All questions

Franchise law

i Legislation

In the Czech Republic, there is no legislation dedicated specifically to franchising. However, this absence of franchising legislation is perhaps not unusual, and definitely not a barrier to the development of franchise systems. Franchise arrangements are typically governed by civil law (as far as the actual contract or establishment of the business is concerned) but other areas, including public law (e.g., competition regulation, employment, trade licences and tax), can play an important role. Therefore, it is really a mixture of laws that are relevant in connection with the franchising industry.

A franchise agreement as such would be considered an innominate agreement (meaning a type of contract not specifically provided for in law) pursuant to Section 1746(2) of the Civil Code. The Civil Code is one of the most important pillars of Czech private law. Several years ago, the Civil Code was fully recodified, focusing on, among other things, the extension of contractual flexibility and freedom. Even though the current Civil Code has now been in effect for five years, it will still take time before the courts establish the necessary case law to bridge a few interpretation gaps and provide sufficient guidance to parties affected. A typical franchise contract would include elements of a sale contract, lease contract, licensing agreement, consignment contract and trade secrets, etc., which are all expressly regulated by the Civil Code. That, in turn, needs to be reflected when drafting a franchising agreement.

The European Code of Ethics for Franchising is not binding legislation in the Czech Republic; however, it seems to have certain persuasive power and tends to be relied on by entities involved in the cross-border franchising business.

ii Pre-contractual disclosure

The Civil Code brought into Czech law the concept of pre-contractual liability (culpa in contrahendo), which involves an element of disclosure obligation. Sections 1728 and 1729 of the Civil Code set out the following general rules:

  1. parties are entitled to hold talks freely and they are not liable when the contract is not concluded unless the other party starts or continues negotiations without the intention of concluding the contract;
  2. during the contract negotiations, parties should inform each other about all factual and legal circumstances to allow the other party to determine the possibility of concluding a valid agreement, and be clear about the other party's interest in making the contract;
  3. if during the negotiations the parties reach the point where the conclusion of the agreement appears to be highly likely, the party who, despite the other party's reasonable expectations, terminates the negotiations without justified reason is deemed to have acted unfairly; and
  4. the party that acts unfairly is liable for damages up to the maximum amount corresponding to the loss from non-concluded contracts in similar cases.

Other than this, there are no pre-contractual disclosure obligations specifically relating to franchising under Czech law. Also, the above rules are fairly general, broad and new, hence no proper judicial guidance is available yet. There are no special provisions regarding formal requirements for pre-contractual information concerning franchise agreements.

iii Registration

There are no specific registration requirements for franchises and no franchise register exists in the Czech Republic. Nevertheless, some general registration requirements apply; for example, relating to the setting up of a business in the Czech Republic (e.g., the trade licences register, registration of a legal entity in the Commercial Register and tax-related obligations).

As of 1 January 2018, a new central register of beneficial owners was established in the Czech Republic in line with the obligations imposed on EU Member States under the Fourth Anti-Money Laundering Directive. Czech companies have until 1 January 2019 to register their beneficial owners. Although currently there is no direct penalty stipulated by law for non-compliance, failure to register the beneficial owner may lead to negative consequences in, for instance, public procurement proceedings.

iv Mandatory clauses

There are no mandatory clauses applicable to franchise contracts. In principle, parties can determine the terms and conditions of their contract freely provided that their contract does not infringe good morals (bonos mores), public order or protection of personality status or rights.

Despite the fact that the European Code of Ethics for Franchising is not legally binding, members of national associations and federations of the European Franchise Federation (like CFA) undertake to respect the Code's principles and often incorporate these principles into provisions of franchise agreements or attach their national annex to an agreement.

v Guarantees and protection

A franchisor may request guarantees and protection under civil law. According to the Civil Code there are several options for guarantees, such as suretyship, financial guarantees, collateral transfer of rights, liens, bank guarantees, contractual penalties, etc. Guarantees that are in compliance with the law are enforceable.