ROMANIAN FRANCHISE ASSOCIATION is an association of public utility

Franchise Agreement in Romania

 The franchise agreement content is different due to various aspects. For instance in Romania it is made according theFranchise Law issued by the Government in 1997. However signing this document could be a decision with a major impact of the future both of the franchise network and the franchisee. That’s why is not recommend to hurry up to sign such document.Find out useful advices about this matter by watching this video; it is subtitled into English for a better understanding. Romanian Franchise Association – more details: www.francizor.ro

Definition – Franchise agreement

A legal contract in which a well established business consents to provide its brand, operational model and required support to another party for them to set up and run a similar business in exchange for a fee and some share of the incomegenerated. The franchise agreement lays out the details of what duties each party needs to perform and what compensation they can expect.

The franchise legal stages

When buying a franchise there are several franchise legal stages you need to go through. Before signing any franchise agreement or other franchise legal documents, it is vital that you seek legal advice from a solicitor who specialises in franchising. It is no use using the same solicitor you used when buying your house as though they may be very good at what they do, they are not franchise legal experts. Many franchisors at the interview stage will ask you to sign a confidential agreement. This allows them to give you confidential information about their business operation and seeks to prevent you from disclosing this information to anyone else. It is normal practice for a franchisor who is disclosing confidential information to ask you to sign this. You may be asked to enter into a deposit agreement which will require you to pay a deposit to the franchisor. Please note that not all deposits are refundable and so if you decide not go ahead with buying the franchise you may not receive your deposit back. You should always ask if the deposit is refundable. If not, you need to be certain that you are serious about the franchiseObtain a copy of the franchise agreement from the franchisor. This is the legal franchise document that outlines the obligations of both the franchisee and the franchisor; it protects the interests of all parties involved. As the franchise agreement is weighted in favour of the franchisor and will not be changed by the franchisor, it is vital that you ask a franchise solicitor to check the agreement for you. You should only use a solicitor who specialises in franchising as they will have checked through hundreds of agreements and so whilst it cannot be changed, they will have the experience and knowledge to highlight to you those areas of which you need to be aware of.  They may also advise you to ask for a side letter if appropriate. A normal solicitor may not do this.

Contractual obligations

In order for the franchise agreement to be effective, the parties have to comply with certain requirements imposed by law and these requirements must be unambiguously defined in the contract. According to article 4 of the Franchise Law, the franchisor for a certain period of time prior to launch of the franchise network must own and carry out the commercial business that will be franchised.  The period is not defined by the law or been tested in the courts., We believe that it must be sufficiently long to allow the franchisor to gain experience and know-how on how to develop a business that can be franchised.  Further the franchisor must be the holder of the intellectual and/or industrial property rights of the products, technology or trademarks used in the franchising process.  A breach of these provisions can lead to the annulment of the agreement. The same article states that the franchisor has the duty to provide the franchisee with initial training and activity organization when starting the new business.  No period of time is specified. The initial training is considered to be indispensable for all types of franchises.  The assistance in organizing the activity may consist in choosing the place of the activity and its layout, purchase of the equipment and the initial stock, and choosing staff.  After this period, the franchisee must benefit from full-time commercial and/or technical assistance from the franchisor. The assistance is decided by the parties during the negotiation of the contract, and may consist of periodical meetings, depending on the commercial or technical experience of the franchisee.  These meetings may consider the evolution of the company, inspection of premises, identification of the franchisee’s needs, as well as discussions with the staff and clients. The same doctrinaire states that there is also an obligation on the franchisor to promote both nationally and internationally, the activities that are the subject of the franchise agreement. Before doing this, the franchisor must inform the franchisee and provide him the advertising materials of the promotion campaign. The franchisee is required by the Franchise Law to develop the franchise for the benefit of itself and the franchisor and preserve its identity, as well as its reputation.  The franchisee must provide the franchisor with information to facilitate knowledge of the development of the franchise and to enable the franchisor to analysis the performances and the actual financial situation, in order to provide an efficient management of the franchise.  Although the Franchise Law mentions the term “managementof the franchise” it does not define it relying on the more general principles of management. The franchisee is required to keep secret the know-how of the Franchisor and any secret process.  According to article 4 paragraph 3 of the franchise law, the franchisee must not disclose to third parties the know-how provided by the franchisor, both during the term of the franchise agreement and after termination, for any reason, of the agreement.  No period is set by the law, but in practice, this period is unlimited.  By analogy, this obligation is binding on the franchisee’s staff as well. Other clauses normally included relating to the parties obligations such as any prescription periods are regulated by the Romanian Civil Code. This enables the parties to establish limitation period than those set out in the Code as well as defining the dates from which the prescription runs as well as other terms.

Disclosure of Information prior to signing the franchise agreement.

The Franchise Law sets out in the article 2 paragraph 3 the rules covering the pre-contractual relationship between the parties.  The franchisor must provide to the prospective franchisee information concerning the franchise to be acquired as well as the details of financial terms of the agreement.  These details should include information concerning the initial royalty, any periodical royalty payments and advertising royalties.  The initial information should allow the prospective franchisee to establish and calculate the future income of the business and also be sufficient for him to draft a financial plan.  In addition there must be clearly stated the objective of the franchise and its scope. Prior to signing the Franchise Agreement the franchisee must be advised as to the period of the agreement (which is not set by the law, but may vary depending of the nature of the business or the parties), as well as the terms for the continuation, cancellation and assignment of the franchise agreement. The franchise law does not state the time when the disclosure should be given only that is must be provided prior to the signing of the Franchise Agreement (article 2 paragraph 3).  The law does not provide which courts or arbitration forums shall apply to any agreement leaving it to the choice of the parties.  Further, the Franchise law does not provide for any specific penalty to be applied to the franchisor for breach of the obligation to supply pre-contractual information. Therefore, the Civil Code’s art. 1184 regarding responsibility in negotiations will be applied. The Civil Code stipulates that when confidential information is communicated by one party to another during negotiations, the other party must not disclose it or use it for themselves, whether or not they enter into a contractual relationship.  Breach of this obligation causes damages which is proportional to the damages suffered by the franchisor. The franchise agreement must also reflect the interests of the members of the franchise network, and protect the industrial or intellectual property rights of the franchisor by preserving the common identity and the reputation of the franchise network.  The franchisor is required by the law to establish a franchise based on the contractual relations with its franchisees.  The network is to be exploited in such a way as to protect and preserve the identity and reputation of the network.  The law further states in art. 12 that this is carried out by means of organisation and development; the franchise network must facilitate the manufacture, distribution of goods and services.

The Franchise Law includes in article 14 the rules about publicity and the selection of the franchisee.  Any publicity for the selection of franchisees must not be ambiguous and must not include any erroneous information.  As an example, the publicity can contain, details of the brand, the franchisor, existing franchisees in the network as well as possible results. The publicity documents presenting the financial information must be objective and able to be checked.  The information can be included in the pre contractual information to be supplied as mentioned above. The franchisor, according to the art. 15 of the Franchise Law, is required to select a franchisee that shows the required competences for a franchise, namely managerial skills, and financial strength to exploit the business.  Also, the franchisor, acting as the initiator and warrantor of the franchise network, must strive to preserve the identity and reputation of the franchise network. The period of the Franchise Agreement must be sufficiently long enough to allow the franchisee to recover its investments.  Normally, this period in Romania is between 5-10 years. The post-contractual relationship between the franchisor and franchisee it to be based on the rules of “loyal competition” as set out in the article 8 of the Franchise Law.  However, the competition relations as provided in the article 8 are not that strict.  Therefore a franchisor should require a non-competition and a confidentiality clause, in order to prevent the alienation of the know-how transmitted during the term of the agreement.  The period for f the non-competition and the confidentiality clause are not provided for in the Franchise Law, parties having the power to set it will through negotiations. The agreement can contain an exclusivity clause which will be regulated by the Franchise Law.   In certain cases, the franchisor will be willing to offer territorial exclusivity, in which case the franchisor will not allow the opening in that perimeter / area of the network of other franchised units or units owned by the franchisor, in exchange for an exclusivity fee. This fee as stated in article 9 of the Franchise Law may be aimed to cover part of the expenses necessary for the implementation of the franchise, for limiting the area and/or for the transmission of the know-how.   In cases where the franchisor proposes the execution of such an agreement, the amount related to exclusivity provided for in the agreement must be proportional to the entry fee and is added to the initial fee.  In case there is no entry fee, the methods for the repayment of the exclusivity fee must be stipulated expressly in the franchise agreement.

The same article mentions that the exclusivity agreement must contain a cancellation clause that must be equitable to both parties.  The term of this agreement is determined according to the specific characteristics of every franchise.  During the term of the exclusivity agreement and afterwards, the franchisor may, for his protection, to require a non-competition and confidentiality clause.

For a list of franchise solicitors, affiliated to the Romania Franchise Association please contact us.

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