An Unregulated Franchising Environment (updated October 2019)

NDV Law > Philippine Legal Advice > Philippine Legal Advice > An Unregulated Franchising Environment (updated October 2019)

Laws Governing Business Format Franchising

Many countries have laws that regulate commercial franchising, such as Vietnam, Australia, Indonesia, Japan, China, Taiwan, Malaysia, South Korea, and the United States, among others. Nevertheless, unlike most countries, the Philippines does not have a law specifically regulating commercial franchising.

Thus, franchising is governed by general laws of the land depending on the issue at hand. For example, provisions of the franchising contract are governed by the applicable sections of the Civil Code while the Intellectual Property Code will apply to issues on trademark. Accordingly, the applicable law will depend on the controversy or subject matter.

Lack of Specific Law in the Philippines for Business Format Franchising

The lack of a specific law regulating franchising has resulted in a liberal business environment and has contributed significantly to the thriving and flourishing of franchising in the Philippines. However, many issues crop up because of the absence of clear directives and unambiguous parameters. For example, save for existing laws on publicly listed shares, there is no law requiring disclosure on the end of the franchisor. More often than not, the franchisee has to rely on his own due diligence to determine the veracity of the franchisor’s claims.

Contrasted to Disclosure Rule in the United States

This is in sharp contrast to the Disclosure Rule in the United States whereby franchisors are required to provide prospective franchisees with detailed information on certain data such as financial history, list of existing franchisees and their contact information, history and business experience of the franchisor’s directors and executive officers, lawsuits or bankruptcies, a detailed description of the franchise being offered, how many franchises were sold during the past 3 years, a statement of inventory, equipment and real estate being provided, limitations on the franchise (such as geographic limits), renewal and termination provisions, copies of legal agreements between the franchisor and franchisee and other significant information. Such disclosure must be embodied in what they call a Franchise Disclosure Document.

In view of the lack of government regulation, it is advised that a prospective franchisee consult with a lawyer regarding these matters, to ensure that his dealings will be with legitimate and bona fide franchisors, and with not fly-by-night scams.

No Disclosure or Legal Requirement to Register Franchise Agreement

In the Philippines, there is no requirement to register a franchising agreement. A Technology Transfer Arrangement need not be registered with the Intellectual Property Office if it complies with the mandatory provisions and does not contain any of the prohibited clauses. On the other hand, some countries require that the franchise agreement be registered and oftentimes updated annually.

There is no requirement of prior operation or business history in the Philippines before one can start franchising. However, some countries like China require the franchisor or its affiliate to have operated at least two (2) company owned franchises in the country for at least twelve (12) months.

New Issuances of the Philippines’ Department of Trade and Industry

There are some relevant issuances of the Department of Trade and Industry (DTI) that were issued to address scams and fly-by-night commercial franchising operations. However, these still do not serve to fill the void in the lack of legislation.

For one, the DTI issued Bureau Order No. 10-24, series of 2010, with the title “Advisory on Due Diligence to be Undertaken by a Prospective Franchisee”. However, as the subject of the issuance states, it is merely an advisory, and compliance is merely suggested, but not mandatory. As a matter of fact, non-compliance is not met with and particular sanction in the issuance.

Bureau Order No. 10-24, series of 2010

Bureau Order No. 10-24, series of 2010 merely advises the prospective franchisee to ask disclosure information from the Franchisor, as follows:

  1. Business address, email address, internet home page/website, fax numbers and other contact details
  2. Copy of DTI or SEC Registration
  3. Parent companies and affiliates, if any, and their respective roles in the Franchise, and Franchisors declaration if any affiliate is a supplier and what they will supply.
  4. Names of the Board of Directors and officers with a brief description of their qualifications and background, ownership of interests and references
  5. The contact number and business location of existing Franchisees
  6. Executed promotional / marketing materials
  7. Description of the business concept, which includes brand image, brand personality, unique selling proposition, target market, mission and vision, among others
  8. Basic Information on training, commercial and /or technical assistance
  9. Certificate that the Franchisor is a member in good standing of any franchisor association and that the franchisor has no pending administrative, civil or criminal case.
  10. Declaration of the Initial Fee, amount that will be collected and services covering these fees.
  11. Training that will be provided, number of persons, how long and training modules
  12. Number of years company has operated and number of years it has franchised with corresponding numbers of company owned branches and franchised outlets.
  13.  Draft Franchise Agreement
  14. Full disclosure of the Financial requirements of the franchise business
  15. A provision that requires the franchise applicant to seek adequate legal and financial counsel before signing the Franchise Agreement
  16. Mechanism for dispute resolution

DTI Regulation Lacks Teeth

The DTI’s Bureau Order No. 10-24, series of 2010 simply lacks teeth, unlike the Franchise Disclosure Documents required by the Federal Trade Commission of the United States, for example, which must be complied with under pain of legal sanction.

Parenthetically, since there is no law specifically addressed at franchising, there is also no government agency charged with regulating the business of franchising in the Philippines. Perhaps, it is about time that Congress enact a law on franchising to protect the legitimate players in such thriving industry.

About Nicolas and De Vega Law Offices

Nicolas and De Vega Law Offices is a full-service law firm in the Philippines.  You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines.  You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected].

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