The Polish Ministry of Justice plans to regulate the franchise agreement (which currently is classified as an unnamed contract according to Polish law) in response to recurring cases of the abuse of contractual position by franchisors. On 3 March 2023, the Ministry presented the main provisions of the proposed Franchise Act, some of which have raised significant controversies. They seem to intrude too far into the freedom of contract and the practical needs of conducting business based on the franchise model. The most controversial governmental proposals are listed below.

The far-reaching formalism

A. Information document

The franchisor will be required to provide the franchisee with an information document along with a franchise agreement draft no later than 14 days before the conclusion of the agreement. The proposal indicates the minimum content of such document, as it must reflect at least 14 points specified therein, including, among others:

  • a description of the franchisor's business activities and services,
  • the number of franchise agreements concluded as of the end of the previous calendar year,
  • a description of the franchisee's business activities with the estimated expenses or investments necessary for the franchisee to start executing the franchise agreement,
  • the method of determining the franchisor's remuneration,
  • information on the estimated amount of the franchisee's revenues and the way how this estimation is calculated, etc.

If this set of information is not provided to the franchisee or if it contains unreliable or false information of material importance, the franchisee will have the right to terminate the agreement with immediate effect within thirty days of becoming aware of such circumstances, but not later than one year from the date of agreement conclusion.

B. Amendments to the agreement

The obligation to provide an information document along with a franchise agreement shall be applied accordingly in case of any amendments to the agreement, which has no rational, economic, or practical justification, as it is associated with excessive formalism, negatively affecting the business. Even minor changes will trigger the franchisor's obligation to submit a complete information document requiring substantial updates to all of the required (extensive) data. As a result, the updates prepared without due care and effort (this will probably occur frequently in practice) can lead to the termination of the agreement even if the not up-to-date information does not affect changes to the contract. Moreover, the process of making contractual changes will be significantly prolonged, often to the detriment of business efficiency, which will negatively affect franchisees and franchisors.

A much better solution for both parties would be the obligation to notify the franchisee in advance of the proposed change by presenting a draft of the annex without a need for updating the information document.

Termination

The proposed provisions regarding the termination of the agreement place the franchisee in a significantly more advantageous position than the franchisor.

A. Notice period for an indefinite agreement and termination of a fixed-term agreement pursuant to cases specified in the agreement

In a franchise agreement concluded for an indefinite period a notice period reserved for the franchisor (six-month notice) will be twice as long as the one granted to the franchisee (three-month notice). Furthermore, the parties will not be able to agree on a different notice period, other than longer than six months reserved for the franchisor. Such general privileging of one of the parties does not find an analogy in the lease agreement, tenancy agreement, or employment contract, where arguments can also be raised that one party has a weaker economic position than the other. Moreover, it will not be possible to specify in a fixed-term agreement the cases when the franchisor can terminate the agreement, while it will be possible for the franchisee to do so. This deprives the franchisor of the right to terminate a fixed-term agreement, with the exception of situations provided for by law allowing for immediate termination of the franchise agreement.

However, it is justified to exclude using an unlimited termination clause and to specify in the agreement only relevant events justifying termination, instead of introducing a significant imbalance between the parties, who are both professional entities. As practice shows, the statutory solution granting both the landlord and the tenant the right to unilaterally terminate a fixed-term lease in cases specified in the agreement has proved to be effective. In this context, it is worth using these models when creating regulations for the Franchise Act.

B. The right to immediate termination of the agreement due to payment delays

The franchisor’s right to immediate termination of the agreement in case the franchisee, despite a written payment demand, is in delay in paying the franchisor's remuneration for two complete payment periods also requires modification. Bearing in mind the franchisor's remuneration may be due monthly, quarterly, or even annually, the need for two full payment periods may deprive the franchisor of being paid for transferred know-how for a significant period of time if a franchisee evades remuneration payment. Otherwise, the only consequence for the franchisee will be the obligation to pay interest.

Therefore, it seems reasonable to adopt a solution that refers to the tenancy agreement regulations, which would allow the franchisor to terminate the agreement without the notice period if the franchisee delays payment of the remuneration for at least two full payment periods, but in the case of semi-annual or less frequent rent payment, if the delay in payment exceeds three months. This solution will secure the liquidity of the franchisor, which at the same time will be reflected in the stability of other franchisees of the such franchisor.

Non-competition obligation after the termination of the agreement

A. Ministry's proposal

The non-competition obligation after the termination of the agreement will be effective for a period not exceeding one year from the termination. The highly controversial part of the proposed regulation is the limitation only to the obligation not to create a competing franchise system, while the former franchisee would not be subject to any contractual sanctions for conducting the same activities as the former franchisor in the same location or territory. This will easily allow franchisees to circumvent such a prohibition, especially in a situation where several beauty salons, shops, or petrol stations of one entity are covered by one franchise agreement. As a result, the former franchisee will conduct the same activities under its own name and for its own benefit, creating the impression among current and potential customers of continuing the previous brand under a new sign.

Moreover, the non-competition clause will not apply when the franchisee changes its former franchisor to another one already operating on the market, as the prohibition is intended to forbid creating a competing franchise system rather than participating in another. The possibility of reserving contractual penalties is also excluded in this situation, which will condemn franchisors to years of litigation to assert their rights.

This leads to the conclusion that the non-competition after the termination of the agreement will not be effectively enforced in practice to the detriment of the know-how protection.

B. Current legal status

The franchise agreements are considered vertical agreements under Polish competition law. Specifically, non-competition clauses that apply after the franchise agreement termination are legally prohibited (in fact null and void), unless they concern goods/services that are considered substitutes for goods/services covered by the vertical agreement in terms of their purpose, price, and characteristics, including quality, and are limited to the premises or territory where the franchisee operates during the term of the vertical agreement, and are necessary for the protection of know-how provided by the franchisor, with a time limit of one year after the expiration of the agreement, except for the possibility of imposing a restriction without a time limit on the use and disclosure of know-how. Beyond that, according to established case law, the freedom of contract allows parties to introduce a non-competition that applies both during the term of the contractual relationship and after its termination, provided that the restriction does not violate the social coexistence rules, which should be assessed after analyzing the circumstances of each case. The social coexistence rules violation makes the clauses null and void. Furthermore, a non-equivalent non-competition generally does not need to be justified, and the contractual penalty for breach of the non-competition does not violate the nature of the franchise legal relationship.

The existing rules define the boundaries of the non-competition adequately to the nature of the franchise agreement considering that the franchise covers various types of economic activities and business models, i.e. each relationship of this kind should be individually assessed. More than that, the Ministry has not decided to regulate the non-competition during the term of the franchise agreement, keeping the general principles derived from competition law and established by the case law in force. Therefore, not modifying the existing proven legal solutions is recommended.

Summary

Franchising, which allows operating under a well-known brand and benefitting from its proven know-how, essential for the success of a business, is indeed a safer and more stable alternative to setting up a business. Especially since establishing the business carries a significant risk and barrier to entry. The lack of attractiveness of the franchise model will consequently be reflected in the diminishing development of entrepreneurship in Poland, as many people will not start their own businesses without the existence of the franchise model on the market.

The Ministry’s Franchise Act proposals fail to ensure the balance between the rights of the franchisee and the franchisor to the detriment of both contracting parties. As a consequence, they can decrease the profitability of the franchise system itself and result in a relevant decline in potential or existing investors’ interest in creating or maintaining franchise networks.