Planned Introduction of Statutorily Defined Franchise Agreements in Slovak Legislation

Current state of regulation of franchise agreements

In Slovakia, there are currently no specific legal rules dealing directly with franchise agreements. Under such circumstances, parties can negotiate their contracts while using the general principle of freedom of contract as established by Act No. 513/1991 Coll. Commercial Code (the “Commercial Code”). Within the current legislative framework, a franchise agreement has the nature of the so-called innominate (or mixed) agreement under Sec. 269 (2) of the Commercial Code, and is composed of other types of standard contractual clauses, in particular a license agreement, purchase agreement, lease agreement, etc. However, a certain level of legal uncertainty may arise if franchise agreements are not clear enough to define all rights and obligations of the contracting parties.

The Slovak Ministry of Justice is currently preparing a completely new contract law code and the so-far published proposal also includes the regulation of franchise agreements among regulation of other types of contracts, that are very common in practice, but their legal regulation is currently lacking in Slovakia.

Proposed legislation on franchise agreements

According to the proposed regulation, a franchise agreement must be concluded in writing. The draft defines the franchise as a set of rights, other property values and information that belong to the franchisor and is used for the performance of business activities or is intended to serve this purpose. Under the proposed regulation, the franchisor should be in any case entitled to exercise the rights, use other property values and information that is the subject of the franchise even after providing the franchisee with a franchise. However, the franchisor's right to provide the franchise to other persons should depend on the parties' agreement.

The franchisor should be obliged to provide the franchisee with the necessary cooperation, information, and items. On the other hand, the franchisor is entitled to control the use of the franchise, and if not used properly (even after a reasonable period provided to remedy the improper use), the franchisor should be legally entitled to withdraw from the agreement.
The proposed provisions also regulate the franchisee's core obligations, particularly in relation to the franchisor's instructions, the quality of the goods/services and the range of provided services. The draft bill also formulates a legal obligation for the franchisee to maintain the confidentiality of information related to the franchise for the duration of the agreement if it is necessary to protect the franchisor's interests. In case that industrial property rights are granted under the franchise, the statutory provisions of the license agreement shall, in the alternative, apply to the franchise agreement.

Conclusion

The planned regulation of franchise agreement means that franchise agreement will become a statutorily recognized type of contract in Slovakia and default rules will be applicable. The introduction of the new legislation should reduce the transaction costs, simplify legal relations related to franchise and increase the level of legal certainty by defining the essential rights and obligations of the contracting parties. Although according to the initial plan the proposed legislation was supposed to enter into force on 1 January 2021, the drafting procedure related to the new legal code is still ongoing. Meetings of working groups are being held to prepare a draft of a new Slovak Civil Code by the end of 2021. Accordingly, it remains to be seen when the new legislation concerning also franchise agreements will become officially adopted. The current Covid-19 pandemic has reshuffled legislative priorities, and it is now obvious that there will be some delay. In any case, we support this legislative proposal and believe that it could bring further legal certainty and protection to parties involved in franchise business.