Franchise negotiations: who pays the pre-contract costs?

Before an established business takes on its first franchisee, both sides start investing time and money in meetings, location assessments, advice and preparations for opening. Problems arise when talks end without an agreement. When building a franchise network, it is worth setting the ground rules for these preparations in advance. The aim is not to make it harder to withdraw, but to allocate risk clearly and avoid expenditure based solely on verbal assurances.

1. Separate negotiations from a commitment to work together

Poland has no standalone statute comprehensively regulating franchising. A franchise agreement is an ‘unnamed contract’ — one not specifically defined by statute — entered into under the principle of freedom of contract set out in Article 353¹ of the Polish Civil Code. Depending on the scope of the relationship, rules on competition protection, unfair competition and intellectual property may also apply. The negotiations themselves are governed by general civil law principles.

There is no general statutory deadline specific to franchising for providing a disclosure document before the agreement is signed. Descriptions of proposed regulations, including a requirement to provide documents fourteen days in advance, should not be presented as current law. However, the absence of such a requirement does not mean that parties can conduct negotiations as they please.

Article 72 § 2 of the Polish Civil Code is important here. A party that starts or conducts negotiations contrary to good practice, particularly without intending to conclude an agreement, may be liable for losses incurred because the other party expected an agreement to be reached. This does not mean automatic liability whenever someone withdraws, nor does it guarantee compensation for profits from an outlet that never opened.

Before the first discussions, therefore, establish who within the business can approve prospective franchisees, commission paid preparatory work and make legally binding commitments. An employee presenting the opportunity should not promise that an opening is certain if the decision still depends on an assessment of funding or the location.

2. Draw up a table of costs and approval points

Rather than relying on a general statement that ‘each party bears its own costs’, list the specific activities involved. That principle can be a starting point, but it does not explain how to handle design work commissioned by head office for a particular prospective franchisee.

For each activity, record:

• who commissions it and who contracts with the supplier;
• who pays and whether the cost estimate needs prior approval;
• the scope of the work and how completion will be confirmed;
• who receives the output, such as a design or report;
• what happens to the cost if negotiations end.

In practice, deal separately with travel to meetings, legal advice, location assessments, layout concepts and bespoke orders for the proposed outlet. Do not assume that a prospective franchisee’s attendance at a meeting amounts to consent to a paid service.

Introduce a rule that any expenditure to be reimbursed by the other party must be approved in advance, in an agreed form. The approval should specify the scope and amount, or how that amount will be calculated. Ideally, it should also explain whether the order can be cancelled and what cancellation would cost.

Do not wait until talks have ended to present your internal partner recruitment costs as a debt owed by the prospective franchisee. If a particular assessment carries a charge, they should know this before it is commissioned.

3. Clarify letters of intent and reservation payments

A letter of intent can set out the timetable and scope of negotiations, but its title does not determine its legal effect. It may contain binding obligations, for example on confidentiality, costs or a temporary period of exclusive negotiations. Depending on its wording, it may also be treated as a preliminary agreement obliging the parties to enter into the final contract.

Clearly identify which provisions are binding and which merely describe intentions. If you do not yet wish to commit to entering into a franchise agreement, the document should consistently reflect that position. Simply adding the label ‘non-binding’ will not resolve contradictory commitments elsewhere in the text.

Payments to reserve a franchise opportunity require particular care. Specify exactly what is being reserved, for how long, and what the franchisor must refrain from doing during that period. Also agree the rules on refunds, deductions for agreed costs and any credit towards future payments.

Do not use advance payment (zaliczka), earnest money (zadatek) and reservation fee (opłata rezerwacyjna) interchangeably. Under Article 394 of the Polish Civil Code, zadatek has specific legal consequences unless the parties agree otherwise. Before accepting money, it is worth asking a lawyer to check the legal nature of the payment and the circumstances in which it may be retained.

4. Plan how to end negotiations without unnecessary losses

Set decision points: an initial assessment of the prospective franchisee, confirmation of funding, a location assessment and a decision to proceed to signing the agreement. At each stage, specify which preparations may begin. The harder it is to reverse an expenditure commitment, the firmer the prior confirmation from both parties should be.

If an obstacle makes the relationship impossible, communicate this without undue delay. Do not encourage the prospective franchisee to make further purchases once the business has decided not to proceed. Keep records of agreed arrangements, cost estimates and approvals; documentation helps establish which expenses were actually agreed.

When talks end, prepare a brief closing statement covering completed work, outstanding payments, refunds and orders that need to be cancelled. Keep this separate from obligations that continue, such as confidentiality.

Practical takeaway: before a prospective franchisee incurs their first significant cost, agree who approves it, who pays and what happens if either side withdraws. One clear table of preparatory activities is better than a later dispute over what a promise to open an outlet actually meant.