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 Serbia, covering the essentials for franchisors, the relevant areas of law, selected aspects such as fees, and dispute resolution and applicable law.
ESSENTIALS
about Serbia´s franchising law
- No specific regulation targeting franchising arrangements;
- Poor court practice due to which the subjects entering in franchising arrangements should consider some amount of legal uncertainty;
- Various examples of franchising arrangements in practice result in lack of adjusted and unified approach in resolving similar matters.
RELEVANT AREAS OF LAW
Legal basis of Franchise Law
In Serbia, there is neither a legal definition of “franchise”, nor a codified franchise law. Serbian “franchise law” is currently developing mostly through the commercial practice and in rare court decisions; its implications result from many different areas of law, especially civil, commercial and corporate law.
Corporate Law
The most common corporate form to set up business in Serbia is a limited liability company (“DOO” in Serbian). It is easy to set up by one or more people and requires a minimum capital of approximately EUR 1. The company is liable to the creditors with its property that is separate from the shareholders’ property as a rule. The formation costs for a limited liability company are not high. Notwithstanding specifics of some industries, Serbian corporate law does not impose any general restrictions on foreign operations in Serbia, nor on franchise systems in particular.
Consumer Protection
Law Under Serbian consumer protection law, individuals seeking to become franchisees would not qualify as consumers, as they would be operating a business venture. If the franchisee is an entity such as a limited liability company or entrepreneur, consumer protection rules are not applicable.
Employment Law
In case where an entrepreneur (natural person registered with the commercial registry) is performing franchise services for the legal entity and fulfils five (5) out of nine (9) criteria defined by the local law (so called “independence test”), this income which they receive as an entrepreneur will have a treatment of “other income” and would be subject to 20% tax and 25.5% social security contributions for pension and disability. This is paid in addition to the tax for independent activities and social security contributions for independent activities.
Law on commercial agents
There is no separate law on commercial agents in Serbia. However, similar concept of “commercial representation” exists in local law on contracts and torts, which is not often used in practice but may be confused for franchising arrangement due to unclear concept of the latter. Commercial representation contract is a type of contract by which the commercial agent undertakes to find third parties who would conclude a contract with their principal. Commercial agent may also be authorized to conclude a contract on behalf of their principal, provided that the principal undertakes to pay them a certain fee for each concluded contract. In one resolution of the Commercial Appellation Court from 2014, the court stated that if a contract that is named as “commercial representation contract” does not contain provision on mandatory commission but contains work instructions, information on training for presentation and sales, it should be considered as a complex contract such as franchising contract. Current court practice is not sufficiently developed in order to assess the relation between commercial representations as regulated concept and franchising as unregulated concept.
IP Law
Franchisors need to protect their IP against third parties´ attacks or imitations, especially by registering their trademarks—either as International Registration (“IR”) with the World Intellectual Property Organization (“WIPO”) or as national trademark in Serbia only with the Serbian Intellectual Property Office (“SIPO”). It is recommended to also carry out research beforehand in order to prevent the potential later loss of the trademark and corresponding claims for disclosure and damages.
Real Estate/Tenancy Law
Depending on the specific design of the franchise arrangement, legal implications may arise from real estate and tenancy law. In a structure where the franchisor (sub-) leases the locations to the franchisees, harmonizing the termination rights of the (sub-) leasing and the franchise is of essence.
SELECTED QUESTIONS/ASPECTS
Precontractual disclosure
Prior to signing a franchise agreement, franchisors and in a sub-franchising structure, master franchisees should inform each potential franchisee accurately and with reasonable advance about all circumstances recognizably relevant for the conclusion of the franchise agreement.
However, since the franchising relations are not recognized as a separate and independent legal institute in Serbia, there are no specific precontractual disclosure rules that would target franchising in particular. General rules regarding negotiations to conclude a contract, business secret, personal data and other applicable institutes need to be taken into consideration.
Legal restrictions
Antitrust/Competition Law Franchise agreements may contain restrictions that collide with local Competition Law and accompanying bylaws. Exemptions from the prohibition are possible under the local Vertical Block Exemption Rule (“V-BER”), provided that the respective parties to a franchise agreement do not have a market share of more than 25% each. The V-BER contains black clauses (“core restrictions”), rendering the entire agreement null and void, as well as grey clauses, rendering solely the specific provision in an agreement null and void. As a rule prescribed in the V-BER, exemption is possible for the franchising agreements. However, special attention should be paid to the black and grey clauses.
Franchise fees
Since there are no separate laws regulating franchising fees, general rules would apply. Among others, there is a statutory prescribed payment deadline of 60 calendar days that cannot be contractually changed in a way to be longer than 60 days between franchisor and franchisee. In addition, special note should be paid to the foreign exchange rules in Serbia since official currency in Serbia is Serbian Dinar (RSD) if the franchisor is a foreign entity.
Confidentiality
Confidentiality clauses in franchise agreements (often in combination with a contractual penalty) are enforceable as in other agreements i.e., there are no special rules for franchising agreements. The franchisor may file an interim injunction against an infringing franchisee, claim damages occurred due to the breach, and possibly terminate the franchise agreement extraordinarily.
Amendments
According to general rules from the law on contracts and torts, if the (franchise) agreement contains a precise and reasonable change reservation clause, considering the franchisees interests, unilateral amendments of the agreed terms by the franchisor may be admissible as an expression of the franchisor’s obligation to continuously develop its franchise system according to changing market conditions. Without a respective provision, amendments of the franchise agreement may only be agreed unanimously between franchisor and franchisee.Termination
Franchise agreements are usually entered into for a certain time and terminate with lapse of that time. A regular termination by one of the parties before that is not admissible, unless both parties unanimously agree upon the same. However, franchise agreements may be terminated by each party without notice if it is unreasonable for the terminating party to continue the contractual relationship until the agreed time of termination (good cause). If the cause for termination is a breach of a contractual obligation by the other party, e.g., non-payment of franchise fees, the termination is only admissible after having issued a warning to the franchisee to remedy the breach. Unjustified terminations by a franchisor might entitle the franchisee to claim damages. Neither party to the franchising agreement cannot terminate it because of the breach/non fulfilment of a small portion of the contractual obligation. In one old (second instance) commercial court decision, the court assessed that the franchise agreement was (dully) terminated, because the conditions for termination were met, since the franchisee did not perform the contract in the agreed manner. In this particular case, the “economic interest” was not satisfying as defined in the franchise agreement.
Renewal and transfer
Franchisors are free to decide whether or not to renew a franchise agreement. If they do so, renewals should be done explicitly and in writing. It is admissible to contractually restrict a franchisee´s ability to transfer its franchise, typically by requiring an explicit prior written approval of the franchisor.
DISPUTE RESOLUTION AND APPLICABLE LAW
Serbia has 1) basic court system for general disputes (basic court in first instance, high courts for high value cases, special subject cases and second instance in some cases, appellation court as second instance and supreme court as the highest court in the country), 2) commercial court system for disputes between commercial entities (commercial court as first instance, commercial appellation court as second instance and supreme court as the highest court in the country) and administrative court system for proceedings with the public entities such as ministries, agencies and similar public institutions depending on the specific subject matter (administrative proceeding with a specific administrative body as first instance, special body or ministry for the subject matter as second instance, administrative court and supreme court). In principle, it is admissible for the parties to a franchise agreement to agree on a choice of law to be applicable on their contractual relationship. In commercial relations i.e., excluding consumers, the parties may agree on the specific venue. It is also admissible to agree on arbitration as the exclusive way of resolving disputes between the parties, thus waiving the due process of law. This may be favourable, as the parties may choose the language of the proceedings and have influence on the arbitrators selected. Also, arbitration proceedings are, unlike proceedings before ordinary courts, not held in public. However, if the value in dispute is rather low, arbitration may often be too cost-intensive.
COVID-19
The COVID-19 pandemic has been having a huge impact especially on some sectors such as tourism and catering, including franchising in those sectors due to the government measures, especially shutting down public life to contain the pandemic. Some of the measures provided by the government aimed at mitigating the situation in the affected sectors did help but only up to a limited extent.
By Stefan Antonic and Igor Dencic, Independent Attorneys at Law, practicing in cooperation with Deloitte Legal