Franchise instructions: who bears the risk of decisions?

When you join a franchise network, you remain an independent business owner, although the franchisor may issue operating instructions. A mandatory change to opening hours, a new workflow or an urgent product withdrawal can directly affect your costs and liability. Before buying a franchise, it is therefore worth understanding not only which instructions you must follow, but also how you can raise concerns and who bears the consequences of a disputed decision.

1. Understand the Hungarian legal framework for issuing instructions

Hungary has no standalone, comprehensive franchise law, but that does not mean franchise agreements are unregulated. Act V of 2013 on the Civil Code specifically recognises franchise agreements. The Civil Code’s general rules on contracts, co-operation and damages are also important. Nor can a franchisor’s instructions override occupational health and safety, consumer protection or food safety requirements applicable to your business.

Under the Civil Code’s franchise provisions, the franchisor’s right to issue instructions serves to protect the reputation of the network and the products and services produced or sold. This does not give the franchisor unlimited authority to take over any business decision from you. Check the draft agreement to see which matters may be subject to binding instructions, for what purposes and through which procedures.

An ill-advised instruction is not the same as an unlawful one. If an instruction is inappropriate or technically unsound, the Civil Code requires you to warn the franchisor. If the franchisor nevertheless maintains the instruction, you must follow it; under the statutory rule, the franchisor is liable for the resulting loss. However, you must refuse to comply if doing so would breach legislation or a decision by a public authority, or endanger other people or their property.

Have a lawyer review these rules alongside the agreement as a whole. It is particularly important to understand how limitations of liability or contractual provisions that depart from the statutory rules affect your position. Fear of a business loss does not, in itself, give you a general right to refuse an instruction.

2. Specify what counts as a binding instruction

In day-to-day operations, the distinction between a recommendation, a request from an area manager and a mandatory head-office requirement can easily become blurred. If their status is unclear, a later dispute may also arise over whether you made an independent decision or carried out the franchisor’s instruction.

Before signing, ask for clear answers to the following:

• Who is authorised to issue binding instructions on the franchisor’s behalf?
• Which platform or contact address counts as an official communication channel?
• How are recommendations distinguished from binding instructions?
• When does a change take effect, and how much preparation time is allowed?
• Who can you contact if two head-office instructions contradict each other?

Also ask for urgent verbal instructions to be confirmed in writing afterwards. A written record protects both parties: it sets out the content, the deadline and any local exceptions. This is not merely administration; it could be important evidence in a later liability dispute.

It is also worth asking to see anonymised examples of previous operating instructions. These can show whether decision-making within the franchise network is genuinely predictable, or whether franchisees are regularly forced to adapt at a moment’s notice.

3. Put a workable procedure in place for raising warnings

A promise to ‘let us know if there is a problem’ is not enough. The agreement or agreed procedure should specify whom you can send a warning to, who decides how to respond, and what happens while you are waiting for an answer. Raising an objection does not necessarily suspend your obligation to comply; this needs to be clarified separately.

Suppose head office requires longer opening hours, but local evening trade is low. Rather than simply saying the change is too expensive, set out the expected additional staff hours, wage costs and utility expenses, together with the available sales data. Suggest a trial period or a local exception, and ask for written confirmation of whether the instruction still stands.

The situation is different if, for example, an operating requirement puts workplace safety at risk. Here, it is not enough to raise a financial objection or wait for tacit approval. Document the specific danger, report it without delay and involve an appropriate specialist where necessary. The fact that head office requested something in writing does not make unlawful or dangerous conduct lawful.

4. Check who bears losses and how you can prove a claim

The franchisor’s statutory liability does not mean that every additional expense will automatically be reimbursed without dispute. Relevant factors may include what the franchisor required, what you warned them about, whether they maintained the instruction, and whether you can prove a link between the decision and your loss.

Check whether the agreement contains a cap on damages, exclusions for certain types of loss, a short deadline for notifying claims or a specific dispute resolution procedure. Do not assess their legal effect in isolation: ask a lawyer for focused advice on how they would operate where a franchisor maintains an ill-advised instruction despite a warning.

During operations, keep supporting financial documents, working-time records and correspondence relating to the instruction separately identifiable. Remember to take reasonable steps to mitigate your loss: document the alternatives you proposed and what you did to reduce avoidable losses. The allocation of liability between you and the franchisor does not, in itself, release you from your obligations towards customers, employees or public authorities.

Practical takeaway: before signing, ask for clear procedures for issuing instructions, raising warnings and handling claims for losses. A well-run franchise network provides not only consistent operating standards, but also a structured way to flag local risks.