Franchising Legislation
Franchising and legislation in Finland
By Hanna-Maija Elo, Attorney-at-Law, Partner, Properta Attorneys Ltd
February 2024
In Finland, the principle of the general freedom of contract applies. There is no specific franchising legislation in Finland and thus franchise is legally considered as one form of agreement-based cooperation between two parties, mostly both companies. In general, franchising is described as being a long-term cooperative relationship between two independent companies. In this cooperation, the franchisor gives to the franchisee, against an agreed payment, among others the right to use the business model developed by the franchisor in accordance with its plans and instructions.
As there is no franchise-specific legislation in Finland, the laws regulating
business relations and agreements in general, for example, the Contracts Act, the Act on Regulating the Agreement Terms between Entrepreneurs, the Trademarks Act, the Competition Act, The Employment Contracts Act and the Unfair Business Practices Act, apply.
There are no special approvals or licences that must be obtained unless the franchising chain operates within a particular regulated line of business such as the security, medical or financial sectors, or the food and alcoholic beverages industry.
Contracts Act and competition rules
The Contracts Act and the Act on Regulating the Contract Terms Between Entrepreneurs include basic rules about reasonable agreement terms between entrepreneurs. The most relevant rules for franchising in the Contracts Act are sections 36 and 38. In accordance with section 36, unreasonable clauses and contracts can be adjusted. According to the Act on Regulating the Contract Terms between Entrepreneurs, the agreements between entrepreneurs must not include such terms that would be unreasonable for the other party of the agreement, especially when taking into account the weaker status of that agreement party (that is, the franchisee). Using and applying such agreement terms can be prohibited by the Market Court and the prohibition can be reinforced through a conditional fine.
Furthermore, in accordance with section 38 of the Contracts Act, non-competition clauses in the franchise agreements may be considered too restrictive or they can be considered to unreasonably limit the freedom of action of a party to such restriction.
The Competition Act prohibits price-fixing directly and indirectly – the franchisor cannot order the minimum prices to be charged by the franchisees. The use of maximum resale prices or recommended prices is thus not prohibited if they do not actually amount to a minimum resale price. The Finnish competition rules are interpreted in accordance with the EU competition rules. Consequently, the interpretation guidelines for the EU competition rules are also directly applicable to Finnish vertical agreements. The provisions of the EU Block Exemption on Vertical Agreements and concerted practices (Commission Regulation (EC) No. 2022/720) must also be considered in respect of the terms of franchise agreements. More information about the vertical agreements can be found from the website of the Finnish Competition and Consumer Authority here: https://www.kkv.fi/en/competition-affairs/vertical-agreements/.
Unfair Business Practices Act
The Unfair Business Practices Act prohibits the use of false and misleading expressions concerning one’s own business operations or those of another party, which are of a character tending to affect the supply of, or demand for, a commodity. The Unfair Business Practices Act also sets the basic principle according to which good business practices may not be violated nor may practices that are otherwise unfair to other entrepreneurs be used in business.
In Finland, there are no specific legal provisions concerning the disclosure obligations of franchisors. But the Unfair Business Practices Act prohibits the use of false and misleading expressions concerning one’s own business operations or those of another party that are of a character tending to affect the supply of, or demand for, a commodity. Based on this rule, the franchisor shall be considered obliged to provide an accurate description of its operations to the franchisee and if the franchisor fails to fulfil this obligation and gives a prospective franchisee an untrue or too favorable an impression, this may constitute grounds for rescinding or terminating the entire agreement.
If the rules of the Unfair Business Practices Act are to be referred to because the franchisor has given the franchisee false and misleading expressions about the franchisor’s business, the Market Court may prohibit the franchisor’s action. The order of the Market Court may be reinforced through a thread of fine. The franchisee’s right to possible damages is considered based on the general laws and rules concerning damages like the Tort Liability Act. Thus, the franchisee must be able to prove that it has suffered damages because of the acts of the franchisor.
Finnish Franchising Association’s Code of Ethics
The Finnish Franchising Association (“FFA”) is a member of the European Franchise Federation. As a member of EFF, FFA is committed to complying with EFF’s ethical rules, the ”European Code of Ethics for Franchising”, and to ensure that FFA’s Code of Ethics complies with EFF’s ethical rules. FFA’s Code of Ethics is a self-regulatory norm for the franchise industry, the aim of which is to define good practice in the industry and serve as a basis for improving the operating conditions for cooperation between franchisors and entrepreneurs. The Code of Ethics is applicable in all stages of the franchise relationship, i.e. before the conclusion of the franchise agreement, during the validity period of the agreement and after the end of the agreement. The Code of Ethics does not as such and does not automatically replace or supplement the franchise agreement, but all franchisor members of FFA are committed to complying with the Code of Ethics in their operations. Many member chains of FFA therefore either refer to the Code of Ethics in their franchise agreement, include parts of the Code of Ethics directly in their agreement, or add the Code of Ethics as an appendix to the franchise agreement as part of the franchise agreement.
When a franchise chain that is a candidate member of FFA applies for actual membership, the chain must have its franchise agreement reviewed by FFA to ensure that the agreement meets the minimum requirements of the Code of Ethics. In addition, compliance with the Code of Ethics can be submitted to FFA’s three-member (chairman, representative of franchisors and representative of franchise entrepreneurs) Ethical Committee. FFA’s Ethical Committee will give a statement on whether a certain procedure of the franchisor or franchises is in accordance with good franchising practice and whether the procedure is in accordance with FFA’s Code of Ethics.
As part of the guiding principles of the franchise agreement, the Code of Ethics define the obligations of both the franchisor and the franchisee, which should at least be included in franchise agreements.
According to the FFA’s Code of Ethics, all written material concerning the franchising cooperation must be given to the franchisee well before any binding agreement is signed. If the franchisor demands that a preliminary agreement is signed by a franchisee candidate, before signing the preliminary agreement the franchisee must be given in writing information about the reasons for the preliminary agreement and about the payment the franchisee must pay to the franchisor to cover the costs incurred during the agreement negotiations.
Finnish case law
Mostly franchise agreements in Finland include a provision according to which the disputes are settled in arbitration. This is why there are not many public court cases specifically relating to franchising.
Arbitration clause
According to the precedent of the Finnish Supreme Court KKO:1996:27 the use of an arbitration clause in a franchise agreement is acceptable and that the said clause is binding. In said case the Supreme Court stated that the co-operation agreement (i.e. franchise agreement) in question was a commercial agreement in nature, which the franchisee had entered into as an entrepreneur. As such the franchisor and the franchisee have not been on an equal footing with each other when entering into the agreement. It was also likely that the franchisee could not have influenced the content of the agreement and that the franchisee therefore had to accept the terms of the agreement at least almost as they were. However, when included in a commercial cooperation agreement, the arbitration clause is not an unusual or surprising contract term. The franchisee had also been allowed to familiarize himself with the text of the agreement for a week before signing it and had legal expertise at his disposal when deciding on the agreement. At the time of signing the agreement, the franchisee was employed by a travel agency. The franchisee has thus been financially independent from the franchisor and has been free to decide whether he wants to enter into a cooperation agreement under the terms offered. Taking into account what was stated above about the creation of the cooperation agreement and the nature of the agreement, the arbitration clause was not to be considered unreasonable.
Termination of a fixed term agreement
The judgment of Kouvola Court of Appeal HO 09.06.2005 641 concerned the prior termination of a fixed-term franchise agreement. The franchise agreement was made for 10 years and did not include a termination clause. However, the franchisee had after 14 months from the beginning of the franchise agreement terminated the agreement because the business was in danger to be bankrupt. According to the franchisee the franchise agreement was exceptionally long-lasting and unreasonable because it did not include a termination clause i.e. grounds for how the contract can be terminated. The Court of Appeal considered that the agreement was unreasonable.
According to Section 36 of the Contracts Act, if the condition of the legal action is unreasonable or its application would lead to unreasonableness, the condition can either be negotiated or disregarded. When evaluation unfairness, the entire content of the legal action, the position of the parties, the circumstances that prevailed when the legal action was taken and afterwards, and other factors must be taken into account. If the condition of the legal action in question is such that it is not reasonable for the agreement to remain in force unchanged in other respects due to the settlement of the condition, the agreement may be settled in other respects as well or it may be ordered to expire.
Since the continuation of franchisee’s operations has become financially impossible, the application of the agreement valid for 10 years without the possibility of termination leads to unreasonableness. Consequently, the Court of Appeal confirmed, that the franchisee had the right to withdraw from the agreement. The franchisor had not shown that the franchisee’s conduct was the reason for the franchisee’s company’s unprofitability. The Court of Appeal confirmed that the franchisee was not obliged to pay a contractual penalty or damages for the franchising and marketing fees that the franchisor did not receive because of the early termination.
Use of trademarks after the termination of the agreement
The Market Court considered in its judgement MAO:190/12 that use of the domain name and related email addresses including the franchise chains trademarks after the termination of the franchise agreement created the impression that the former franchisee was still participating in the sale of the franchisor’s products and that there would have been a business relationship between them, so the former franchisee had sought to benefit from the chain’s goodwill. The actions of the former franchisee were considered contrary to good business practice and misleading the clients and thus against the Unfair Business Practices Act. The Market Court prohibited the former franchisee, under the threat of a fine of 50.000 euros, from using the domain name in question and email addresses based on it in its business activities, as well as the in the decision listed franchisor’s trademarks in its marketing.
Retail price fixing in distribution agreements
In the judgement MAO:594/11 the Market Court imposed a 3 million euroes fine on Finnish design firm Iittala Group for minimum resale price maintenance which took place from 2005 to 2007. The Market Court found that, among other things, the terms and conditions on the resale prices of Iittala products that were included in the distribution agreements amounted to a minimum resale price for the products.