Franchise in Latvia
Successful business model or brand may be leased to another party for period of time; this practice is regarded as franchising. For lessor, otherwise known as franchiser, franchising opens an opportunity to increase the notoriety of the brand and also gain extra revenues, while the lessee (franchisee) gains the access to know-how and exclusive rights without having to invest in development of business concept and recognition of brand. The contract of franchise and obligations of both parties have specific regulation in Latvian Commercial law which is provided in this article.
Concept of franchise
Under a contract of franchise, one party which is called franchiser undertakes to grant to the other party (franchisee) the right to use in the business activity of the franchisee a complex of exclusive rights which belong to the franchiser (right to the brand name, right to the trade or service mark, right to protected commercial information, etc.), while the other party shall be obliged to pay for that the remuneration determined in the contract. Franchise agreement has to be concluded in written form.
Remuneration under a contract of franchise
Remuneration of franchise usually consists of two parts, lump sum- that have to be paid to receive right to use franchise, and monthly payment for usage of franchise. Amount of monthly payment is determined in franchise contract.
Responsibilities of Franchisor
Franchisor is obligated by law to perform certain activities before conclusion of contract, during time of contract and after termination of contract according to Commercial Law and regulations of franchise agreement:
- Before conclusion of franchise agreement franchisor have to provide franchisee with- general information and characterization of franchise, evidence of existence of included rights in franchise and know-how, term of contract and opportunities to extend contract, amount of remuneration and order of payments, other information that franchisor considers as important;
- Guarantee that rights to use intellectual property are in force during whole contract period;
- Cooperate with and support franchisee during term of franchise agreement;
- Train franchisee and give him commercial and technical support in accounting, logistics, deliveries and management of business;
- Provide with all documents (instructions, permits, license and other materials) necessary to use franchise according to franchise agreement;
- Ensure that delivery of products is in time, if goods have to be purchased from specific supplier;
- Perform promotional activities to ensure recognition and good name of company in public.
Obligations of Franchisee
- Inform franchisor with topical and true information about conditions that have significant importance in conclusion of franchise agreement;
- Use franchise according to franchise contract, respecting and operating like franchisor, without causing any harm to franchisors name;
- Protect and do not expose commercial secret of company in time of contract and also 5 years after termination of contract;
- Allow franchisor to check work of franchisee in place of business in time of regular business hours.
Consequences of Franchise agreement
- Both parties have to act according to concluded contract;
- It is possible to unliterary cancel contract, if performance of obligations have become too difficult or false information was given before conclusion of contract;
- If performance of obligations of contract have become too difficult, because of objective changes in circumstances, parties have right to debate over changes in terms or terminate contract;
- If it is not possible to agree on new terms of contract within one month, each party have right to ask court to terminate contract or change terms of contract, dividing proportionally gains and losses of parties.
Commercial law also determines Limitation of competition
- Agreement to limit professional activities of Franchisee after termination of contract have to be concluded in written form;
- Limitation of competition can not extend period of one year;
- Franchisor have to pay for period of limitation of competition according to concluded contract, if Franchise agreement was terminated because of fault of Franchisee then no compensation should be paid.
Franchise is beneficial for both parties. Franchisor gains extra revenues and by franchising it is possible to expand business in more countries in this way strengthening global recognition and increasing value of brand. But franchisee receives opportunity to use already established and proved business model, thus significantly increasing chances to succeed. Time and resources don’t have to be spent on making business model and brand recognition.
Eduards Dzintars, lawyer of the Gencs Valters Law Firm in Riga.
Practising in fields of Franchises and Franchising Law in Latvia, Lithuania and Estonia.
T: +371 67 24 00 90
F: +371 67 24 00 91