Territorial Rights in Franchise Agreements in Croatia

When expanding an existing business into a franchise network, it is not enough to promise a prospective partner ‘their own city’. You need to define precisely what the territory covers, whether the franchisor may operate there and how online orders will be handled. Well-defined territorial rights protect the franchisee’s investment while allowing the network to grow and complying with competition law.

1. Separate the premises from territorial protection

The right to open an outlet at a particular address is not the same as an exclusive right to operate across a wider area. The agreement should therefore address the approved location, the territory covered by any protection and the precise scope of that protection separately.

Before drafting the agreement, answer four questions:

• Can the franchisor open its own outlet in the territory?
• Can it appoint another franchisee there?
• Does the protection cover all products and services included in the agreement, or only a particular outlet format?
• Are specific sales channels, such as sales to large corporate customers, excluded from the protection?

State any exceptions explicitly. For example, protection for a high-street outlet need not cover an airport outlet, but the prospective franchisee must understand that exclusion before accepting the terms.

Do not promise blanket ‘exclusivity’ if you intend to retain your own sales in the same territory. Set out the franchisor’s specific obligations rather than relying on a label that each party may interpret differently.

2. Base boundaries on demand, not just the map

A city’s administrative boundary may be convenient, but it may not reflect an outlet’s actual catchment area. For services delivered at customers’ premises, travel time and team capacity matter; for retail, accessibility, shopping habits and existing outlets are important.

Use data from your own business: where customers come from, how often they buy, where delivery costs arise and which areas you can serve effectively. Use aggregated data wherever possible, without unnecessarily sharing customers’ personal data.

Define the territory in a schedule to the agreement using both a map and a written description. Specify which takes precedence if they conflict. If you use postcodes or administrative boundaries, also set out what happens if these change.

Avoid automatic territorial expansion based on vague wording such as ‘surrounding settlements’. Instead, make future expansion subject to written agreement and a capacity assessment. This prevents the first partner from inadvertently acquiring rights that could later block the development of the entire franchise network.

3. Check the Croatian and EU legal framework

Croatia has no specific franchise law. A franchise agreement is an innominate contract governed by the general provisions of the Croatian Civil Obligations Act. Territorial restrictions are subject in particular to the Croatian Competition Act and, where an agreement may affect trade between EU Member States, Article 101 of the Treaty on the Functioning of the European Union.

Commission Regulation (EU) 2022/720 provides a block exemption for certain vertical agreements. Its application depends on conditions including the parties’ market shares and the nature of the restrictions. Simply labelling an arrangement a ‘franchise’ does not make every contractual prohibition lawful.

An important distinction is between active sales, such as targeted approaches to customers in a particular territory, and passive sales, such as responding to an unsolicited customer enquiry. Certain restrictions on active sales may be permitted within a properly structured exclusive distribution system. Bans on passive sales are generally particularly problematic, subject to specified exceptions.

Do not therefore draft a clause stating that the franchisee ‘must not sell to anyone outside its territory’ without specialist advice. Ask a competition law specialist to assess the provision’s actual effect. There is no general obligation to notify every franchise agreement to the Croatian Competition Agency; historical references to such notification should not be treated as a current requirement.

4. Agree how online orders will work in advance

A shared website may receive orders from across Croatia. Territorial protection must therefore align with the arrangements for allocating enquiries, fulfilling orders and supporting customers.

For each type of order, specify:

• who is the seller and issues the invoice;
• who delivers the goods or provides the service;
• how enquiries from the shared website are allocated;
• who handles complaints and returns;
• how the associated revenue and costs are allocated.

Distinguish between the internal allocation of enquiries and a ban on independent sales. For example, forwarding an enquiry to the nearest available outlet is an organisational matter, but prohibiting the acceptance of an unsolicited enquiry from a customer in another city may raise concerns about an unlawful restriction on passive sales.

Pay particular attention to the rules on online advertising. Do not turn territorial protection into a ban on the effective use of the internet for selling.

5. Agree a process for changes and resolving overlaps

A territory with sufficient capacity today may need an additional outlet tomorrow. If you link protection to the franchisee’s performance, define the criteria, assessment method, improvement period and possible consequences in advance. Avoid giving the franchisor the right to change boundaries arbitrarily.

Also establish a process for disputes: who receives the complaint, what information they review and how soon they must provide a reasoned response. Before changing boundaries, assess the impact on the partner’s existing investment and record the agreement in a written addendum to the contract.

Practical takeaway: before offering your first franchise, prepare a territory map, a list of exceptions and rules for online orders. Then submit these, together with the agreement, for legal review. Clear territorial rules build trust within the franchise network.