International Franchising - What Franchisors Need to Know before Expanding Abroad (Part II)
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(Part two of a two part series)
Franchise agreements drafted for common law countries tend to be longer and more comprehensive than franchise agreements used in civil law countries. Franchisors based in the United States often use their common law agreements in civil law countries without localization, reasoning that a more comprehensive agreement is all that is needed to protect them in a civil law system. However, when considering this approach, franchisors and their counsel need to be aware that a more comprehensive franchise agreement alone may not be enough to protect them in a civil law system. Recently, when discussing this issue with Kenneth A. Goss, Esq., in house counsel to a franchisor experienced in franchising in countries under common law, civil law and Islamic law systems, Mr. Goss explained some general principles common to many civil law systems from the perspective of a common law practitioner. The following is the second of Mr. Goss' two part guest post on this important topic:
Common Law Franchise Agreements in Civil Law Systems
As discussed in Part I of this series, courts in civil law systems are not bound by precedent, may look only to statutes as the source of law applicable to a franchise relationship and may go beyond the plain meaning of the terms of a franchise agreement to ascertain the parties' intent. As a practical matter, this means that franchisors should expect courts in a civil law system to apply certain mandatory rules regardless of whether the parties have negotiated and agreed to different terms in their common law franchise agreement. Additionally, courts may apply by analogy rules the legislature intended to govern contracts other than franchise agreements if the legislature is silent on an issue or the court otherwise deems it appropriate. In each case, courts in civil law systems typically will not recognize that a common law franchise agreement contains the complete agreement between the parties and may look beyond the four corners of a franchise agreement to ascertain the parties' intent.
Mandatory Rules
Civil codes typically delineate general rules of contract construction that are applicable to all contracts including franchise agreements. Examples of terms that are often mandatory in civil law systems relate to the definition of a contract, whether or not parties have the capacity to enter into a contract, the object of the contract, the formalities for creating the contract, the evidence a court will use to determine the parties' intent and the legal effect of the contract. Such are analogous to the boilerplate terms found in contracts in the United States. However, unlike boilerplate, parties cannot agree to opt out of mandatory terms provided by civil codes. In other words, courts in civil law countries will simply substitute mandatory terms for conflicting provisions of a franchise agreement, even when to do so is contrary to the express intent of the parties. Therefore, franchisors should be prepared to accept the mandatory terms of a civil code of the target country as part of their franchise agreement.
Rules Applicable by Analogy
A civil law court's ability to draw by analogy rules applicable to different types of contracts reflects the characteristic systemization of civil code systems and the emphasis placed on the classification of contracts. Traditionally, the interpretation of a contract in a civil law system would begin with defining the type of contract and then extracting the legal consequences from that definition. As stated in detail below, contracts that govern relationships that the legislature has chosen to exhaustively define in the civil code are called nominate contracts and, conversely, contracts that govern relationships that the legislature has not exhaustively defined are called innominate contracts.
The concept of nominate contracts, which evolved from the Roman law requirement that litigants name the contract when an action was filed, greatly simplifies certain contractual relationships by embodying many of the terms of an agreement in the statute. In practical terms, parties to a nominate contract for sale in a civil law country may, for example, simply state what good is to be sold and at what price. All other terms of the contract are contained in the applicable provisions of the civil code. Typically, nominate contracts are exchange agreements such as sale, lease, loan and insurance contracts and the list will vary from country to country depending on the enactments of the respective law making body. In each case, courts must first decide what type of nominate contract the parties entered into in order to apply the correct statutory rules.
If a court determines that a contract does not fit into any type of nominate contract - and thus is innominate - then the applicable rules will be cobbled together by the court. Innominate contracts typically include agreements for cooperation, such as business undertakings and employment relations, in which the parties set forth more of the terms of the relationship in the contract. Franchise agreements usually fall into this category because courts have universally held franchise agreements to be a new type of contract without a specific statutory discipline. In many modern civil law systems, the classification of contracts as nominate or innominate may be obsolete where the civil code states that the actual terms will be considered regardless of the name that the parties have given to the contract. In this regard, it may seem proper to use a common law franchise agreement in a civil law system. However, courts may not always look for the parties' mutual intent within the franchise agreement and, without precedent to follow, may borrow and apply terms from varies nominate contracts to a franchise agreement in ways that may not be anticipated by the common law practitioner. For this reason, it is important for a franchisor to localize its franchise agreement before using the same.
Judicial Interpretation
Additionally, courts in civil law systems may apply rules in interpreting common law franchise agreements that are inapposite to rules of common law procedure and under which a common law franchise agreement is ill suited to operate. In particular, civil law courts typically consider parol evidence in ascertaining the mutual intent of the parties. Parol evidence is an oral statement or other evidence relating to the general course of the parties' behavior that purportedly modifies, explains or contradicts a written contract such as a franchise agreement. While common law franchise agreements typically are drafted to contain the complete agreement between the parties, a civil law court may not see it as such. Civil law courts may use parol evidence to modify, vary, explain or contradict the literal meaning of the terms of a valid written franchise agreement if the court deems the mutual intent of the parties to be other than what is contained in the franchise agreement.
U.S. based franchisors considering expansion overseas should include the type of legal system of the target country as a factor in deciding whether or not to enter into any particular country. This includes having a basic understanding of the general approach to contract interpretation of the relevant legal system and, as always, seeking the advice of local counsel as early in the process as possible.
