Buying a franchise: check which law governs the agreement

When joining an international franchise network in Finland, you may receive a draft agreement stating that the relationship is governed by the law of a country other than Finland. This clause may look like a technical detail, but it affects how the agreement is interpreted and your rights if problems arise. Before buying a franchise, establish which country’s rules you are signing up to and what operating in Finland requires, regardless of the chosen law.

1. Distinguish the governing law from the contract language and dispute venue

A governing law clause identifies the country whose law will, in principle, be used to assess the contractual relationship. It is not the same as the language of the agreement, the place where it is signed or the venue for resolving disputes. An English-language agreement can be governed by Finnish law, and having premises in Finland does not, on its own, guarantee that Finnish law applies to the entire agreement.

The choice of law may affect, for example, how an ambiguous clause is interpreted, when compensation is available for breach of contract and how limitations of liability are assessed. Simply translating the agreement into Finnish therefore does not establish a clause’s legal effect.

Carry out an initial review of the contract documents:

• Which country’s law has been chosen for the main franchise agreement?
• Does a separate licensing, services or supply agreement specify a different governing law?
• Are any issues excluded from the choice of law?
• Which language version takes precedence if the translations differ?

Ask the franchisor to show you where the answers appear in the documents. A verbal assurance that franchisees in Finland follow Finnish rules in practice is no substitute for assessing the written governing law clause. If there is no such clause, the applicable law is determined by the rules of private international law. Do not automatically assume that the absence of a clause means Finnish law applies.

2. Understand Finland’s regulatory framework

Finland has no specific franchising act, statutory franchise disclosure document or dedicated registration system for franchise agreements. This does not mean franchising is unregulated. Legislation affecting franchise networks’ agreements and operations includes the Finnish Contracts Act, the Unfair Business Practices Act, the Competition Act and the Trademarks Act.

Section 36 of the Finnish Contracts Act allows an unreasonable contractual term to be adjusted or set aside where the conditions for applying the provision are met. In a business-to-business agreement, however, it should not be treated as a guaranteed safety net after the event. If foreign law is chosen to govern the agreement, the potential relevance of this Finnish provision must also be assessed separately.

Material information provided before the agreement is signed must be sufficient, accurate and not misleading. Member networks of the Finnish Franchising Association are also bound by the association’s code of ethics. This is self-regulation, not legislation enacted by Parliament. Check membership separately, along with how the network has committed to the code.

Where a contract has an international element, the Rome I Regulation on the law applicable to contractual obligations is a key starting point in the EU. It generally allows the parties to choose the governing law, but also contains rules limiting that choice. Choosing foreign law therefore does not provide a blanket exemption from mandatory Finnish or EU requirements.

For example, obligations relating to staff working in Finland, sales to Finnish consumers and competition must be assessed under the rules governing their respective scope of application. Distinguish the legal system governing your agreement with the franchisor from your business’s obligations as an employer and seller.

3. Commission a focused assessment of the effects of foreign law

If foreign law is proposed for the agreement, first ask the franchisor to explain the choice. It may want to use the same contract template across several countries. Administrative consistency, however, tells you neither whether the template suits a business operating in Finland nor how much reviewing it will cost.

Give a lawyer with franchising expertise the full set of contract documents and request a written assessment with a clearly defined scope. A specialist in the chosen country’s law may need to be involved. The aim is not to investigate an entire foreign legal system, but to identify the differences that affect your particular commitments.

Ask for answers to at least these questions:

• How does the chosen law affect interpretation of the agreement and contractual liability?
• What time limits might apply to bringing claims?
• Could limitations of liability have a different effect than they would under Finnish law?
• Which mandatory rules applicable in Finland must be taken into account despite the choice of law?
• Are specific terms tailored to Finnish conditions needed?

Request a cost estimate before instructing the lawyer. Where necessary, include translation costs and fees for a foreign legal specialist in your purchase budget. Compare franchise networks as a whole: a low initial franchise fee alone does not tell you how much it may cost to understand the agreement and exercise your rights later.

4. Negotiate a clear, workable solution

You can propose that Finnish law should govern the franchise operation in Finland. The franchisor does not have to agree, but its response will help you assess the scope for negotiation. If foreign law remains in the agreement, focus on ensuring that the key rights and obligations are drafted as precisely as possible.

Do not accept an unclear arrangement in which one country’s law governs the agreement while a general promise is made to respect the rights of franchisees operating in Finland. Ask for clarification of what that promise means and how it relates to the other terms. Have any amendments reviewed as well: a single addition can have unexpected effects on the agreement as a whole.

Before signing, make sure you understand the final text, have access to all binding documents and know where to obtain advice on the chosen law if needed. Keep the franchisor’s written responses and the version of the agreement used for the legal assessment. This will help you distinguish promises made during negotiations from the terms ultimately agreed.

Practical reminder: clarify the choice of law before committing, not only when a disagreement arises. Sign only once you understand what the chosen law means for your business and which Finnish obligations apply to your operations regardless.