16th Apr 2013

Franchise Business Concept

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.

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. 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.

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.

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.

Let us help you. For further inquiries, you may seek legal assistance by e-mailing us at info@ndvlaw.com.

Nicolas & 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 4706126, +632 4706130, +632 4016392.

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