The relevance of conditions prevailing in the franchise market in drafting the Commercial Code Bill

What’s the problem: The Commercial Code Bill, a chapter of which is devoted to commercial contracts has been returned by the Guardian Council to the Parliament for reconsideration. Accordingly all its articles will have to be reviewed in the open session of the Parliament, which provides a much-needed opportunity for the Government to reconsider all parts of the Bill, in particular from the perspective of its policy functions. Since all legal regulations are indeed policy instruments of the government, used to materialize its strategic objectives, it is important to determine the strategic objectives and policies of a given regulation before drafting it, having regard to the conditions prevailing in the environment where the regulation is to be implemented. Here, we have touched open a number of most important shortcomings of the Commercial Code Bill regarding the conditions prevailing in the distribution market in general and the franchise market in particular.

Key points: According to our studies including interviews carried out with actors in the franchise market in Iran (both franchisers and franchisees), the following are among the most important issues that must be addressed in drafting the Commercial Code Bill.

1. Decreasing price disparities. Price disparity is a major problem in the grocery market. The existing structure of the grocery distribution network which consists of an enormous number of small non-competitive grocery stores, has led to considerable price disparities in the market. The Commercial Code Bill can use the franchise model of business to address this problem. In this sense, the franchise regulations in the Commercial Code Bill can be formulated in such a manner as to promote a certain franchising model with mechanisms necessary for unification of prices, and therefore contribute to eliminating price disparities in the retail market. One such mechanism is requiring the franchiser to set the prices of items to be sold to the consumers, and the franchisees to strictly adhere to those prices, so that all similar goods will be sold with the same prices by all the members of the same network. Such an emphasis on convergence of prices is because consumers will normally expect the qualities and prices of the goods to be the same at the outlets of the same retailing brand, compared to separate individual stores.

2. Countering arbitrary business practices among franchisees. The Bill must be drafted in such a way as to suppress the possibility of arbitrary behavior of franchisees even in the non-price-related functions. One such arbitrary behavior is using or even misusing sale incentives, taking advantage of asymmetric information in the market and even among the different franchisees within the same retailing brand. In order for solving this problem, the Bill must require the franchisers to effectively control the way franchisees use sale promotions so that such arbitrary business practices are prevented from misleading consumers and causing different behaviors to prevail among the members of the same retailing network.

3. Redressing the inequality between the parties to franchise agreement. The overall weaknesses of the franchisees allow franchisers to effectively impose their own will and interests on the weaker party to the franchise agreement. The Commercial Code Bill must be drafted in such a way as to rectify the inequality between the parties of the franchise agreement through protecting the weaker side. From among the instances of abusing higher bargaining power by the franchisers, we can refer to allotting different contract terms and conditions to different franchisees and even imposing unfair terms and conditions on some of them, in particular as regards franchise fees and the like.

4. Regulating trial periods in the franchise business model. Franchise contracts typically include trial periods in the pre-contractual phase, at the end of which the franchisee can decide to continue or to stop participating in the relevant business relationship. However, as in addition to contracting parties, the trial period activity has impacts on third parties (i.e. consumers) too, the Commercial Code Bill must determine in detail the rights and obligations of the parties in the pre-contractual trial period, so as to protect the reputation and credibility the franchiser has earned after years of activity in the market, the rights and interests of the franchisees as the weaker side of the relationship, and - the last but certainly not the least - the interests of the consumers who not knowing about the trial period, will reasonably rely on all outlets of a franchise network.


Contact Us

 No.1204 North Kargar st. Tehran, Iran
 Phone: (+9821) 66 93 62 00 / (+9821) 61 06 2322
 Fax: (+9821) 66 93 36 56