Franchise Contracts – Summary of the Hungarian regulation

Franchising is a very popular and effective form of economic cooperation. There are many advantages to entering into a franchise contract, or what is known as a lease contract in Act V of 2013 on the Civil Code (hereinafter referred to as Civil Code). In this article, we shall describe the characteristics of the franchise contract.

1. Definition

For a long time, Hungarian law did not regulate franchise contracts as a separate type of contract, but as an atypical contract, which was widely used. Today, Book VI of the Civil Code of Hungary now treats franchise contracts as a separate type of contract.

A franchise is a form of economic cooperation in which the franchisor grants the franchisee the rights of use and exploitation of the necessary copyright and industrial property rights in return for consideration.

2. The key features of a franchise contract

The franchise contract is the key element of the franchising system. The purpose of a franchise system is that the members such system, holding the know-how (that includes organisational, technical, and economic knowledge selected by the franchisor), the trade name, the industrial property rights, or copyrights, which are part of the franchise, guarantee the same quality to the customers in the same form in all the shops.

The key feature of a franchising system is that it is organised around a center, with members of the system operating under a single name, image, and operating rules. This also ensures that there is minimal potential for business risk.

The franchise agreement defines the key elements of the cooperation between the franchisor and the franchisee.

2.1. Obligations and rights of the franchisee

Under the contract, the franchisee undertakes to use the common brand name and image and to comply with the quality and quantity requirements set out in the agreement.

The advantage thereof is that the franchisee may benefit from the familiarity of the brand/image and is relieved of significant business start-up costs, benefits from the experience of the franchisor, and receives substantial support in setting up and running the business (e.g. advertising, procurement, and management). It takes on a widely recognised image with virtually no (or minimal) risk.

The franchisee is also obligated to protect the knowledge provided to them.

Under the contract, the franchisee is usually obligated to produce and sell products and services using the rights and knowledge granted to them and they are obligated to pay a fee for these. In making the sale, the franchisee acts in their own name and for their own benefit.

2.3. Payable fees

The fee payable by the recipient usually consists of several components. Typically, it includes the so-called entry fee, payable on joining the franchise network, a fixed base fee, payable periodically in advance, which is a condition of remaining in the system, and royalty, which is a percentage of turnover, or a fixed amount based on turnover in the previous period. The Civil Code does not, however, specifically regulate the consideration paid by the franchisee, but merely stipulates that the contract is for consideration in the context of the definition of franchise.

2.4. Obligations and rights of the franchisor

In the contract, the franchisor authorises the franchisee to exploit the franchise in a specific territory for the purpose of distributing the goods or providing the services specified.

The franchisor has a duty of cooperation and information towards the franchisee, and they must inform the franchisee in detail of all the rules and regulations relating to the franchise. They shall make the know-how available to the franchisee, transfer the various rights of use and exercise them without interruption, and provide ongoing support.

If the franchisee does not receive all or part of the necessary information, they may challenge the contract on the grounds of mistake, misrepresentation, or mutual misapprehension on the part of the parties.

The franchisor shall have the right to give instructions in relation to the production and sale of the goods and services. In addition, the franchisor has the right to instruct the franchisee in relation to the protection of the franchise network and the reputation of the product. The franchisee thus loses part of their autonomy and must implement the decisions that are binding on it.

Should the franchisor give inappropriate or unprofessional instruction, the franchisee shall warn them. If despite the warning, the franchisor still insists on the instructions which the franchisee considers unprofessional, the franchisee is obligated to comply with them, but the franchisee is no longer liable for any resulting damage. The franchisee is obligated to refuse to comply with the instruction if its execution would lead to a breach of the law or an administrative decision or would endanger any person or property of others.

The parties must protect the reputation of the franchise network and the products and services produced or sold.

2.5. Written form

The written form of the franchise contract is not a requirement for validity, nevertheless, for the purpose of avoiding potential disputes, ensuring the visibility of intellectual property, and ensuring protection, franchise agreements are almost always concluded in writing.

2.6 Duration of the contract

The Civil Code does not specify the duration of a franchise. Section 6:381 of the Civil Code only stipulates that the contract may be concluded for a fixed term or an indefinite term.

2.7. Termination of the contract

The previously mentioned 6:381 of the Civil Code, the contract concluded for an indefinite period may be terminated by either party for the last day of the calendar month. The period of notice is one month in the first year of the contract, two months in the second year, and three months in the third and subsequent years.

Questions regarding Hungarian business law? We are happy to assist you with our partner:

dr. Franczia Ágnes attorney at law

dr. Kőhidi Ákos attorney at law

dr. Dobos István attorney at law