Buying a Franchise: Checking Penalty Clauses

Buying a franchise involves more than assessing the initial fee and ongoing payments. A penalty clause can create an additional financial burden if a specific contractual obligation is breached. In franchising, clear consequences for a breach support a good working relationship; vague or disproportionate charges create uncertainty. Before signing, you need to know not only the amount of each penalty, but also when it is triggered, how it is calculated and whether it can be claimed alongside other sums.

1. Identify every penalty clause, not just those in the relevant section

A penalty clause is an agreement to pay a sum of money or provide some other form of performance if an obligation is not fulfilled, or is not fulfilled properly. It is not the same as a penalty imposed by a public authority. It is a contractual mechanism whose application depends on the terms of the agreement and the law.

In a draft agreement, it may appear as ‘agreed damages’, a ‘breach charge’ or a ‘daily charge’. The label alone does not determine its legal classification. Ask your lawyer to examine how each provision operates, including those in schedules and any other documents incorporated into the agreement.

Create a table with four columns:

• The obligation secured by the clause.
• The event that triggers the charge.
• The amount or calculation method.
• Any period allowed to remedy the breach and any cap on charges.

For example, submitting an operating report late is not the same as ceasing to operate the outlet. If both attract the same charge, ask for an explanation and an assessment of whether it is proportionate. Do not settle for an assurance that ‘the clause is not enforced in practice’.

2. Understand the Greek legal framework

Greece has no specific law providing a comprehensive framework for franchise agreements. The general provisions of the Greek Civil Code on contracts and obligations apply, alongside other rules depending on the subject matter of the agreement. There is no specific mandatory pre-contractual disclosure document, nor a statutory minimum review period before signing a franchise agreement. You should therefore agree sufficient time to review the documents.

Penalty clauses are governed by Articles 404 onwards of the Civil Code. Article 409 is particularly important: at the debtor’s request, a court may reduce a disproportionately high penalty to an appropriate amount. Any agreement to the contrary is invalid.

This does not mean that every high penalty is automatically invalid, or that a franchisee can unilaterally decide how much to pay. A court must assess the circumstances before reducing a penalty, and this is no substitute for negotiating before signing.

Articles 197–198 also govern good faith in negotiations, Article 288 governs the performance of obligations in accordance with good faith, and Article 281 prohibits the abusive exercise of a right. These rules require legal assessment on a case-by-case basis; they do not provide a blanket exemption from unfavourable terms.

3. Calculate your total exposure from a single incident

The greatest financial risk may come not from one penalty, but from repeated or cumulative charges. A charge per day, per outlet or per breach needs to be assessed differently from a one-off amount.

Work through a hypothetical incident in writing: a mandatory report is submitted late, and the problem continues until a technical fault is resolved. Ask:

• Is this a single breach, or a new breach each day?
• When does the charge start and stop accruing?
• Is there an overall cap?
• Who documents the breach, and what evidence must they provide?
• Can interest, damages or other charges apply at the same time?

Whether a penalty can be claimed alongside performance of the obligation or additional damages depends on its nature, the agreement and the applicable legal provisions. Ask for a specific legal answer rather than simply adding up every amount mentioned. Then discuss with your accountant what the potential liability would mean for the business’s cash flow.

4. Negotiate a procedure before penalties are imposed

A workable clause should make it possible to establish clearly what happened. Ask for written notice describing the breach, identifying the specific obligation and explaining how the amount claimed has been calculated.

For breaches that can be remedied, propose a reasonable period to put matters right before the penalty is triggered. This is a matter for negotiation, not an automatic entitlement in every case. Also ask for a distinction between first and repeated breaches, clear treatment of incidents for which you are not responsible, and provisions to avoid multiple charges for the same event.

Finally, check whether the franchisor can recover a disputed amount directly from a guarantee or other security. The ability to challenge a charge later does not necessarily prevent immediate pressure on cash flow.

Practical takeaway: before signing, ask for a legally reviewed table of penalty clauses and a worked example for each one. If you cannot explain when you will be charged, how much and under what procedure, the clause needs clarification.