Franchising Legislation

Franchising Legislation in Finland

By Petri Rinkinen, Attorney-at-Law, Castrén & Snellman Attorneys Ltd
August 2005
Revised and updated from an earlier article by Petri Rinkinen and Marja Tommila.

Freedom of contract

The most important principle in Finland with respect to franchise agreements is that of general freedom of contract. There is no specific Finnish legislation governing franchising operations. However, certain legislative stipulations are especially relevant to franchise agreements.

Various laws depending about the nature of the franchise business govern the material content of a franchise agreement. Trademark law, employment law, consumer protection laws, company laws etc. must always be taken into account when drafting the agreement. These are not dealt with in this article, but instead certain mandatory rules and basic elements of the Finnish legislative system, which we believe are the most interesting to a non-Finnish audience.

It is always recommendable to be in contact with local attorneys and other advisers when entering a new market and the same is strongly recommended to everyone who is interested in entering the Finnish market.

The following legislative provisions may be considered to be particularly relevant in franchising in Finland.

Unreasonable clauses and contracts can be adjusted (Section 36 of the Contracts Act)

Section 36 of the Contracts Act (228/1929 as amended) prescribes a general requirement of reasonableness, whereby a court of law or an arbitrator may adjust a franchise agreement, which has been concluded on unreasonable terms. While general freedom of contract might thus be invoked to support highly restrictive conditions placed on the franchisee, a danger would then exist that these conditions might subsequently be adjusted to render them more reasonable. One particular problem in this area is that it is very difficult, or even impossible, to predict the manner in which a court will render an agreement more reasonable. It is therefore also in the interests of the franchisor to ensure that the franchise agreement is drafted from the outset in a manner which is reasonable from the point of view of both of the parties.

Non-competition clauses may not be too restrictive (Section 38 of the Contracts Act)

This section of the Contracts Act contains provisions on the use of non-competition clauses in agreements. It stipulates that no non-competition clause shall be binding on a party insofar as it unreasonably restricts his freedom of action. This means that the restraint of trade conditions of a franchise agreement may not be too restrictive, nor may they unreasonably limit the freedom of action of a party thereto. The provisions of the EU Vertical Agreements Block Exemption Regulation (Commission Regulation (EC) No 2790/1999) must also be considered in this respect, if applicable.

Price fixing is prohibited (Section 4 of the Competition Act)

The Competition Act (480/1992 as amended, note especially that the act was amended in 2004 in order for it to follow the EU competition legislation) seeks to ensure healthy and functional competition in the economy and to prevent damaging restrictions of competition.

Section 4 of the Act prohibits vertical and horizontal price fixing. The provision means that a franchisor may not stipulate the prices to be charged in the chain, nor may entrepreneurs in the chain agree among themselves on applicable prices. The Act does not prohibit price recommendations, however, and so a franchisor may provide the chain with the price-setting ground recommendations, which it has found to be effective.

Other provisions of the Competition Act must also be taken into account, but they are not dealt in detail in this article. As mentioned the act follows the EU competition rules very faithfully. For further information, please see the web site of the Finnish Competition Authority, www.kilpailuvirasto.fi, pages available also in English.

Disclosure rules are very limited (The Unfair Trade Practices Act, 1061/1978)

Many countries have special legislative provisions governing the disclosure obligations of franchisors. While there are no such special provisions in Finland, the Unfair Trade 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. This provision may well also be regarded as applicable to franchise agreement negotiations, i.e. the franchisor must provide an accurate description of its operations. If a franchisor infringes this requirement and gives a prospective franchisee an untrue or too favourable impression, then this may constitute grounds for rescinding or terminating the entire agreement.

European Union Legislation

Franchising operations in Finland are also naturally bound by the legislation of the European Union governing franchising.

Commission Regulation (EC) No 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practises (Vertical Distribution Agreements Block Exemption Regulation), which governs also franchising agreements, which fall under EU competition rules, is the most important of the EU legislation. There are no specific national rules in Finland concerning whether an agreement falls under EU competition rules and thus this aspect is not dealt with in detail in this article. Neither there has been any specific Finnish interpretations about applying the Vertical Distribution Agreements Block Exemption Regulation, thus general EU principles apply in Finland.

Other Regulation of Franchising Operations

The Code of Ethics of the Finnish Franchising Association

The Finnish Franchising Association (FFA) has issued a Code of Ethics, with which the members of the Association are required to comply when concluding agreements. This code of ethics may be regarded as a good guide when compiling agreements for all franchising chains, even when the chain does not intend to join the Association. By complying with the Code, a chain may be confident that its agreement and operating practices are of a high ethical standard and thus stand on a sustainable footing.

The Code can be found on the FFA’s web page in Finnish. The code follows the EFF’s (European Franchise Federation) Code of Ethics very closely – it is actually almost identical translation from it.

FFA has an Ethical Board, which issues statements based on the Ethical rules from cases, which has been brought in front of it. These decisions can be found on FFA’s web page (also only available in Finnish).

Judgement of the Market Court in the Musta Pörssi Case

The Finnish Market Court has issued a judgement on chain marketing and its associated liability issues (Market Court judgement no. 1997:012). In this case the Court levied fines on the parent company of a chain as a result of unlawful advertising by members of the chain.

On the basis of this judgement it may be held that a franchisor may be liable for the marketing activities of enterprises in the chain. Allowances must be made for this in practices pertaining to agreements and adequate precautions must be included therein to ensure that no advertising occurs which is contrary to the law or to the stipulations of public authorities.

Exemption by the Finnish Competition Authority
The Competition Authority has issued an exemption (14.3.2003, 187/67/2003 valid till 28.2.2008) on price cooperation by business enterprises when implementing a campaign of offers intended for consumers. This exemption allows campaigns of offers extending throughout the chain and the use of consistent prices when certain conditions are met. These conditions include a limited time period (no longer than two months) and the right of the vendor to sell the product or service at an even lower price should he so desire.

New exemptions shall not be issued after the present ones expires and thus after the above mentioned exemption expires, each chain shall evaluate its operations independently and according to the then valid competition legislation.

Case Law

Almost without exception franchise agreements stipulate arbitration as the means of settling disputes. Because of this there is very little public material on legal proceedings arising from franchising disputes. The only Supreme Court judgement pertaining to a franchising operation is judgement No 1996:27 holding that the use of an arbitration clause in a franchise agreement is acceptable and that the said clause is binding.