Jurisdiction in Franchising Agreements: In Search of Efficiency

Jurisdiction in Franchising Agreements: In Search of Efficiency Abstract United States’ and European legal systems treat choice-of-forum clauses differently. The US practice focuses in the substantial fairness of the clause while European provisions concentrate in its formal validity. These differences can affect franchising agreements. The article aims to compare both systems and to determine which one fits better with these complex transactions in which the balance of power of the parties is always challenged. This comparative analysis is based on the assumption that the aim of private international law is to minimize the costs of an international private relation and to allocate them to the cheapest risk bearer, in other words, to provide the most efficient solution. 1. INTRODUCTION Franchising has assumed a place of great interest in the global economy. The latest forecast for franchise businesses of the International Franchise Association (IFA) shows 2017 as a year of solid growth for the franchise sector, still ahead of the pace of growth in 2016.1 In its start-up phase, located in the United States in the early 1900s, this way of making business was used to create national networks.2 More recently, it has been used as a tool for international expansion. Its success is due to the fact that the risk-taking of the enterprise is smaller if it uses franchising techniques than if it undertakes the ‘conquest’ of an unknown new market on its own. In so far as the number of international franchising agreements has grown, the number of disputes related to these agreements has also boosted. When these disputes arise, Private International Law (PIL) comes into play. This branch of law shall determine in the first place which authority has jurisdiction over the lawsuit. Its rules should be considered by the entrepreneurs who are contemplating making use of the franchising vehicle in an international context even before the execution of the agreement. Careful drafting of forum-selection clauses is indispensable to preserving time and money if and when a dispute occurs.3 The first decision to be taken is the selection of an appropriate dispute resolution mechanism. Distinction must be made between mediation, litigation and arbitration. Even if mediation and arbitration clauses are more and more common in international franchise agreements, the majority of contractors still prefer the court system of a given State. Given that franchising agreements are almost by definition written agreements, the parties usually include a choice-of-forum clause. This is why this article will focus on jurisdiction clauses. PIL rules that govern choice-of-forum agreements differ from system to system. This article will pay attention to European Private International Law (hereinafter, ‘EPIL’) rules and the US rules. As it will be discussed in the article, in EPIL the conditions of validity of a choice-of-forum clause are mainly formal. EPIL considers franchising as any other business-to-business contract. However, parties to these agreements usually do not have the same, or even a similar, bargaining power. The influence that this difference of bargaining power should have in EPIL has been masterfully addressed in relation to choice-of-law agreements.4 However, this issue has not been studied with respect to the field of international jurisdiction, where it seems to be generally accepted that franchisees should be treated as any other entrepreneur, and therefore, that the choice-of-forum rules should be applied strictly. In this matter, the US jurisdiction system works differently. As it will be shown in the article, it subjects the enforcement of a choice-of-court agreement to a test of ‘reasonableness’ and ‘fairness’.5 As a consequence, the same jurisdiction clause could be enforced by an EU court and declared null and void by a US tribunal in the light of the unequal bargaining power of the parties. This article aims to compare both systems and to determine which one of them fits better with this kind of contracts, in other words, which one encourages the parties to enter into an international franchising agreement. The analysis will be made using a Law & Economics perspective. This method will be used as a ‘pedagogical tool’ which helps to measure the fairness of PIL legal rules, as it has already been used by a significant stream of scholars.6 From this point of view, a jurisdiction rule is fair if it allocates litigation costs efficiently. Litigation costs will be efficiently located if they are borne by the ‘cheapest risk bearer’ (as the other party would be willing to pay the most so as not to bear them). If jurisdictional costs are not efficiently allocated, this is, if they are not born by the cheapest risk bearer but by the other party, this contracting party might decide not to enter into the contract. The contract might never be concluded and both parties will lose (the prisoner’s dilemma). The only way to enhance international exchange is to assign litigation costs to the cheapest risk bearer.7 In particular, this article will analyse if the allocation of litigation costs is influenced by the bargaining power of the parties to the contract. The main reason for using this approach is that it can be applied to all PIL systems because efficiency is a ‘universal’ concept. As a consequence, this analysis works no matter the countries the agreement is connected to. If the standard is efficiency, the PIL rule that should apply to a certain kind of relation, ie franchise contracts, should be the same in all PIL systems around the world. The following example will clarify this concept: in the frame of an international franchising agreement executed by a Californian franchisor and a French franchisee, instead of having one ‘fair’ rule from the US law perspective and one from the EU, there will be just one ‘efficient’ rule of jurisdiction for this relationship.8 In this article, the analysis will be reduced to the comparison of two established common law (US) and civil law (EU) PIL systems. Summarizing, this article aims to compare the US and EU PIL systems to determine which one is more efficient for franchising choice-of-forum clauses. In the first place, the concept and structure of international franchising agreements will be circumscribed. This analysis will show that the parties to a franchising contract do not usually have the same bargaining power. Secondly, European and the US choice-of-forum rules applicable to this contract will be examined. Then, the efficiency of both systems will be tested to show that, in most cases, party autonomy does not lead to the forum that presumptively is the most efficient to both parties, but only to the franchisor. 2. INTERNATIONAL FRANCHISE AGREEMENTS: CONCEPT AND STRUCTURE A. In Search of a Uniform Concept Albeit franchising contracts are not covered by the majority of legal systems, its social and economic popularity have made them ‘socially regulated’ contracts.9 All around the world, everybody knows what a franchise is. However, the concept of franchising agreements can have different nuances from country to country. It is documented that franchise contracts were first created in the US in 1892 (Singer Sewing’s Company).10 This is franchising for the Americans, but it is still not franchising for Europeans. In this stage of its evolution, franchising consisted in granting the right to sell a company’s products or services and to use its brand and image. In Europe this kind of contract is not a franchise but a ‘concession’. For Europeans, franchising is something more. That ‘something more’ is the cession not only of Intellectual Property rights, and the image and brand of a company, but also of the way of doing business, of the know-how of the franchisor, who will assist the franchisee in developing the business, and will offer formation and technical support to the franchisee. All this support comes with a price for the franchisee. His/her canons will usually be higher, as higher will be the control that the franchisor will exercise over him/her. This contract is what in the US is called business format franchising. As such, it appeared in the late 1950s. Its first user was probably ‘McDonald’s’.11 It saw rapid expansion to Europe in the 1960s and 1970s.12 The concept that will be used in this article is the ‘European’ concept of franchising, this is, the equivalent to the US ‘business format’ franchising. The reason for choosing this concept is that it frames a certain structure of power relations between the parties in both pre-contractual and contractual phases that may not be shared by concession agreements. As it will be shown hereby, these power relations are of the utmost importance to determine the most efficient PIL rules. Regarding the contractual phase, in this business format franchising the franchisor guides and gives indications to the franchisee, which places the franchisor’s products or services in the market. Regarding the pre-contractual phase, there is usually a stronger bargaining power of the franchisor, as he/she has got the ‘key’ for the success of the business. This unbalance of power is not always present in other distribution contracts. Let’s imagine a big mall and a small town baker who wants to sell his/her bio bread on the mall’s supermarket. The mall will be the distributor, but it will probably impose its conditions to the baker. In addition, during the relationship, the mall will probably give the instructions to the baker on the prices and the standards of the bread for its sale on the supermarket. Franchising in the European sense has been defined by the European Court of Justice (ECJ) as the contract through which ‘an undertaking which has established itself as a distributor on a given market and thus has developed certain business methods grants independent traders, for a fee, the right to establish themselves in other markets using its business name and the business methods which have made it successful’.13 This definition was provided in the Pronuptia case, the leading case on the matter.14 Master franchise agreements and area development agreements are not included in this definition. The obligations exchanged by the parties in these agreements differ from those present in a simple franchise agreement. The most relevant obligation of the master franchisee is to find and train sub-franchisees and provide them with the know-how adapted to the local market; and the area developer renders services to the franchisor by assisting him/her in the expansion of the franchise network.15 As a consequence of the foregoing, this article will focus on this ‘simple’ franchising, also called direct franchising and its private international law regime. B. The Structure of Franchise Contracts It is very important for prospective franchisees, courts and regulators to understand not only the terms of a certain contract, but also the very nature of the contract itself.16 Among other characteristics, franchise contracts are relational or long-term.17 Particularly, they are ‘collaboration’ contracts, like distribution and agency. Their defining note is that a party (the franchisee, the distributor, the agent) promotes the placing in the market of the products or services of the other party (the franchisor, the principal).18 In this sense, agency, distribution and franchise are ‘distribution’ systems. The agent, the distributor and the franchisee are independent entrepreneurs but they remain somehow under the power and the instructions of the principal. From a New Institutional Economics perspective, it is said that these contracts are ‘hybrid’, because the distribution services are neither provided directly under the directions and structures of the enterprise (the principal) nor under the sole structure of the market (independently by the franchisees, agents or distributors), but that they are somewhere between both concepts.19 Of all these distribution systems, franchise is the closest to enterprise. The franchisee is more integrated in the principal’s structure than other distributors and agents. In terms of control, the franchisee is closer to an employee than to an independent contractor. The franchisor may require high standards regarding its image, its attitude towards the client, its brand or its products.20 This situation, in which the franchisee is subject to the permanent indications of the franchisor, makes the franchisee’s position weaker, even if franchisees hold a very valuable input for the franchisor, for they provide direct information from the client. This situation is worsened due to the fear of the franchisee to an ad nutum termination of the franchise contract by the franchisor.21 As a consequence, it can be stated that during the contractual phase, the franchisor has ‘power’ over the franchisee in the sense provided by Robert A. Dahl: the ‘ability of one individual or group to prompt another unit to do what it would not have otherwise done’.22 This unbalance of contractual power has not been addressed frequently by the courts or by law makers.23 Only a few decisions in Europe have related to the balance of power in franchising relations.24 A few more have been submitted in the US.25 In addition, scholarship has not reached a common opinion on whether this contractual superiority should be accepted by the law and if so, to what level.26 For some scholars, this superiority is a natural characteristic of franchising contracts, set in the benefit of both parties. For others, it is abusive and therefore it should be forbidden.27 Other authors, like M. Martinek, proposed to distinguish between two different kind of franchising contracts: ‘subordination’ franchising contracts and ‘cooperation’ franchising, depending on the weaker or balanced position of the franchisee.28 This lack of consensus is also present in relation to the pre-contractual phase, when the parties are negotiating the terms of the contract. Scholars first considered that franchisees always entered into negotiation in an extreme disadvantage towards the franchisor.29 New theories show that this bargaining superiority should not be taken for granted. When franchisors bargain a franchise contract, they compete with other franchisors, so in certain cases they must pay attention to the franchisees wishes if they do not want them to leave.30 However, the greater bargaining power of the franchisor is the most common situation, because the franchisor’s size and economic power is usually bigger. As a consequence, non-negotiated, one-sided clauses are very common in this kind of agreements. Should these circumstances be taken into account by the legislator or the court when deciding whether a jurisdiction clause should be enforced or not? Should non-negotiated jurisdiction clauses be enforced? As it will be shown in the next sections of the article, the answer to these questions has been different in the EU and in the US. 3. EUROPEAN JURISDICTION RULES REGARDING FRANCHISING The rules of international jurisdiction in civil and commercial matters in the US and in the EU differ in several aspects.31 The most relevant one is that in the EU these rules are contained in a common instrument, the recent Brussels I Regulation Recast.32 This unification appeared to be necessary for the achievement of an internal market.33 However, this unification is still incomplete and some lawsuits are still governed by European national civil procedure laws.34 Brussels I Regulation Recast (BIR-R) determines the jurisdiction of EU Member State courts in lawsuits relating to contracts making a distinction between ‘general rules’, and those rules applicable to ‘typically’ weaker parties to a contract (insured, consumers and employees).35 Franchise contracts are not in the list so they are governed by ‘general’ rules. This differentiation between general rules and weaker parties’ rules is unknown to US law, which examines the jurisdictional issue for all contracts in the same way.36 The question whether the lack of contractual bargaining power should be taken into account in the assertion of jurisdiction arises either in the presence or in the lack of a choice-of-court agreement. However, the article will focus in the presence of a jurisdiction clause, the most usual scenario in relation to a franchise contract.37 In BIR-R general rules, party autonomy is one of the main principles of international jurisdiction. When exclusive, it derogates all other rules of jurisdiction if Article 24 BIR-R is not applicable.38 Article 25 BIR-R provides the conditions for the validity of a choice-of-forum clause when the chosen forum is a Member State court.39 Regarding formal validity, the agreement must be in writing or evidenced in writing, or by any other form that is a usage between the parties or in international commerce. Regarding substantial validity, Brussels I Regulation Recast submits to the conditions to the law of the State ‘whose courts have been agreed by the parties to have jurisdiction’, including its conflict-of-laws provisions.40 These substantial conditions refer to the parties’ consent to enter into the choice-of-court agreement, which is considered an independent contract (principle of severability, Article 25.5 BIR-R).41 Even if the capacity of the parties to enter into an agreement is considered a ‘substantial condition of validity’, it is expressly excluded from Brussels I Regulation Recast material scope (Article 1 BIR-R). As a consequence, the issue of capacity of the parties to enter into the choice-of-forum agreement should be governed by the rules of the State whose courts are seized.42 Does Article 25 BIR-R leave room for the examination of the bargaining power of the parties? Let’s imagine the typical case of a franchisee who asks for the non-enforcement of the jurisdiction clause, claiming that it was imposed by the franchisor and that it seriously harms his access to justice. The answer to the aforementioned question is very relevant, moreover if we take into account that some Member States have enacted rules which protect professional contractors from ‘abusive’ contract terms that could be applied to declare null and void unfair jurisdiction clauses.43 Two different scholar positions can be identified on this issue. For some authors, the incorporation of an ‘unfair jurisdiction clause’, this is, a clause which clearly benefits only a party to the contract, shall be characterized as a question of consent.44 According to them, it could be possible for a franchisee who agreed to a choice-of-forum clause which harms his interests to argue that the clause was imposed by the drafting party and that he really did not consent to it. For these authors, the fairness of the clause should be therefore examined under the law of the State ‘whose courts have been agreed by the parties to have jurisdiction’, including its conflict-of-laws provisions. For another sector of scholarship, the ‘fairness’ of the clause shall be included neither in the formal nor in the substantial conditions of validity of the clause.45 The European legislator would have deliberately excluded the possibility of examining the bargaining power of the parties in business-to-business transactions. According to them, consent to the forum-selection clause is valid if there is no fraud, error or violence in its emission. As a consequence of the foregoing, to declare the invalidity of a jurisdiction clause, the parties to the contract should not be able to claim the ‘unfairness’ or ‘abusive character’ of the clause, even if the clause is included in a take-it-or-leave-it contract or in standard contract terms. The court who examines the clause should only grant an “incorporation control” but not a control of its “content”.46 This second stance on the issue seems to be supported by the ECJ. With respect to the Belgian law which prohibited Belgian agents and distributors—including franchisees—the execution of choice-of-forum agreements, the ECJ in Case C- 9/12 Corman-Collins SA v La Maison du Whisky SA [2013] ECLI:EU:C:2013:860, stated that these national restrictions cannot be taken into account, because they shall be considered as ‘jurisdiction rules’ and therefore as incompatible with Brussels I Regulation, the only instrument that should regulate jurisdiction in the disputes where the defendant is domiciled at the EU.47 However, in the case, Belgian rules specifically referred to jurisdiction clauses and this is why they were clearly considered as ‘national jurisdiction rules’ incompatible with BIR-R. There is no ECJ decision in relation to BIR-R where the weaker party tried to apply general unfair contract terms national laws to a choice-of-court clause. So the ECJ has not said the last word with regard to the interpretation of the term ‘substantial validity’. In a very recent case in the field of applicable law, it has stated that a choice-of-law clause included in the seller’s standard contract terms can be deemed as abusive according to the EU consumer’s legislation (Amazon case).48 This decision has been issued against the majority of scholarship, which considers that Rome I Regulation already provides consumers with conflict-of-laws protection (Article 6 RR-I).49 In spite of this, the Judgment has applied Directive 93/13/CEE of the Council, of 5 April 1993, on the abusive clauses in the contracts celebrated with consumers to a choice-of-law clause. It may be asked whether the court’s decision would have gone in the same direction if the case had not been covered by the scope of the directive, which would happen when the adherent is a franchisee, a professional. Which has been the position of Member States’ case law? Courts tend to follow this second stream, and consider that consent to the forum-selection clause is valid if there is no fraud, error or violence according to the law applicable to consent, leaving no room to examine the bargaining power of the parties.50 This is why franchisees have tried other ways out. They have tried to be considered as consumers, and therefore to make applicable the consumers regime of BIR-R. This move even arrived to the ECJ in the Benincasa case.51 In the said case, Mr Benincasa, domiciled in Germany, entered into a franchise contract with the Italian franchisor Dentalkit, specialized in the sale of dental products, for the operation of a franchised premise in Munich. The contract included a jurisdiction clause in favour of the courts of Florence, the place of the seat of the franchisor. Mr Benincasa paid the entrance fee and placed some orders, but before running the business he sued Dentalkit in his place of residence, Munich. He claimed the invalidity of the contract and the jurisdiction of the German court arguing that he was a consumer. Mr Benincasa pleaded that the contract had not been signed ‘in the exercise’ of a professional activity but in the sight of a commercial activity that was going to start in the future. The court of appeal referred a question to the ECJ, who answered that the concept of consumer shall be interpreted in a very narrow way and that the protection provided to consumers should not be provided to contracts whose object is a professional activity, current or future.52 In short, at the current stage of development of EPIL, it can be stated that the interpretation of Article 25 BIR-R and, particularly, of the term ‘substantial validity’, made by the ECJ and Member States’ courts does not open the door to the avoidance of ‘unfair’ jurisdiction clauses in franchising agreements. This position which respects the balance (or imbalance) of the parties’ bargaining power may be related to the way that franchising contracts are considered at the EU from a substantive legal perspective. The common denominator of the Member States’ legal systems is that none of them (except for Belgium) has specifically identified the ‘power issue’ has a key corollary of franchising, what enables the franchisor to maintain its superior position.53 The same can be concluded with respect to the Draft Common Frame of Reference (DCFR), the soft-law code drafted by the ‘Acquis Group’ (Study Group on a European Civil Code, Research Group on EC Private Law) and financed by the EU.54 The DCFR contains rules with respect to franchising in its book IV, section E. These rules were inspired by the comparative study of national legal systems compiled in the Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC, 2006).55 Even if its drafters have claimed that there was no specific interest in favouring one of the parties to the contract, some authors have seen a pro-franchisor orientation in the bigger number and more onerous obligations imposed on the franchisee.56 We should ask ourselves if Member States’ courts act in the same way when BIR-R is not applicable to the examination of the jurisdiction clause (when the clause points to the courts of a third State). Here, Member States’ courts are free to apply national unfair contract terms laws to the jurisdiction clauses if these clauses are covered by the scope of such national laws.57 In these cases, choice-of-forum clauses are handled like arbitration clauses.58 A relevant number of decisions deal with the validity of arbitration clauses in franchising agreements.59 In Germany, several judgments have been submitted in relation to the same franchising network, denying the enforcement of International Centre for Dispute Resolution of the American Arbitration Association (ICDR) awards rendered in the United States because the arbitration clause in the franchise contract created a gross disparity to the disadvantage of the franchisee, a small German entrepreneur, and was therefore invalid under the law applicable to the said arbitration clause.60 In these judgements, the substantial validity of the clause was analysed under section 879(3) of the Civil Code of Liechtenstein, which provides that contractual clauses that disadvantage one party by creating a ‘considerable disparity’ are void, after it was proved that these rules applied to arbitration clauses. 4. US JURISDICTION RULES REGARDING FRANCHISING A. A Bird’s-Eye-View on the US International Jurisdiction System Regarding the US jurisdiction system, it is important to note that States have their own bases for the exercise of jurisdiction. As a consequence, these rules are ‘unilateral’. That is to say, the rules of jurisdiction of a State can determine whether the courts of that State have jurisdiction over the dispute, but cannot determine if any other State has jurisdiction over the case.61 Another relevant aspect is that these rules apply to both interstate and international lawsuits.62 Nevertheless, there are some rules which only apply to cases connected with other countries, particularly when a non-US-resident is sued.63 Notwithstanding the foregoing, all these State jurisdiction rules are subject to a constitutional control. The first constitutional boundary is that a court needs ‘adjudicatory power’ in order to entertain an action and enter a valid and enforceable judgment. This ‘adjudicatory power’ is composed of personal jurisdiction, subject matter jurisdiction and venue.64 In addition, adequate notice shall be given to the defendant.65 The rules that control international jurisdiction are those that refer to ‘personal jurisdiction’. They determine whether a person or enterprise can be judged in the territory of a certain State. Modern US personal jurisdiction law distinguishes between jurisdiction in personam, in rem, quasi in rem and jurisdiction related to the family status of the person. Disputes arising from a franchise contract would usually need a court with in personam jurisdiction, in other words, a jurisdiction with power to enter a money judgment on a person, executable with all his goods in and outside the jurisdiction territory.66 US State statutes provide different grounds for the exercise of in personam jurisdiction.67 The US Supreme Court’s interpretation of their constitutional boundaries has customarily accepted the so-called ‘traditional grounds of jurisdiction’: domicile or incorporation in the forum State,68 service of process of the defendant on the State, appearance in court and consent. These grounds are stranded on the de facto power of a State over a defendant.69 The jurisdiction over these defendants is ‘general’, which means that the defendant may be sued on that State on claims having a direct connection to that State or to elsewhere. These fora have been supplemented by ‘modern grounds of jurisdiction’ in order to reach non-residents who, falling outside the traditional categories, engage in activities in a certain State or direct their activities towards that State.70 This jurisdiction is ‘specific’, which means that it requires the plaintiff’s claim to arise out of the particular act performed by the defendant within the forum State.71 To see if the defendant’s activities are enough to open a jurisdiction, the US Supreme Court has established the ‘minimum contacts test’ rule: the foreign defendant must have enough contact to satisfy minimum standards of due process.72 As a consequence, authors have affirmed that defendants who happen to have a ‘minimum contact’ with a US jurisdiction may be sued before its courts.73 Once jurisdiction has been asserted, and in the absence of a choice-of-forum clause, the finding that there is no more convenient forum elsewhere has also become crucial. B. The Treatment of Forum-Selection Clauses in Franchise Agreements Although ‘consent’ has traditionally been considered a ground of jurisdiction, its modern configuration started in 1972 with the Bremen case.74 Before this breakthrough case, US Courts frequently refused to accept the derogatory effect of a forum-selection clause, because they understood that this choice collided with the right of a court to deal with a case related to its territory. After Bremen, forum-selection clauses benefit from a prima facie presumption of validity and enforceability. This presumption is iuris tantum, so their invalidity of unenforceability can be shown under the circumstances of the case.75 However, the party bringing the suit in a court other than the contracted forum bears a heavy burden of proof. The party resisting the forum provision has the burden of clearly showing that the clause is (i) invalid, because its formation was induced by fraud or overreaching; or (ii) valid but unenforceable. Unenforceability can be based on two reasons. Firstly, it can be based on the reason that the enforcement of the clause would contravene a strong public policy of the forum state. Secondly, it can be argued that the clause was imposed by a party with overweening bargaining power and would place an unreasonable burden on the complaining party.76 The defence of fraud and overreaching can match the European consent requisites, contained in the conditions for substantial validity of the clause. However, the other two defences (public policy and overweening bargaining power) have no European equivalent. Regarding the public policy defence, as it was stated before, it was prohibited by the ECJ in the Corman Collins decision.77 To the contrary, in the US this exception can be used as a defence from forum-selection clauses. In relation to franchise contracts, some states have enacted statutes or norms directly affecting the place for litigation of franchise contract lawsuits.78 Nevertheless, the use of this exception does not seem to be consistent with the pre-contractual structure of franchise agreements as stated above, wherein the franchisor’s superior bargaining power should be analysed on a case-by-case basis. The public policy exception seems to be a more suitable defence for those contracts that structurally entail the superior bargaining power of one party in the pre-contractual phase (ie consumer contracts). On the other hand, the defence based in the overweening bargaining power of one party is more consistent with the structure of franchising agreements as explained hereto. What may be considered by some scholars as ‘too much discretion’ left to courts to defeat a choice-of-court made by parties, may be considered by others as a way of adapting an unfair result of the application of jurisdiction rules when the parties are not invested with the same bargaining power.79 It must be underlined that US law does not include any specific jurisdictional federal legislation for weaker parties; all choice-of-forum clauses have to pass the same constitutional control. In this sense, the US system leaves less room for protectionism, giving space to the ‘reasonableness’ exam not only in Business to Consumer but also in Business to Business transactions. This could be seen at first sight as negative because it can affect legal certainty though it can become an advantage for some contracts that do not fit in the typical categories of different bargaining power parties, like franchising. Nevertheless, scholars argue that this exception should be used with caution, because it entails a risk of chauvinism: a choice-of-forum clause could be considered as ‘reasonable’ when used by a national plaintiff and as ‘not reasonable’ when used by a foreign one.80 Caution also claims that the non-enforcement of a forum selection clause should always be an exception to a strong presumption of the clause’s validity and enforceability. To declare a clause as unenforceable, the court shall be satisfied that (i) the clause has been imposed by one party to the other; and that (ii) it does not add value to the position of both parties to the contract, but only to the drafting party’s position. The complaining party should satisfy this ‘heavy burden of proof’ required to set aside the clause on the ground of unreasonableness.81 Hitherto, this has been the position of the US Supreme Court, who has never considered the non-negotiation of the clause as enough for its non-enforcement. For example, in the Carnival Cruise case, the US Supreme Court failed that the Florida forum-selection clause enabled the cruise line to confine its legal knowledge to a single forum; this reduced its costs and therefore ticket prices to passengers. As a consequence, the forum-selection clause was considered not only a benefit to the drafting party but also to the adherent.82 Regarding franchising agreements, it is important to underline that this burden of proof of the clause’s imposition and unilateral benefit should be on the side of the franchisee and not on the side of the franchisor. The contrary would hamper international commerce and US strong policy on validity of choice-of-court agreements. However, some US courts have almost inverted the burden of the proof, leaving the franchisor before a probatio diabolica.83 In these cases, enforcement of the clause is only allowed if the franchisor can prove that the clause was not imposed unfairly or based on his superior bargaining power.84 As can be seen, the US’s flexible approach regarding the enforcement of forum-selection clauses differs from the EPIL perspective. As long as the parties manifest a valid consent in writing, European courts will not go further in scrutinizing the potential hardship on one of the parties or the possibility of violation of public policy of the otherwise available forum.85 As stated above, this happens because EPIL’s test on the substantial validity of the clause is not interpreted as permitting a defence based in the imposition of a harmful clause. On the contrary, the US system distinguishes between substantial validity (fraud and overreaching defence) and enforceability, leaving the defence based in the imposition of a harmful clause to the latter. In addition, this defence does not resort to any state law, but regulates the conditions of that enforceability in a direct and material way.86 Accordingly, the appreciation of both enforceability defences (public policy or overweening bargaining power) have led some US jurisdictions to declare franchising choice-of-forum clauses unenforceable, stating that in the concrete case the clauses had been imposed to the franchisees and harmed them: ‘here is a clear disparity in the bargaining power of franchisors versus franchisees’.87 However, courts still accord great weight to forum-selection clauses and have not appreciated the non-enforceability in most of the cases.88 This position, more favourable to the protection of the franchisee and to its consideration as the weaker party to the agreement may also be related to the way that franchising contracts are considered by the US courts and law makers in a substantive law perspective. The prevailing opinion in this country is that the regulation should be devoted to the protection of franchisees and to make franchisors responsible for the consequences of opportunistic behaviour and case law has also frequently reflected this view.89 5. THE EFFICIENCY TEST: A LAW AND ECONOMICS ANALYSIS OF JURISDICTION CLAUSES According to the current interpretation of EPIL rules explained herein, a jurisdiction clauses included in a franchise contract will be substantially valid if the parties had the capacity to agree to it and their consent was not vitiated by error, fraud or violence. According to the current state of US constitutional standards, the validity test of a choice-of-forum clause includes the evaluation of the parties’ bargaining power. Which solution fits better with the structure of franchising agreements as explained before? Which one enhances international commerce? The answer to these questions will be addressed from a Law & Economics perspective, which explains the fairness of legal rules in terms of efficiency. According to this perspective, choice-of-forum agreements should be enforced because they increase the value of the contract for the parties.90 There are many ways in which jurisdiction clauses can add value to a contract. The most common way is that one of the parties, in an ex ante situation, places more value than the other on litigating disputes at home or at a single place. Litigating abroad can impose costs that de facto reduce the profits of the parties to the contract (travel costs and delays are added to the costs of information on a foreign legal system). In a competitive market, a party can offer a greater price or other advantage to the other party in return for a forum-selection clause. This would increase the value of the contract and create an overall improvement.91 In other words, the forum-selection clause should be enforced because it is more ‘efficient’ for the parties than its absence or non-enforcement. For example, if a seller of goods finds of the utmost importance to litigate at home, he/she will offer a substantial consideration to the buyer in order to get that. The buyer would accept the offer if it improves his/her position in the contract (to him/her, the costs of litigating abroad are lower than the consideration offered by the seller) (Table 1). Table 1. Efficient forum-selection clause Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 15 Buyer’s Profits 5 6 Total 15 21 Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 15 Buyer’s Profits 5 6 Total 15 21 As the table shows, the forum selection clause is intrinsically efficient because it improves the situation of both contractors. Table 1. Efficient forum-selection clause Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 15 Buyer’s Profits 5 6 Total 15 21 Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 15 Buyer’s Profits 5 6 Total 15 21 As the table shows, the forum selection clause is intrinsically efficient because it improves the situation of both contractors. To the contrast, the buyer would never accept the offer if it does not improve his/her position in the contract. This will happen when he/she values the costs of litigating abroad as higher than the consideration offered by the seller (Table 2). Table 2. Inefficient forum-selection clause Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 17 Buyer’s Profits 5 4 Total 15 21 Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 17 Buyer’s Profits 5 4 Total 15 21 As the table shows, the forum selection clause is intrinsically inefficient because it does not improve the situation of both contractors. It only benefits one of them and harms the other. Table 2. Inefficient forum-selection clause Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 17 Buyer’s Profits 5 4 Total 15 21 Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 17 Buyer’s Profits 5 4 Total 15 21 As the table shows, the forum selection clause is intrinsically inefficient because it does not improve the situation of both contractors. It only benefits one of them and harms the other. In order to add value to a contract, the forum-selection clause does not necessarily need to appoint the courts which are most connected to both parties.92 The appointment can also increase the value of the contract by providing legal certainty to the parties or even neutrality when they fear that the courts of one party may favour its local over a foreigner. Another way of adding value by a choice-of-forum clause is by selecting an experienced court. In this case both parties may prefer to have their disputes resolved by someone familiar with the type of commerce involved in the transaction.93 As a consequence of the foregoing, when a valid jurisdiction clause is pleaded, the court should enforce it because it is presumed that it is the ‘most efficient’ one for the parties to the contract. The parties, then, will have chosen the jurisdiction that may entail the allocation of the risks to the cheapest risk bearer, and the value of their contract will have increased by the inclusion of such a clause.94 However, it can be easily demonstrated that some forum-selection clauses do not add value to the contract. In such a case, an economic analysis recommends the clause’s non-enforcement. When a clause creates a win-lose situation, non-enforcement is the most efficient solution.95 Such a win-lose situation is created when a party can make the other to agree on something without improving his/her general position in the contract. This only happens when a party has a greater bargaining power than the other. In this context, if the buyer in our former example had been the weaker party to the negotiation, he/she would have accepted the forum-selection clause under the conditions of Table 2. This is the risk of a forum-selection clause in a consumer contract, but also in a franchise agreement. As it has been explained, it is very likely that the franchisor has had more bargaining power than the franchisee, and under these circumstances it can have made the franchisee to accept a clause that may be harmful to his/her contractual interests. Unlike efficient forum-selection clauses, the gains to the drafting party are not shared with the non-drafting party. As there are some cases in which the franchisor and the franchisee may have negotiated in a balanced arena, caution recommends that the appreciation of the balance between the parties should be left to the court. Summarizing, from a Law and Economics perspective, the enforcement of forum-selection clauses should be the general rule, but the systems needs a ‘way out’ to solve the win-lose situations. In other words, a rule whose presumption regarding the efficiency of the choice is iuris et de iure may not be the most efficient solution for franchise contracts. Such a rule would probably make the franchisee to bear the litigation costs even if he/she is not the cheapest risk bearer, just because he/she was the party with less bargaining power. Fully effective but abusive choice-of-forum clauses may prevent many franchisees to enter into franchising agreements in the future. In contrast, an economic analysis would recommend this presumption of efficiency to be iuris tantum, this is, that the option could be given to the franchisee to demonstrate his/her less bargaining power and the harm that the acceptance of this clause has meant to his/her contractual position. 6. CONCLUSIONS According to the foregoing, the current interpretation of Article 25 BIR-R leads to the enforcement of non-efficient forum-selection clauses in disputes arising from franchise contracts. In contrast, the US defence based in the overweening bargaining power of one party appears to be consistent with the conclusions of our Law & Economics’ analysis, according to which a clause should not be enforced (i) if it has been imposed by a party with a relative stronger bargaining power and (ii) if it benefits only the drafting party, leaving the other in a worse general position than the one he/she would hold if the clause had not been incorporated to the agreement.96 As a consequence of the above it can be affirmed that recent US practice regarding the enforcement of franchise forum-selection clauses is consistent with the conclusion that this enforcement should only take place to the extent that it makes the contracts more valuable to both parties, and not only to the franchisor. When forum-selection clauses create no value to both parties, rather they simply reflect the stronger contracting party’s desire to litigate at home, the tendency in the US is not to enforce them, which is a more efficient solution than the one provided by the current interpretation of the term ‘substantial validity’ of Article 25 BIR-R. The American Conflict of Laws revolution made European scholars, judges and rulers to reconsider their PIL methods 50 years ago.97 The ‘proximity principle’ and the ‘closest connection’ clauses present in some EPIL instruments are a proof of this reconsideration. However, nowadays European jurists have stopped looking to US PIL given the fact that any attempt to introduce flexibility in this system has been rejected by both the EU legislator and the ECJ.98 Maybe the ‘fairness’ test of forum-selection clauses in US PIL is also something to look at. The US ‘reasonableness’ judgment enables the court to examine whether the clause was imposed by the franchisor and if it would only benefit that drafting party. Accordingly, non-efficient forum-selection clauses are not enforced, in contrast with the European practice. An implementation of this flexibility seems to be desirable in the EPIL system. Taken into account its civil law tradition, this would not be possible via a written rule in Brussels I Regulation. But this kind of rule would not be necessary. A broader interpretation of the concept of ‘substantial validity’ would be enough. This broader interpretation would not be against Article 25 BIR-R or its principles and what is more, seems to be more consistent with the latest case law of the ECJ (Amazon case). This more flexible interpretation would allow measuring the bargaining power of the parties to the contract and would allocate the risks of internationalization to the ‘cheapest risk bearer’. As a consequence, it would assure to a greater extent that parties to franchise contracts will not have to bear with disproportionate litigation costs to get their redress. This would encourage the execution of international franchising agreements, which are a very desirable instrument not only for the parties but also for the economy as a whole. International franchising fosters economic development, knowledge transfer and the cohesion of territories, because it creates lasting bonds and common interests between economic operators. In addition, the benefits of such an interpretation of Article 25 BIR-R would not end in franchising, but would be extendable to all other contracts which, due to their specific pre-contractual structure, contain jurisdiction clauses in the exclusive benefit of one of the parties and which are not contemplated by Brussels I Regulation Recast as typically weaker parties agreements, such as agency and distribution. Footnotes 1 International Franchise Association, Franchise Business Economic Outlook (2016) 5. 2 M Mendelsohn, Franchising Law (2004) 21; E Zanelli, ‘Il franchising nella tipologia delle concessioni tra imprese’ in G Alpa (ed), Nuovi tipi contrattuali e tecniche di redazione nella pratica commerciale (Giuffrè 1978) 255. 3 KL Bundy, M Hero and P Hollander, ‘Choice of Law. Venue and Jurisdiction, Arbitration v. Litigation’ (2012) 10 Int’l J Franchising L 3, 4. 4 D Valdini, Der Schutz der schwächeren Vertragspartei im Internationalen Vertriebsrecht (Sellier 2014); P Piroddi, La tutela del contraente debole nel regolamento Roma I (CEDAM 2013). 5 Bremen vZapata Off-Shore Co, 407 US 1, 15 (Colex 1972). 6 J Carrascosa González, Conflicto de Leyes y Teoría Económica (2006) 20; F Garcimartín Alférez, ‘El régimen normativo de las transacciones privadas internacionales: Una aproximación económica’ (1995) 47 Rev Esp Derecho Int 11; F Garcimartín Alférez, ‘La racionalidad económica del derecho internacional privado’ (2012) 2011 Cursos de D. Internacional y Relaciones Internacionales de Vitoria Gasteiz 87; H Muir Watt, ‘Aspects économiques de droit international privé’ (2004) 307 RCADI 25; HJ Schmidt-Trenz, Außenhandel und Territorialität des Rechts (Nomos 1990); D Schmidtchen, ‘Territorialität des Rechts, Internationales Privatrecht und die privatautonome Regelung internationaler Sachverhalte’ (1995) 59 Rabels Zeitschrift 56; G Rühl, Statut und Effizienz (Mohr Siebeck 2011). 7 F Garcimartín Alférez, ‘La racionalidad económica’ (n 6) at 127. 8 In this respect, a Law & Economics analysis may be a very useful tool to reach consensus on international PIL Conventions. 9 DP Fernández Arroyo, ‘Modalidades contractuales específicas’ in D P Fernández Arroyo (ed), Derecho internacional privado de los Estados del Mercosur (Librarius 2003) 1027, 1049. 10 JN Adams and KV Pritchard Jones, Franchising: Practice and Precedents inBusinessFormatFranchising (Tottel 2006) 6. 11 E Gallego Sánchez, La Franquicia (Trivium 1991) 21. 12 ibid at 5. E Crawford Spencer, TheRegulation ofFranchising in theNewGlobalEconomy (2010) 1. 13 Judgment of the ECJ of 28 January 1986, case C-161/84, Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis, ECR 1986, I-353. 14 ibid. 15 Bundy, Hero and Hollander (n 3) at 14–15. 16 Spencer (n 12) at 77. 17 GK Hadfield, ‘Problematic Relations: Franchising and the Law of Incomplete Contracts’ (1990) 42 Stanford L Rev 927, 946. 18 Mendelsohn (n 2) at 59; A Bercovitz Rodríguez-Cano (dir), Contratos mercantiles (Aranzadi 2004) 359; R Alonso Soto and A Sánchez Andrés, ‘Los Contratos de Colaboración’ in A Menéndez and A Rojo (dirs), Lecciones de Derecho Mercantil (Thomson Reuters - Civitas 2012) 100; F Vicent Chuliá, Introducción al Derecho Mercantil (Tirant lo Blanch 2003) 683. 19 PH Rubin, ‘The Theory of the Firm and the Structure of the Franchise Contract’ (1978) 21 J L & Eco 223, 226. 20 On the performance of franchise systems: EE Anderson, ‘The Growth and Performance of Franchise Systems: Company versus Franchisee Ownership’ (1984) 36 J Eco & Business 421; F Lafontaine, ‘Agency Theory and Franchising: Some Empirical Results’ (1992) 23 Rand J Eco 291; F Lafontaine and PJ Kaufmann, ‘The Evolution of Ownership Patterns in Franchise Systems’ (1994) 70(2) J Retailing 97; RE Martin, ‘Franchising and Risk Management’ (1988) 78(5) Am Eco Rev954; AR Oxenfeldt and AO Kelly, ‘Will Successful Franchise Systems Ultimately become Wholly-owned Chains?’ (1969) 44 J Retailing 69. 21 Rubin (n 19) at 228. 22 RA Dahl, ‘The Concept of Power’ (1957) 2 Behav Sci 201, 213. This concept is usually used as the starting point for the study of power relations in franchise and distribution: LW Stern and FJ Beier, ‘Power in the Distribution Channel’ in LW Stern, Distribution Channels: BehavioralDimensions (1969) 92; SD Hunt and JR Nevin, ‘Power in a Channel of Distribution: Sources and Consequences’ (1974) 11 J Marketing Res 186; B Klein, ‘The Economics of Franchise Contracts’ (1995) 2(1) J Corp Fin 12; AM Doherty and N Alexander, ‘Power and Control in International Retail Franchising’ (2006) 40(11) Eur J Marketing 1292. 23 T Tajti, ‘Franchise and Contract Asymmetry: A Common Trans-Atlantic Agenda?’ (2015) 37(2) Loyola of Los Angeles International and Comparative L Rev 245, 246. 24 Court of Appeal of Katowice of 4 March 1998, n I ACa 636/98 , as explained by Tajti, see above n 23, 247, the franchisees claimed that all the risks of the contracts shifted to them and that there was no equivalency of performance. The court proclaimed that contractual power of franchisors was a normal feature of franchise contracts. 25 Some of them have failed in favour of the franchisee. See eg Postal Instant Press, IncvSue Sealy, 51 Cal Rptr 2d 365, 373 (Cal Ct App 1996). In the case, the court described the relationship between franchisor and franchisee as a reflection of their gross bargaining disparity. Others have not shared this protective attitude. See eg Texaco, IncvAAGold, 357 NYS2d. 951 (1974). As explained by Tajti, see above n 23, in the case, the contract gave the right to the franchisor to evict the franchisee on 10 days’ notice. The Court held that the parties had been free to agree on the terms of the contract. 26 Tajti (n 23) at 249. 27 ibid at 250, footnote n 18 referring to P Steinberg and G Lescatre, ‘Beguiling Heresy: Regulating the Franchise Relationship’ (2004) 109 Penn St L Rev 105, 113, an article that clearly reflects the divide. 28 M Martinek, Franchising. Grundlagen der zivil- und wettbewerbsrechtlichen Behandlung der vertikalen Gruppenkooperation beim Absatz vom Waren und Dienstleistungen (Decker & Schenck 1987) 256. 29 Hunt and Nevin (n 22) at 187. 30 B Klein and L Saft, ‘The Law and Economics of Franchise Tying Contracts’ (1985) 28(2) J L & Eco 356: ‘The important economic distinction that must be made is between pre- and postcontract economic power. Precontract, competition among franchisors (such as McDonald’s or Kentucky Fried Chicken) to sign up franchisees prevents Chicken Delight from exercising any economic power in setting contract terms with potential franchisees’ (…) ‘Postcontract, on the other hand, any franchisor can use the threat of termination to “hold up” a franchisee that has made a specific investment in the marketing arrangement’. 31 W Posch, ‘Resolving Business Disputes through Litigation or other Alternatives: the Effects of Jurisdictional Rules and Recognition Practice’ (2002) 26(2) Houston J Int Law 363, 363. 32 Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast), L 351 OJ, 1(2012). This regulation replaced the Council Regulation No 44/2001, L 12 OJ, 1 (2001) and applied from 10 January 2015. Most of the rules of the Recast comply with the respective rules of the precedent Regulation. 33 Art 3 Consolidated Version of the Treaty on European Union, C 326 OJ, 13, 390 (2012). P Lagarde, ‘Développements futurs du droit international privé dans une Europe en voie d'unification: quelques conjectures’ (2004) 68(2) Rabels Zeitschrift 225, 243. 34 Jurisdiction shall be examined according to Member State procedural rules if the defendant is not domiciled in the European Union and if jurisdiction cannot be asserted according to arts 24, 25 or 26 BIR-R (choice-of-forum agreement in favour of a EU court, tacit submission to a EU Court or lawsuit on a matter which is considered of the exclusive jurisdiction of a EU court). 35 In matters relating to insurance, arts 10–16; in matters relating to consumer contracts, arts 17–19 and in matters relating to individual contracts of employment, arts 20–23. 36 See Posch (n 31) at 362; SB Burbank, ‘Jurisdictional Conflict and Jurisdictional Equilibration: Paths to a Via Media’ (2004) 26(2) Houston J Int’l L 385, 394; PJ Borchers, ‘Comparing Personal Jurisdiction in the United States and the European Community: Lessons for American Reform’ (1992) 40 Am J Comp L 121, 156. 37 See Posch (n 31) at 375. 38 P Lagarde, ‘Le principe de proximité dans le droit international privé contemporain’ (1986) 196 RCADI 9, 127; AT von Mehren, Theory and Practice of Adjudicatory Authority in PIL:AComparative Study of the Doctrines, Policies and Practices of Common Law and Civil Law Systems (RCADI 2003) 29–36. 39 When the chosen jurisdiction is the court of a third State, the Member State Court should apply its national civil procedural rules to see if such an agreement is valid. For example, if the parties to a contract chose the exclusive jurisdiction of California courts, but one suits the other before the courts of Madrid, Spain, the Spanish courts shall not apply Brussels I Regulation Recast to see if the forum-selection clause is valid, but its national norms (Civil Procedure Act 1/2000). 40 See Recital 20 BIR-R: ‘Where a question arises as to whether a choice-of-court agreement in favour of a court or the courts of a Member State is null and void as to its substantive validity, that question should be decided in accordance with the law of the Member State of the court or courts designated in the agreement, including the conflict-of-laws rules of that Member State’. 41 AL Calvo Caravaca and J Carrascosa González, Derecho Internacional Privado (Comares 2014) 228–29. 42 These national rules regularly refer to the ‘personal law’ of each party to the contract, which is the law of their nationality in civil law tradition countries and the law of their domicile in common law influence countries. 43 See eg the Spanish Law 7/1998, of 13 April on General Contractual Terms (‘Condiciones Generales de la Contratación’), BOE n 89 14 April 1998. 44 Y Loussouarn, P Bourel and P de Vareilles-Sommières, Droit International Privé (Dalloz 2013) 780; DP Fernández Arroyo and others, ‘Modalidades contractuales específicas’ in DP Fernández Arroyo (coord), Derecho internacional privado de los Estados del Mercosur (Librarius 2003) 1027, 1048. 45 H Kenfack, La franchise international (1996) 385–86; L García Gutiérrez, ‘Los contratos de franquicia internacional’ (2010) Revista de Derecho Mercantil 275, 249, 267; FJ Garcimartín Alférez, ‘Contratos de distribución internacional: competencia judicial y Ley aplicable’ in A Alonso Ureba and others (dirs), Los contratos de distribución (La Ley 2010) 221, 224; D Bureau and H Muir Watt, Droit International Privé (PUF 2014) 372. 46 Garcimartín Alférez, ibid at 224. 47 Belgium enacted a national law which prohibited Belgian in relation to this, MA Cebrián Salvat, ‘Agency and Distribution Contracts: National Rules v. European Private International Law’ in JS Bergé, M Gardeñes and S Franq (cords), Boundaries of European Private International Law (Bruylant Larcier 2015) 10. 48 Judgment of the ECJ of 28 July 2016, case C-191/15, Verein für Konsumenteninformation vAmazon EU Sàrl, ECLI:EU:C:2016:612, para 71: ‘The answer to Question 4(a) is therefore that Article 3(1) of Directive 93/13 must be interpreted as meaning that a term in the general terms and conditions of a seller or supplier which has not been individually negotiated, under which the contract concluded with a consumer in the course of electronic commerce is to be governed by the law of the Member State in which the seller or supplier is established, is unfair in so far as it leads the consumer into error by giving him the impression that only the law of that Member State applies to the contract, without informing him that under Article 6(2) of the Rome I Regulation he also enjoys the protection of the mandatory provisions of the law that would be applicable in the absence of that term, this being for the national court to ascertain in the light of all the relevant circumstances.’. This judgment has been extensively criticized by scholarship because of this statement. See P Mankowski, ‘Anmerkung zu EuGH, Urteil vom 23. 12. 2015–C-297/14’ (2016) NJW 69, 699. 49 P Mankowski, ‘Article 3: Freedom of Choice’ in U Magnus and P Mankowski (dirs), Rome I Regulation (Otto Schmidt 2017), 87, 249: ‘The european legislator protects the consumer against unfair clauses through the use of private international law, not through the consumer protection regimes of the lex fori or the lex causae’. 50 See the following decisions of Spanish Courts of Appeal in relation to other commercial contracts: SAP Alicante 24 febrero 2014, n 41/2014, RJ AC\2014\453 (hotel management contract); AAP Tarragona 10 junio 2004, n 60/2004, RJ JUR\2004\204232 (sale of pipes); AAP Pontevedra 24 septiembre 2009, n 153/2009, RJ JUR\2009\436563 (contract of carriage of goods by sea); SAP Pontevedra 31 julio 2007, n 465/2007, RJ JUR\2007\355464 (ibid); SAP Guipúzcoa 21 septiembre 2007, n 197/2007, RJ JUR\2008\35356 (bicycle distribution contract); SAP Navarra 27 diciembre 2007, n 229/2007, RJ JUR\2008\184460 (sale of machinery). The ‘unfairness’ of the clause is not claimed very frequently before the courts of other Member States. See, for example, the decision of the Cour de Cassation Française, Sent Cour Cass Civ 1re, 6 marzo 2007, pourvoi n 06-10.946, BullCivI, 2007, n 93. 51 Judgment of the ECJ of 3 July 1997, case C-269/95, Francesco Benincasa v Dentalkit Srl, ECLI:EU:C:1997:337. 52 Judgment of the ECJ of 3 July 1997, Benincasa, ibid 51, para 17. 53 Tajti (n 23) at 249. 54 JW Rutgers and others, Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC) (Sellier 2010) at 77; O Bueno Diaz, Franchising in European Contract Law. AComparison between theMainObligations of theContractingParties in the Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC), French and SpanishLaw (Sellier 2008) 3–19. 55 Rutgers and others, ibid 54 at 77–88. 56 Diaz (n 54) at 22; Tajti (n 23) at 250. 57 When French law is applicable, the jurisdiction clause is upheld. Regarding exclusive distribution agreements, Sent Cour Cass Civ 1ere 22 octubre 2008, pourvoi n 07-15.823, (‘Monster Cable’), Bull. Civ. I, 2008, n 233. 58 Tajti (n 23) at 246. 59 Helsinki Court of Appeal, judgment of 11 January 2017 (#24, docket S16/838), set aside the arbitration clause and permitted the franchisee to have his case brought to court. For a synopsis of the case and a reference to an earlier decision of the Supreme Court in the opposite sense, see <https://www.idiproject.com/news/finland-arbitration-clause-held-unreasonable> accessed 26 November 2017. See also the Higher Regional Court of Thuringia judgment of 13 January 2011, 1 Sch 01/08, <www.dis-arb.de/en/47/datenbanken/rspr/olg-th&uumlringen-case-no-1-sch-01-08-date-2011-01-13-id1232> accessed 26 November 2017 and the Federal Supreme Court judgment of 15 January 2009, III ZB 87/07 in relation to the earlier decision of the Court of Appeal of Dresden of 7 December 2007, 11 Sch 08/07, reported in Yearbook XXXIII (2008), pp 549–51, Germany n 115. 60 See Higher Regional Court of Thuringia judgment of 13 January 2011, ibid. 61 Lagarde (n 38) at 130. 62 Burbank (n 36) at 388. 63 SN Subrin and others (dirs), Civil Procedure: Doctrine, Practice and Context (Wolters Kluwer, 3rd edn, 2008) 637. Non-residents can be sued before state courts, but also before federal courts according to Fed Civ P 4, at 4(k)(2), if the claim arises under federal law, the defendant is beyond the reach of any state court and the case has minimum contacts with the US as a whole. 64 As explained in the webpage of the Judicial Branch of California, ‘California Courts’, personal jurisdiction is defined as ‘jurisdiction over the person (or business or organization) you want to sue’, subject matter jurisdiction is ‘jurisdiction over the legal issue or dispute you are suing about’. Regarding their difference with venue: ‘while jurisdiction says in what state and what court you file your lawsuit, “venue” is the county where you file your action’. <http://www.courts.ca.gov/9617.htm> accessed 26 November 2017. 65 Subrin and others (n 63) at 609. 66 However, quasi in rem jurisdiction, this is, power to enter a judgment on a person only enforceable with the goods in his territory could also be used for the disputes arising from a franchise contract. Also in rem, in the lawsuits directly related to property (the franchise premises). 67 The majority of states have enacted statutes which authorize their courts to exercise jurisdiction in certain conditions (NY CPLR 302). Other states have opted for an open-ended approach which directly refers to constitutional limits (California Code Civ Proc 410.10). 68 The domicile in US law is the person’s ‘true, fixed and permanent home and principal establishment, and to which he has the intention of returning whenever he is absent therefrom’ (Mass vPerry, 489 F2d 1396, 1399 (5th Cir 1974). 69 Pennoyer vNeff, 95 US 714, 733 (1877). 70 Burger King Corporation vRudzewicz, 471 US 462 (1985). 71 Subrin and others (n 63) at 612. However, the Supreme Court included among them ‘continuous, systematic and substantial business of a non-resident in the forum’ as a ground for subjecting that defendant to general jurisdiction over any claim regardless of where it arose in International Shoe Company vState of Washington, Office of Unemployment Compensation & Placement, et al, 326 US 310 (1945). 72 Subrin and others (n 63) at 632. 73 See Posch (n 31) at 368. 74 Bremen vZapata Off-Shore Co, 407 US 1, 15 (1972). 75 See Bundy, Hero and Hollander (n 3) at 15. 76 Watt (n 6) at 147; EA O’Hara, ‘The Jurisprudence and Politics of Forum-Selection Clauses’ (2002) 3(2) Chicago J Int’l L 301, 308–12. 77 See n 35. 78 California, Connecticut, Illinois, Indiana, Iowa, Louisiana, Maryland, Michigan, Minnesota, New Jersey, North Carolina, North Dakota, Rhode Island, and South Dakota, Wisconsin. 79 Burbank (n 36) at 393. 80 ibid at 394. 81 Carnival Cruise LinesIncvShute, 499 US 585 (1991). 82 ibid 594–95 (1991). O’Hara (n 76) at 310. 83 ie in New Jersey, where the franchisor must show evidence of specific negotiations over the inclusion of the forum selection clause that proof that the clause was not imposed on the franchisee against its will. 84 See Kubis & Perszyk AssociatesIncvSun Microsystems, Inc, 680 A.2d 618, 626 (NJ 1996) (New Jersey); Korean AmBroadCoIncvKorean Broad Sys, 2012 WL 1080260 (ND III 29 March 2012) (Illinois Franchise Disclosure Act); Business StoreIncvMail Boxes et al, 2012 WL 525966 (DNJ 16 February 2012) (New Jersey Law); Phoenix SurgicalsLLC vBlackstone MedInc, 2011 WL 63992 (D Conn 3 January 2011) (Strong public policy of the State of Connecticut), Brown DogIncvThe Quizno’s Franchise CoLLC, 2004 WL 1114427 (WD Wis 13 May 2004) (Wisconsin WFDL); Jones vGNC FranchisingInc, 211 F.3d 495 (9th Cir 2000) (California FRA), cf Bundy, Hero and Hollander (n 3) at 16. 85 FA Gabor, ‘PIL from the US Perspective’ (1988) 8(3) North W J Int’l L 538, 550. 86 Calvo Caravaca and Carrascosa González (n 41) at 230. 87 See IndepAss’n of Mailbox CtrOwners, IncvSuperior Court supra note 85 at 407; See also Graham vScissor TailInc, 28 Cal. 3d 807, 817 (Cal 1981) quoting Neal vState Farm InsCos, 188 Cal App 2d 690, 694 (cal Ct App 1961). 88 G&R Moojectic Treats IncvMaggiemoo’s Int’lLLC, 2004 WL 1110423 (SDNY 19 May 2004. In this lawsuit between an ice-cream franchisor and two franchisees, the latter filed their claim before NY courts. The franchisor responded by filing a motion to stay, dismiss and transfer the claims to the District of Maryland, pursuant to identical forum selection clauses in the franchise agreements. The ruling of the case declared that the forum selection clauses agreed to by the franchisee plaintiffs were enforceable. Other examples of enforcement of forum-selection clauses in franchise contracts are: HOODZ Int’lLLC vToshiaddi, 2012 WL 883912 (ED Mich 14 March 2012) (enforcing clause against California FRA); Big O TiresLLC vFelix BrosInc, 724 F Supp 2d 1107 (D Colo 2010) (enforcing clause against California FRA); Park Inn Int’lLLC vMody EntersInc 105 F Supp 2d 370 (DNJ 2000) (enforcing clause against New Mexico law); Szymczyk vSigns Now Corp, 606 SE 2d 728 (NC App 2005) (against North Carolina law); Bakhsh vJACRRC EntersInc, 895 P 2d 746 (Okla Ct App 1995) (against Oklahoma’s franchisee); My Café-CCC, LtdvLunchstopInc, 107 S.W.3d 860 (Tex Ct App 2003) (Texas’ franchisee), cf Bundy, Hero and Hollander (n 3) at 16; ibid at 7. 89 Tajti (n 23) at 263. 90 O’Hara (n 76) at 309. 91 ibid at 309. 92 Lagarde (n 38) at 141: ‘Le pouvoir localisateur de l’autonomie de la volonté exclut sa correction par le principe de proximité et exclut du même coup l’exigence d’un lien entre le tribunal et le litige’. 93 O’Hara (n 76) at 310. 94 Garcimartín Alférez (n 6) at 87. 95 JD Morrow, Game Theory for Political Scientists (Princeton University Press 1994) 74–76; O’Hara (n 76) at 310. 96 Burbank (n 36) at 390; von Mehren (n 38) at 313: ‘It would be in keeping with the jurisdictional standard of reasonableness for courts to take into account at the constitutional level such factor as the relative strength of the parties’ bargaining positions’. 97 See Lagarde (n 38) at 25; SC Symeonides, ‘The American Revolution and the European Evolution in Choice of Law: Reciprocal Lessons’ (2006) 82(5) Tulane L Rev 1, 5; SC Symeonides, The American Choice-Of-Law Revolution in the Courts (Martinus Nijhoff 2006) 13–36. 98 ie the rejection of forum non conveniens by the European Court of Justice in the Judgment of 1 March 2005, case C-281/02, Andrew Owusu vNBJackson and others, ECR 2005, I-1383. © The Author(s) 2018. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of International Dispute Settlement Oxford University Press

Jurisdiction in Franchising Agreements: In Search of Efficiency

Loading next page...
 
/lp/ou_press/jurisdiction-in-franchising-agreements-in-search-of-efficiency-PteBeO0G4U
Publisher
Oxford University Press
Copyright
© The Author(s) 2018. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com
ISSN
2040-3585
eISSN
2040-3593
D.O.I.
10.1093/jnlids/idx020
Publisher site
See Article on Publisher Site

Abstract

Abstract United States’ and European legal systems treat choice-of-forum clauses differently. The US practice focuses in the substantial fairness of the clause while European provisions concentrate in its formal validity. These differences can affect franchising agreements. The article aims to compare both systems and to determine which one fits better with these complex transactions in which the balance of power of the parties is always challenged. This comparative analysis is based on the assumption that the aim of private international law is to minimize the costs of an international private relation and to allocate them to the cheapest risk bearer, in other words, to provide the most efficient solution. 1. INTRODUCTION Franchising has assumed a place of great interest in the global economy. The latest forecast for franchise businesses of the International Franchise Association (IFA) shows 2017 as a year of solid growth for the franchise sector, still ahead of the pace of growth in 2016.1 In its start-up phase, located in the United States in the early 1900s, this way of making business was used to create national networks.2 More recently, it has been used as a tool for international expansion. Its success is due to the fact that the risk-taking of the enterprise is smaller if it uses franchising techniques than if it undertakes the ‘conquest’ of an unknown new market on its own. In so far as the number of international franchising agreements has grown, the number of disputes related to these agreements has also boosted. When these disputes arise, Private International Law (PIL) comes into play. This branch of law shall determine in the first place which authority has jurisdiction over the lawsuit. Its rules should be considered by the entrepreneurs who are contemplating making use of the franchising vehicle in an international context even before the execution of the agreement. Careful drafting of forum-selection clauses is indispensable to preserving time and money if and when a dispute occurs.3 The first decision to be taken is the selection of an appropriate dispute resolution mechanism. Distinction must be made between mediation, litigation and arbitration. Even if mediation and arbitration clauses are more and more common in international franchise agreements, the majority of contractors still prefer the court system of a given State. Given that franchising agreements are almost by definition written agreements, the parties usually include a choice-of-forum clause. This is why this article will focus on jurisdiction clauses. PIL rules that govern choice-of-forum agreements differ from system to system. This article will pay attention to European Private International Law (hereinafter, ‘EPIL’) rules and the US rules. As it will be discussed in the article, in EPIL the conditions of validity of a choice-of-forum clause are mainly formal. EPIL considers franchising as any other business-to-business contract. However, parties to these agreements usually do not have the same, or even a similar, bargaining power. The influence that this difference of bargaining power should have in EPIL has been masterfully addressed in relation to choice-of-law agreements.4 However, this issue has not been studied with respect to the field of international jurisdiction, where it seems to be generally accepted that franchisees should be treated as any other entrepreneur, and therefore, that the choice-of-forum rules should be applied strictly. In this matter, the US jurisdiction system works differently. As it will be shown in the article, it subjects the enforcement of a choice-of-court agreement to a test of ‘reasonableness’ and ‘fairness’.5 As a consequence, the same jurisdiction clause could be enforced by an EU court and declared null and void by a US tribunal in the light of the unequal bargaining power of the parties. This article aims to compare both systems and to determine which one of them fits better with this kind of contracts, in other words, which one encourages the parties to enter into an international franchising agreement. The analysis will be made using a Law & Economics perspective. This method will be used as a ‘pedagogical tool’ which helps to measure the fairness of PIL legal rules, as it has already been used by a significant stream of scholars.6 From this point of view, a jurisdiction rule is fair if it allocates litigation costs efficiently. Litigation costs will be efficiently located if they are borne by the ‘cheapest risk bearer’ (as the other party would be willing to pay the most so as not to bear them). If jurisdictional costs are not efficiently allocated, this is, if they are not born by the cheapest risk bearer but by the other party, this contracting party might decide not to enter into the contract. The contract might never be concluded and both parties will lose (the prisoner’s dilemma). The only way to enhance international exchange is to assign litigation costs to the cheapest risk bearer.7 In particular, this article will analyse if the allocation of litigation costs is influenced by the bargaining power of the parties to the contract. The main reason for using this approach is that it can be applied to all PIL systems because efficiency is a ‘universal’ concept. As a consequence, this analysis works no matter the countries the agreement is connected to. If the standard is efficiency, the PIL rule that should apply to a certain kind of relation, ie franchise contracts, should be the same in all PIL systems around the world. The following example will clarify this concept: in the frame of an international franchising agreement executed by a Californian franchisor and a French franchisee, instead of having one ‘fair’ rule from the US law perspective and one from the EU, there will be just one ‘efficient’ rule of jurisdiction for this relationship.8 In this article, the analysis will be reduced to the comparison of two established common law (US) and civil law (EU) PIL systems. Summarizing, this article aims to compare the US and EU PIL systems to determine which one is more efficient for franchising choice-of-forum clauses. In the first place, the concept and structure of international franchising agreements will be circumscribed. This analysis will show that the parties to a franchising contract do not usually have the same bargaining power. Secondly, European and the US choice-of-forum rules applicable to this contract will be examined. Then, the efficiency of both systems will be tested to show that, in most cases, party autonomy does not lead to the forum that presumptively is the most efficient to both parties, but only to the franchisor. 2. INTERNATIONAL FRANCHISE AGREEMENTS: CONCEPT AND STRUCTURE A. In Search of a Uniform Concept Albeit franchising contracts are not covered by the majority of legal systems, its social and economic popularity have made them ‘socially regulated’ contracts.9 All around the world, everybody knows what a franchise is. However, the concept of franchising agreements can have different nuances from country to country. It is documented that franchise contracts were first created in the US in 1892 (Singer Sewing’s Company).10 This is franchising for the Americans, but it is still not franchising for Europeans. In this stage of its evolution, franchising consisted in granting the right to sell a company’s products or services and to use its brand and image. In Europe this kind of contract is not a franchise but a ‘concession’. For Europeans, franchising is something more. That ‘something more’ is the cession not only of Intellectual Property rights, and the image and brand of a company, but also of the way of doing business, of the know-how of the franchisor, who will assist the franchisee in developing the business, and will offer formation and technical support to the franchisee. All this support comes with a price for the franchisee. His/her canons will usually be higher, as higher will be the control that the franchisor will exercise over him/her. This contract is what in the US is called business format franchising. As such, it appeared in the late 1950s. Its first user was probably ‘McDonald’s’.11 It saw rapid expansion to Europe in the 1960s and 1970s.12 The concept that will be used in this article is the ‘European’ concept of franchising, this is, the equivalent to the US ‘business format’ franchising. The reason for choosing this concept is that it frames a certain structure of power relations between the parties in both pre-contractual and contractual phases that may not be shared by concession agreements. As it will be shown hereby, these power relations are of the utmost importance to determine the most efficient PIL rules. Regarding the contractual phase, in this business format franchising the franchisor guides and gives indications to the franchisee, which places the franchisor’s products or services in the market. Regarding the pre-contractual phase, there is usually a stronger bargaining power of the franchisor, as he/she has got the ‘key’ for the success of the business. This unbalance of power is not always present in other distribution contracts. Let’s imagine a big mall and a small town baker who wants to sell his/her bio bread on the mall’s supermarket. The mall will be the distributor, but it will probably impose its conditions to the baker. In addition, during the relationship, the mall will probably give the instructions to the baker on the prices and the standards of the bread for its sale on the supermarket. Franchising in the European sense has been defined by the European Court of Justice (ECJ) as the contract through which ‘an undertaking which has established itself as a distributor on a given market and thus has developed certain business methods grants independent traders, for a fee, the right to establish themselves in other markets using its business name and the business methods which have made it successful’.13 This definition was provided in the Pronuptia case, the leading case on the matter.14 Master franchise agreements and area development agreements are not included in this definition. The obligations exchanged by the parties in these agreements differ from those present in a simple franchise agreement. The most relevant obligation of the master franchisee is to find and train sub-franchisees and provide them with the know-how adapted to the local market; and the area developer renders services to the franchisor by assisting him/her in the expansion of the franchise network.15 As a consequence of the foregoing, this article will focus on this ‘simple’ franchising, also called direct franchising and its private international law regime. B. The Structure of Franchise Contracts It is very important for prospective franchisees, courts and regulators to understand not only the terms of a certain contract, but also the very nature of the contract itself.16 Among other characteristics, franchise contracts are relational or long-term.17 Particularly, they are ‘collaboration’ contracts, like distribution and agency. Their defining note is that a party (the franchisee, the distributor, the agent) promotes the placing in the market of the products or services of the other party (the franchisor, the principal).18 In this sense, agency, distribution and franchise are ‘distribution’ systems. The agent, the distributor and the franchisee are independent entrepreneurs but they remain somehow under the power and the instructions of the principal. From a New Institutional Economics perspective, it is said that these contracts are ‘hybrid’, because the distribution services are neither provided directly under the directions and structures of the enterprise (the principal) nor under the sole structure of the market (independently by the franchisees, agents or distributors), but that they are somewhere between both concepts.19 Of all these distribution systems, franchise is the closest to enterprise. The franchisee is more integrated in the principal’s structure than other distributors and agents. In terms of control, the franchisee is closer to an employee than to an independent contractor. The franchisor may require high standards regarding its image, its attitude towards the client, its brand or its products.20 This situation, in which the franchisee is subject to the permanent indications of the franchisor, makes the franchisee’s position weaker, even if franchisees hold a very valuable input for the franchisor, for they provide direct information from the client. This situation is worsened due to the fear of the franchisee to an ad nutum termination of the franchise contract by the franchisor.21 As a consequence, it can be stated that during the contractual phase, the franchisor has ‘power’ over the franchisee in the sense provided by Robert A. Dahl: the ‘ability of one individual or group to prompt another unit to do what it would not have otherwise done’.22 This unbalance of contractual power has not been addressed frequently by the courts or by law makers.23 Only a few decisions in Europe have related to the balance of power in franchising relations.24 A few more have been submitted in the US.25 In addition, scholarship has not reached a common opinion on whether this contractual superiority should be accepted by the law and if so, to what level.26 For some scholars, this superiority is a natural characteristic of franchising contracts, set in the benefit of both parties. For others, it is abusive and therefore it should be forbidden.27 Other authors, like M. Martinek, proposed to distinguish between two different kind of franchising contracts: ‘subordination’ franchising contracts and ‘cooperation’ franchising, depending on the weaker or balanced position of the franchisee.28 This lack of consensus is also present in relation to the pre-contractual phase, when the parties are negotiating the terms of the contract. Scholars first considered that franchisees always entered into negotiation in an extreme disadvantage towards the franchisor.29 New theories show that this bargaining superiority should not be taken for granted. When franchisors bargain a franchise contract, they compete with other franchisors, so in certain cases they must pay attention to the franchisees wishes if they do not want them to leave.30 However, the greater bargaining power of the franchisor is the most common situation, because the franchisor’s size and economic power is usually bigger. As a consequence, non-negotiated, one-sided clauses are very common in this kind of agreements. Should these circumstances be taken into account by the legislator or the court when deciding whether a jurisdiction clause should be enforced or not? Should non-negotiated jurisdiction clauses be enforced? As it will be shown in the next sections of the article, the answer to these questions has been different in the EU and in the US. 3. EUROPEAN JURISDICTION RULES REGARDING FRANCHISING The rules of international jurisdiction in civil and commercial matters in the US and in the EU differ in several aspects.31 The most relevant one is that in the EU these rules are contained in a common instrument, the recent Brussels I Regulation Recast.32 This unification appeared to be necessary for the achievement of an internal market.33 However, this unification is still incomplete and some lawsuits are still governed by European national civil procedure laws.34 Brussels I Regulation Recast (BIR-R) determines the jurisdiction of EU Member State courts in lawsuits relating to contracts making a distinction between ‘general rules’, and those rules applicable to ‘typically’ weaker parties to a contract (insured, consumers and employees).35 Franchise contracts are not in the list so they are governed by ‘general’ rules. This differentiation between general rules and weaker parties’ rules is unknown to US law, which examines the jurisdictional issue for all contracts in the same way.36 The question whether the lack of contractual bargaining power should be taken into account in the assertion of jurisdiction arises either in the presence or in the lack of a choice-of-court agreement. However, the article will focus in the presence of a jurisdiction clause, the most usual scenario in relation to a franchise contract.37 In BIR-R general rules, party autonomy is one of the main principles of international jurisdiction. When exclusive, it derogates all other rules of jurisdiction if Article 24 BIR-R is not applicable.38 Article 25 BIR-R provides the conditions for the validity of a choice-of-forum clause when the chosen forum is a Member State court.39 Regarding formal validity, the agreement must be in writing or evidenced in writing, or by any other form that is a usage between the parties or in international commerce. Regarding substantial validity, Brussels I Regulation Recast submits to the conditions to the law of the State ‘whose courts have been agreed by the parties to have jurisdiction’, including its conflict-of-laws provisions.40 These substantial conditions refer to the parties’ consent to enter into the choice-of-court agreement, which is considered an independent contract (principle of severability, Article 25.5 BIR-R).41 Even if the capacity of the parties to enter into an agreement is considered a ‘substantial condition of validity’, it is expressly excluded from Brussels I Regulation Recast material scope (Article 1 BIR-R). As a consequence, the issue of capacity of the parties to enter into the choice-of-forum agreement should be governed by the rules of the State whose courts are seized.42 Does Article 25 BIR-R leave room for the examination of the bargaining power of the parties? Let’s imagine the typical case of a franchisee who asks for the non-enforcement of the jurisdiction clause, claiming that it was imposed by the franchisor and that it seriously harms his access to justice. The answer to the aforementioned question is very relevant, moreover if we take into account that some Member States have enacted rules which protect professional contractors from ‘abusive’ contract terms that could be applied to declare null and void unfair jurisdiction clauses.43 Two different scholar positions can be identified on this issue. For some authors, the incorporation of an ‘unfair jurisdiction clause’, this is, a clause which clearly benefits only a party to the contract, shall be characterized as a question of consent.44 According to them, it could be possible for a franchisee who agreed to a choice-of-forum clause which harms his interests to argue that the clause was imposed by the drafting party and that he really did not consent to it. For these authors, the fairness of the clause should be therefore examined under the law of the State ‘whose courts have been agreed by the parties to have jurisdiction’, including its conflict-of-laws provisions. For another sector of scholarship, the ‘fairness’ of the clause shall be included neither in the formal nor in the substantial conditions of validity of the clause.45 The European legislator would have deliberately excluded the possibility of examining the bargaining power of the parties in business-to-business transactions. According to them, consent to the forum-selection clause is valid if there is no fraud, error or violence in its emission. As a consequence of the foregoing, to declare the invalidity of a jurisdiction clause, the parties to the contract should not be able to claim the ‘unfairness’ or ‘abusive character’ of the clause, even if the clause is included in a take-it-or-leave-it contract or in standard contract terms. The court who examines the clause should only grant an “incorporation control” but not a control of its “content”.46 This second stance on the issue seems to be supported by the ECJ. With respect to the Belgian law which prohibited Belgian agents and distributors—including franchisees—the execution of choice-of-forum agreements, the ECJ in Case C- 9/12 Corman-Collins SA v La Maison du Whisky SA [2013] ECLI:EU:C:2013:860, stated that these national restrictions cannot be taken into account, because they shall be considered as ‘jurisdiction rules’ and therefore as incompatible with Brussels I Regulation, the only instrument that should regulate jurisdiction in the disputes where the defendant is domiciled at the EU.47 However, in the case, Belgian rules specifically referred to jurisdiction clauses and this is why they were clearly considered as ‘national jurisdiction rules’ incompatible with BIR-R. There is no ECJ decision in relation to BIR-R where the weaker party tried to apply general unfair contract terms national laws to a choice-of-court clause. So the ECJ has not said the last word with regard to the interpretation of the term ‘substantial validity’. In a very recent case in the field of applicable law, it has stated that a choice-of-law clause included in the seller’s standard contract terms can be deemed as abusive according to the EU consumer’s legislation (Amazon case).48 This decision has been issued against the majority of scholarship, which considers that Rome I Regulation already provides consumers with conflict-of-laws protection (Article 6 RR-I).49 In spite of this, the Judgment has applied Directive 93/13/CEE of the Council, of 5 April 1993, on the abusive clauses in the contracts celebrated with consumers to a choice-of-law clause. It may be asked whether the court’s decision would have gone in the same direction if the case had not been covered by the scope of the directive, which would happen when the adherent is a franchisee, a professional. Which has been the position of Member States’ case law? Courts tend to follow this second stream, and consider that consent to the forum-selection clause is valid if there is no fraud, error or violence according to the law applicable to consent, leaving no room to examine the bargaining power of the parties.50 This is why franchisees have tried other ways out. They have tried to be considered as consumers, and therefore to make applicable the consumers regime of BIR-R. This move even arrived to the ECJ in the Benincasa case.51 In the said case, Mr Benincasa, domiciled in Germany, entered into a franchise contract with the Italian franchisor Dentalkit, specialized in the sale of dental products, for the operation of a franchised premise in Munich. The contract included a jurisdiction clause in favour of the courts of Florence, the place of the seat of the franchisor. Mr Benincasa paid the entrance fee and placed some orders, but before running the business he sued Dentalkit in his place of residence, Munich. He claimed the invalidity of the contract and the jurisdiction of the German court arguing that he was a consumer. Mr Benincasa pleaded that the contract had not been signed ‘in the exercise’ of a professional activity but in the sight of a commercial activity that was going to start in the future. The court of appeal referred a question to the ECJ, who answered that the concept of consumer shall be interpreted in a very narrow way and that the protection provided to consumers should not be provided to contracts whose object is a professional activity, current or future.52 In short, at the current stage of development of EPIL, it can be stated that the interpretation of Article 25 BIR-R and, particularly, of the term ‘substantial validity’, made by the ECJ and Member States’ courts does not open the door to the avoidance of ‘unfair’ jurisdiction clauses in franchising agreements. This position which respects the balance (or imbalance) of the parties’ bargaining power may be related to the way that franchising contracts are considered at the EU from a substantive legal perspective. The common denominator of the Member States’ legal systems is that none of them (except for Belgium) has specifically identified the ‘power issue’ has a key corollary of franchising, what enables the franchisor to maintain its superior position.53 The same can be concluded with respect to the Draft Common Frame of Reference (DCFR), the soft-law code drafted by the ‘Acquis Group’ (Study Group on a European Civil Code, Research Group on EC Private Law) and financed by the EU.54 The DCFR contains rules with respect to franchising in its book IV, section E. These rules were inspired by the comparative study of national legal systems compiled in the Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC, 2006).55 Even if its drafters have claimed that there was no specific interest in favouring one of the parties to the contract, some authors have seen a pro-franchisor orientation in the bigger number and more onerous obligations imposed on the franchisee.56 We should ask ourselves if Member States’ courts act in the same way when BIR-R is not applicable to the examination of the jurisdiction clause (when the clause points to the courts of a third State). Here, Member States’ courts are free to apply national unfair contract terms laws to the jurisdiction clauses if these clauses are covered by the scope of such national laws.57 In these cases, choice-of-forum clauses are handled like arbitration clauses.58 A relevant number of decisions deal with the validity of arbitration clauses in franchising agreements.59 In Germany, several judgments have been submitted in relation to the same franchising network, denying the enforcement of International Centre for Dispute Resolution of the American Arbitration Association (ICDR) awards rendered in the United States because the arbitration clause in the franchise contract created a gross disparity to the disadvantage of the franchisee, a small German entrepreneur, and was therefore invalid under the law applicable to the said arbitration clause.60 In these judgements, the substantial validity of the clause was analysed under section 879(3) of the Civil Code of Liechtenstein, which provides that contractual clauses that disadvantage one party by creating a ‘considerable disparity’ are void, after it was proved that these rules applied to arbitration clauses. 4. US JURISDICTION RULES REGARDING FRANCHISING A. A Bird’s-Eye-View on the US International Jurisdiction System Regarding the US jurisdiction system, it is important to note that States have their own bases for the exercise of jurisdiction. As a consequence, these rules are ‘unilateral’. That is to say, the rules of jurisdiction of a State can determine whether the courts of that State have jurisdiction over the dispute, but cannot determine if any other State has jurisdiction over the case.61 Another relevant aspect is that these rules apply to both interstate and international lawsuits.62 Nevertheless, there are some rules which only apply to cases connected with other countries, particularly when a non-US-resident is sued.63 Notwithstanding the foregoing, all these State jurisdiction rules are subject to a constitutional control. The first constitutional boundary is that a court needs ‘adjudicatory power’ in order to entertain an action and enter a valid and enforceable judgment. This ‘adjudicatory power’ is composed of personal jurisdiction, subject matter jurisdiction and venue.64 In addition, adequate notice shall be given to the defendant.65 The rules that control international jurisdiction are those that refer to ‘personal jurisdiction’. They determine whether a person or enterprise can be judged in the territory of a certain State. Modern US personal jurisdiction law distinguishes between jurisdiction in personam, in rem, quasi in rem and jurisdiction related to the family status of the person. Disputes arising from a franchise contract would usually need a court with in personam jurisdiction, in other words, a jurisdiction with power to enter a money judgment on a person, executable with all his goods in and outside the jurisdiction territory.66 US State statutes provide different grounds for the exercise of in personam jurisdiction.67 The US Supreme Court’s interpretation of their constitutional boundaries has customarily accepted the so-called ‘traditional grounds of jurisdiction’: domicile or incorporation in the forum State,68 service of process of the defendant on the State, appearance in court and consent. These grounds are stranded on the de facto power of a State over a defendant.69 The jurisdiction over these defendants is ‘general’, which means that the defendant may be sued on that State on claims having a direct connection to that State or to elsewhere. These fora have been supplemented by ‘modern grounds of jurisdiction’ in order to reach non-residents who, falling outside the traditional categories, engage in activities in a certain State or direct their activities towards that State.70 This jurisdiction is ‘specific’, which means that it requires the plaintiff’s claim to arise out of the particular act performed by the defendant within the forum State.71 To see if the defendant’s activities are enough to open a jurisdiction, the US Supreme Court has established the ‘minimum contacts test’ rule: the foreign defendant must have enough contact to satisfy minimum standards of due process.72 As a consequence, authors have affirmed that defendants who happen to have a ‘minimum contact’ with a US jurisdiction may be sued before its courts.73 Once jurisdiction has been asserted, and in the absence of a choice-of-forum clause, the finding that there is no more convenient forum elsewhere has also become crucial. B. The Treatment of Forum-Selection Clauses in Franchise Agreements Although ‘consent’ has traditionally been considered a ground of jurisdiction, its modern configuration started in 1972 with the Bremen case.74 Before this breakthrough case, US Courts frequently refused to accept the derogatory effect of a forum-selection clause, because they understood that this choice collided with the right of a court to deal with a case related to its territory. After Bremen, forum-selection clauses benefit from a prima facie presumption of validity and enforceability. This presumption is iuris tantum, so their invalidity of unenforceability can be shown under the circumstances of the case.75 However, the party bringing the suit in a court other than the contracted forum bears a heavy burden of proof. The party resisting the forum provision has the burden of clearly showing that the clause is (i) invalid, because its formation was induced by fraud or overreaching; or (ii) valid but unenforceable. Unenforceability can be based on two reasons. Firstly, it can be based on the reason that the enforcement of the clause would contravene a strong public policy of the forum state. Secondly, it can be argued that the clause was imposed by a party with overweening bargaining power and would place an unreasonable burden on the complaining party.76 The defence of fraud and overreaching can match the European consent requisites, contained in the conditions for substantial validity of the clause. However, the other two defences (public policy and overweening bargaining power) have no European equivalent. Regarding the public policy defence, as it was stated before, it was prohibited by the ECJ in the Corman Collins decision.77 To the contrary, in the US this exception can be used as a defence from forum-selection clauses. In relation to franchise contracts, some states have enacted statutes or norms directly affecting the place for litigation of franchise contract lawsuits.78 Nevertheless, the use of this exception does not seem to be consistent with the pre-contractual structure of franchise agreements as stated above, wherein the franchisor’s superior bargaining power should be analysed on a case-by-case basis. The public policy exception seems to be a more suitable defence for those contracts that structurally entail the superior bargaining power of one party in the pre-contractual phase (ie consumer contracts). On the other hand, the defence based in the overweening bargaining power of one party is more consistent with the structure of franchising agreements as explained hereto. What may be considered by some scholars as ‘too much discretion’ left to courts to defeat a choice-of-court made by parties, may be considered by others as a way of adapting an unfair result of the application of jurisdiction rules when the parties are not invested with the same bargaining power.79 It must be underlined that US law does not include any specific jurisdictional federal legislation for weaker parties; all choice-of-forum clauses have to pass the same constitutional control. In this sense, the US system leaves less room for protectionism, giving space to the ‘reasonableness’ exam not only in Business to Consumer but also in Business to Business transactions. This could be seen at first sight as negative because it can affect legal certainty though it can become an advantage for some contracts that do not fit in the typical categories of different bargaining power parties, like franchising. Nevertheless, scholars argue that this exception should be used with caution, because it entails a risk of chauvinism: a choice-of-forum clause could be considered as ‘reasonable’ when used by a national plaintiff and as ‘not reasonable’ when used by a foreign one.80 Caution also claims that the non-enforcement of a forum selection clause should always be an exception to a strong presumption of the clause’s validity and enforceability. To declare a clause as unenforceable, the court shall be satisfied that (i) the clause has been imposed by one party to the other; and that (ii) it does not add value to the position of both parties to the contract, but only to the drafting party’s position. The complaining party should satisfy this ‘heavy burden of proof’ required to set aside the clause on the ground of unreasonableness.81 Hitherto, this has been the position of the US Supreme Court, who has never considered the non-negotiation of the clause as enough for its non-enforcement. For example, in the Carnival Cruise case, the US Supreme Court failed that the Florida forum-selection clause enabled the cruise line to confine its legal knowledge to a single forum; this reduced its costs and therefore ticket prices to passengers. As a consequence, the forum-selection clause was considered not only a benefit to the drafting party but also to the adherent.82 Regarding franchising agreements, it is important to underline that this burden of proof of the clause’s imposition and unilateral benefit should be on the side of the franchisee and not on the side of the franchisor. The contrary would hamper international commerce and US strong policy on validity of choice-of-court agreements. However, some US courts have almost inverted the burden of the proof, leaving the franchisor before a probatio diabolica.83 In these cases, enforcement of the clause is only allowed if the franchisor can prove that the clause was not imposed unfairly or based on his superior bargaining power.84 As can be seen, the US’s flexible approach regarding the enforcement of forum-selection clauses differs from the EPIL perspective. As long as the parties manifest a valid consent in writing, European courts will not go further in scrutinizing the potential hardship on one of the parties or the possibility of violation of public policy of the otherwise available forum.85 As stated above, this happens because EPIL’s test on the substantial validity of the clause is not interpreted as permitting a defence based in the imposition of a harmful clause. On the contrary, the US system distinguishes between substantial validity (fraud and overreaching defence) and enforceability, leaving the defence based in the imposition of a harmful clause to the latter. In addition, this defence does not resort to any state law, but regulates the conditions of that enforceability in a direct and material way.86 Accordingly, the appreciation of both enforceability defences (public policy or overweening bargaining power) have led some US jurisdictions to declare franchising choice-of-forum clauses unenforceable, stating that in the concrete case the clauses had been imposed to the franchisees and harmed them: ‘here is a clear disparity in the bargaining power of franchisors versus franchisees’.87 However, courts still accord great weight to forum-selection clauses and have not appreciated the non-enforceability in most of the cases.88 This position, more favourable to the protection of the franchisee and to its consideration as the weaker party to the agreement may also be related to the way that franchising contracts are considered by the US courts and law makers in a substantive law perspective. The prevailing opinion in this country is that the regulation should be devoted to the protection of franchisees and to make franchisors responsible for the consequences of opportunistic behaviour and case law has also frequently reflected this view.89 5. THE EFFICIENCY TEST: A LAW AND ECONOMICS ANALYSIS OF JURISDICTION CLAUSES According to the current interpretation of EPIL rules explained herein, a jurisdiction clauses included in a franchise contract will be substantially valid if the parties had the capacity to agree to it and their consent was not vitiated by error, fraud or violence. According to the current state of US constitutional standards, the validity test of a choice-of-forum clause includes the evaluation of the parties’ bargaining power. Which solution fits better with the structure of franchising agreements as explained before? Which one enhances international commerce? The answer to these questions will be addressed from a Law & Economics perspective, which explains the fairness of legal rules in terms of efficiency. According to this perspective, choice-of-forum agreements should be enforced because they increase the value of the contract for the parties.90 There are many ways in which jurisdiction clauses can add value to a contract. The most common way is that one of the parties, in an ex ante situation, places more value than the other on litigating disputes at home or at a single place. Litigating abroad can impose costs that de facto reduce the profits of the parties to the contract (travel costs and delays are added to the costs of information on a foreign legal system). In a competitive market, a party can offer a greater price or other advantage to the other party in return for a forum-selection clause. This would increase the value of the contract and create an overall improvement.91 In other words, the forum-selection clause should be enforced because it is more ‘efficient’ for the parties than its absence or non-enforcement. For example, if a seller of goods finds of the utmost importance to litigate at home, he/she will offer a substantial consideration to the buyer in order to get that. The buyer would accept the offer if it improves his/her position in the contract (to him/her, the costs of litigating abroad are lower than the consideration offered by the seller) (Table 1). Table 1. Efficient forum-selection clause Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 15 Buyer’s Profits 5 6 Total 15 21 Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 15 Buyer’s Profits 5 6 Total 15 21 As the table shows, the forum selection clause is intrinsically efficient because it improves the situation of both contractors. Table 1. Efficient forum-selection clause Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 15 Buyer’s Profits 5 6 Total 15 21 Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 15 Buyer’s Profits 5 6 Total 15 21 As the table shows, the forum selection clause is intrinsically efficient because it improves the situation of both contractors. To the contrast, the buyer would never accept the offer if it does not improve his/her position in the contract. This will happen when he/she values the costs of litigating abroad as higher than the consideration offered by the seller (Table 2). Table 2. Inefficient forum-selection clause Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 17 Buyer’s Profits 5 4 Total 15 21 Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 17 Buyer’s Profits 5 4 Total 15 21 As the table shows, the forum selection clause is intrinsically inefficient because it does not improve the situation of both contractors. It only benefits one of them and harms the other. Table 2. Inefficient forum-selection clause Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 17 Buyer’s Profits 5 4 Total 15 21 Absence of a forum-selection clause Presence of a forum-selection clause Seller’s Profits 10 17 Buyer’s Profits 5 4 Total 15 21 As the table shows, the forum selection clause is intrinsically inefficient because it does not improve the situation of both contractors. It only benefits one of them and harms the other. In order to add value to a contract, the forum-selection clause does not necessarily need to appoint the courts which are most connected to both parties.92 The appointment can also increase the value of the contract by providing legal certainty to the parties or even neutrality when they fear that the courts of one party may favour its local over a foreigner. Another way of adding value by a choice-of-forum clause is by selecting an experienced court. In this case both parties may prefer to have their disputes resolved by someone familiar with the type of commerce involved in the transaction.93 As a consequence of the foregoing, when a valid jurisdiction clause is pleaded, the court should enforce it because it is presumed that it is the ‘most efficient’ one for the parties to the contract. The parties, then, will have chosen the jurisdiction that may entail the allocation of the risks to the cheapest risk bearer, and the value of their contract will have increased by the inclusion of such a clause.94 However, it can be easily demonstrated that some forum-selection clauses do not add value to the contract. In such a case, an economic analysis recommends the clause’s non-enforcement. When a clause creates a win-lose situation, non-enforcement is the most efficient solution.95 Such a win-lose situation is created when a party can make the other to agree on something without improving his/her general position in the contract. This only happens when a party has a greater bargaining power than the other. In this context, if the buyer in our former example had been the weaker party to the negotiation, he/she would have accepted the forum-selection clause under the conditions of Table 2. This is the risk of a forum-selection clause in a consumer contract, but also in a franchise agreement. As it has been explained, it is very likely that the franchisor has had more bargaining power than the franchisee, and under these circumstances it can have made the franchisee to accept a clause that may be harmful to his/her contractual interests. Unlike efficient forum-selection clauses, the gains to the drafting party are not shared with the non-drafting party. As there are some cases in which the franchisor and the franchisee may have negotiated in a balanced arena, caution recommends that the appreciation of the balance between the parties should be left to the court. Summarizing, from a Law and Economics perspective, the enforcement of forum-selection clauses should be the general rule, but the systems needs a ‘way out’ to solve the win-lose situations. In other words, a rule whose presumption regarding the efficiency of the choice is iuris et de iure may not be the most efficient solution for franchise contracts. Such a rule would probably make the franchisee to bear the litigation costs even if he/she is not the cheapest risk bearer, just because he/she was the party with less bargaining power. Fully effective but abusive choice-of-forum clauses may prevent many franchisees to enter into franchising agreements in the future. In contrast, an economic analysis would recommend this presumption of efficiency to be iuris tantum, this is, that the option could be given to the franchisee to demonstrate his/her less bargaining power and the harm that the acceptance of this clause has meant to his/her contractual position. 6. CONCLUSIONS According to the foregoing, the current interpretation of Article 25 BIR-R leads to the enforcement of non-efficient forum-selection clauses in disputes arising from franchise contracts. In contrast, the US defence based in the overweening bargaining power of one party appears to be consistent with the conclusions of our Law & Economics’ analysis, according to which a clause should not be enforced (i) if it has been imposed by a party with a relative stronger bargaining power and (ii) if it benefits only the drafting party, leaving the other in a worse general position than the one he/she would hold if the clause had not been incorporated to the agreement.96 As a consequence of the above it can be affirmed that recent US practice regarding the enforcement of franchise forum-selection clauses is consistent with the conclusion that this enforcement should only take place to the extent that it makes the contracts more valuable to both parties, and not only to the franchisor. When forum-selection clauses create no value to both parties, rather they simply reflect the stronger contracting party’s desire to litigate at home, the tendency in the US is not to enforce them, which is a more efficient solution than the one provided by the current interpretation of the term ‘substantial validity’ of Article 25 BIR-R. The American Conflict of Laws revolution made European scholars, judges and rulers to reconsider their PIL methods 50 years ago.97 The ‘proximity principle’ and the ‘closest connection’ clauses present in some EPIL instruments are a proof of this reconsideration. However, nowadays European jurists have stopped looking to US PIL given the fact that any attempt to introduce flexibility in this system has been rejected by both the EU legislator and the ECJ.98 Maybe the ‘fairness’ test of forum-selection clauses in US PIL is also something to look at. The US ‘reasonableness’ judgment enables the court to examine whether the clause was imposed by the franchisor and if it would only benefit that drafting party. Accordingly, non-efficient forum-selection clauses are not enforced, in contrast with the European practice. An implementation of this flexibility seems to be desirable in the EPIL system. Taken into account its civil law tradition, this would not be possible via a written rule in Brussels I Regulation. But this kind of rule would not be necessary. A broader interpretation of the concept of ‘substantial validity’ would be enough. This broader interpretation would not be against Article 25 BIR-R or its principles and what is more, seems to be more consistent with the latest case law of the ECJ (Amazon case). This more flexible interpretation would allow measuring the bargaining power of the parties to the contract and would allocate the risks of internationalization to the ‘cheapest risk bearer’. As a consequence, it would assure to a greater extent that parties to franchise contracts will not have to bear with disproportionate litigation costs to get their redress. This would encourage the execution of international franchising agreements, which are a very desirable instrument not only for the parties but also for the economy as a whole. International franchising fosters economic development, knowledge transfer and the cohesion of territories, because it creates lasting bonds and common interests between economic operators. In addition, the benefits of such an interpretation of Article 25 BIR-R would not end in franchising, but would be extendable to all other contracts which, due to their specific pre-contractual structure, contain jurisdiction clauses in the exclusive benefit of one of the parties and which are not contemplated by Brussels I Regulation Recast as typically weaker parties agreements, such as agency and distribution. Footnotes 1 International Franchise Association, Franchise Business Economic Outlook (2016) 5. 2 M Mendelsohn, Franchising Law (2004) 21; E Zanelli, ‘Il franchising nella tipologia delle concessioni tra imprese’ in G Alpa (ed), Nuovi tipi contrattuali e tecniche di redazione nella pratica commerciale (Giuffrè 1978) 255. 3 KL Bundy, M Hero and P Hollander, ‘Choice of Law. Venue and Jurisdiction, Arbitration v. Litigation’ (2012) 10 Int’l J Franchising L 3, 4. 4 D Valdini, Der Schutz der schwächeren Vertragspartei im Internationalen Vertriebsrecht (Sellier 2014); P Piroddi, La tutela del contraente debole nel regolamento Roma I (CEDAM 2013). 5 Bremen vZapata Off-Shore Co, 407 US 1, 15 (Colex 1972). 6 J Carrascosa González, Conflicto de Leyes y Teoría Económica (2006) 20; F Garcimartín Alférez, ‘El régimen normativo de las transacciones privadas internacionales: Una aproximación económica’ (1995) 47 Rev Esp Derecho Int 11; F Garcimartín Alférez, ‘La racionalidad económica del derecho internacional privado’ (2012) 2011 Cursos de D. Internacional y Relaciones Internacionales de Vitoria Gasteiz 87; H Muir Watt, ‘Aspects économiques de droit international privé’ (2004) 307 RCADI 25; HJ Schmidt-Trenz, Außenhandel und Territorialität des Rechts (Nomos 1990); D Schmidtchen, ‘Territorialität des Rechts, Internationales Privatrecht und die privatautonome Regelung internationaler Sachverhalte’ (1995) 59 Rabels Zeitschrift 56; G Rühl, Statut und Effizienz (Mohr Siebeck 2011). 7 F Garcimartín Alférez, ‘La racionalidad económica’ (n 6) at 127. 8 In this respect, a Law & Economics analysis may be a very useful tool to reach consensus on international PIL Conventions. 9 DP Fernández Arroyo, ‘Modalidades contractuales específicas’ in D P Fernández Arroyo (ed), Derecho internacional privado de los Estados del Mercosur (Librarius 2003) 1027, 1049. 10 JN Adams and KV Pritchard Jones, Franchising: Practice and Precedents inBusinessFormatFranchising (Tottel 2006) 6. 11 E Gallego Sánchez, La Franquicia (Trivium 1991) 21. 12 ibid at 5. E Crawford Spencer, TheRegulation ofFranchising in theNewGlobalEconomy (2010) 1. 13 Judgment of the ECJ of 28 January 1986, case C-161/84, Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis, ECR 1986, I-353. 14 ibid. 15 Bundy, Hero and Hollander (n 3) at 14–15. 16 Spencer (n 12) at 77. 17 GK Hadfield, ‘Problematic Relations: Franchising and the Law of Incomplete Contracts’ (1990) 42 Stanford L Rev 927, 946. 18 Mendelsohn (n 2) at 59; A Bercovitz Rodríguez-Cano (dir), Contratos mercantiles (Aranzadi 2004) 359; R Alonso Soto and A Sánchez Andrés, ‘Los Contratos de Colaboración’ in A Menéndez and A Rojo (dirs), Lecciones de Derecho Mercantil (Thomson Reuters - Civitas 2012) 100; F Vicent Chuliá, Introducción al Derecho Mercantil (Tirant lo Blanch 2003) 683. 19 PH Rubin, ‘The Theory of the Firm and the Structure of the Franchise Contract’ (1978) 21 J L & Eco 223, 226. 20 On the performance of franchise systems: EE Anderson, ‘The Growth and Performance of Franchise Systems: Company versus Franchisee Ownership’ (1984) 36 J Eco & Business 421; F Lafontaine, ‘Agency Theory and Franchising: Some Empirical Results’ (1992) 23 Rand J Eco 291; F Lafontaine and PJ Kaufmann, ‘The Evolution of Ownership Patterns in Franchise Systems’ (1994) 70(2) J Retailing 97; RE Martin, ‘Franchising and Risk Management’ (1988) 78(5) Am Eco Rev954; AR Oxenfeldt and AO Kelly, ‘Will Successful Franchise Systems Ultimately become Wholly-owned Chains?’ (1969) 44 J Retailing 69. 21 Rubin (n 19) at 228. 22 RA Dahl, ‘The Concept of Power’ (1957) 2 Behav Sci 201, 213. This concept is usually used as the starting point for the study of power relations in franchise and distribution: LW Stern and FJ Beier, ‘Power in the Distribution Channel’ in LW Stern, Distribution Channels: BehavioralDimensions (1969) 92; SD Hunt and JR Nevin, ‘Power in a Channel of Distribution: Sources and Consequences’ (1974) 11 J Marketing Res 186; B Klein, ‘The Economics of Franchise Contracts’ (1995) 2(1) J Corp Fin 12; AM Doherty and N Alexander, ‘Power and Control in International Retail Franchising’ (2006) 40(11) Eur J Marketing 1292. 23 T Tajti, ‘Franchise and Contract Asymmetry: A Common Trans-Atlantic Agenda?’ (2015) 37(2) Loyola of Los Angeles International and Comparative L Rev 245, 246. 24 Court of Appeal of Katowice of 4 March 1998, n I ACa 636/98 , as explained by Tajti, see above n 23, 247, the franchisees claimed that all the risks of the contracts shifted to them and that there was no equivalency of performance. The court proclaimed that contractual power of franchisors was a normal feature of franchise contracts. 25 Some of them have failed in favour of the franchisee. See eg Postal Instant Press, IncvSue Sealy, 51 Cal Rptr 2d 365, 373 (Cal Ct App 1996). In the case, the court described the relationship between franchisor and franchisee as a reflection of their gross bargaining disparity. Others have not shared this protective attitude. See eg Texaco, IncvAAGold, 357 NYS2d. 951 (1974). As explained by Tajti, see above n 23, in the case, the contract gave the right to the franchisor to evict the franchisee on 10 days’ notice. The Court held that the parties had been free to agree on the terms of the contract. 26 Tajti (n 23) at 249. 27 ibid at 250, footnote n 18 referring to P Steinberg and G Lescatre, ‘Beguiling Heresy: Regulating the Franchise Relationship’ (2004) 109 Penn St L Rev 105, 113, an article that clearly reflects the divide. 28 M Martinek, Franchising. Grundlagen der zivil- und wettbewerbsrechtlichen Behandlung der vertikalen Gruppenkooperation beim Absatz vom Waren und Dienstleistungen (Decker & Schenck 1987) 256. 29 Hunt and Nevin (n 22) at 187. 30 B Klein and L Saft, ‘The Law and Economics of Franchise Tying Contracts’ (1985) 28(2) J L & Eco 356: ‘The important economic distinction that must be made is between pre- and postcontract economic power. Precontract, competition among franchisors (such as McDonald’s or Kentucky Fried Chicken) to sign up franchisees prevents Chicken Delight from exercising any economic power in setting contract terms with potential franchisees’ (…) ‘Postcontract, on the other hand, any franchisor can use the threat of termination to “hold up” a franchisee that has made a specific investment in the marketing arrangement’. 31 W Posch, ‘Resolving Business Disputes through Litigation or other Alternatives: the Effects of Jurisdictional Rules and Recognition Practice’ (2002) 26(2) Houston J Int Law 363, 363. 32 Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast), L 351 OJ, 1(2012). This regulation replaced the Council Regulation No 44/2001, L 12 OJ, 1 (2001) and applied from 10 January 2015. Most of the rules of the Recast comply with the respective rules of the precedent Regulation. 33 Art 3 Consolidated Version of the Treaty on European Union, C 326 OJ, 13, 390 (2012). P Lagarde, ‘Développements futurs du droit international privé dans une Europe en voie d'unification: quelques conjectures’ (2004) 68(2) Rabels Zeitschrift 225, 243. 34 Jurisdiction shall be examined according to Member State procedural rules if the defendant is not domiciled in the European Union and if jurisdiction cannot be asserted according to arts 24, 25 or 26 BIR-R (choice-of-forum agreement in favour of a EU court, tacit submission to a EU Court or lawsuit on a matter which is considered of the exclusive jurisdiction of a EU court). 35 In matters relating to insurance, arts 10–16; in matters relating to consumer contracts, arts 17–19 and in matters relating to individual contracts of employment, arts 20–23. 36 See Posch (n 31) at 362; SB Burbank, ‘Jurisdictional Conflict and Jurisdictional Equilibration: Paths to a Via Media’ (2004) 26(2) Houston J Int’l L 385, 394; PJ Borchers, ‘Comparing Personal Jurisdiction in the United States and the European Community: Lessons for American Reform’ (1992) 40 Am J Comp L 121, 156. 37 See Posch (n 31) at 375. 38 P Lagarde, ‘Le principe de proximité dans le droit international privé contemporain’ (1986) 196 RCADI 9, 127; AT von Mehren, Theory and Practice of Adjudicatory Authority in PIL:AComparative Study of the Doctrines, Policies and Practices of Common Law and Civil Law Systems (RCADI 2003) 29–36. 39 When the chosen jurisdiction is the court of a third State, the Member State Court should apply its national civil procedural rules to see if such an agreement is valid. For example, if the parties to a contract chose the exclusive jurisdiction of California courts, but one suits the other before the courts of Madrid, Spain, the Spanish courts shall not apply Brussels I Regulation Recast to see if the forum-selection clause is valid, but its national norms (Civil Procedure Act 1/2000). 40 See Recital 20 BIR-R: ‘Where a question arises as to whether a choice-of-court agreement in favour of a court or the courts of a Member State is null and void as to its substantive validity, that question should be decided in accordance with the law of the Member State of the court or courts designated in the agreement, including the conflict-of-laws rules of that Member State’. 41 AL Calvo Caravaca and J Carrascosa González, Derecho Internacional Privado (Comares 2014) 228–29. 42 These national rules regularly refer to the ‘personal law’ of each party to the contract, which is the law of their nationality in civil law tradition countries and the law of their domicile in common law influence countries. 43 See eg the Spanish Law 7/1998, of 13 April on General Contractual Terms (‘Condiciones Generales de la Contratación’), BOE n 89 14 April 1998. 44 Y Loussouarn, P Bourel and P de Vareilles-Sommières, Droit International Privé (Dalloz 2013) 780; DP Fernández Arroyo and others, ‘Modalidades contractuales específicas’ in DP Fernández Arroyo (coord), Derecho internacional privado de los Estados del Mercosur (Librarius 2003) 1027, 1048. 45 H Kenfack, La franchise international (1996) 385–86; L García Gutiérrez, ‘Los contratos de franquicia internacional’ (2010) Revista de Derecho Mercantil 275, 249, 267; FJ Garcimartín Alférez, ‘Contratos de distribución internacional: competencia judicial y Ley aplicable’ in A Alonso Ureba and others (dirs), Los contratos de distribución (La Ley 2010) 221, 224; D Bureau and H Muir Watt, Droit International Privé (PUF 2014) 372. 46 Garcimartín Alférez, ibid at 224. 47 Belgium enacted a national law which prohibited Belgian in relation to this, MA Cebrián Salvat, ‘Agency and Distribution Contracts: National Rules v. European Private International Law’ in JS Bergé, M Gardeñes and S Franq (cords), Boundaries of European Private International Law (Bruylant Larcier 2015) 10. 48 Judgment of the ECJ of 28 July 2016, case C-191/15, Verein für Konsumenteninformation vAmazon EU Sàrl, ECLI:EU:C:2016:612, para 71: ‘The answer to Question 4(a) is therefore that Article 3(1) of Directive 93/13 must be interpreted as meaning that a term in the general terms and conditions of a seller or supplier which has not been individually negotiated, under which the contract concluded with a consumer in the course of electronic commerce is to be governed by the law of the Member State in which the seller or supplier is established, is unfair in so far as it leads the consumer into error by giving him the impression that only the law of that Member State applies to the contract, without informing him that under Article 6(2) of the Rome I Regulation he also enjoys the protection of the mandatory provisions of the law that would be applicable in the absence of that term, this being for the national court to ascertain in the light of all the relevant circumstances.’. This judgment has been extensively criticized by scholarship because of this statement. See P Mankowski, ‘Anmerkung zu EuGH, Urteil vom 23. 12. 2015–C-297/14’ (2016) NJW 69, 699. 49 P Mankowski, ‘Article 3: Freedom of Choice’ in U Magnus and P Mankowski (dirs), Rome I Regulation (Otto Schmidt 2017), 87, 249: ‘The european legislator protects the consumer against unfair clauses through the use of private international law, not through the consumer protection regimes of the lex fori or the lex causae’. 50 See the following decisions of Spanish Courts of Appeal in relation to other commercial contracts: SAP Alicante 24 febrero 2014, n 41/2014, RJ AC\2014\453 (hotel management contract); AAP Tarragona 10 junio 2004, n 60/2004, RJ JUR\2004\204232 (sale of pipes); AAP Pontevedra 24 septiembre 2009, n 153/2009, RJ JUR\2009\436563 (contract of carriage of goods by sea); SAP Pontevedra 31 julio 2007, n 465/2007, RJ JUR\2007\355464 (ibid); SAP Guipúzcoa 21 septiembre 2007, n 197/2007, RJ JUR\2008\35356 (bicycle distribution contract); SAP Navarra 27 diciembre 2007, n 229/2007, RJ JUR\2008\184460 (sale of machinery). The ‘unfairness’ of the clause is not claimed very frequently before the courts of other Member States. See, for example, the decision of the Cour de Cassation Française, Sent Cour Cass Civ 1re, 6 marzo 2007, pourvoi n 06-10.946, BullCivI, 2007, n 93. 51 Judgment of the ECJ of 3 July 1997, case C-269/95, Francesco Benincasa v Dentalkit Srl, ECLI:EU:C:1997:337. 52 Judgment of the ECJ of 3 July 1997, Benincasa, ibid 51, para 17. 53 Tajti (n 23) at 249. 54 JW Rutgers and others, Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC) (Sellier 2010) at 77; O Bueno Diaz, Franchising in European Contract Law. AComparison between theMainObligations of theContractingParties in the Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC), French and SpanishLaw (Sellier 2008) 3–19. 55 Rutgers and others, ibid 54 at 77–88. 56 Diaz (n 54) at 22; Tajti (n 23) at 250. 57 When French law is applicable, the jurisdiction clause is upheld. Regarding exclusive distribution agreements, Sent Cour Cass Civ 1ere 22 octubre 2008, pourvoi n 07-15.823, (‘Monster Cable’), Bull. Civ. I, 2008, n 233. 58 Tajti (n 23) at 246. 59 Helsinki Court of Appeal, judgment of 11 January 2017 (#24, docket S16/838), set aside the arbitration clause and permitted the franchisee to have his case brought to court. For a synopsis of the case and a reference to an earlier decision of the Supreme Court in the opposite sense, see <https://www.idiproject.com/news/finland-arbitration-clause-held-unreasonable> accessed 26 November 2017. See also the Higher Regional Court of Thuringia judgment of 13 January 2011, 1 Sch 01/08, <www.dis-arb.de/en/47/datenbanken/rspr/olg-th&uumlringen-case-no-1-sch-01-08-date-2011-01-13-id1232> accessed 26 November 2017 and the Federal Supreme Court judgment of 15 January 2009, III ZB 87/07 in relation to the earlier decision of the Court of Appeal of Dresden of 7 December 2007, 11 Sch 08/07, reported in Yearbook XXXIII (2008), pp 549–51, Germany n 115. 60 See Higher Regional Court of Thuringia judgment of 13 January 2011, ibid. 61 Lagarde (n 38) at 130. 62 Burbank (n 36) at 388. 63 SN Subrin and others (dirs), Civil Procedure: Doctrine, Practice and Context (Wolters Kluwer, 3rd edn, 2008) 637. Non-residents can be sued before state courts, but also before federal courts according to Fed Civ P 4, at 4(k)(2), if the claim arises under federal law, the defendant is beyond the reach of any state court and the case has minimum contacts with the US as a whole. 64 As explained in the webpage of the Judicial Branch of California, ‘California Courts’, personal jurisdiction is defined as ‘jurisdiction over the person (or business or organization) you want to sue’, subject matter jurisdiction is ‘jurisdiction over the legal issue or dispute you are suing about’. Regarding their difference with venue: ‘while jurisdiction says in what state and what court you file your lawsuit, “venue” is the county where you file your action’. <http://www.courts.ca.gov/9617.htm> accessed 26 November 2017. 65 Subrin and others (n 63) at 609. 66 However, quasi in rem jurisdiction, this is, power to enter a judgment on a person only enforceable with the goods in his territory could also be used for the disputes arising from a franchise contract. Also in rem, in the lawsuits directly related to property (the franchise premises). 67 The majority of states have enacted statutes which authorize their courts to exercise jurisdiction in certain conditions (NY CPLR 302). Other states have opted for an open-ended approach which directly refers to constitutional limits (California Code Civ Proc 410.10). 68 The domicile in US law is the person’s ‘true, fixed and permanent home and principal establishment, and to which he has the intention of returning whenever he is absent therefrom’ (Mass vPerry, 489 F2d 1396, 1399 (5th Cir 1974). 69 Pennoyer vNeff, 95 US 714, 733 (1877). 70 Burger King Corporation vRudzewicz, 471 US 462 (1985). 71 Subrin and others (n 63) at 612. However, the Supreme Court included among them ‘continuous, systematic and substantial business of a non-resident in the forum’ as a ground for subjecting that defendant to general jurisdiction over any claim regardless of where it arose in International Shoe Company vState of Washington, Office of Unemployment Compensation & Placement, et al, 326 US 310 (1945). 72 Subrin and others (n 63) at 632. 73 See Posch (n 31) at 368. 74 Bremen vZapata Off-Shore Co, 407 US 1, 15 (1972). 75 See Bundy, Hero and Hollander (n 3) at 15. 76 Watt (n 6) at 147; EA O’Hara, ‘The Jurisprudence and Politics of Forum-Selection Clauses’ (2002) 3(2) Chicago J Int’l L 301, 308–12. 77 See n 35. 78 California, Connecticut, Illinois, Indiana, Iowa, Louisiana, Maryland, Michigan, Minnesota, New Jersey, North Carolina, North Dakota, Rhode Island, and South Dakota, Wisconsin. 79 Burbank (n 36) at 393. 80 ibid at 394. 81 Carnival Cruise LinesIncvShute, 499 US 585 (1991). 82 ibid 594–95 (1991). O’Hara (n 76) at 310. 83 ie in New Jersey, where the franchisor must show evidence of specific negotiations over the inclusion of the forum selection clause that proof that the clause was not imposed on the franchisee against its will. 84 See Kubis & Perszyk AssociatesIncvSun Microsystems, Inc, 680 A.2d 618, 626 (NJ 1996) (New Jersey); Korean AmBroadCoIncvKorean Broad Sys, 2012 WL 1080260 (ND III 29 March 2012) (Illinois Franchise Disclosure Act); Business StoreIncvMail Boxes et al, 2012 WL 525966 (DNJ 16 February 2012) (New Jersey Law); Phoenix SurgicalsLLC vBlackstone MedInc, 2011 WL 63992 (D Conn 3 January 2011) (Strong public policy of the State of Connecticut), Brown DogIncvThe Quizno’s Franchise CoLLC, 2004 WL 1114427 (WD Wis 13 May 2004) (Wisconsin WFDL); Jones vGNC FranchisingInc, 211 F.3d 495 (9th Cir 2000) (California FRA), cf Bundy, Hero and Hollander (n 3) at 16. 85 FA Gabor, ‘PIL from the US Perspective’ (1988) 8(3) North W J Int’l L 538, 550. 86 Calvo Caravaca and Carrascosa González (n 41) at 230. 87 See IndepAss’n of Mailbox CtrOwners, IncvSuperior Court supra note 85 at 407; See also Graham vScissor TailInc, 28 Cal. 3d 807, 817 (Cal 1981) quoting Neal vState Farm InsCos, 188 Cal App 2d 690, 694 (cal Ct App 1961). 88 G&R Moojectic Treats IncvMaggiemoo’s Int’lLLC, 2004 WL 1110423 (SDNY 19 May 2004. In this lawsuit between an ice-cream franchisor and two franchisees, the latter filed their claim before NY courts. The franchisor responded by filing a motion to stay, dismiss and transfer the claims to the District of Maryland, pursuant to identical forum selection clauses in the franchise agreements. The ruling of the case declared that the forum selection clauses agreed to by the franchisee plaintiffs were enforceable. Other examples of enforcement of forum-selection clauses in franchise contracts are: HOODZ Int’lLLC vToshiaddi, 2012 WL 883912 (ED Mich 14 March 2012) (enforcing clause against California FRA); Big O TiresLLC vFelix BrosInc, 724 F Supp 2d 1107 (D Colo 2010) (enforcing clause against California FRA); Park Inn Int’lLLC vMody EntersInc 105 F Supp 2d 370 (DNJ 2000) (enforcing clause against New Mexico law); Szymczyk vSigns Now Corp, 606 SE 2d 728 (NC App 2005) (against North Carolina law); Bakhsh vJACRRC EntersInc, 895 P 2d 746 (Okla Ct App 1995) (against Oklahoma’s franchisee); My Café-CCC, LtdvLunchstopInc, 107 S.W.3d 860 (Tex Ct App 2003) (Texas’ franchisee), cf Bundy, Hero and Hollander (n 3) at 16; ibid at 7. 89 Tajti (n 23) at 263. 90 O’Hara (n 76) at 309. 91 ibid at 309. 92 Lagarde (n 38) at 141: ‘Le pouvoir localisateur de l’autonomie de la volonté exclut sa correction par le principe de proximité et exclut du même coup l’exigence d’un lien entre le tribunal et le litige’. 93 O’Hara (n 76) at 310. 94 Garcimartín Alférez (n 6) at 87. 95 JD Morrow, Game Theory for Political Scientists (Princeton University Press 1994) 74–76; O’Hara (n 76) at 310. 96 Burbank (n 36) at 390; von Mehren (n 38) at 313: ‘It would be in keeping with the jurisdictional standard of reasonableness for courts to take into account at the constitutional level such factor as the relative strength of the parties’ bargaining positions’. 97 See Lagarde (n 38) at 25; SC Symeonides, ‘The American Revolution and the European Evolution in Choice of Law: Reciprocal Lessons’ (2006) 82(5) Tulane L Rev 1, 5; SC Symeonides, The American Choice-Of-Law Revolution in the Courts (Martinus Nijhoff 2006) 13–36. 98 ie the rejection of forum non conveniens by the European Court of Justice in the Judgment of 1 March 2005, case C-281/02, Andrew Owusu vNBJackson and others, ECR 2005, I-1383. © The Author(s) 2018. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com

Journal

Journal of International Dispute SettlementOxford University Press

Published: Jan 12, 2018

There are no references for this article.

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create lists to
organize your research

Export lists, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off