Legislation and rules that govern franchise transactions
Is there a legal definition of a franchise and, if so, what is it?
The applicable Romanian laws define franchise as follows: “Franchise represents a system of marketing products and/or services and/or technologies based on continuous collaboration between legally and financially independent individuals or entities. In this arrangement, one person, known as the franchisor, grants another person, known as the franchisee, the right and imposes the obligation to operate a business in accordance with the franchisor’s concept. This right authorizes and obliges the franchisee, in exchange for a direct or indirect financial contribution, to use product and/or service trademarks, other protected intellectual or industrial property rights, know-how, copyrights, as well as trademarks, benefiting from ongoing commercial and/or technical assistance from the franchisor, within the framework and for the duration of the franchise agreement concluded between the parties for this purpose“.
Romanian franchise regulations are primarily governed by a key legislative document: Government Ordinance no. 52/1997, which was recently modified through the enactment of Law no. 179/2019.
Are there any requirements that must be met prior to the offer and/or sale of a franchise? If so, please describe and include any potential consequences for failing to comply.
Before expanding through franchise, the franchisor must have (i) proven the business concept by successfully operating it for at least one year, as well as (ii) registered its intellectual property rights. Also, before selling the franchise, the franchisor is obliged to meet the pre-contractual disclosure requirement. In case failing to comply with these obligations, the franchisee may request the courts to ascertain that the contract is null and void and it may be entitled to claim the related damages.
Are there any registration requirements for franchisors and/or franchisees? If so, please describe them and include any potential consequences for failing to comply. Is there an obligation to update existing registrations? If so, please describe.
Registration of franchisors and/or franchisees is possible, but not mandatory under Romanian law.
Are there any disclosure requirements (franchise specific or in general)? If so, please describe them (i.e. when and how must disclosure be made, is there a prescribed format, must it be in the local language, do they apply to sales to sub-franchisees) and include any potential consequences for failing to comply. Is there an obligation to update and/or repeat disclosure (for example in the event that the parties enter into an amendment to the franchise agreement or on renewal)?
The pre-contractual information disclosure is a legal obligation of the franchisor. Before executing the franchise agreement, the franchisor must inform the franchisee on the following:
- the history and experience of the franchisor;
- details regarding the management’s identity;
- the franchisor’s and its management’s litigation history;
- the initial investment required to operate the franchise;
- the mutual obligations of the parties;
- the franchisor’s financial results from the previous year;
- information regarding the pilot unit.
The information must be disclosed to the franchisee in the form of a disclosure letter, drafted in the language of the franchise agreement.
If the franchisor fails to comply, the franchisee may file a lawsuit seeking damages. Additionally, conditioned by proving its consent had been vitiated, the franchisee may initiate legal proceedings to request the invalidation / annulment of the franchise agreement. If the agreement is invalidated, the franchisee may seek, among others, the reimbursement of the entry fee and the royalties paid.
If the franchisee intends to use a special purpose vehicle (SPV) to operate each franchised outlet, is it sufficient to make disclosure to the SPVs’ parent company or must disclosure be made to each individual SPV franchisee?
While Romanian law doesn’t explicitly mention the disclosure should be done towards each SPV individually, we strongly advise that disclosure is carried out separately for each SPV -since they are distinct legal entities.
What actions can a franchisee take in the event of mis-selling by the franchisor? Would these still be available if there was a disclaimer in the franchise agreement, disclosure document or sales material?
If the franchisee was misled by the franchisor into a franchise agreement – this may constitute ground for the franchise agreement’s invalidation.
Limitation of liability could only be possible if a disclaimer was inserted in the franchise agreement and provided that the franchisor was unaware of the misrepresented information.
Would it be legal to issue a franchise agreement on a non-negotiable, “take it or leave it” basis?
In practice, franchise contracts often take the form of adhesion contracts, primarily because the franchisor assumes the most significant risk. The franchisor, through the franchise agreement, shares its entire wealth of experience, know-how, and trade secrets with the franchisee. Subsequently, the franchisor must incorporate contractual provisions aimed at preventing any unauthorized or unlawful use of this information.
Should the franchisor fail to effectively prevent the unlawful use of its know-how, it places the entire franchisee network in a precarious position.
How are trademarks, know-how, trade secrets and copyright protected in your country?
Romanian laws offer various remedies designed to safeguard against trademark and design infringement, as well as know-how / trade secrets disclosure and unlawful competition. Additionally, it is strongly advisable for the franchisor to include provisions in the franchise agreement that grant the ability to swiftly pursue remedies in the event of trademark, know-how, or trade secret infringements.
These provisions can help protect the franchisor’s intellectual property and business interests more effectively.
Are there any franchise specific laws governing the ongoing relationship between franchisor and franchisee? If so, please describe them, including any terms that are required to be included within the franchise agreement.
The ongoing relationship between franchisor and franchisee is governed by Law no. 179/2019, the Government Ordinance no. 52/1997 and supplemented with the Romanian Civil Code and related legislation.
The franchise agreement must:
- clearly define the obligations and responsibilities of each party, as well as any other collaboration clauses;
- include the subject of the agreement / the rights and obligations of the parties / financial conditions / agreement duration / conditions for amendment, extension and termination.
- a non-compete obligation.
Are there any aspects of competition law that apply to the franchise transaction (i.e. is it permissible to prohibit online sales, insist on exclusive supply or fix retail prices)? If applicable, provide an overview of the relevant competition laws.
Based on the EU competition law, namely Regulation (EU) 2022/720 of 10 May 2022 (the “new VBER”), a franchise agreement can impose restrictions of active sales (online or offline) but can’t restrict passive sales.
Also, the franchisor can recommend the selling price and even impose a maximum price to be observed by the franchisee but can’t impose the actual price. An important exception to this rule had been recently regulated by the new VBER – the franchisor may impose the price only for short-period marketing campaigns.
Are in-term and post-term non-compete and non-solicitation clauses enforceable and are there any limitations on the franchisor’s ability to impose and enforce them?
The most important factor that determines the enforceability of the non-compete and non-solicitation clauses is the manner in which these clauses are drafted within the franchise agreement. Also, these clauses should fall within the limits specified under the new VBER.
Are there any consumer protection laws that are relevant to franchising? Are there any circumstances in which franchisees would be treated as consumers?
The franchisee is not considered to be a consumer under the Romanian laws (but a professional merchant) and therefore the consumer protection laws are not applicable.
On the other hand, and provided that the franchise’s clients are consumers (and not business customers), consumer protection laws shall apply between the franchisees and their clients.
Is there an obligation (express or implied) to deal in good faith in franchise relationships? If so, what practical effects does this have on the relationship between franchisor and franchisee?
The Romanian franchise legislation and the Romanian Civil Code provide the obligation of dealing in good faith in business relations in general, as well as in a franchise relationship in particular.
If the party that deals in good faith suffers damages resulted by the bad faith of the other party, the first party can seek damages.
Are there any employment or labour law considerations that are relevant to the franchise relationship? Is there a risk that the staff of the franchisee could be deemed to be the employees of the franchisor? What steps can be taken to mitigate this risk?
The independence of the franchisee and the franchisor is one of the fundamental principles of franchising.
When the control of the franchisor over the franchisee’s employees exceeds the purposes of franchising, there is a potential risk that the employees / managers of the franchisee could be deemed to be the employees of the franchisor. However, so far there had been no relevant case law in Romania on this matter.
Is there a risk that a franchisee could be deemed to be the commercial agent of the franchisor? What steps can be taken to mitigate this risk?
The risk is minimal and is mitigated by the provisions of the franchise agreement, which typically state that the franchisor and the franchisee are distinct entities that independently manage their respective businesses as they deem appropriate.
Are there any laws and regulations that affect the nature and payment of royalties to a foreign franchisor and/or how much interest can be charged?
The royalty amount is a commercial aspect that is subject to negotiation between the franchisee and the franchisor. In Romania, there are no laws ruling the payment of royalties to a foreign franchisor.
Regarding the interest rate applicable for any failure to fulfil contractual obligations on time, this matter is typically addressed within the franchise agreement itself. It’s worth noting that if the interest rate specified within the franchise agreement is excessively high, the court has the authority to decrease it.
Is it possible to impose contractual penalties on franchisees for breaches of restrictive covenants etc.? If so, what requirements must be met in order for such penalties to be enforceable?
Yes, penalties for breaches of the restrictive covenants are standard in franchise agreements. Such aim at simplifying the damages calculation in court. For the penalties to be enforceable, the respective breach must be reported in writing.
What tax considerations are relevant to franchisors and franchisees? Are franchise royalties subject to withholding tax?
There is no specific tax regime for franchising, such depends on the legal form used to set up the business.
How is e-commerce regulated and does this have any specific implications on the relationship between franchisor and franchisee? For example, can franchisees be prohibited or restricted in any way from using e-commerce in their franchise businesses?
If the franchise involves online sales, the parties have to comply with e-commerce regulations. Additionally, a franchisor may not prevent the franchisees from selling the services/products online but may control the way online sales are conducted and make sure such observe the know-how / the franchise standards.
What are the applicable data protection laws and do they have any specific implications for the franchisor/franchisee relationship? Is the franchisor permitted to restrict the transfer of (a) the franchisee’s rights and obligations under the franchise agreement or (b) the ownership interests in the franchisee?
In Romania, the applicable data protection law is EU Regulation 2016/679. The national laws do not provide for significant deviations from the above-mentioned regulation.
The data protection implication for the franchisor/ franchisee relationship must be established through a data processing agreement in which the parties will have the roles of controller/ processor or joint controllers.
Renewal and termination
Does a franchisee have a right to request a renewal on expiration of the initial term? In what circumstances can a franchisor refuse to renew a franchise agreement? If the franchise agreement is not renewed or it if it terminates or expires, is the franchisee entitled to compensation? If so, under what circumstances and how is the compensation payment calculated?
The franchisee does not have a legal right to request renewal of the franchise agreement, hence the franchisor may refuse renewal at its own discretion. The franchisee may not seek compensation for such refusal.
However, the parties have the flexibility to include renewal terms and conditions within the franchise agreement, outlining any compensations related to non-renewal, as they see fit.
Are there any mandatory termination rights which may override any contractual termination rights? Is there a minimum notice period that the parties must adhere to?
The Romanian laws do not contain provisions regulating the termination of franchise agreements; instead, they regulate that termination grounds must be explicitly stated within the agreement. Therefore, the provisions of the Civil Code and the contractual terms are generally applicable.
Are there any intangible assets in the franchisee’s business which the franchisee can claim ownership of on expiry or termination, e.g. customer data, local goodwill, etc.
Keeping in mind that the local goodwill and the customer data were built under the franchise network and the franchisor’s trademark, the franchisee can’t claim ownership.
One circumstance where the franchisee could be entitled to claim ownership of the goodwill is in case of franchise agreement annulment caused by the breach of legal obligations by the franchisor.
General considerations
What due diligence should both the franchisor and the franchisee undertake before entering into a franchise relationship?
From the franchisee perspective, the most important aspect is verifying the information disclosed by the franchisor especially on the trademark, the financial results and the litigation history (all these could be validated from public sources).
On the other hand, the franchisor should check whether the franchisee is a good fit for the business and if it has the financial / personal capabilities and means to open and operate the business.
How widespread is franchising and what are the most active sectors? Are there any specific economic, cultural or regulatory issues that make franchising particularly attractive?
Nearly any prosperous business has the potential to evolve into a franchise model, although the food & beverage sector is notably one of the most prolific in Romania.
One of the primary factors that render a franchise highly appealing to entrepreneurs is the opportunity to invest in a well-established business, thereby reducing the inherent risk associated with starting a business entirely from scratch.
Is there a national franchising association? Is membership required? If not, is membership commercially advisable? What are the additional obligations of the national franchising association?
In Romania there are several franchise associations active, but membership is not required. Being part of a franchise association may have some advantages regarding the gathering of knowledge in the field and the opportunity to establish a network of contacts with other professionals.
The purpose of the franchise associations is to support with information and to make the franchise more visible, but there are no legal obligations to be part of a franchise associations as a franchisor or as a franchisee.
Are foreign franchisors treated differently to domestic franchisors? Does national law/regulation impose any debt/equity restrictions? Are there any restrictions on the capital structure of a company incorporated in your country with a foreign parent (thin capitalisation rules)?
In Romania, there are no distinctions between a foreign franchisor and a domestic one when it comes to legal requirements. Both must adhere to the same regulations imposed by national laws.
Concerning the capital structure, Romania does not impose restrictions such as thin capitalization rules, and there are no disparities between incorporating a company as a Romanian citizen or as a foreign citizen. The legal framework treats both domestic and foreign entities equally in these regards.
Are there any requirements for payments in connection with the franchise agreement to be made in the local currency?
If the paying party and the recipient are both incorporated in Romania, then the payment currency must be the local currency (RON). But if one of the parties is a foreign entity, the necessary payments could be done in any other currency.
Must the franchise agreement be governed by local law?
The franchise agreement must not be governed by the local law, but by the law chosen by the parties. If the parties choose another law than the Romanian law, a different court jurisdiction than the Romanian state court should be also chosen.
What dispute resolution procedures are available to franchisors and franchisees? Are there any advantages to out of court procedures such as arbitration, in particular if the franchise agreement is subject to a foreign governing law?
Franchisors and franchisees might seek amicable settlement and mediation before submitting their case to the courts. However, this preliminary step is not mandatory.
If an amicable resolution cannot be reached, there are two dispute resolution options: the state courts and arbitration courts.
The arbitration procedure is quicker than the state court procedure, but more expensive than the latter. Another advantage of arbitration is, in some cases, the confidentiality of the arbitration file.
In urgent matters (e.g. intellectual property / non-compete infringements), interim injunctions could be sought under state court procedures to temporarily block use. This type of injunction is not possible in arbitration procedures.
Does local law allow class actions by multiple franchisees?
The Romanian law does not have specific provisions for class actions, but multiple plaintiffs with connected interests could submit a court claim. For example, if multiple franchisees claim the same breach of the franchise agreement by the franchisor, they can submit together a claim in court and every one of them can request the damages incurred. Such a claim has the advantage of splitting the burden of proof.
Must the franchise agreement and disclosure documents be in the local language?
If the franchise agreement is governed by Romanian law, it is advisable for the documents to be drafted in the local language (Romanian) or at the very least, be bilingual with both Romanian and another agreed-upon language. This bilingual approach ensures clarity and legal validity, especially if any disputes or legal matters arise in Romania, as judges can readily understand and reference the contract in the local language.
Is it possible to sign the franchise agreement using an electronic signature (rather than a wet ink signature)?
Yes, the Romanian law recognises several types of qualified electronic signatures that ensure the identity of the person signing the person executing the agreement. For signing the franchise agreement electronically, both parties must have a qualified electronic signature.
Can franchise agreements be stored electronically and the paper version be destroyed?
The answer depends on the manner the franchise agreement was executed. If the agreement was executed by both parties electronically using a qualified electronic signature, there is no need for a paper version, but if the contract was executed in the paper version, that that version is the original and must be stored.
Please provide a brief overview of current legal developments in your country that are likely to have an impact on franchising in your country.
There currently aren’t any specific legal developments anticipated to have a direct impact on the franchise sector. Nevertheless, there are fiscal changes on the horizon that could potentially affect the broader business landscape.
These changes encompass shifts in the VAT rate, revisions in the necessary share capital for company establishment, and adjustments to the withholding tax rate. While not targeting franchises specifically, these fiscal changes may indirectly influence franchises and other businesses operating within Romania.
In your opinion, what are the key lessons to be learned by franchisors as a consequence of the COVID-19 crisis?
The key lessons learned by the franchisors as a consequence of the COVID-19 crisis are:
- the need to have some flexibility with the business model;
- the need of specific procedures in order to conduct business remotely;
The COVID-19 crisis changed a significant part of the way business are conducted and shifted them to online (delivery services, online trainings etc.) and also raised awareness on the need to have specific force major provisions in the agreements.
Do you foresee any significant commercial or legal developments that might impact on franchise relationships over the next year or so?
Currently, we do not anticipate any substantial legal developments that could significantly impact franchise relationships over the next year or so. However, a significant positive change could arise from Romania’s potential entry into the Schengen Area, although the timing remains uncertain. Becoming a part of the Schengen Area would result in easier transportation of products and labour force, streamlining daily operations for international businesses.
