Franchise lawi Legislation
In the absence of a dedicated franchise act, franchises are subject to the same laws – primarily the Civil Code – that govern other businesses. The general rules of civil and contractual law as well as the Civil Code's specific chapter on franchise agreements (in the wording of the Civil Code, 'agreements on the lease of rights') apply to franchises in Hungary. According to the definition of the Civil Code, the lessor (i.e., the franchisor), in exchange for remuneration, licenses its copyright, IP rights and know-how to the lessee (i.e., the franchisee), whereas the franchisee manufactures and sells products or provides and sells services through the use of the franchisor's rights. This definition does not include any reference to the licensing of trademarks and focuses on service and distribution franchises instead of the most common commercial franchises. The Civil Code also includes provisions on (1) the licensing of copyright, IP rights and protected know-how, (2) the franchisor's supply obligation, (3) the protection of the good reputation of the franchise network, (4) the franchisor's instruction and supervisory rights, and (5) rules on the termination of contracts concluded for an indefinite period. Because of the Civil Code's dispositive nature the parties may deviate from these provisions in their agreements. Since the focus of the franchise agreement in the Civil Code is rather one-sided and the provisions are not comprehensive, the parties, using the freedom-of-contract principle, usually exclude the application of the provisions of the Civil Code on franchise agreements.
The Civil Code entered into force as of 15 March 2014 and replaced the previous Civil Code. The rules of the previous Civil Code apply to agreements that were in place on 15 March 2014 and statements and declarations made concerning such agreements. Nonetheless, the parties may agree to apply the provisions of the current Civil Code to their contract even if the contract was entered into before 15 March 2014.
Franchise agreements must be in compliance with the Competition Act. In the absence of a special block exemption regulation on franchises, the Block Exemption Regulation sets out the criteria as to how franchise agreements may be exempted from the prohibitions relating to the restriction of competition.
In relation to IP rights and know-how, the provisions of the Trademark Act, Copyright Act, Patent Act and Trade Secret Act may apply to franchise agreements.
Although they are not binding legislation, the Code of Ethics and the HFA guidelines have been considered by courts in civil proceedings on an increasing number of occasions. Additionally, these regulations may also serve as a basis for assessing whether the parties to a franchise agreement acted in good faith and according to the applicable standard of conduct in a particular situation.ii Pre-contractual disclosure
Under the rules of Hungarian civil law, contracts must be concluded on the basis of mutual agreement by the parties. The parties must agree on all material details. There is no need to agree on details that are regulated by law. However, the Civil Code does not define the term 'material details'. According to the standard practice and the HFA's Code of Ethics, in the case of franchise agreements material details include: the licensing of know-how, commercial appearance, trademarks, the franchisee fee and royalties to be paid, and duration and termination of contract (see Section IV.iv).
The Civil Code recognises the doctrine of culpa in contrahendo. Under this principle the parties are obliged to (1) cooperate during the conclusion of the franchise agreement, (2) respect each other's rightful interests and (3) before the conclusion of the franchise agreement inform each other regarding all essential circumstances in relation to the proposed contract. There is no explicit statutory provision on the formal requirements of the pre-contractual information duty concerning franchise agreements.
Under Hungarian law, a franchisor may be exposed to a damages claim in tort over pre-contractual statements if the franchisee is able to prove that (1) the franchisor unlawfully concealed or misrepresented essential circumstances prior to entering into the franchise agreement (breach of duty); (2) the franchisee incurred damage (damage); (3) the damage was incurred by the franchisee because of the concealment or misrepresentation of essential circumstances (causal link); and (4) the franchisor is not able to excuse itself by proving that it proceeded as generally expected under the given circumstances (i.e., acted according to the applicable standard of conduct in the particular situation). However, neither party may be held liable for not entering into the agreement.
It is generally accepted practice that, to protect their business interest and trade secrets, franchisors require franchisees to sign a non-disclosure agreement before the franchisor delivers the draft of the franchise agreement.iii Registration
There are no specific registration requirements for franchises. However, there are registration requirements that may have an impact on franchising:
- for the purpose of pursuing economic activities in Hungary, everyone can freely establish a company. Companies are registered by registry courts;
- before a newly established company can be registered by the competent registry court and its tax number issued, a preliminary tax registration procedure is completed by the tax authority;
- after their registration by the registry court, companies are obliged to apply for registration at the competent chamber of commerce and industry within five days; and
- if the franchisor or the franchisee pursues a specific activity, additional registration (e.g., at chambers or authorities) may be required.
Under Hungarian law, there are no specific mandatory statutory clauses to be included in franchise agreements. According to the general contractual rules, the parties must agree on all material details of the contract, otherwise it may be invalid or unenforceable. The Civil Code regulates some of the basic content of franchise agreements (see Section IV.i). However, parties may deviate from or even exclude these statutory provisions and agree on additional contractual provisions.
The HFA's Code of Ethics, which does not constitute a mandatory legislative act, is often considered by courts as a guideline for assessing the fulfilment of the duty of good faith. It sets out minimum requirements to be included in franchise agreements. These are (1) the franchisor's and the franchisee's rights and obligations; (2) the description of goods and services to be provided to the franchisee; (3) the term of the agreement, which must be sufficiently long to enable the franchisee to achieve a return on its initial investments; (4) provisions on renewal of the agreement; (5) conditions under which the franchisee may sell or assign the business being subject to the franchise agreement and the franchisor's related rights; (6) the advantages on the franchisee's side resulting from the use of the business name, trademarks, signs, images and other marks of the franchisors; (7) the franchisor's rights to adapt new or changed methods with regard to the franchise system; (8) termination of the agreement; and (9) conditions for post-contractual mechanisms concerning goods, real estate etc. that belong to the franchisor or third parties.v Guarantees and protection
The franchisor may request guarantees or other types of securities from the franchisee. Those securities are regulated in the Civil Code. The parties to the franchising agreements usually rely on suretyship, security deposit, liens, bank guarantee, contractual penalty or purchase options. Under the Civil Code, in line with the protection of the good reputation of products and services subject to franchise agreements, each party is obliged to protect the good reputation of the franchise network.
Guarantees provided to the franchisor by the franchisee are enforceable. To ensure proper enforcement, the guarantee should be properly drafted. It is also recommended that the scope of the franchisee's collateral commitments cover the franchisee's breach of its contractual obligations towards suppliers.