Many Western companies have shunned Russia as a result of the invasion of Ukraine, but some have remained open in the nation and claim they are unable to close them.
Complex franchise agreements preclude Marks & Spencer, Burger King, and hotel firms Marriott and Accor from exiting.
The companies have outsourced their Russian activities to third parties, and they do not own the enterprises that wear their names.
In Russia, the companies’ combined outlets number about a thousand.
M&S has 48 stores open and Burger King has 800 restaurants open, while Marriott and Accor both have 28 and 57 hotels open.
According to reports, the companies are bound by formal franchise agreements, making it impossible for them to remove their names from Russian shopping malls and high streets.
For decades, many Western companies have had similar partnerships. Marks & Spencer outlets, for example, have been run by FiBA, a Turkish business that has had the rights to sell the retailer’s items across Eastern Europe since 1999. In reaction to the battle, the retail behemoth has announced that it has halted supplies to FiBA.
Restaurant Brands International, which owns Burger King, also informed reporters that its stores are operated by franchisees. It said that “long-standing legal arrangements are not readily altered in the near future.”
According to reports, hotel chains Marriott, IHG, and Accor, which owns the Ibis and Novotel brands, are all operating in Russia under identical agreements.
Marriott told reporters that third parties control its properties in Russia, but that it will “continue to review the potential for these hotels to remain open,” implying that it was looking at its franchise agreements.
A business way of selling products or services is franchising. It entails a franchisor, who has created the brand’s name, and a franchisee, which pays a fee for the right to do business and sell the franchisor’s products under the franchisor’s name.
Graeme Payne, a UK and worldwide franchising specialist at law firm Bird&Bird, told reporters that franchising was beneficial to Western firms that wanted to enter new markets but lacked local knowledge, money, or aptitude to do so.
“As a member of the public, you might wonder why they don’t just close their businesses. However, from a purely commercial and contractual standpoint, it’s quite difficult to do so without having far-reaching legal ramifications “Mr. Payne stated.
Those repercussions might have major financial ramifications for Western corporations, since they risk being sued by franchisees if they breach any franchise agreements, which are sometimes ten or more years old.
If a franchise owner is proven to have ties to Russian President Vladimir Putin or has been sanctioned, a transaction might be cancelled from a UK viewpoint, according to Victoria Hobbs, a partner at Bird&Bird who works with franchise disputes.
Despite the fact that many franchise agreements have a clause that specifies “if the franchisee does something to damage our name, we can terminate,” Ms Hobbs says the difficulty in Russia right now is that many franchisees are not doing anything illegal.
“It’s pretty difficult for them because, under English law, they don’t actually have the authority to terminate the arrangement – that’s the issue,” she explained.
According to John Pratt, a partner with the biggest team of specialized franchise attorneys in Europe, even if a brand was successful in obtaining a UK court order against a franchise in Russia, “the Russian courts would not enforce it.”
Meanwhile, the companies are doing everything they can to assist with the crisis, and they have all expressed support for Ukraine following Russia’s incursion.
While many brands remain trapped in Russia, Yum Brands, the parent company of KFC and Pizza Hut, said that it was finalizing an arrangement with its principal franchisee to temporarily cease Pizza Hut operations.
Ms Hobbs, a lawyer at law firm Bird&Bird, believes that businesses are “extremely concerned” about potential reputational harm from continuing to operate in Russia.
“They are certainly concerned about what is occurring on a human and moral level, but I also believe they are concerned [because] a lot of firms have been threatened with boycotts.”