When concluding an international franchise agreement, it is important which national law will apply to it. The chosen law will regulate the validity of the agreement provisions, the situations not stipulated in the agreement, and other issues. The regulation of the Baltic States demonstrates how different the legal provisions applicable to franchises can be.
The key to these regulations is summarized in the following table.
The franchise regulation in the Baltic states is heterogeneous and there are few similar provisions. Also, the length and the comprehensiveness of the regulation differ significantly. It is important to remember, that many other laws and provisions apply to the franchising arrangements, such as language requirements, intellectual property protection rules and general provisions of civil laws of the particular country.
Latvia’s national legislation is sufficient, but not excessive at the same time. It grants to the contracting parties enough freedom in deciding regarding the content of the franchise agreement, but mandatory liabilities of the franchisor are explained in a very concise way and clearly regulated.
The Latvian Commercial Law is the only law among the Baltic states which have implemented the best practice defined by the UNIDROIT Model Franchise Disclosure Law. The franchisor is obliged to provide in writing the most important information to the franchisee in the pre-contractual stage and failure to do it, can lead to unilateral termination of the agreement by the franchisee. The Commercial Law is structured to provide protection to the franchisee as the weaker and less experienced party. The best example of this provision is the franchisor’s obligation to pay the franchisee a remuneration for the time period of restriction on competition.
Lithuania has the most exhaustive regulation of the franchising in the Baltic states. The Civil Code is the basic law that comprehensively discusses the franchise agreements, its conclusion, amendments, termination, form and content. Albeit the comprehensive list of terms and conditions of the franchise agreement is not included in the Civil Code, it explains in great detail or at least refers to the necessary requirements applicable to the franchise agreements. It benefits and encourages the parties of franchising arrangements because the state has defined and made clear its attitude to the franchising issues. Mostly the law is favourable to franchisees – small and medium companies which are not experienced in franchising. Therefore, the entrepreneurs could feel more confident to conduct business in the environment where the regulation is comprehensive. Besides, the Lithuanian Civil Code explicitly provides the most important rules on the competition related to franchising.
The Lithuanian Civil Code is very favourable to the franchisee rather than the franchisor; for example, it provides for the franchisee the right to conclude a new agreement for a new term under the same terms and conditions on the basis the established expiry date of the franchise agreement. Moreover, the franchisor and the franchisee under particular circumstances must share the liability towards third persons for the goods sold or services provided. Therefore, the Lithuanian regulation does not follow the principle that the franchisor conducts business on its own risk. The Civil Code provided that the franchise contract parties share the liability and risks. Those provisions significantly differ from the regulation in other Baltic states.
The Lithuanian Civil Code takes an unusual approach in connection with the issue of renewal by determining an automatic right of renewal on the same terms for any franchisee who has not been in breach of his obligations under the franchise agreement during the term of the agreement. This clearly raises a considerable number of problems for any franchisor who, due to the changes which may have taken place during the term of the franchise agreement (either in the market, business environment, or in the applicable legislation), or as a result of his or her experiences over the course of the agreement, wishes to adjust the new terms of their franchise agreements.
Since the Lithuanian Civil Code requires registration of the franchise agreement in the Enterprise Registry and the intellectual property registries, Lithuania follows the most formalistic approach to the franchise arrangements and therefore causes additional encumbrance to the entrepreneurs, for example, additional procedures, fees and disclosure of the content of franchising agreements. If the franchise agreement is not registered with the registers in Lithuania, the agreement it is valid, although it is unenforceable against third parties.
The Estonian regulation is very narrow and does not set forth provisions on sub-franchising, non-competition, termination of the franchise agreement, renewal of the agreement etc. Therefore, the general rules of commercial transactions must be applied to franchise agreements. This approach makes the regulation of franchising untransparent as it must be traced through-out the Law of Obligations Act and other legal regulations.
As regards the protection of the interests of the contracting parties, the regulation more favours franchisors as franchisees, notwithstanding the fact that in other countries franchisees are treated as weaker contracting parties which receives additional protection. There are no provisions which grant any additional security to franchisees or any specific rights, for example, rights to obtain information or receive compensation for complying with a non-competing obligation.
There are no any bureaucratical requirements under the Estonian legislation. The law does not even require a written form of franchise agreements.
Every company which enters into an international franchising agreement must examine the national legislation and consider carefully all requirements and peculiarities. In most cases, a deeper analysis might be necessary to detect the mandatory statutory rules which cannot be altered by the agreement. As shorter is the regulation, like in Estonia, as more favourable it is for the experienced international companies which can implement their franchise agreements, rules and approaches without significant alterations. However, for less experienced franchisees the Lithuanian exhaustive and franchisee-favourable regulation is more supportive and encouraging. The Latvian legislation provides good balance and supports the interest of both parties of a franchise agreement.