Franchising Comparative Guide

• Published date: 04 August 2021
• Subject Matter: Corporate/Commercial Law, Franchising
• Law Firm: Bird & Bird
• Author: Mr Ivan Kisely and Róbert Čuperka

1 Legal and enforcement framework

1.1 Which legislative and regulatory provisions govern franchising in your jurisdiction?

The franchising relationship is not specifically regulated as an explicit type of contract.

Under Slovak law, franchising agreements are considered a non-specific contract (sui generis) which, depending on each individual case, will combine elements of several other types of contracts (eg, lease contracts, licensing contracts, agency contracts, distribution agreements, cooperation agreements).

The Commercial Code, the Civil Code (40/1964 Coll, as amended), the Trademark Act (506/2009 Coll, as amended) and other statutes will likely apply to the franchising relationship.

In addition, it is advisable for the franchising agreement to be in general compliance with the European Code of Ethics for Franchising. Although the European Code of Ethics for Franchising is not legally binding, members of national associations and federations of the European Franchise Federation undertake to respect its principles and often incorporate these principles into their franchising agreements. Of these, the Slovak Franchising Association is the most important.

THE EUROPEAN CODE OF ETHICS FOR FRANCHISING should be followed too.

1.2 Do they apply to foreign franchisors entering your jurisdiction or only to domestic franchises?

In principle, no specific restrictions or approvals are required for foreign franchisors to enter the local market. There are certain areas - such as defence and gambling - in which the entry of foreign entities into the Slovak market is subject to certain limitations; but the franchising model is not common in these sectors.

The legislation will generally apply to both domestic and foreign entities. However, there are certain exemptions, in particular with regard to the choice of (foreign) law.

1.3 Do any special regimes apply in specific sectors?

Some sectors of the Slovak market are regulated, such as pharmaceuticals, food and defence. These regulations might have implications for the franchise business, as each has its own regulatory specifics. However, no limitations are imposed specifically in connection with franchising.

1.4 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The authority responsible for the supervision of commerce is the Slovak Trade Inspectorate.

In addition, individual regulated sectors may have their own regulatory bodies and authorities, which can impose sanctions for violations of the law. For example, in the food sector, this body is the State Veterinary and Food Administration of the Slovak Republic.

1.5 What is the regulator's general approach in regulating the franchise sector?

Franchising is not explicitly governed under Slovak law; thus, there are no major differences between franchising agreements and other types of business agreements. Instead, various sectors have their own sector-specific rules, such as the food sector.

1.6 Are there any trade associations for the franchise sector? If so, what are the conditions for membership? What are the commercial implications of not being a member?

The primary self-regulatory franchising association is the Slovak Franchising Association, which is a member of the European Franchise Federation. In this regard, the Slovak Franchising Association is responsible for the application of the European Code of Ethics for Franchising of the European Franchise Federation.

Membership of the Slovak Franchising Association is not mandatory to operate a franchising business in Slovakia. However, it may be useful with regard to the overall image of the franchise. In addition, members communicate, cooperate and exchange knowledge together more closely.

2 Franchise market

2.1 How mature is the franchise sector in your jurisdiction?

Although the Slovak franchising sector is growing, we believe that there is still potential for further expansion. In our view, the regulation of franchising in Slovak law and the promotion of better opportunities for financing would definitely facilitate such expansion.

2.2 In which sectors is franchising most common?

In Slovakia, franchising is most common in the following sectors:

• food and beverages (restaurants, bars);
• textiles and fashion;
• health and fitness;
• industrial products and machines;
• real estate;
• hotels; and
• car rental.

2.3 Who are the biggest and most successful franchisors in your jurisdiction? How are they typically structured?

The biggest and best-known franchisors in Slovakia are:

• fast food chains (eg, McDonald's, Subway, KFC, Pizza Hut);
• coffee shops (eg, Starbucks); and
• estate agents (eg, Re/Max).

3 Franchising models

3.1 Is master franchising or the development model most common in your jurisdiction?

Both models are common in Slovakia. However, master franchising is not used to its full potential - for example, the option to sub-franchise is less common. At the same time, there have been cases in which a master franchising licence has been issued after some time, once the franchisee had proved itself a reliable business partner to the franchisor.

Compared to the United States and many parts of the European Union, the franchising model is not used as widely in Slovakia. However, the number of franchising operations is growing, with foreign franchises predominating over local franchises.

3.2 What other models of franchising are commonly used in your jurisdiction?

Business-format franchising is one of the most common models. Under this model, the franchisor generally offers a wide range of services to the franchisee, including advertising, strategy, training and precise operations and quality manuals.

However, all types of franchising models are generally permitted, including product (trademark) franchising, manufacturing franchising and combinations thereof.

3.3 What are the potential advantages and disadvantages of these different models?

The business format franchise is generally preferred by franchisors. However, it may also be attractive to franchisees, especially those that are new to business, due to the high level of input and overall assistance provided by the franchisor. However, under the business format, the franchisee has less room for creativity.

On the other hand, the franchisor generally has less involvement in the product (trademark) franchise model. In this model, the franchisee pays a fee to the franchisor for the right to distribute and sell goods - similarly to a dealer or distributor - on the franchisor's behalf as the product manufacturer. The franchisee receives the actual products, as in a business format franchise; however, the franchisee is given more operational freedom in terms of how to run the business. Also, the fees are often lower than in business format franchising.

Overall, the business format is considered to be easier to operate, as the trademarks are already market tested, are usually well known and are recognised by customers. Also, the franchisee need not produce an operation strategy and thus the risk of failure of the business is mitigated.

Regardless of which model is adopted, there are several disadvantages to franchising, such as the greater number of restrictions involved, including the franchising manual and requirements for operational and qualitative uniformity. The right of franchisees to sell their businesses without the franchisor's approval may also be restricted; and the franchisee faces a higher business risk if the business of franchisor and the whole franchise fails.

3.4 What specific considerations should be borne in mind in the case of cross-border franchising into your jurisdiction?

In principle, there are no restrictions on foreign franchisors owning equity in a local business.

Also, there are no general restrictions on a foreign entity granting a master franchise or development rights to a local entity. However, the terms of the respective agreements must comply with the provisions of law, especially competition law.

4 Definitions and scope of application

4.1 How is 'franchising' defined in your jurisdiction?

'Franchising' is not explicitly defined (as a specific contract type) in Slovak law. In Slovakia, franchising agreements are considered a non-specific contract (sui generis) which, depending on each individual case, will combine elements of several other types of contracts (eg, lease contracts, licensing contracts, agency contracts, distribution agreements, cooperation agreements).

The regulation of lease agreements applies to the extent and on the basis that the lessor (franchisor) grants a 'thing' (intellectual property/know-how) to the lessee (franchisee) for the agreed remuneration, to use it temporarily or to take advantage of it.

The Commercial Code, the Civil Code, the Trademark Act and other statutes will also apply to the franchising relationship.

In addition, it is advisable for the franchising agreement to be in general compliance with the European Code of Ethics or the Code of Ethics of the Slovak Franchising Association.

4.2 What are the key requirements that apply to franchising? Is pre-contractual disclosure required? Is...