The franchise system – a new challenge for Romania

Dumitru Matiş[1], Răzvan Mustaţă1, Sorin Achim1

Abstract. A system that represents a partnership between distinct parts, due to develop the same business, but with the financial capital of both partners, based on the conditions conjunctly established and as a consequence of a selection process, reflected in a specific contract, represent the new success in business. For a new marketplace, that wants to become integrant part of the Common European Market, the franchise system is the strategy through which significant names of European firms will freely conquer. A franchise system will constitute the success of an autochthon capital invested in a low risk business, but especially the success of foreign companies. The development of a business in a franchise system it’s a challenge for Romania and also an opportunity for the economy to be improved. We’ll see if the Romanian companies will be able to take advantage of this opportunity to impose the system and the chances to better develop.

1The Conceptual Approach of the Franchise System

The conceptual delimitation of the franchise makes up the subject (matter) of many studies, but we appreciate that such a scientific measure should be realized considering the context of the economical environment where it’s proved this form of a business achievement.

Starting from this meaning in the following ideas we’ll try attempt a conceptual delimitation of the franchise system taking into consideration the Romanian context of the business environment.

The franchise represents a system of unrolling of a business based on contractual relationship between two partners, out of which one supplies to the other the know-how gained along with unrolling his business and the beneficiary brings his contribution through human and financial efforts to the business development and the gaining of his supplier, as well as to his individual profits. This system where a juridical person disposes to another one, a juridical person or natural person, his knowledge, his mark, his image, being the beneficiary of the advantages of somebody else’s business consequences, knowing a fast and ample word-wide evolution, to this global economy belongs the franchise system, with its pluralist structure and the marketplace globalization tendencies, that has mainly behaved in the distribution and services fields. It is undeniably the fact that the franchise system is in full expansion on the global marketplace and its development perspectives are difficult to evaluate.

We can say that the franchise system represents a partnership between distinct parts, which will together develop a business in certain conditions established on the base of a contract, both parts having a lot to gain. The partnership is usually established after a well-determined selection process, through which one of the partners chooses his future business partner. This practice means that the business offered by the franchise system is carefully entrusted for development to a natural or juridical person.

The national franchise legislation defines this concept, as well as the terms that interfere in the unrolling of this economical process. The Government Ordinance no. 52/1997 states that the franchise is “a system of commercializing the products, the services and the technologies, based on a closed collaboration between the physical and juridical persons, independent from the financial point of view, through which a person, called franchisor, gives to another one, called beneficiary, the right to explore a business, a product or a service”. The Law no. 79/1998, through which the Ordinance no. 52/1997 is modified and approved, the definition given to the franchise is modified and completed in the following way: ”The franchise is a commercializing system based on a continuous collaboration between natural and juridical persons, independent from a financial point of view, through which a person, called franchisor, gives to another one, called beneficiary the right to explore or develop a business, a product, a technology or a service”.

We consider that the definition of this concept given by the national legislation is defective because it ignores a series of terms or elements used in the franchise business practice. We could mention the fact that the beneficiary of the franchise is called franchisee, that does not refer to the mark or know-how and franchisor assistance terms, and the right to explore a business through the simple fact that exploring a business is accomplished, in normal conditions, through its development.

The franchisor is defined by the laws in force [1] as a dealer that is the titular of the rights of a trademark, and the rights have to be carried out on duration at least equal to the franchise period contract. The dealer assures the right to exploit or develop a business, an article, a technology or a service, assures to the beneficiary an initial training for exploiting the trade mark, using, in a personal manner, financial means for promoting its mark, for research and innovation, that assures the developing and stability of the product. The beneficiary is a dealer, a natural or a juridical person, selected by the franchisor that adheres to the homogeneity principle of the franchise system, as it is defined by the franchisors.

The Romanian Fiscal Code [2] retakes the definition of the franchise belonging to the Ordinance no. 52/1998, republished, and mentions that for the right of using the franchise, a sum of money has to be paid down. Inside this act, the know-how concept is mentioned as being considered information with respect to an industrial trading or scientific experience, necessary for a product or for applying an existent process whose exposure to other persons is not allowed without the authorization of the person in question. According to it, the know-how represents exactly what a producer can’t know by simply checking over the product or the simple get in touch with the technology.

After analyzing the elements that define the concepts presented above we claim that the franchise represents a system through which a business can be reeled off a business of distribution, of services attendance, of production or “business format”, with an individual or master character, between a franchisor and one or more franchisees, based on contractual intercourse following a selection process, based on a tight collaboration between partners – natural or juridical person, financially independent -, and which presumption to deliver by the franchisor - in return of franchise taxes - of trade mark and know-how, giving to any type of assistance and training anticipated in the contract, on the partnership continuance, in order to help the business and the franchise network develop.

As it could be ascertained out of this definition, an absolutely needed and incontestable element is the contract concluded between business partners. This element, called a franchise contract, can be considered an assurance and a proof of the partnership acceded between a franchisor and a franchiser, but also a legally support for the economical operations implied by the franchise system process. In the following part, we will analyze the main elements of such a contract.

2The Legal Policy of the Franchise System in Romania

In Romania, the franchise regulations date from 1997, and it bears subsequently modifications. The first prescriptive act is represented by the Government Ordinance no. 52 from 28.08.1997, regarding the juridical franchise policy published in O.M. no. 224 from 30.08.1997. This ordinance readjusts the franchise system in Romania, defining the terms franchise, franchisor, franchisee, appointee franchise, know-how, franchise network, pre-contractual and contractual franchise, relationships between franchise partners, publicity and partners’ selection, sanction and transgression. The ordinance in charged was debated by the Romanian Parliament and adopted through the Law 79 from 9.04.1997 published in OHM. No. 147/13.04.1998. By adopting this law, certain articles from No. 52 Ordinance have been totally abrogated and some pre-contractual and post-contractual relationships have been eliminated. Reaching this way a restatement and restructuring of the national franchise legislation. The new regulations have taken the shape of some directives in the franchise system, with the possibility of new amendment. This way the legislation according to which the Romanian franchise system works, is foreseen by the Government Ordinance No. 52/ 1997 – regarding the juridical franchise system, republished conforming the foresight of 79/1997 Law and renumbered, published in O.M. no. 180 from 14.05.1998.

Within this supporting document, we recommend the association of the two terms “beneficiary” and “franchisee”, frequently used in practicing this area of action. The franchisee can be a legal person or a juridical one distinctively designating by a franchisor, which will contribute to the development of everything franchise implies. The rights of the franchisee are determined (assigned) unitary and distinctively without any interpretations. The Romanian pulse shaper should include in its regulations, definitions of assistance concepts, given by franchisor; the term of the contract is established such that it allows the franchiser the amortization specific to the franchise in time getting, in minimal or maximal limits. Regarding the non-competing clauses, there have to be specified the limits and the context in which the franchisee can take advantage of the know-how, gained along the franchise rotary peeling.

The Romanian Fiscal Code specifies and defines the franchise term and the know-how inside the common terms definitions (art 7, cap III) and in the royalty concept delimitation it states the equivalence with any sum of money paid in cash or in nature, for the right of using an concession, invention, innovation, license, commercial brand, franchise, project or any know-how.

According to the competing regulations, the franchise contract has to be subdued to the Council of Concurrency. The parts of the contract have to complete a notification formulary and to dispose to the Council of Concurrency before passing to the contract’s execution. The Council should conclude that the contract is plead from applying the competition law [3]. Although a simple formality, the franchisors can be surcharged if we are talking about a great concurrence on a certain market. The Council of Concurrency, in the virtue of concurrency law, could declare important franchise – such as Petrom or LukOil [4] - illegal.

Unfortunately we have to agree that the legislative reality from Romania in the matter of franchise regulation doesn’t correspond to the current needs of regulation, and because of this we consider that the part of the economic entities that develop their activities in a franchise system should be that one of also determining the Romanian state to operate the changes that are necessary in the national legislation regarding the regulation of the franchise system.

3The Franchise Contract

The operations in the franchise system develop based on a contract closed between two parts that interact between them, mainly under economical aspect. The aim and necessity of such a contract’s existence is obvious and normal according to the economical trade rules.

The literature in the field of study tried to include the franchise contract in a certain category of existing contracts, of the mixed ones, of the distribution ones, because they represent elements specific to more types of contracts.

We consider that, the assembly of implied actions in the franchise system has to unreel in the base of a distinct contract - the franchise contract. According to the legal regulations, the natural and juridical person has the right to make a contract by specifying the domain of action. The elements and the mandatory parts have to be presented inside of a contract with the specification of each field of action. Although it becomes rather difficult the exact establishment of a contract’s parts, therefore the laws in force present principles and rules for making such a contract, not exactly, stringent and mandatory parts are to be included inside the contract.

The laws in force mention that a franchise contract has to reflect the interests of the franchise members system, protecting the attribute of intellectual and industrial rights of franchisor, using all the possible manners, but especially the affordable practices. Through the franchise contract, the franchisor’s and the franchisee’s commitments and responsibilities have to be univocal assigned. Most of the times, the franchise contract is represented as a predefined form, which is done by the franchisor who proposes to the franchisee. It is recommended that this contract constitute a first draught of the franchise contract, as being concluded or between the parts, at the transaction moment.

According to the literature [5] the franchise contract is made up of four distinct main parts: preamble, franchisor’s commitment, franchisee’s commitment and other regulation. Inside these parts, all the principles include the rights and commitments of contractual partners, as well as the elements defining the relationship between the two franchise partners. Some other references details the elements mentioned above pointing to the contact of the franchise system including: the contract object, the field of action, taxes and know-how, publicity, assurance, rights to control, reciprocal information.

We consider that a franchise contract should have in its structure a series of distinct elements that could offer the possibility of a clear, correct image over the way of developing the activities imposed by its existence. We propose the following structure for a franchise contract:

I. THE CONTRACTUAL PARTS

It covers the information due to identify the franchise partners, the franchisor and the franchisee as well.

II. THE CONTRACT OBJECT

This part refers to the terminology and the concepts used in the contract, the field of action, the products or services that make up the franchise system, the way of deploying the activity, as well as any other components considered useful for an optimal running of the business.

III. THE OBLIGATIONS AND THE RIGHTS OF THE CONTRACTING PARTS

From both, the franchisor’s and the franchisee’s points of view there have to be exactly mentioned all the owned rights and obligations. Aspects such as royalty, taxes collected by the franchisor, the ways of paying the financial obligations, the deadline payments, the guaranties presented by the franchisee or any other aspects can be mentioned as well.

IV. THE CONTRACT’S PERIOD

V. NON-COMPETTION AND CONFIDENTIALITY CLAUSE

Inside this part of the contract, all aspects’ notification is imposed: issues regarding the professional secret, the confidentiality of information sent by the franchisor, how such a system should work and to maintain the franchisor’s principle of non-competition. We consider necessary such an existence of a contract’s part in order to assure a good development of the business and for protecting the other partners.

VI. SPECIAL SITUATIONS

We can consider special situations such as: contract’s cancellation, the transfer and other contractual rights, litigations of any kind, instances for solving conflicts and litigations. If the two implied parts conclude, there can be some other clauses of the contract having the same cognation.

VII. OTHER CLAUSES considered by both, the franchisor and franchisee, but which can’t be included in the parts, mentioned above.

VIII. FINAL DISPOSITIONS, followed by the date of the contract’s concluding and the authorized signatures.

It is up to the parts in charge to establish if there exists the possibility of introducing some other parts distinct from the ones existent in the franchise contract.

The Romanian legislation in the franchise terms states that any franchise contract should contain the following clauses: the object of the contract, the rights and commitments of each part implied alongside with the financial conventions, the course, the severance and the extension of the contract [6].

4The Franchise Activity in Romania

In Romania, the activity in the franchise field is at its beginnings but we can consider that it has already begun and the start is significant.

The representative of Chamber of Commerce and Industry of Romania and Bucharest (CCIRB) declared that „After questioning about 100 firms, we conclude that the Romanian market is at its very beginning regarding the franchise concept and the legislation in force (only 10% from the ones questioned are acquainted with the legal plan of the franchise, and almost 80% have a medium knowledge or a null knowledge regarding the franchise concept). The important thing is that exists an interest for this field (over 90% out of the ones completing the questionnaire given by us wish to gain information about the franchise system, over 75% want consultancy and over 80% wish to achieve a franchise)”[7].

One of the national organisms that develop activities in the franchise field is indeed CCIRB, which offers consulting, as well as useful information for the economic entities which are involved in doing business in franchise system. CCIRB organized a series of events in the franchise field, amongst them:

-«Spanish Franchise Market» – December 3rd-4th 2003,

-«Contacts exchange» as part of the International Investments Forum, October 15 2004, that had as the main focus, the meeting of the Romanian companies with investors in the projects and with franchisers in different fields.

-«Economic mission organized by CCIRB at the International Franchise Fair in Paris », March 18 – 21 2005.