Franchise contracts have played a pivotal part in shaping the Polish economy, ever more so since the country’s transition into free-market economy. In 2020, before COVID-19, there were more than 1300 franchise chains in Poland – from small diners and repair shops to such giants as McDonald’s.
Unlike elsewhere across the EU (Italy, Holland, Latvia, Romania), let alone in franchise’s birthplace – the US, Polish franchise contracts (surprisingly, given their economic significance) are scarcely regulated and qualify as the so-called innominate contracts. This means that neither the language of the contract, nor the obligations of the parties are specifically regulated by statute. The existence and functioning of franchise contracts is based on the freedom of contract principle emanating from the Polish Civil Code. This means that the parties are free to structure them as they please, so long as the contract does not infringe on the appropriate legal relationship, or contradict the law and the community life rules.
A certain consensus has evolved over more than 30 years of the Polish free-market economy as to such contract’s mandatory terms. Under the franchise contract, the chain organizer (the franchisor) allows the other party (the franchisee) to use its trade name, style, symbols, trademarks, specific business know-how, concepts, and operating techniques – all that in exchange for the franchise fee set forth in the contract. The franchisor should assist the franchisee with the operating techniques, while the franchisee ought to operate using the provided know-how and intellectual property rights, as well as in line with the franchisor’s guidelines. In the franchise model, the franchisee may run its business using a full-proof setup and a recognizable brand.
Despite no statutory regulations, the Polish system had been developing fairly uninterruptedly for many years. Between 2018 and 2020, irregularities on the franchise market began to surface. Among others, concerns were raised about abusing the chain organizers’ market position (e.g. by forcing franchisees to purchase products and services from preferred partners, often overpaying and overstocking), as well as charging excessive chain entry and contract termination fees. Also, allegedly, under the popular standard-form franchise contracts, the franchisee would bear nearly all of the business risk. Other reported issues included promoting questionable-efficiency business models and misrepresenting to future franchisees, so that they were unable to fully appreciate the future operation’s business risk.
These shortcomings have prompted the legislator to attempt to regulate the franchise contract parties’ rights and obligations. The need for and the extent of such regulations have been debated since 2020, and they practically continue to date. On 27 July 2022, the Justice Ministry announced a Civil Code (and other laws) amendment regulating the franchise contracts. Seeing as this Parliament’s term is coming to a close, there is little hope the laws will be enacted before the general election.
The pace of the legislative work aside, one should pose a question whether it is necessary to regulate the franchise contract language by statute. Whether putting it in strict legislative confines will not result in “overregulation”, which may slow down or even set back this market’s development, because the franchise contract will be overly expensive and regulated.
I believe such regulation seems advisable. Perhaps it is not an urgent matter – the existing regulations seem sufficient to thwart any material market irregularities – however some framework may prove useful. I tend to lean toward civil-law style regulation, i.e. including the franchise contract within the Civil Code. Regulating the franchise contract would result in a more stable legal environment for this market to function. Better legal protection enjoyed by franchisees would facilitate their business decision-making and be conducive to more potential entrepreneurs deciding to operate like that.
Such regulation should, first, define the franchise contract and set out its basic terms. It would also be advisable to enact provisions protecting the weaker party – in most situations franchisees are natural persons, lacking the knowledge and skills to fully appreciate the proposed contract and its ramifications. To a certain extent, such protection might be effected by obliging the franchisor to provide a detailed informational document describing the proposed contract, its language and the franchise chain’s operations, including the financial information for the past 2-3 years (if the franchise has been operating this long). Such document should be drafted in simple and understandable language. This would enable the franchisee to more objectively assess its contemplated enterprise. Such obligation applies under the US law.
When protecting the franchisee, we should not be forgetting about protecting the franchisor. What may be beneficial, if regulated, is a no-competition requirement to be met by the franchisee leaving the chain and a franchisor’s intellectual property protection clause, as well as certain contract termination rules. Notably, the 27 July 2022 Justice Ministry draft does regulate the above matters. The draft is relatively short and covers only the rudiments of the franchise contract. It seems that the legislator need not further interfere with freedom of contract. The existing regulations, such as the Unfair Competition Act or the Civil Code (in regard to contractual penalties) appear a sufficient basis to combat any irregularities.
