International Franchise Lawyers Association e.V. (IFLA)
 
 
Franchising in the Slovak Republic
 
For further details please contact:

Irsák, Stanislav

Irsák & Partners

29. Augusta 5
811 08 Bratislava

Slovak Republic

(+421 2 5263 2994

Ê+421 2 5263 2996

stanislav.irsak@irsak.sk

www.irsak.sk

 

CONTENT

1.     Introduction

2.     The economic relevance of franchising

2.1.   Position of franchising in Slovak economy

2.2.   Taxation regulations

3.     Legal basis of franchising functioning

3.1.   Branches of relevant law to franchising

 3.1.1.     Commercial Code

3.1.2.     Intellectual property law

3.1.3.     Competition law 

4.     Franchise contract

4.1.   The term and contents of franchise contract  

4.1.1.     Introductory provisions

4.1.2.     Object of agreement

4.1.3.     Comprehension of agreement, rights and duties of contracting parties,  franchise  fees

4.1.4.     Duration of a contract

 5.    Summary

 

1.     Introduction

This report is focused on franchising as the trading method in Slovak republic. Report comprises not only general knowledge concerning franchising, but the main intent of this report is to bring an actual review of legal framework and it’s functioning in the conditions of Slovak republic. Developing of this business method in our country is rather different than in other countries of West Europe. The reason of this situation is obvious – there were forty years of communism, the private ownership nearly didn’t exist and individuals and their business activities were strictly oppressive.  

Origin of the word „franchise, franchising“ is French. It was used in the meaning of exemption from state taxes or duties. Since 17th century, in Europe, was the term franchising used as an identification for privilege to run manufacturing or trading business activities in the areas of state monopolies.

At present, we can explain the word franchising as a method of making business. In USA, at the break of 19th and 20th century the franchising method became a basis for organizing of supplies. This method was commercially used by automotive, gas and soft drinks traders.

There is no worldwide accepted definition of franchising. Some of the definitions embodies only one type of franchising. The term franchising itself encompasses various types of business relations. It is also often used interchangeably with the term license. Other definitions specify franchising very strictly and therefore is the meaning restricted. In Europe, the definition of European Ethical Codex is considered to be the official definition of franchising.

 

2.     The economic relevance of franchising

The goal of this section is not to give a summary of useless statistics. The main intent is to point at the advantages of franchising and it’s important position in the national and international economy. 

Enlarging of franchising as a trading method is natural. The reason is very simple. It brings a lot of advantages to the franchiser besides to investor. There is no doubt, that franchising is also useful for the customers and the whole economy. For example domestic sales through franchised establishment in the United States increased from US $ 113 billion in 1969 to US $ 803 billion in 1992. This increasing is symptomatic almost for every industrial economy. Franchising entered also new opened markets especially in Eastern Europe. The most obvious benefit of franchising to the national economy is creation of new jobs. New jobs are created not only franchising industry itself, but also in connected industries. Spreading of franchising can bring a lot of opportunities for employees. Matter of common knowledge is that failure rate of franchised business is substantially lower than in traditional, non – franchised retail business. It offers a rapid expansion of individual business with a greater chance of success than the average business. There are also advantages on both sides of contracting parties. Franchisor can by this method achieve stronger position of the company on the market relatively in short time. Franchisee has an effort of well – established methods of running business.   

 

2.1.    Position of franchising in Slovak economy

Franchising is still so new for Slovakia. Economies of Eastern Europe turned from planned economy to open market economy. This breaking point brought not only threads, but also opportunity to start own business. Characteristic feature of these economies is, that people in here do not have a lot of experiences with running own business. That is the reason, why this trading method can be very useful for people in here. Franchisor provides a training and assistance, so as to enable franchisees to operate as effective as possible.

The most visible differences between long – established multinational franchisers and newly settled franchisers in our country resides in tradition, experiences and in qualified people with capital to invest. But financial criteria are not priority. Providers wants to choose right person for their company.

An entrepreneur has to decide, if he joins multinational firm or young local firm. Multinational firm offers wider support, which can last for longer period of time, but it may require a greater investment of money and spare time. Young local firm can’t offer such range of advantages as a multinational firm, but it requires less time and money. 

Franchising as a method of marketing goods and services and also method of risqué elimination in business is still not wide developed in the conditions of our economy.  

 

2.2.   Taxation regulations

Taxation issues are in many cases one of the reasons, why entrepreneurs decides to start business in certain country. Slovakia made a big progress in tasks of taxation. Taxation regulations turned from blind corner system to uniform and equal tax. At present time we’ve got uniform 19% taxation. Franchise agreement should solve the issues such as who has to pay withholding taxes.

State aid is also one of the measures, which is used for supporting business. Tasks of state aid are regulated not only through European union legislation, but also by virtue of legally binding acts in Slovakia (State Aid Act). A lot of foreign investors decided to start business owe to this benefits.

 

3.     Legal basis of franchising functioning

Despite of franchising importance in national economy, in most Eastern Europe countries there is no legislation specific to franchising. Franchising is regulated mostly through laws of general applicability:

-         Commercial code( hereinafter referred to as „CC“);

-         Competition law - Protection of economic competition (Antitrust Act);

-         Intellectual property law.

 

3.1.   Branches of relevant law to franchising

We can say that franchising touches many different areas of law. Important is, that franchising can be regulated not only through domestic legislation, but also through international treaties.

 

3.1.1.     Commercial Code

Franchising contract is “sui generis” agreement. In our legal system there is no explicit enactment of franchising contract (“contractus inominati”). Commercial Code 513/1991 regulates in §508-515 the “Licensing Contract Concerning Industrial property Rights”. Under this licensing contract concerning industrial property rights, the licensor grants license to the licensee to exercise rights ensuing from an industrial property to an agreed extent. The rights can be exercised only in agreed territory for a specific period of time. Licensee also undertakes to pay for such rights, or to provide as payment other material values – payment in kind. Contract has to be concluded in writing form. Licensor provides licensee with all documentation and information needed for exercising of the rights as under the contract.  Contract can be repudiated, if it is not concluded for a specific period of time. If the contract fails to stipulate a notice period, the given notice will take effect one year as of the end of the month in which such a notice is delivered to other party. 

 

3.1.2.     Intellectual property law

There is no doubt, that intellectual property law has fundamental importance for franchising. Intellectual property rights are the basis upon which the franchise relationship is built. International treaties and other regulations of international origin has to be taken into account. Legal system of our country is built on same principles. Observing the principles is evident also after entering Slovakia to European Union. In other words, Acts must be in line with Constitution of Slovak Republic, European legislation and international treaties we took a part.

Intellectual property legislation which refers the tasks of franchising in our legal system is possible to divide (every mentioned Act concerns with specific tasks): 

a)    435/2001 Patent Act ( hereinafter referred to as „PA“ );

b)   55/1997 Trade marks Act ( hereinafter referred to as „TMA“ );

c)    478/1992 Utility design Act ( hereinafter referred to as „UDA“ ).

 

a)            Under the rule of § 14 PA, only the owner of patent has exclusive rights to use patented invention. Owner has also right to permit using of invention by another subject. Authorization to work, use an invention should be given by written contract. From day of its entry in the Patent Register kept by the Industrial Property Office, the licensing contract will have effect in respect of third parties. Transferring intellectual property rights are regulated in §508-515 CC.  

b)            Provision of § 30 TMA deals with disposing of trade mark. Owner of trade mark is entitled to permit using of trade mark or by another subject. Owner can grant a registered license to assignee to exercise trade mark for all registered goods and services, or just for the specific part of it. License contract shall be in written form. The licensing contract will have effect in respect of third parties from day of its entry in the Register Office. This type of contract is “contractus nominati” and it is also regulated by Commercial Code in §508-515 as a “Licensing Contract Concerning Industrial property Rights”.   

c)             Utility designed Act provides in § 21 section 2, that license relationships are regulated by provisions of PA (mentioned thereinbefore part 3.1.2, a).

3.1.3.     Competition law

Some terms of the franchising agreement can be covered by regulations of competition law. It can be for example contract clauses related to price, that franchisee should charge for the products and services, clauses related to the exclusive rights granted franchisee in a franchise relationship. The problem can occur when contract clauses are contrary to competition law regulations. Therefore properly care should be taken in drafting agreements.

It is necessary to know, if the franchise contract is contrary to competition law, especially to act number 188/1994 Body of laws, Antitrust Act (hereinafter referred to as „AA“). This specific act deals with rules, which has to be observed by any competitor who takes a part in market competition. By virtue of § 3 section 1. AA, if the contract is forbidden because it is considered as a cartel, there is still a chance to apply for individual statutory exception. Entrepreneurs can apply for individual statutory exception only in accordance with § 5 of AA. They have to fulfill all the claims settled by this Act. Agreements concluded in accordance with § 4 section 1 are not considered as a cartel. But there is a binding condition, that these contracts has to be approved by Antitrust Office. Good advice for franchising entrepreneurs is: Before singing franchising contract ask Office for biding opinion, if the contract is in accordance with AA, or if an exception has to be vest or Official approval. 

Very important role in the field of franchising is legislation of European Union. Commission regulation EEC No 4087/88 on the Application of Article 85 (3) of the Treaty to Categories of Franchise Agreements gives block exemption for different categories of franchising agreements. This regulation is also known as the Block Exemption Regulation. It is obvious that Antitrust Office has to interpret legislation (AA) in accordance with European legislation.   

 

4.     Franchise contract

Franchise contract is bipartite legal act between franchisor and franchisee. Both contracting parties are legally and economically independent subjects. Contract is the base for their long-term co-operation. Therefore such a contract should comprise all possible aspects, principles and rules, duties and rights between franchisor and franchisee. This is necessary especially on account of that this contract is not specified in any legal act.  It is “contractus inominati”. In consideration of provision § 262 section 2 CC, contracting parties can enter contract, which is not regulated by any valid Act. It is necessary to stress, that franchise contract includes combination of many contracting types from different branches of law. Therefore it is not easy to define franchise contract. The form of the contract is also not regulated by law. It depends on intention of contracting parties. Written form of the contract is suitable for stability of legal relation. In this case parties should use legal provision § 272 CC. If they want to transfer some intellectual property rights, they will have to follow provision § 508 CC. Consequence in law of that situation is, the franchise contract has to be concluded in written form. 

 

4.1.   The term and contents of franchise contract

Franchise contract can be defined as an agreement whereby one undertaking, the franchisor, grants the other, the franchisee, in exchange for direct or indirect financial consideration, the right to exploit a franchise for purposes of marketing specified types of goods, services.  

Every franchise agreement should comprise at least these provisions: 

4.1.1.     Introductory provisions

1.       precise specification of contracting parties;

2.       preamble – embodies substance of a franchise contract and its purpose;

3.       type of co-operation between parties;

  

4.1.2.     Object of agreement

4.       subject – matter of a contract, this should be specified in detail, for example – image of retail shops, view of a trade mark, logo. It is good to express or conclude all important identification signs of franchisor, which are being transferred by a contract;

 

4.1.3.     Comprehension of agreement, rights and duties of contracting parties, 

franchise fees

5.      scope of rights and duties of franchisee;

6.      scope of rights and duties of franchisor ( providing franchisee with information concerning franchising system, market analysis, situation on relevant market, advertisement);

7.      comprehension of  a contract, specification of trading goods, services and technologies;

8.      relations within the franchising - net, relations to competition subjects on market;

9.      delivery terms, terms of payment, administration of accounting;

10.  training of franchisee and  its employees;

11.  pre – emption rights;

12.  tasks of legal succession;

13.  stipulated damage for breaking contracting rules;

14.  franchise fees:

a) initial fee - paid when entering the contract;

b) repeating fee  - this fee can be paid for example every month, quarterly;

c) advertisement feeevery franchisee is forced to pay this fee, saved money can be used only for advertisement purpose

  

4.1.4.            Duration of a contract

15.  duration of a contract, possibilities of renewing a contract – one of the goals of franchise agreement is long – term co-operation of contracting parties, therefore duration or operation of the contract is exactly determined (mostly 5-7 years with possibility of renewing the contract);

16.  clauses of terminating the contract, reasons of rescinding the contract;

17.  consequences of rescinding and mutual settlement. 

 

5.     Summary

            Every entrepreneur before starting franchise business has to consider all relevant tasks, pros and cons of the market he wants to enter, legislation, political stability, taxation regulations, possibilities of business expanding.      

            Franchising method is still so new for our entrepreneurs. This business method is not used in such range as it could be, for that reason there is still a lot to opportunities to start franchise business. Slovakia as a opened market economy offers many advantages to entrepreneurs. We’ve got equal and uniform taxation 19%. In Central Europe area is taxation regulation like this very unique. But taxation regulation is not the only advantage, we can offer. Slovak republic has good infrastructure (especially in western parts of country), a lot of educated people willing to work hard. Entrepreneurs has got also lower payloads than in other countries in that area. Important role in running business is stability of political system. Our government supports developing of open-market economy. This support is stable and very efficient.

            It is obvious that Slovak republic still offers a lot of benefits for every entrepreneur.