Contractual penalties in franchising: what to negotiate before buying

Before joining a franchise network, check not only the initial fee but also the financial consequences of breaching the terms of the relationship. A penalty for a late report, an unapproved advertisement or a delay in removing signage can become a significant liability. This guide explains how to assess contractual penalty clauses before buying a franchise in Poland and negotiate terms that protect the network’s standards without placing a disproportionate burden on your business.

1. Distinguish contractual penalties from other amounts payable

Under Polish law, a franchise agreement is an ‘innominate contract’: it is not a separately defined statutory type of contract. There is no dedicated statute comprehensively regulating franchising, nor any specific statutory obligation to provide prospective franchisees with a franchise disclosure document. The general provisions of the Polish Civil Code apply primarily, alongside rules on competition, intellectual property and unfair competition, depending on the issue. Voluntary codes of conduct do not replace legislation.

The key provisions governing penalties are Articles 483–484 of the Polish Civil Code. A contractual penalty may secure a non-monetary obligation against non-performance or improper performance. Examples include obligations to maintain confidentiality, submit reports or remove brand signage when the relationship ends.

By contrast, late payment of a franchise fee breaches a monetary obligation. The appropriate mechanism here is generally interest, rather than a contractual penalty. Simply calling a sanction an ‘administration fee’ does not establish that it is permissible — the substance and function of the clause matter.

When reviewing the draft agreement, mark penalties, interest, reimbursement of costs and damages separately. This will help you identify whether a single event triggers several different claims. The general principle of freedom of contract under Article 353¹ of the Polish Civil Code does not mean that every agreed clause is valid.

2. Check exactly what triggers the penalty

The greatest risk may lie not in the size of an individual penalty but in an unclear definition of the breach. A clause imposing a penalty for ‘any breach of standards’ could cover both a serious disclosure of know-how and a minor product display error.

For each penalty, answer five questions:

• Which obligation does it secure? The obligation should be identified specifically, rather than through a general reference to all the rules governing the relationship.
• Where is the breach defined? Check the appendices and operations manual too, particularly whether they can be changed unilaterally.
• How will it be established? Clarify whether the evidence will be an inspection report, a system log or another verifiable record.
• Can you remedy the breach? For minor errors, negotiate prior notice and a realistic period to put things right.
• Is the event within your control? Clarify the consequences of head office system failures, incorrect instructions or delivery delays on the franchisor’s side.

The scope of liability depends on the agreement and the general rules of law. Pay particular attention to clauses extending your liability to circumstances for which you would not normally be responsible. Do not assume that paying a penalty releases you from the underlying obligation: under Article 483 § 2, this is not possible without the creditor’s consent.

3. Calculate how penalties can accumulate and negotiate limits

Ask to work through a hypothetical case: a report does not reach head office because the system is down for several days. Is the penalty charged once, for each day, for each report, or separately for each outlet? Is an additional penalty charged for failing to comply with an instruction to submit the report?

This is not a profitability forecast but a test of how the liability provisions work. It helps reveal situations in which a seemingly small penalty can accumulate without a clear limit.

Focus your negotiations on:

• a cap on the penalty for a single event and an overall cap on penalties within a specified period;
• a prohibition on imposing multiple penalties for the same circumstances;
• clear start and end points for daily penalties;
• a distinction between minor, remediable failings and serious breaches;
• a procedure for raising objections before amounts are set off or security is enforced.

Also check for wording allowing ‘damages exceeding the amount of the penalty’. Under Article 484 § 1, such damages may be claimed if the parties have agreed to allow them. A cap on penalties alone may therefore not limit your total liability. Ask a lawyer to assess how penalties, damages, set-off rights and security arrangements interact, rather than examining each clause in isolation.

4. Do not rely on a court reducing the penalty as a fallback

Article 484 § 2 of the Polish Civil Code allows you to seek a reduction in a penalty if the obligation has been substantially performed or the penalty is grossly excessive. This is known as judicial reduction of a contractual penalty. It is not automatic, however, and does not guarantee any particular outcome in a dispute.

Importantly, the fact that the franchisor has suffered no loss does not, by itself, prevent it from claiming the penalty. It may, however, be relevant when assessing whether the penalty should be reduced. The argument that ‘head office has lost nothing’ is therefore no substitute for examining the grounds for imposing the penalty.

Before signing, agree how inspections will be documented, notices served and the remedying of breaches confirmed. Afterwards, retain fault reports, correspondence and inspection records. If you receive a demand for payment, check the obligation, the basis of liability, the calculation and the deadlines; do not ignore the demand simply because the amount seems excessive.

Practical takeaway: before buying a franchise, prepare a one-page table covering each breach, the penalty amount, how it is calculated, the time allowed to remedy the breach and the cap. If any field cannot be completed unambiguously, clarify the clause before signing the agreement.