Publikacijos

SPECIFIC REGULATION OF FRANCHISING IN LITHUANIA

Law firm Bernotas & Dominas GLIMSTEDT
Lithuania
Until the adoption of the new Lithuanian Civil Code in 2000, franchising was
generally governed by a considerable number of laws and regulations, in addition to
those regulating contract, intellectual property and competition law, and no franchisespecific
regulation existed in Lithuania.
Nevertheless, some of the general laws and regulations specifically addressed certain
issues relevant to franchising; in particular, the Competition Law of 23 March 1999
and the former Block Exemption Regulation on the Application of Relevant Articles
of Competition Law to Categories of Vertical Agreements of 27 December 1999. Due
to the integration of the Republic of Lithuania into the European Union, local
competition laws and other relevant legislation have been harmonized with the
relevant EU competition laws and contain similar provisions.
To date, no pre-contractual disclosure legislation has been introduced in Lithuania,
while specific regulation of franchising as a dynamic approach to the market was
adopted on 18 July 2000. Provisions directly relating to franchising were introduced
in Chapter XXXVII, Vol. 6 of the new Civil Code of the Republic of Lithuania.
Notably, the provisions of the new Lithuanian Civil Code relating to franchising are
very similar to those stipulated in the Russian Civil Code, which was used as a model
when drafting the aforementioned chapter.
Since franchising was virtually non-existent in Lithuania until recently, and is fairly
uncommon even now, there remain both practical and theoretical questions as to how
the provisions of the new Lithuanian Civil Code (the ‘LCC’) will be applied and
interpreted by the courts.
The concept of the franchise agreement
Article 6.766 of the LCC defines a franchise agreement as a contract in which one
party (the rightholder) undertakes to grant the other party (the user), for a specified or
unspecified period of time, the right to use in the course of the user’s entrepreneurial
activity a complex of exclusive rights belonging to the rightholder (the right to use the
firm name, the trademark, the service mark, protected commercial information, and
the like), and in return the other party undertakes to pay remuneration as stipulated in
the contract.
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Although the LCC gives a definition of franchise agreements, it follows the pattern of
the Russian Civil Code where the parties to a franchise agreement are named as
rightholder and user rather than franchisor and franchisee – evidently a direct
reflection of its origins in Russian legislation.
As may be observed from the analysis of the concept of franchise agreements
determined in the LCC, this definition is rather ambiguous. On the one hand, a
franchisor, for instance, may not have any exclusive rights, but may simply have a
licence from any third party that owns exclusive rights, and that permits the
franchisor to use them; and therefore such relationships formally should not come
within the purview of the article in question. On the other hand, it might be possible
to argue that, where the exclusive rights do not belong to the franchisor, then a
particular franchise agreement may not be covered by the law because formally it is
not in line with the definition set forth in the LCC.
In fact, greater certainty as to the scope of the relevant article should arrive when the
official commentary to Volume 6 of the LCC is published by the drafters of the LCC,
or when relevant case law is established by the Lithuanian courts.
It is further provided in the LCC that franchise agreements shall provide for the use of
a complex of exclusive rights, and the business reputation and commercial expertise
of the franchisor to a specified extent (establishing the minimum or maximum method
or other form of use). Franchise agreements may also stipulate the territory for the
application of such exclusive rights, business reputation or commercial expertise, or
the field of entrepreneurial activity to which the relevant agreement shall be applied
(sales of goods, provision of services, etc).
Pre-contractual franchise disclosure
The LCC does not lay down any specific obligations for the franchisor in respect of
pre-contractual disclosure. It restricts itself to regulation of specific terms of the
franchise relationship only.
However, the following statutory regulation in connection with the pre-contractual
relationship is determined in the LCC:
(1) The parties must disclose to each other the information they have which is
of essential importance for the conclusion of a contract. In essence, this is
only a general provision, and no indication is given as to what specific
information must be disclosed before entering into a franchise agreement
and what specific disclosures a franchisor would have to make to a
prospective franchisee in order to permit the prospective franchisee to
make an informed decision as to acquiring the appropriate franchise.
(2) In the course of pre-contractual relationships, the parties must conduct
themselves in accordance with the requirements of good faith.
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(3) The parties shall be free to begin negotiations and to negotiate, and shall
not be subject to any liability in respect of failure to reach an agreement.
(4) A party who begins negotiations or negotiates in bad faith shall be liable
in damages for harm caused to the other party. It shall be considered as
being in bad faith for a party to enter into negotiations or continue them
without intending to reach an agreement with the other party; likewise any
other actions that do not conform with the requirements of good faith.
(5) Where in the course of negotiations one party furnishes the other with
confidential information, the party that has learned or received such
information shall be under a duty not to disclose it, or use it unlawfully for
his or her own purposes, irrespective of whether a contract is subsequently
concluded or not. Where breach of confidentiality occurs, the breaching
party is liable in damages in compensation for the harm suffered by the
aggrieved party. In such cases, the minimum amount of recoverable
damages equates to the monetary value of the benefit received.
Form and registration of franchise agreements
Article 6.767 of the LCC provides that franchise agreements must be concluded in
written form. Failure to observe this requirement invalidates the agreement.
The LCC then provides that franchise agreements may be used against third persons
only after having been registered, pursuant to the procedure established by law, in the
register of legal entities where the franchisor is registered. If the franchisor is
registered in a foreign state, the registration of the franchise agreement shall be made
in the register of legal entities that registered the franchisee.
This article also contains a provision relating to the effect of registration of a
franchise agreement. It stipulates that in relations with third persons the parties to the
franchise agreement may refer to the agreement only if it has been registered.
As distinct from the practice in some other jurisdictions, the Lithuanian Register of
Legal Entities is not a special Franchisors’ Register but a uniform state register of all
types (forms) of legal entities. Pursuant to the aforementioned requirement
established by the LCC, the following data relating to the facts of entry, amendment,
and termination of the franchise or sub-franchise agreements shall be registered with
the Lithuanian register:
(1) the dates of such entry, amendment, or termination;
(2) the data about the parties to the agreement; and
(3) the subject of the agreement.
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Both the application and the copy of the agreement or its amendments must be
submitted to the Register of Legal Entities. In this connection, it is important to note
that, pursuant to article 4 of the Law on Register of Legal Entities of 12 June 2001, all
data submitted to this register will be public and accessible in accordance with the
procedure established in Lithuanian law. There is much confusion over the nature of
such statutory provisions laid down by legislation, due to the lack of argumentation as
to why contractual information of a confidential nature should be made available to
the public.
Sub-franchise
Article 6.768 of the LCC attempts to legislate for sub-franchising techniques. It states
that franchise agreements may grant the franchisee the right to permit the use of the
complex of the exclusive rights granted to him or her – or the use of some of those
rights – by other persons on sub-franchise terms. The terms of the sub-franchise
agreement must be stipulated beforehand in the franchise agreement or agreed upon
with the franchisor at a later stage. The franchise agreement may also oblige the
franchisee to grant to other persons, for a specified period of time, the right to use the
exclusive rights on sub-franchise terms after conclusion of the agreement.
This article also stipulates that sub-franchise agreements may not be concluded for a
term longer than the term of the franchise agreement. Moreover, should the franchise
agreement be deemed invalid, the sub-franchise agreement shall also be deemed
invalid. It is further provided that if a franchise agreement concluded for a specified
term is terminated early, the rights and obligations of the franchisee under the subfranchise
agreement shall revert to the franchisor, provided that the latter consents to
assuming the rights and obligations under the sub-franchise agreement.
An article on the sub-franchise issue contains an additional provision imposing
subsidiary liability on the franchisor, on the part of the sub-franchisor, for the subfranchisee’s
acts. However, such liability may be excluded if the parties so agree in
the franchise agreement. This issue, of course, may give rise to the question of how
that could affect a third party who might make a claim without having knowledge of
the exclusion of liability. The main intention when drafting this provision, probably,
was to make a main franchisee liable to the franchisor for losses incurred as a result
of a sub-franchisee’s actions. The term subsidiary liability leads to these conclusions:
(1) the sub-franchisor is not liable unless the sub-franchisee has defaulted; and
(2) no joint and several liability in this respect is provided for in the LCC.
Royalties
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Article 6.769 of the LCC outlines how fees are to be arranged under the franchise
agreement. It provides that remuneration may be paid in the form of a fixed lump sum
and/or periodical payments, deductions from the franchisee’s proceeds, or in any
other form stipulated in the agreement. In this connection, the LCC confers the
possibility to use a combination of different methods of fee or remuneration payments
under the franchise agreement, which seem to be similar to those paid in transactions
of international franchising.
Franchisor’s obligations
Article 6.770 of the LCC defines the franchisor’s obligations, and provides a list of
obligations in this regard. These appear to be intended as minimum rather than
maximum requirements, although this is not specifically stated. It is provided that
franchisor is obliged to:
(1) transfer technical and commercial documentation to the franchisee, and
provide other information necessary for the franchisee to exercise the
rights granted to him or her under the franchise agreement, as well as
instruct the franchisee and his or her employees on all issues related to the
execution of granted rights; and
(2) issue the licences stipulated in the agreement to the franchisee and ensure
the formalization thereof in accordance with the established procedure.
In addition, unless provided otherwise by the franchise agreement, the franchisor
shall be obliged to:
(1) ensure the registration of the franchise agreement;
(2) render continuous technical and consultancy assistance to the franchisee
and assist in training his or her employees;
(3) supervise the quality of goods manufactured, work performed, or services
rendered by the franchisee in compliance with the franchise agreement.
In particular, it should be noted that many of the franchisor’s obligations under this
article must be met unless stipulated otherwise in the franchise agreement. From a
practical point of view, it is likely that in a number of cases there would be attempts
by the franchisor to contract out of certain of the obligations provided for in the LCC.
Franchisee’s obligations
Article 6.771 of the LCC provides a non-exhaustive list of the franchisee’s
obligations, all of which are common in franchise agreements. In particular, the
franchisee is obliged:
(1) to use the franchisor’s firm name, trademark, and service mark;
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(2) to ensure the proper quality of goods manufactured, work performed, or
services rendered;
(3) to observe the franchisor’s directions and instructions concerning the use
of rights, and the exterior and interior decoration of the commercial
premises used by the franchisee;
(4) to render to customers such additional services as they could reasonably
count on when purchasing goods or services directly from the franchisor;
(5) not to disclose the franchisor’s know-how or any other confidential
information received from him or her to other persons;
(6) to conclude a sub-franchise agreement, should the franchise agreement
stipulate this obligation;
(7) to inform customers by the means most obvious for them that he or she is
operating under the franchise agreement and using the franchisor’s firm
name, trademark, service mark or any other symbol that identifies the
franchisor.
Although these are listed obligations, it should be borne in mind that they should not
be interpreted as the minimum of obligations laid upon the franchisee, and that
obviously others could be added to the agreement if the parties so wished.
Limitations on stipulating certain terms
When drafting franchise agreements under the laws of Lithuania, or where the laws of
Lithuania are applicable to the agreement, the following general rules must be
observed, in the light of competition law. As is generally provided in the LCC, the
parties to the franchise agreement may stipulate in the agreement only such terms and
conditions restraining competition as are not prohibited by competition law. Although
it is subject to competition issues and virtually falls within the purview of competition
law, the LCC provides for some exceptions and includes a permissive list of
restrictions where the franchise agreement may stipulate various limitations on the
rights of the parties to the franchise agreement, and this will not be deemed as
restraining competition. Pursuant to article 6.772 of the LCC franchise agreements
may stipulate the following restraints:
(1) The franchisor’s obligation not to grant other persons similar complexes of
exclusive rights to be used in the territory assigned to the franchisee or to
desist from performing on his or her own account a similar activity in this
territory.
(2) The franchisee’s obligation not to compete against the franchisor in the
territory covered by the franchise agreement, with respect to the
entrepreneurial activity performed by the franchisee, by using the
exclusive rights belonging to the franchisor.
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(3) A prohibition imposed upon the franchisee to enter into franchise
agreements, involving similar rights, with the franchisor’s competitors
(potential competitors).
(4) The franchisee’s obligation to coordinate with the franchisor the location
of commercial premises defined in the agreement, as well as the exterior
and interior decoration thereof.
The article also contains a statement to the effect that where the terms of a franchise
agreement restrict the rights of the parties to that agreement, these may be deemed
invalid, upon the bases and procedure established by competition law, if they restrict
competition. In particular, it is provided that terms prohibited by competition law
shall be deemed void. Specifically, these are:
(1) terms that entitle the franchisor to fix prices or establish the minimum
level of such prices; and
(2) terms that entitle the franchisee to sell goods, perform work, or render
services exclusively to a specific group of customers or exclusively to
customers residing in the territory defined in the agreement.
The LCC provides that both these prohibitions are mandatory; and therefore such
terms, if included in an agreement, shall be automatically void. On the matter of fixed
prices, although prices cannot be fixed, it is clear that price recommendations are
permissible.
Franchisor’s liability for claims filed against franchisee
Article 6.773 of the LCC, which deals with this issue, provides that the franchisor
shall have subsidiary liability for claims filed against the franchisee in relation to lack
of conformity, in terms of quality, of the goods sold, work performed, or services
rendered by the franchisee under the franchise agreement. It also provides that, with
respect to claims filed against the franchisee as the manufacturer of the franchisor’s
products, the franchisor shall be held jointly and severally liable with the franchisee.
These provisions are somewhat controversial, since they render the franchisor liable
for the acts, deeds, and misdeeds of the franchisees.
Moreover, the franchisor’s liability issue gives rise to further questions in connection
with article 6.771 of the LCC (as already discussed) which contains one of the
obligations on the part of the franchisee and requires him or her to inform customers
that he or she is operating under a franchisee agreement and that customers are
dealing not with the franchisor, but with the franchisee.
There is also a question mark over whether or not an indemnity provided by the
franchisee to the franchisor, in the franchise agreement, against any claim which
might be made, would be legally valid. Most anticipate that interpretation of this issue
will depend on the official commentary to be published by the drafters of the LCC as
well as on appropriate case law established by the Lithuanian courts.
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Franchisee’s right to renew franchise agreement
The provisions of article 6.774 of the LCC appear much more questionable than those
of the article dealing with franchisor’s liability. This article provides that:
(1) the franchisee who has been properly performing his or her obligations
under the franchise agreement shall have the right on the expiry of the
term of the agreement to renew the agreement on the same terms and
conditions; and
(2) the franchisor shall have the right to refuse to renew the agreement,
provided that within three years after the end of the agreement term he or
she will not conclude with other persons a similar franchise agreement to
cover the same territory previously covered by the terminated agreement.
Should the franchisor, before the three year period is up, wish to grant to
another person the same rights as those granted to the franchisee under the
terminated agreement, he or she shall be obliged to offer the franchisee the
possibility to conclude a new agreement, or compensate the latter for
losses incurred. The new agreement must be concluded on terms no less
advantageous for the franchisee than those contained in the terminated
agreement.
In regulating franchise relationships, the LCC takes an unusual and rather impractical
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 or
her 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 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.
In this respect, some could argue that the franchisee is the weaker party and that
therefore the appropriate instruments providing for relevant protection have been
introduced in the legislation. However, it also has to be admitted that the drafters of
Chapter XXXVII, Vol. 6 of the LCC simply followed the model provided by the
Russian Civil Code, and stipulated the same provisions, without giving thorough
consideration to the question of what practice exists internationally to deal with such
cases.
Termination of franchise agreements
Article 6.775 of the LCC – which deals with termination of franchise agreements –
lays down certain rules and specifies certain events in respect of termination. It
provides that a franchise agreement must be terminated if:
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(1) the franchisor forfeits his or her rights to the firm name or trade (service)
mark and these rights remain unreplaced by new and similar rights; and
(2) bankruptcy proceedings are instituted against the franchisor or the
franchisee.
It also provides that where a franchise agreement is concluded for an unspecified
term, either party shall have the right to terminate the agreement on six months’
notice, unless the agreement stipulates a longer notice period. Termination of the
franchise agreement must be registered in accordance with the procedure prescribed
in the LCC (specifically, article 6.767, which has been already discussed).
Change of contractual parties
Article 6.777 of the LCC provides that should any of the exclusive rights which
constitute the object of the franchise agreement be transferred to another person, the
franchise agreement shall remain valid. The new franchisor shall become a party to
the franchise agreement in respect of the rights and obligations relating to the
exclusive rights transferred. It further provides that in the event of the franchisor’s or
franchisee’s death, his or her rights and obligations under the franchise agreement
shall be transferred to his or her heir, provided the latter is an entrepreneur and
continues or undertakes a entrepreneurial activity within six months of the date of the
inheritance. Otherwise, the agreement shall be terminated. The performance of the
rights and obligations of the deceased franchisor under the agreement until the heir
has assumed the inheritance and has undertaken an entrepreneurial activity shall be
carried out by an administrator of the assets appointed by the court.
Consequences of changes in franchisor’s trademark and termination of exclusive
right
Articles 6.778 and 6.779 of the LCC provide that should the franchisor’s firm name
or trademark which constitutes the object of the franchise agreement change, the
franchise agreement shall remain valid with respect to the franchisor’s new firm name
or trade (service) mark, unless the franchisee demands termination of the agreement
and compensation in respect of losses. Should the agreement remain in force, the
franchisee shall have the right to demand a commensurate decrease of remuneration
due to the franchisor, unless the agreement provides otherwise.
It is further provided that should the term of an exclusive right which constitutes the
object of the franchise agreement expire, or should such right terminate on any other
grounds, the franchise agreement shall remain valid, save for the provisions relating
to the terminated right, while the franchisee, unless the agreement provides otherwise,
shall have the right to demand a commensurate decrease of remuneration due to the
franchisor. This provision also appears questionable, because it is rather difficult to
see how in practice the contract could survive the loss of exclusive rights, since such
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rights are essential to the franchisee. It is highly probable that without these rights the
franchisee would never have entered into the agreement at all.
The article also stipulates that unless the franchisee demands the termination of the
agreement and compensation of losses, in the event of expiration of exclusive right,
the franchise agreement must be re-registered.
The Lithuanian model of franchise regulation
As regards the domestic regulation of franchising, research shows that the states
which introduced legislation on franchising, adopted either:
(1) disclosure legislation, limited to regulation of the information that a franchisor
must provide to a prospective franchisee in order to permit the prospective
franchisee to make an informed decision as to whether or not to acquire the
franchise; or
(2) legislation known as relationship laws regulating specific terms of the
franchise relationship (such as renewal and termination of the franchise
agreement, registration requirements, limitation of liability, etc).
Since no disclosure legislation has yet been introduced in Lithuania, the adoption of
the new LCC containing so-called relationship provisions has placed the Republic of
Lithuania in the second category of states that attempt to regulate franchising by
specific statutory laws.
In the meantime, since very little franchising occurs in Lithuania at present, a number
of questions arise regarding the manner in which the provisions of the LCC
specifically regulating franchise relationship will be applied in practice.

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