recent years and it seems that many industry players recognize that alternative dispute resolutions are a viable solution to arbitration or litigation before public courts. The mediation rules are a big step forward in this regard and, in my opinion, we should see a number of disputes that go to mediation, where the parties realize there is a value in a continued relationship.
When it comes to this in practice, I have learnt that no requests for mediation have been submitted to the franchise association as of April 1, 2018. The franchise association has also informed me that they do not keep a list of mediators, even though the mediation rules provide for that. The rules are not clear as to the size of the administrative fee that must be paid upon application, but I have drawn the conclusion that it is SEK 5 000 and that it is deductible from the total fee (of SEK 55 000).
CERTIFICATION OF FRANCHISE AGREEMENTS
In addition to the Swedish Franchise Association, there is a national association that organizes franchisees, the Swedish Franchisee’s Association (www.sverigesfranchisetagare.se) (referred to as the “franchisee’s association” below). The franchisee’s association has been in place for at least the last 30 years but was more or less dormant until about ten years ago. They now offer legal advice to franchisees that are members of the association in various matters as well as assistance in negotiations with franchisors, landlords and others.
In autumn 2017, the franchisee’s association launched an initiative to certify franchise agreements of various franchise systems called “Kontrollerad Franchise – Vitlistning av franchiseavtal” (roughly translated to “Controlled Franchise – Whitelisting of Franchise Agreements”). According to the franchisee’s association, the purpose of the whitelisting (I will refer to this as the “certification” henceforth) was to enable franchisees to make well founded decisions when entering into franchise agreements and to offer franchisors the opportunity to offer transparent franchise agreements that had been reviewed by an outside party. The certification is not to be seen as an endorsement of the franchise system in itself, but only of the franchise agreement. It is pointed out and expressly stated that the franchisee still has to perform a due diligence of the franchise system. It is also stated that the certification in no way shall mean that the franchisor may omit proper disclosure of information regarding the franchise system.
If a franchisor is interested in having its franchise agreement certified by the franchisee’s association, the franchisor must apply to the association and pay a nominal fee of SEK 7 800. The franchisor may sign a waiver allowing the franchisee’s association to publish that the franchise agreement has been certified.
Criteria to be certified
During the certification process, the franchisee’s association will determine whether or not the franchise agreement complies with eight criteria. This is done by independent reviews from two persons from the franchisee’s association. These two must concur that the franchise agreement complies with the minimum conditions of the criteria. The criteria are:
- the franchise agreement must be governed by Swedish law and be drafted in Swedish;
- the franchisor must be limited in its ability to unilaterally amend material conditions of the franchise system;
- the franchisor must not be allowed to enter into binding agreements on behalf of franchisee;
- there must be no minimum purchase requirements that upon default may terminate agreement;
- there must be an obligation for the franchisor to buy back the franchisee’s stock upon termination;
- there must be limitations on in-term and post-term non-competes, i.e. limited to territory and limited to one year after termination;
- there must be possibilities to resolve disputes with limited costs, i.e. disputes should be resolved in public courts or in expedited arbitrations or there should be an undertaking from the franchisor to bear costs higher than a certain amount if arbitration is chosen;
- there must be limited personal liability for franchisees and such risks should be able to be calculated with reasonable foreseeability.
I have been in contact with the Swedish Franchisee’s Association and understand that they currently have certified at least ten franchise agreements. Eight of these systems are published on its web site. Two of the systems that have certified the agreements are major fuel distributor systems.
It is interesting that more franchise systems may follow to certificate. According to what I have learnt, some (bigger) franchise systems find it very helpful to offer a certified franchise agreement to their franchisees. In doing so, the franchisor takes out, or at least minimizes, the negotiating part of entering into a franchise agreement with a plentitude of franchisees. This lowers legal costs significantly and speeds up the process of renewing numerous franchise agreements. It may also be an argument in a future dispute.
I have also learnt that smaller franchise systems are interested in the certification process. The same rationale applies to them as for the bigger systems, but maybe even more so for a smaller system. The smaller franchisor can refer to the certification as a mark of quality for its franchise agreement but also imply that its franchise system has a certain seriousness to it, which may give that system an edge in the competition for franchisees.
The downside for franchisors that decide to certify their franchise agreements is that certain important clauses must be taken out of the agreement and not all franchisors are ready to do that. However, the franchise systems are usually good at adapting and when looking really hard into each criteria that must be adhered to, it is not unimaginable that many franchise systems’ agreements could be certified, if required.
Anders Thylin, IDI franchising expert for Sweden