Franchising may be an attractive proposition for many companies wishing to expand internationally. Take a look at this overview to discover the applicable franchise law in Slovenia, covering the essentials for franchisors, the relevant areas of law, selected aspects such as fees, and dispute resolution and applicable law.
about Slovenia's franchising law
- No legal codification and special regulation of franchise agreements;
- Parties to the franchising agreement may regulate their contractual relationship freely, as long as it does not contravene the Slovenian Constitution, mandatory legal provisions, and moral principles;
- Case law on franchise agreements is scarce. However, courts regularly uphold provisions of franchise agreements (also those made in favour of the franchisor);
- Confidentiality clauses are essential as this area is regulated by the mandatory provisions of the 2019 Slovenian Trade Secrets Act.
RELEVANT AREAS OF LAW
Legal basis of Franchise Law
Franchise agreements are not codified in Slovenian law, and there is no official legal definition of “franchise”. In Slovenian legal theory, franchise agreements are considered as “agreements sui generis”, which may contain elements of various codified agreements (e.g., license, agency, sale and purchase, or lease agreements). Franchise law in Slovenia is primarily developed by Slovenian courts, which inter alia, decide in accordance with the principles of civil, commercial, and corporate law. However, jurisprudence regarding franchise agreements up till now is very scarce. Until now, the Slovenian courts upheld the content of franchise agreements, and have not found a respective clause to be null and void just because it was in favour of the franchisor. In 1998, the franchisors in Slovenia have established a Slovenian Franchise Association, which is a member of the European Franchise Federation and the World Franchise Council since 2001.
Slovenian legislation does not prescribe a specific legal form of incorporation for franchisees. However, in practice, franchisees most commonly operate under the formation of a limited liability company (“LLC”; družba z omejeno odgovornostjo (d.o.o.)). The formation of an LLC is quick and simple; an LLC can have one or multiple founders (which are not liable for the obligations of the company), the minimum amount of share capital is EUR 7,500, whereas the costs of incorporation are also reasonably low. Each shareholder must fulfil several conditions under Slovenian Companies Act (absence of criminal records for certain felonies, absence of records of unpaid tax obligations etc.), in order to be able to be registered as a shareholder.
As of 2020, the incorporation of LLCs by foreign natural persons or legal entities is also subject to a special interim legislation which regulates Foreign Direct Investments (“FDI”). The legislation represents a transposition of the EU FDI Regulation (2019/452). However, as opposed to the EU regulation, Slovenian legislation considers foreign investors as also investors from EU countries. Accordingly, an establishment of a subsidiary in Slovenia by an EU or third country person, as well as an acquiring of at least 10% share or voting rights in a Slovenian company, shall require notification of such investment to the Ministry of Economic Development and Technology, if such a foreign investment can have an impact on critical infrastructure in Slovenia. The Ministry then considers whether such an investment represents a threat to security and public order in Slovenia, and issues a decision on allowing or rejecting the foreign direct investment, or else (if the FDI does not affect Slovenian critical infrastructure) issues an opinion that a special decision is not necessary.
Consumer Protection Law
The relationship between a franchisor and franchisee is not considered as a consumer relationship, as the franchisees’ activity with respect to the franchise agreement is business-oriented. This stands true even if the franchisee is organized as an “independent contractor” (samostojni podjetnik), i.e., a natural person performing business activity. The rules of consumer protection law shall thus apply only in respect of the franchisee’s marketing and selling of products or services to consumers.
To enter into the franchise agreement, the franchisee shall be organized as a company or an independent contractor (samostojni podjetnik; natural person, registered for performance of business activities). Such set up means that the franchisee shall not be considered as an employee of the franchisor, nor shall the employees of the franchisee be considered as employees of the franchisor. Potential exception could exist only if the franchisee would not be organized as a company (e.g., LLC) but as an independent contractor, and who would act as an employee of the franchisor (they would be economically dependent from the franchisor, the franchisor would organize its business process, give mandatory instructions to the franchisee etc.).
Law on commercial agents
It is generally accepted in Slovenian legal theory that franchising agreements also contain some elements of agency agreements. However, there is no uniform position that provisions for agency agreements (which would include provisions of compensation upon termination of the franchise agreement, legally prescribed notice period for termination of agreement etc.) should be applied mutatis mutandis also for franchising agreements. This is also reflected in the currently existing Slovenian jurisprudence, which does not apply agency agreement provisions in the Code of Obligations to franchising agreements. In this respect, the Higher Court of Ljubljana has in the Judgement case no. I Cpg 119/2014 stated that the provisions on non-compete clauses, which are otherwise used for agency agreements, are not to be used for franchise agreements, but that general provision on contractual penalty shall apply instead.
AS a rule, the holder of the IP rights will be the franchisor, and the franchisee shall acquire a license to use such IP for the duration of the franchise agreement. In order for the franchisor’s IP to enjoy protection in Slovenia, the IP shall be registered with the Slovenian Intellectual Property Office (SIPO), or EUIPO or WIPO (with designation for Slovenia). The IP/license relationship between the franchisor and the franchisee shall entirely be regulated by the franchise agreement, whereas under the Slovenian law the license agreements must be concluded in written form.
SELECTED QUESTIONS / ASPECTS
There is no legal regulation on exactly which information need to be disclosed to the franchisee prior to signing the agreement. There are also no special guidelines by the Slovenian Franchise Association on the minimum information that need to be disclosed. Therefore, general provisions of the Code of Obligations shall apply. In this respect, the following provisions of the Code of Obligations are particularly relevant: (i) in order for an agreement to be concluded, the parties must agree on all important elements of the agreement; (ii) if parties believe that they have reached an agreement, but in reality there exists a misunderstanding on the nature, basis or subject of the agreement, it shall be deemed that the agreement was never concluded; (iii) participants in contractual relationships must obey principles of fair treatment and must avoid causing harm to one another; and (iv) if one party misleads the other party into concluding an agreement, the other party may demand rescission of the agreement. It stems from the above listed provisions, that both parties have a duty to disclose all information which they can expect the other party will consider relevant for the conclusion of the franchise agreement. In case this obligation is violated, the other party could demand the rescission of the agreement and reimbursement of incurred damages.
Parties to a franchise agreement may generally regulate their contractual relationship freely, as most of the provisions of the Slovenian Code of Obligations are dispositive (and can therefore be cordially amended). However, the parties to the franchise agreement are prohibited to act in contravention of the Slovenian Constitution, mandatory legal provisions, and moral principles. Failure to comply with any of the preceding, may render the agreement, or a respective contractual clause, null and void.
Slovene national legislation does not provide any direct antitrust/competition law restrictions in respect of franchise agreements. However, it should be noted that franchise agreements may contain certain provisions which would contravene Article 101 of the Treaty on the Functioning of the European Union (“TFEU”), which sets forth competition-law rules applying to undertakings and certain restriction in that respect. However, those restrictions may be declared inapplicable by specific “safe harbour rules” (e.g., Commission Regulation (EU) No 330/2010) which stipulates that Article 101 of the TFEU does not apply to vertical agreements, provided that both parties of the franchise agreement do not exceed 30% of the relevant market share, respectively (subject to additional conditions).
Law on general terms and conditions (“T&Cs”)
Most commonly, franchise agreements are concluded as reformulated agreements, so that all franchisees in different countries are bound by the same contractual obligations. However, pursuant to Slovenian Code of Obligations, any unclear provisions in such pre-prepared franchise agreements would be interpreted for the benefit of the franchisee, whereas any clauses which could be considered as significantly too harsh for the franchisee, could ultimately be declared null and void in judicial proceedings. Since franchise agreements are B2B agreements, the chance of a court declaring a contractual provision as being null and void based on it being too harsh on the other party, are significantly lessened. Generally, courts in Slovenia tend to uphold the content of franchise agreements, including those which are made for the benefit of the franchisor (e.g., the High Court of Ljubljana in the Judgement case no. I Cpg 119/2014 upheld the contractually agreed penalty of EUR 20,000 for respective violations of non-compete clause by the franchisee, for violations made after the termination of the franchise agreement).
Confidentiality clause is one of the most important part of the franchising agreement. The courts will uphold the confidentiality clauses in the franchising agreements, whereas during judicial review, courts also apply provisions of Slovene Trade Secrets Act, which are mostly mandatory (ius cogens). It shall be noted that, pursuant to the Slovenian Trade Secrets Act, trade secrets are information which (i) are not generally known to the relevant public; (ii) have a market value and (iii) the holder of a trade secret has taken appropriate measures to keep it a secret. The latter condition shall be fulfilled if the holder of the trade secret has designated the information as a trade secret in writing and has informed thereof all persons who come into contact with respective information (business partners, employees, etc.). To protect the confidentiality of the franchisor’s trade secrets, it is advisable that franchisors specifically determine which information is considered as trade secrets (e.g., in internally adopted Trade Secret Rules) and have all relevant persons sign a non-disclosure agreement. Such diligence offers franchisors remedies under the Trade Secrets Act, including requesting a cessation of violation, prohibition of distribution of goods which are subject of violation (both claims may also be accompanied by a claim for temporary injunction, to be issued before the final ruling), as well as claim contractual penalties and damages resulting from the breach.
As a general rule, any amendments to franchise agreements must be agreed upon by both parties to the agreement. The franchisor is entitled to amend the franchise agreement unilaterally only if the franchise agreement contains a clause to that effect. Should the franchisor use this clause to impose upon the franchisee disproportionately onerous obligations, such a clause could be found null and void in case of dispute (for more on this, see the section on General Terms and Conditions).
The parties to the agreement may always bilaterally agree on premature termination of a franchise agreement concluded for a definite or indefinite term. However, unilateral premature termination of agreement without cause is possible only if the franchise agreement contains a clause to that effect. Conversely, premature termination of agreement for cause (i.e., due to breach of contract) is possible also without a contractual clause, based on mandatory provisions of the Slovenian Code of Obligations. In this case, the terminating party must first issue a notice to the other party, in which it explains the breach and awards the other party a reasonable time to remedy the breach. If the breach is not remedied within the set time, the party may terminate the agreement with immediate effect. Premature unilateral termination of agreement results in both parties having to return what they have received, whereas in the case of a breach of contract, the terminating party may also claim damages from the wrongdoing party for the damage it sustained as a result of a breach.
Renewal and transfer
The parties to the franchise agreement may always bilaterally agree to renew an agreement. Since the franchise agreement usually contains elements of a license agreement, for which the Slovenian law requires a written form, also the renewal of the franchise agreement must be concluded in writing. With respect to transfer of the franchise agreement by one party to a third person, a general rule of the Code of Obligations is that a party may transfer an agreement to a third person only with consent by the other contractual party. Without a special clause to that effect, neither party shall be able to transfer (assign) the agreement to another person without the consent of the other party. The parties may, however, always agree differently in the franchise agreement itself.
DISPUTE RESOLUTION AND APPLICABLE LAW
Dispute resolution, court system In Slovenia, the court system consists of Local Courts (for cases in which the value of the dispute does not exceed EUR 20,000, and some special types of cases), District Courts (for cases in which the value of the dispute exceeds EUR 20,000, and some special types of cases, including all commercial disputes), Higher Courts (generally courts of appeal against decisions of local and district courts), and the Supreme Court (which can in some cases also review decisions of Higher Courts). The parties may agree upon the venue for dispute resolution (Slovenian courts or courts of another country). The parties may also opt for arbitration, which is in principle a much more flexible and timely manner of dispute resolution than proceedings before Slovenian courts. Arbitration proceedings in Slovenia are governed by the Arbitration Act, which sets out several ground rules for arbitration proceedings, and which also states that rulings in arbitration proceedings bear the same validity as final judicial decisions. In practice, more and more companies thus opt for an arbitration clause instead of a judicial clause, in their commercial agreements. The most common arbitration venue in Slovenia is the Permanent Arbitration before the Slovenian Chamber of Commerce.
Parties to the franchising agreement are, in principle, allowed to freely determine the law which will govern their contractual relationship. In case of judicial dispute, Slovenian courts or arbitral bodies would be obliged to apply provisions of said law. The only exception are rules which would contravene certain fundamental principles of Slovenian law and Slovenian legal system (the so called order public exception), as the courts and arbitration bodies can disregard such foreign-law rules.
In order to mitigate the impact of COVID-19 pandemic on commerce, Slovenia adopted several interim COVID-19 acts. The measures included, inter alia, state aids in the form of direct grants, tax and payment benefits, loan guarantees, wage subsidies (e.g., reimbursement of wage compensation to employees on temporary lay-off; reimbursement of paid salary compensation due to part-time work) etc. Some of the measures also included moratoriums on bank loans, and (in certain cases) moratoriums on lease payments. Namely, to help companies which were renting commercial real estate, and which could not use said real estate due to COVID-19 government measures, interim legislation provided for new rules with respect to such leases. The lessees were granted the possibility to unilaterally terminate the lease agreement, or else to request a deferral of payment of obligations under the lease agreement, as well as to demand the extension of a fixed-term lease. No special moratoriums were imposed on payment of franchise fees. In general, it was up to contractual parties to negotiate potential amendments to commercial agreements in the event that one party was harmed by the COVID-19 pandemic. Legal remedies, prescribed in the Slovenian Code of Obligations (such as demanding the rescission of contract based on changed circumstances etc.) proved to be very limited.
By Ana Kastelec and Lilit Zavašnik, Attorneys at Law, Deloitte Legal