The Players, The Transactions, The Contracts and the Legal Environment
Lee Plave of Plave Koch PLC discusses franchise theory.
In a pair of columns published in The New York Times in December 1996, Thomas Friedman first posited his Golden Arches Theory of Conflict Prevention: that “[n]o two countries that both have a McDonald’s have ever fought a war against each other.” (Thomas Friedman, “Foreign Affairs Big Mac I,” NY Times, 8 December 1996.) He observed that “when a country reaches a certain level of economic development, when it has a middle class big enough to support a McDonald’s, it becomes a McDonald’s country, and people in McDonald’s countries don’t like to fight wars; they like to wait in line for burgers.”
Although Friedman’s term (the “Golden Arches Theory of Conflict Prevention”) was, by his own admission, tongue-in-cheek, his conclusion is hardly frivolous. The proliferation of franchised businesses, the build-up of investment by business people who are learning of and adapting to one another’s cultures, and the exchange of commercial ideas – all drive the notion that people from different parts of the world can live, work, and deal with one another peaceably. In an age when we are globally connected in terms of travel, trade, and communication, it is logical if not inevitable that businesses such as franchises will proliferate.
This publication recognises outstanding practitioners around the world who devote a substantial portion of their law practice to representing franchisors or franchisees. Those of us who have worked together know that this publication lists attorneys who are skilled in the art of making transactions possible. The talent of these attorneys rests on their fluency in the language of international franchising – the players, the transactions, the contracts, and the legal environment.
International franchising is alive and well notwithstanding daunting global economic challenges. In 2010, 61 per cent of McDonald’s Corporation’s revenue came from international sales, and 25 per cent of the revenue of Marriott International, Inc came from properties located outside the USA and Canada. With 8,800 USA units, the “7 Eleven” logo is one of the most recognisable brands in the USA – but that number is dwarfed by the over 13,000 units in Japan and the global total of 42,470 “7-Eleven” units. Of course, 7-Eleven, Inc itself is emblematic of the internationalisation of franchising: the brand, while closely associated with the USA, is actually owned by its Japanese licensee, Seven-Eleven Japan Co, Ltd. In Europe, almost 10,000 franchised brands operate, according to the European Franchise Federation. On the franchisee/developer side of the equation, companies such as the Al-Shaya group, of Kuwait, with more than 2,000 retail stores from the Middle East to Europe, and Berjaya Corporation of Kuala Lumpur with a multitude of retail businesses throughout Asia fuel franchising growth.
Franchise transactions require a different approach than is typical in the more conventional exchange of funds for immediately-delivered products or services, as in a typical sales transaction. Rather, a franchise transaction is more like a commercial marriage, in which independent parties bind themselves to a common course of dealing, for better or for worse, often for what is quite a number of years. The goal, as in all transactions, is to explore commercial possibilities, create new opportunities, and generate profit. But in franchising, special complexities arise because more than one level of commerce is involved in producing and delivering goods and services to the consumer: the franchisor, the franchisee, and very frequently, a master franchisee as well. And the transactions have a deeper impact than just producing revenue. Clearly, business generation is a worthy goal in itself especially at a time when job creation is a highly prized outcome of any such undertaking. However, cultural and political implications also flow from franchise transactions. In an age when we are globally connected in terms of travel, trade, and communication, it is logical if not inevitable that businesses such as franchises will proliferate. Consumers increasingly are highly knowledgeable about markets other than the one in which they live, and are exposed to new and different concepts and ideas. As much as consumers may wish to enjoy recognisable brands when they travel, they also wish to explore new possibilities, products, and services in their home markets. In this manner, global interconnectivity creates greater demand for franchised businesses and the goods and services that they offer to consumers.
In any business deal, the parties must be able to reach understandings and enter into an agreement with confidence that they can rely on their counterparty to live up to their end of the bargain. While some lawyers prefer that civil law complete the parties’ understandings, common law practitioners prefer to draw up contacts that address all of the points critical to the parties’ relationship. Under either approach, the international lawyer’s role is to help clients transact business in a reliable and amicable manner with people who live and work abroad. Special qualities are necessary to help clients recognise the possibilities, see and address unknown elements, and overcome the commercial fear of the unknown so that these transactions can take place.
THE LEGAL ENVIRONMENT
The skillful explanation by talented lawyers of how to make transactions work, combined with parties’ willingness to address business challenges constructively, is the touchstone of completing an international deal. But in addition to these factors and economic fundamentals, the legal environment in each party country must be stable, transparent, and reliable. Without this backdrop, the parties’ agreement ultimately may not be enforced. The OECD puts it well on its investment policy webpage: “The ability to make and enforce contracts and resolve disputes is fundamental if markets are to function properly. Good enforcement procedures enhance predictability in commercial relationships and reduce uncertainty by assuring investors that their contractual rights will be upheld promptly by local courts. When procedures for enforcing commercial transactions are bureaucratic and cumbersome or when contractual disputes cannot be resolved in a timely and cost effective manner, economies rely on less efficient commercial practices. Traders depend more heavily on personal and family contacts; banks reduce the amount of lending because they cannot be assured of the ability to collect on debts or obtain control of property pledged as collateral to secure loans; and transactions tend to be conducted on a cash-only basis. This limits the funding available for business expansion and slows down trade, investment, economic growth and development.” In other words, another essential element in any transaction is that your counterparty knows that it will be compelled – by a court – to abide by the terms of its agreement. For this reason, proficient barristers and litigators play an indispensable role not only in resolving disputes, but also in assuring parties to the extent possible that their legitimate contractual expectations will be reliably fulfilled.
Attorneys have an ongoing obligation to their clients to develop and maintain proficiency so that they can provide a better understanding of the challenges, risks, and opportunities under the law. However, it is inescapable that in order for practitioners to understand the laws of other countries, they must collaborate with expert counsel in those jurisdictions. Publications such as this one help connect elite lawyers to one another, and serve the needs of clients everywhere.