Territorial protection in franchising: rules for Croatia

Before bringing the first franchisee into your existing business, decide exactly what you are promising when you refer to ‘their territory’. The right to operate one outlet is not the same as the exclusive right to develop an entire city. Within a franchise network, clearly defined territorial protection reduces misunderstandings, makes investment planning easier and leaves room for sustainable growth. It should therefore be designed before negotiations begin, not left until the agreement is signed.

1. First, define what territorial protection covers

A territorial clause should answer a specific question: which activities does the franchisor promise not to carry out, or authorise another partner to carry out, within a defined area?

For example, the agreement might state that the franchisor will neither open a company-owned outlet nor approve a new franchised outlet in that territory. That promise alone does not mean the franchisee receives all online orders from customers in the area, or the right to supply every business customer based there.

Before drafting the agreement, draw up a list of sales channels:

• permanent outlets and points of sale;
• online shops and orders placed through apps;
• deliveries and services at customers’ premises;
• temporary stalls, trade fairs and events;
• contracts with customers operating across multiple locations.

For each channel, record who manages it and whether it falls within the scope of protection. If you wish to retain direct sales to certain customers, describe the exception precisely enough for the franchisee to assess its impact on their business. The phrase ‘the franchisor’s special customers’, without further explanation, leaves too much room for different interpretations.

2. Set boundaries using data, not impressions

Do not allocate a territory simply because a candidate asks for an entire Croatian county or because a city seems large enough. Start with actual purchasing patterns in the existing business: where customers come from, how far they are willing to travel, where reliable delivery can be arranged and how seasonal the market is.

Distinguish between the contractually protected territory and the service area. A franchisee may have a protected territory for opening outlets while also accepting permitted orders from outside it. Conversely, being able to deliver to an address does not necessarily mean having exclusive rights to customers there.

Set out the boundaries in a schedule to the agreement, using a map and a description that make them unambiguous. Administrative boundaries, a list of towns and villages, or clearly specified streets are often easier to understand than a vague expression such as ‘the wider urban area’. If you use distance from an outlet, specify how it is measured.

Check borderline cases too: a shopping centre near the boundary, an outlet relocation or a new residential development. The agreement should explain how these situations will be handled, without assuming that the franchisor can unilaterally change protection already promised.

3. Ensure protection complies with competition law

Croatia has neither a dedicated law comprehensively regulating franchising nor a specific statutory regime requiring pre-contractual disclosure for franchises. Contractual relationships are governed by the Croatian Civil Obligations Act, while territorial restrictions fall particularly under the Competition Act. Where the conditions for applying European Union law are met, Article 101 of the Treaty on the Functioning of the European Union and Commission Regulation (EU) 2022/720 on the block exemption for vertical agreements are also relevant.

In practice, it is important to distinguish active sales, such as targeted approaches to particular customers or territories, from passive sales, meaning responses to unsolicited customer requests. Different rules apply to each. Restrictions on active sales may be permitted under certain conditions, whereas restrictions on passive sales are generally particularly problematic, subject to specified exceptions.

Do not therefore automatically include a clause stating that a franchisee ‘must not sell to anyone outside their territory’. Nor is online selling simply a separate territory: the general availability of an online shop and targeted online advertising may be treated differently under the law.

A lawyer should review the draft against the actual sales model, market shares and the substance of the restrictions. Simply labelling an agreement a ‘franchise’ does not exempt it from competition law.

4. Address territory development and day-to-day situations

If you grant a franchisee a larger territory in which to open several outlets, link the development rights to clearly agreed obligations. Specify deadlines, the process for verifying performance and the consequences of failing to meet those obligations. Distinguish protection for an existing outlet from rights to future locations.

Rather than including a vague right to withdraw territory for ‘poor performance’, agree objective criteria and a reasonable procedure for issuing warnings and remedying shortcomings. The consequences may include loss of the exclusive right to further development, but they must be clearly agreed and legally reviewed.

Prepare a few examples covering day-to-day operations: a customer orders from another city, a company requests services for several branches, or delivery areas overlap. Specify who receives the enquiry, who provides the service and how revenue and costs are allocated. These rules must be consistent with the agreement and must not introduce prohibited sales restrictions by the back door.

Practical takeaway: before offering your first franchise, prepare a territory map, a list of the channels covered and a few borderline examples. Only turn these into a promise of territorial protection once they have undergone commercial and legal review.