Buying a franchise: checking non-compete clauses in Croatia

Before joining a franchise network, check not only what you are allowed to do under your chosen brand, but also which other business activities the agreement prohibits. A non-compete clause may cover your existing business, investment in another company or the launch of a new venture after the franchise relationship ends. Its real cost is therefore not just a potential contractual penalty, but also lost earning opportunities.

1. Establish which activities the restriction actually covers

A contractual clause prohibiting “direct or indirect involvement in a competing business” needs further clarification. Does it prohibit running a similar outlet, working for a competitor, advising one or holding a small stake in a company operating in a related field? These activities do not carry the same level of commercial risk, nor do restrictions on them have the same scope.

Ask the franchisor to link the restriction to clearly defined products or services. A phrase such as “all related activities” could lead to a dispute over a business you did not even consider to be a competitor when you signed.

Before negotiating, draw up a short list of:

• activities you already carry out through a sole trader business or company;
• ownership stakes and management roles you hold;
• other work you intend to continue;
• business plans you would like to pursue later.

For existing activities, request an explicit written exemption in the agreement or a schedule to it. Verbal assurances that a particular activity “is not a problem” are no substitute for contractual wording that reflects what has been agreed. Also check whether the obligation applies only to the franchisee company or whether its owners and other individuals must give separate undertakings.

2. Distinguish contractual restrictions from statutory rules

Croatia has no specific franchise law and no mandatory franchise-specific pre-contractual disclosure document with a prescribed deadline for delivery. The agreement is governed by the Croatian Obligations Act, including its general rules on contractual validity, good faith and fair dealing, and liability for breaches of obligations. Restrictions on competition should also be checked against the Croatian Competition Act and, where applicable, European Union rules.

Commission Regulation (EU) 2022/720 on the block exemption for certain categories of vertical agreements is particularly relevant. It is not a franchise law: it sets out the conditions under which certain agreements between businesses can benefit from an exemption from the prohibition on restrictive agreements. The basic conditions include market shares of no more than 30 per cent for each of the supplier and buyer, and the absence of certain hardcore restrictions of competition.

Five years is not a universal statutory maximum for every non-compete obligation. Under the regulation, obligations of indefinite duration or lasting more than five years generally fall outside the block exemption, subject to specific rules and exceptions. The absence of a block exemption does not automatically make a clause unlawful: an individual legal assessment may be necessary. In franchising, the justification for protecting transferred know-how and the franchise network’s common identity is also relevant.

Do not accept a claim that a clause is valid simply because it is standard for all franchisees. Ask a lawyer to assess its specific wording and commercial context.

3. Pay particular attention to the period after the agreement ends

A restriction during the franchise relationship is not the same as one that applies after it ends. In the latter case, you no longer benefit from the relationship, but your ability to work may still be restricted.

For a post-contractual non-compete obligation to qualify for the block exemption under Regulation 2022/720, all of the following strict conditions must be met: it must relate to competing goods or services, be limited to the premises and land from which the franchisee operated during the agreement, be indispensable to protecting transferred know-how, and last no longer than one year after the agreement ends.

A restriction on operating anywhere in Croatia for several years therefore warrants particular legal scrutiny. Do not automatically assume it is void, but equally do not assume it is permissible simply because you have signed it.

Review the obligation to protect trade secrets separately. Protection of know-how that has not become publicly available may last longer than the non-compete obligation. The expiry of one obligation therefore does not give you the right to use someone else’s confidential manuals, recipes or business procedures.

4. Negotiate precise limits and consequences

Ask for the agreement to specify separately the prohibited activities, the parties bound by the restriction, its geographical scope, its duration and when it begins. Also agree a procedure for obtaining written consent for an activity that might be disputed, including a deadline for the franchisor’s response.

Review the contractual penalty, how it is calculated and how it relates to any claim for damages. Vague wording allowing the penalty to be imposed repeatedly for each day, outlet or individual act is particularly risky. The possibility of a court reducing a disproportionately high penalty under the Croatian Obligations Act is no substitute for reaching a reasonable agreement before signing.

Also consider an exception if the agreement ends because of a serious breach by the franchisor. This protection should be expressly agreed, rather than assumed to arise automatically.

Practical takeaway: before buying a franchise, write down what you would like to do both during the franchise relationship and after it ends. Compare that list with the non-compete clause, and sign only once the exceptions, limits and financial consequences are clearly defined.