Many foreign franchisors underestimate – or even ignore – the changes in their disclosure documents and in their franchise agreements, whether they are master franchising agreements or direct franchising agreements, according to the different legal adopted to enter the Italian market – that are needed to expand their franchise properly and without legal risks in Italy. Legal consequences of a failure, wrongful or improper adaptation of such documents can be very heavy for franchisors. Therefore, such activity is always necessary for a franchise expansion in Italy. Let’s briefly examine what adaptations and changes foreign franchisors need to expand their franchise in Italy.
1. Expand a franchise in Italy: why an adaptation of the Disclosure Document and Franchise Agreement is needed.
Many foreign franchisors underestimate, or sometimes even ignore, the changes in their disclosure documents and their standard franchise agreements – whether they are master franchising agreements, or direct franchising agreements, according to the different legal strategy adopted to enter the Italian market – that are needed in order to expand their franchise properly and without legal risks in Italy.
In fact, both the Franchise Disclosure document and the standard franchise agreement used by a foreign franchisor, irrespective its country origin and filed of activity, cannot be used as such in Italy, but require a careful adaptation. Legal consequences of a failure, wrongful or improper adaptation of such documents can be very heavy for franchisors. Therefore, such activity is always necessary before initiating a franchise expansion in Italy.
Such adaptation requires, of course, time and costs. Misunderstanding the time and cost required to properly revise and/or draft the Franchise Disclosure document and the standard franchise agreement for their use in Italy can be problematic. Franchisors are tipically in a hurry to have documents available once they have an international prospect, and they are also reluctant to incur the expenses of preparing documents until that point.
Let’s briefly examine what adaptations and changes foreign franchisors need to expand their franchise in Italy.
2. What changes to the Disclosure Document are needed for Italy?
Let’s start with the adaptations needed for the Franchising Disclosure Document.
As other foreign regulations on franchising, Italian Law n. 129/2004 on franchising agreements (“Italian Franchise Law”) imposes an obligation on franchisors – including foreign franchisors, as long as they operate in Italy – to provide the potential franchisees with specific information on several items (duty of disclosure), before the franchise agreement is signed, in order to give the potential franchisees a cooling-off period.
In particular, according to Italian Franchise Law, franchisors must provide candidate franchisees with specific information, in Italian language, on a number of issues (such as information about the franchisor, its trademark, the franchise system, the number of franchisees, litigation etc.) at least 30 days before signing the franchise contract, to enable them to make an informed decision about the proposed business.
A special standard of disclosure is required for foreign franchisors who wish to enter into business with Italian franchisees or Master franchisees, as provided for by Min. Decree n. 204/2005.
Italian Franchise Law is mandatory, i.e. it applies irrespective of any different possible applicable law contained in the franchise agreement.
If franchisors fail to provide potential franchisees with the mandatory information, according to Italian Franchise Law, or if they provide wrongful or incomplete information, they are exposed to serious legal consequences.
Italian Franchise disclosure law is someway similar to other franchise disclosure laws in force in other countries (for example in U.S.A, France, Spain etc.); however, the franchise disclosure document provided for by Italian Franchise Law is not identical to other legislations.
In some cases, the disclosure information required by Italian Franchise Law is simpler than that provide for in other countries, such as in the U.S.); in other cases, it is similar, but in any case, not identical, and therefore the Franchise Disclosure Document needs to be adapted to be compliant with Italian Franchise Law. There are also many countries where such disclosure information is not required at all by law (such as some European countries, Asian countries etc.): in such cases, the disclosure document provided for by Italian Franchise Law must be entirely drafted.
Therefore, the Franchise Disclosure document to be used by foreign franchisors wishing to expand their franchise in Italy, needs to be drafted and/or adapted very carefully, according to Italian Franchise Law and in Italian language.
To such extent, it is highly recommended that such important activity is done by and/or under the supervision and advice of an expert Italian franchise lawyer, in order to avoid any legal problems.
3. What changes to the Standard Franchise Agreement are needed for Italy?
As in the case of the Franchise Disclosure Document also the standard franchise agreement – i.e. the master franchising agreement, and/or the direct franchising agreement, according to the different legal strategy adopted to enter the Italian market – needs to be carefully revised and adapted, in expectation of an expansion of the foreign franchise in Italy.
In fact, any standard franchise agreement used by foreign franchisors is originally drafted according to a legislation and a business scenario that is inevitably different from the Italian one, and therefore it requires an adaptation for its proper use in Italy.
In fact, Italian Franchise Law contains a number of mandatory provisions concerning franchise agreements. In particular:
- franchisors must have tested their business concept or formula on the market, before establishing their franchise in Italy;
- the Know-how to be transmitted to franchisees must be consistent with specific provisions;
- there is a minimum three year duration for the franchise agreement.
Therefore, the franchise agreement to be used for the expansion in Italy must be compliant with such provisions and must be duly verified by an experienced Italian franchise lawyer, in order to avoid serious legal risks.
In case Italian law governs the franchise agreement, many other provisions on commercial law should be taken into consideration, mainly contained in the Italian Civil Code.
In this regard, it should be considered that, although the franchise agreement can be governed by a law different from the Italian one, Italian Law should be always chosen in the contract as the applicable law, since the franchise agreement will be signed and will be applied in Italy. In fact, it usually happens in Italian practice that franchise agreements are subject to Italian Law, even if the franchisor is not an Italian company. In addition, potential franchisees would be very reluctant to sign an agreement not governed by Italian law, since they are not familiar with a foreign regulation.
The same applies to the resolution of disputes coming from the franchise agreement: although such disputes can be solved by a foreign court or arbitration, usually franchise agreements contain a clause stating that disputes are decided by an Italian court or arbitration.
Apart from the specific legal rules contained in the franchise agreement, it is also important that the same is revised and adapted to Italian contractual commercial practice on franchising agreements. In fact, the way franchise agreements are drafted in Italy are different than in other countries, such as in the U.S. or in Asia. For example, the way how compensation duration, termination, obligations of the parties, confidentiality, resolution of disputes etc. are drafted in commercial contracts in Italy can be quite different from similar contracts drafted outside. A potential franchisee would be very unfamiliar with an agreement drafted differently than Italian common practice, and therefore would be very unlikely to sign it.
The same applies to preliminary franchising agreements (such as letters of intent and option contracts), that are quite common in Italian franchising practice.
As far as master franchising agreements are concerned, an important issue in structuring a master franchise agreement is the nature and content of the unit sub-franchise agreements to be granted by the master franchisee. In fact, if a franchisor uses the Master Franchise scheme to expand in Italy, he generally provides the Master Franchisee with a draft standard sub-franchise contract to which he must comply, except for exceptions dictated by the peculiarity of the Italian market and by local legislation.
The franchisor will want to have continuity and the comfort that comes from requiring the use by the master franchisee of the form of unit agreement used in the franchisor’s home jurisdiction. On the other hand, the master franchisee will want to have some flexibility to adapt the standard agreement for Italian customs, circumstances, and law. The master franchisee may also wish to have some flexibility to vary the standard agreement for special deals and situations. Ultimately, there has to be a workable balance between the needs of the franchisor and the master franchisee.
Finally, although the franchise agreement need not to be in Italian by Law, it is common practice in Italy that also such agreements – as well as their annexed documents, including the Operation Manual – are drafted in Italian language. Again, potential franchisees would be very reluctant to sign a franchise agreement written in a language that they don’t know well.
In conclusion, there are a lot of important adaptations that standard foreign franchise agreements need before the franchise expansion in Italy is started. Such adaptation should be done by an Italian law firm, with a significant knowledge and expertise in the franchising field. In fact, a thorough review and revision of the franchisor’s domestic franchise agreements and annexed documents are required to prepare the franchise expansion Italy.
Therefore, international franchisors will need to invest significant time in making the decisions required to prepare the documents needed for their expansion in Italy.
Avv. Valerio Pandolfini
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The information contained in this article is of a general nature and is not to be considered an exhaustive examination of the various issues, nor is it intended to express an opinion or provide legal advice. Specific legal advice must be provided with regard to individual cases.