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Franchise Contract – Summary of the Romanian regulation
Franchising is a very convenient way to open a business, given the advantages it presents. In Romania, the franchise has become increasingly popular as Romanians have recognized that it ensures for the business’ owner a concept already known to the target audience that facilitates market entry, reduced risks as well as shared costs.
Franchising comes with significant advantages like rapid market entry, minimal risks for the franchisee who benefits from the franchisor's knowledge right from the start, having a well-designed marketing strategy or even the fact that being part of a franchise system also increases your bargaining power when obtaining capital from foreign investors. Given the many benefits, franchising has become a very common business method and it can even be concluded plastically that franchising means passing on to others how to succeed as we have succeeded, to repeat a success.
Romania is the second country in the world, after the United States, which has adopted a normative act regarding the legal regime of the franchise. The franchise contract was not actually introduced in the Romanian New Civil Code, it was regulated by the Government Ordinance no. 52/1997, subsequently republished in 2019. Franchising is a system of marketing products and/or services and/or technologies, based on continuous collaboration between legally or financially independent natural or legal persons, through which a person, called a franchisor, grants to another person, called a franchisee, the right and imposes the obligation to operate a business, in accordance with the concept of the franchisor.
Both the franchisor and the franchisee operate an enterprise, which means they are professionals within the meaning of Romanian civil law. Each of them acts in its own name and in its own interest, not being involved in a relationship of dependency or representation.
The franchise network comprises a set of contractual relationships between a franchisor and several franchisees, in order to promote a technology, a product or service, as well as to develop the production and distribution of a product or service. The franchisee is supported by the franchisor, through the continuous contribution of commercial and/ or technical assistance, within and during the franchise contract concluded between the parties.
General and special conditions
1. Considering the fact that the special legal provisions aforementioned do not make any reference to the general conditions which such a contract must comply with, we shall refer to the general provisions of the Civil Code: the ability to contract, the consent of the parties, a determined and legal object, a legal and moral cause. As for the form of the contract, it must be written, although this condition is not a requirement of validity, but comes in support of proving the negotiated and agreed elements, where appropriate.
2. Regarding the special conditions, which may, in fact, refer to the rights and obligations of the parties, the franchisor must meet the following requirements: to have a commercial activity before the launch of the franchise network, to be the holder of the intellectual and/ or industrial property right, provide the franchisees with initial training, commercial and technical assistance. On the other hand, the franchisee must meet the following requirements: to develop the franchise network, to provide the franchisor with any information necessary for good management, to not disclose the know-how to third parties, neither during the contract, nor afterwards.
Measures to be taken prior to starting a franchise network
Before making a franchise network, traders who want to sell a business in this system are required to test it in advance, for at least one year, in at least one pilot unit. The pilot unit is the equivalent of a prototype, with the aim of ensuring the easiest way to implement the franchisor's idea in practice, to test its system and its infrastructure in order to design the franchise program and develop training manuals and day-to-day operations. Thus, it becomes easier for start-ups to enter the market.
In order to use the brand name developed by the franchisor and to benefit from its assistance, one or more fees may be included. The fee for entering the franchise system may vary depending on the brand's reputation chosen and may be non-refundable. Other possible fees to the franchisor may be for operating licenses. Significant costs can also arise when renting the location and equipping the point of sale. Furthermore, the royalty is a periodic fee that represents a percentage of the weekly or monthly gross income. Usually, even if there is no profit, the royalty must be paid in order to continue to have the right to use the franchisor's name. Besides these, the franchisee may need to contribute to an ad fund. Some of the advertising fees can be allocated to national advertising or to attract new franchise owners, rather than promote the franchisee’s store.
The stages of concluding the contract
1. The pre-contractual phase aims to allow each party to confirm its decision to cooperate. The franchisor provides the potential franchisee with an information disclosure document containing data on the franchisor's history, even in terms of litigation, the initial amount that the franchisee must invest, or the mutual obligations of the parties.
2. The contractual stage will be guided by certain principles such as the term will be fixed so as to allow the franchisee to amortize the investments specific to the franchise (thus, there is no set term for the duration of the contract, but the franchisee has a certainty that it will at least recover his investment), the franchisor will notify the franchisee with reasonable notice of the intention not to renew the contract on the expiration date or not to sign a new contract, the non-compete clauses will be included in the contract, in order to protect the know-how, the circumstances that may lead to dissolution without notice will be clearly established.
3. The post-contractual stage will be based on the rules of fair competition. The franchisor may impose firm obligations on the former franchisee, thus ensuring the protection of the confidentiality of the business and, in particular, the non-use of know-how by a competing network.
Lastly, we understand to refer to the principle of good faith, a principle with great resonance in the Romanian legislation that must be respected both in the pre-contractual stage and during the execution of the contract or upon its termination. By this principle, we mean that standard of conduct of one party to the civil legal relationship, characterized by fairness, honesty, openness, and taking into account the interests of the other party to the legal relationship, which presupposes that this party does not act contrary to the statements he has previously made or to the conduct he has previously had if the other party, to his detriment, has reasonably relied on those statements or conduct.
Author: Attorney at law Mihaela Bălău, Law Office Grecu & Partners.
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