Franchise Agreement in the Civil Code – Draft Amendment

The Government Legislation Center has published a draft amendment to the Civil Code and Industrial Property Law introducing a new type of contract into the Civil Code called a “franchise agreement.”

Essential Elements of the Franchise Agreement

The new type of agreement will be addressed by Articles 76410 to 74621 of the Civil Code. According to the provision that establishes the franchise relationship, the franchise relationship will involve the franchisor providing the franchisee with the concept or techniques for conducting business activities (know-how) and items or rights used in carrying out these activities, including the business name, trademarks, and patents, for compensation. The franchisee will be obligated to conduct business activities in their own name and at their own expense based on the provided concept.

The franchise agreement will require a written form under the penalty of nullity. As a result, Section 76(1) of the Industrial Property Law will also change. Under the new rule, the grant of a license will require a written form under the penalty of nullity, rather than the previous written form.

Information Document and Franchise Agreement Template

14 days before concluding the franchise agreement, the franchisor will be obligated to provide the franchisee with an information document and a template agreement. Failure to fulfill this obligation, or fulfilling it inadequately or including false information, will allow the franchisee to terminate the franchise agreement with immediate effect within 30 days of the franchisee’s knowledge of the breach, provided there are grounds to believe that the franchisee would not have entered into the agreement had they been properly informed. In any case, this right expires within one year from the date of concluding the franchise agreement. The obligation to provide the information document and template agreement will also apply in the case of amendments to the franchise agreement.

In the case of an amendment to the franchise agreement, failure by the franchisee to accept the new terms of the agreement will result in the parties remaining bound by the existing franchise agreement.

The information document must include:

  • Identifying information about the franchisor.
  • A description of the franchisor’s business activities, including the number of franchise agreements concluded as of the end of the previous calendar year.
  • A description of the business activities to be conducted by the franchisee.
  • The method for determining the franchisor’s compensation.
  • A description of the services provided by the franchisor, including the items made available for use, such as business concepts or techniques, items, or rights.
  • Information on the estimated expenses or costs required to be incurred by the franchisee to commence the franchise agreement.
  • Information on the estimated amount of the franchisee’s income and how it is calculated.
  • Information about the franchisee’s obligation to enter into agreements with third parties specified by the franchisor, if the conclusion of such agreements is anticipated.
  • Information about the scope and means of supervision by the franchisor over the manner of performing the franchise agreement by the franchisee, including access to the franchisee’s trade secrets and the franchisor’s right to issue guidelines and instructions, if supervision by the franchisor is anticipated.
  • Information about the procedures for transferring the rights and obligations arising from the franchise agreement and the admission of a new person to the agreement on the side of the franchisee, if such a possibility is anticipated.
  • Information on the events constituting the basis for imposing contractual penalties and how their amount is determined, if the imposition of contractual penalties is anticipated.
  • The duration of the franchise agreement and the conditions for its extension.
  • Termination deadlines for the franchise agreement.
  • Information about the non-competition clause, including its duration, if such a clause is anticipated.

Confidentiality and the Ban on Transferring Rights and Obligations

Regarding the dispositive provisions, the bill mandates maintaining the confidentiality of the business concept or techniques of unlimited duration (although the agreement can regulate this differently). The franchisee will also not be entitled to transfer their rights under the agreement to another person or to make a contribution to a company. These provisions will also be of a dispositive nature.

Right to Reduce the Franchisor’s Compensation

The amendment introduces a provision similar to Article 700 of the Civil Code, allowing the franchisee to request a reduction in compensation from the franchisor when ordinary income from the business has significantly decreased, and the franchisee is not responsible for this. The reduction in compensation will apply during the period in which income has significantly decreased.

Termination of a franchise agreement for a fixed term will occur according to the provisions set in the agreement, and for an indefinite term, there will be a three-month notice period for the franchisee and a six-month notice period for the franchisor. The amended provisions also allow the termination of a franchise agreement by either party with immediate effect under certain statutory circumstances.

Non-competition Clause and Contractual Penalties in a Franchise Agreement

The non-competition clause after the termination of the franchise relationship can last for one year and may only cover the creation of a competitive system.

Regarding contractual penalties, the claim for payment of the penalty shall expire within one year from the day when the franchisor could have learned, exercising due diligence, about the non-performance or improper performance of the obligation, unless the franchisor issues a notice for payment of the contractual penalty within that period.

Bills of exchange issued by franchisees must contain the designation “not on order” or its equivalent, and in the absence of such reservation, the franchisor shall be obliged to compensate the damage caused to the franchisee from this title.

The proposed provisions are expected to enter into force three months after their adoption.