LEGAL ASPECT OF FRANCHISING

(Marlon Arcellano, Kevin Mark Ferreria, & Ryan Panganiban)

The Franchising Contract (Franchise Agreement)

A Franchise Contact is:

- A written contract or agreement which details the rights and obligations of the
franchisor and the franchisee.
- By which a Franchisor grants the Franchisee the right to engage in the business of
offering, selling or distributing goods or services under a marketing plan, system,
concept, for a certain consideration.
- Unless otherwise provided, said right includes the use of a trademark, service mark,
trade name, business name, logo-type advertising, or other commercial symbols
associated with a particular business.

Philippines Franchising Law

1. There is no currently specific law on Franchising.
2. Contact law thus applies since franchising is essentially an agreement.
3. Intellectual Property Law applies to provisions on technology transfer arrangements.
4. The Department of Trade and Industry (DTI) has issued DTI Bureau Order No. 2010-14
advising the public about franchising agreements.

Key Principles of Contract

Contract Law
Principle of Autonomy- allows the parties to freely stipulate to whatever terms and conditions
provided they are not contrary to law, morals, good customs, public policy or public order.

Principle of Relatively- binds only those who entered into the agreement and cannot favor and
prejudice a third person, even if he is aware of such contract and has acted with knowledge
thereof.

Principle of Adhesion- penalizes the one cause the ambiguity in the contract and thus
interpretation will be against such party.

Principle of Mutuality- binds both contracting parties with its validity or compliance not solely to
the will of one of them.

Intellectual Property Law

Technological Transfer Arrangements refer to the “contracts or agreements involving the
transfer of systematic knowledge for the manufacture of a product, the application of a process,
or rendering of a service including management contracts; and the transfer, assignment of
licensing of computer software except computer software developed for mass market.”

So long as the requirements on technology Transfer Arrangement under the intellectual

Property Code are met, the franchising agreement will depend on the contractual agreement
between the franchisor and the Franchisee. There is no standard Franchising agreement as
contents therein will depend on the commercial terms of the transaction and legal provisions
that the parties will agree on.
The following is prohibited in technology transfer arrangement

1. Those which impose upon the licensee the obligation to acquire from a specific source
capital goods, intermediate products, raw materials, and other technologies, or of
permanently employing personnel indicated by the licensor;
2. Those pursuant to which the licensee reserves the right to fix the sale or resale prices of
the products manufactured on the basis of the license;
3. Those that contain restrictions regarding the volume and structure of production;
4. Those that prohibit the use of competitive technologies in a non-exclusive technology
transfer arrangement;
5. Those that establish full or partial purchase option in favor of the licensor;
6. Those that obligate the licensee to transfer for free to the licensor the inventions or
improvements that may be obtained through the use of the licensed technology;
7. Those that require payment of royalties to the owners of patents for patents which are
not used;
8. Those that prohibit the licensee to export the licensed product unless justified for the
protection of the legitimate interest of the licensor such as exports to countries where
exclusive licenses to manufacture and/or distribute the licensed product(s) have already
been granted;
9. Those which restrict the use of the technology supplied after the expiration of the
technology transfer arrangement, except in cases of early termination of the technology
transfer arrangement due to reason(s) attributable to the licensee;
10. Those which require payments for patents and other industrial property rights
after their expiration or termination of the technology transfer arrangement;
11. Those which require that the technology recipient shall not contest the validity of
any of the patents of the technology supplier;
12. Those which restrict the research and development activities of the licensee
designed to absorb and adapt the transferred technology to local conditions or to initiate
research and development programs in connection with new products, processes or
equipment;
13. Those which prevent the licensee from adapting the imported technology to local
conditions, or introducing innovation to it, as long as it does not impair the standards
prescribed by the licensor; and
14. Those which exempt the licensor from liability for non-fulfillment of his
responsibilities under the technology transfer arrangement and/or liability arising from
third party suits brought about by the use of the licensed product or the licensed
technology.

What is included in the Franchise Agreement?

 Terms of Agreement – The Franchise Agreement carries a contract explanation detailing

the type of relationship a franchisee is entering into with the franchisor
 Renewal – Renewal period grants the franchisor the chance to review the Franchise
Agreement thus enabling him to decide whether to renew the agreement or not.
 Investment Amount and Fees – This part of the Franchise Agreement explains the total
investment cost and its inclusions, as well as the date a franchisor is to be paid.
  Franchise fees – The initial franchise fee, which may be non-refundable, is paid at the
start of a franchise relationship thus giving the franchisee the right to engage in the
business using the franchisor’s name and business system.
 Royalties – Royalties are usually a percentage of the franchisee’s sales and are typically
paid weekly, biweekly or monthly.
 Marketing contribution – System-wide marketing contributions are also based on the
percentage of franchisee’s sales.
 Training and Support – The FA should state the kind of training and support the
franchisor will provide.
 Purchase of Products – Products and supplies used in the franchise system should
maintain consistency. Hence the Franchise Agreement specifies that the franchisee may
only buy from suppliers accredited by the franchisor. A detailed list of approved suppliers
is also provided in the Operations Manual.
 Territory– The Territory determines the geographical boundaries a franchisee may
operate, or within which no other unit of the franchisor’s businesses may compete.
 Termination – The Franchise Agreement carries in it the grounds for termination of the
contract.

Franchise disclosure document

A franchise disclosure document (FDD) is a legal document which is presented to

prospective buyers of franchises in the pre-sale disclosure process in the United States. It was
originally known as the Uniform Franchise Offering Circular (UFOC) (or uniform franchise
disclosure document), prior to revisions made by the Federal Trade Commission in July 2007.
Franchisors were given until July 1, 2008 to comply with the changes.

The Federal Trade Commission Rule of 1979 which governs disclosure of essential information
in the sale of franchises to the public underlies the state FDD's and prohibits any private right of
action for the violation of the mandated disclosure provisions of the FDDs. Therefore, the FDD
implies that only the federal government or the state governments have the right to sue and
negotiate consent decrees and rescissions with those franchisors who violate the provisions of
the FTC Franchise Rule. However, various state franchise laws that provide for use of an FDD,
in lieu of their own disclosure requirements, may create private rights of action, where a
franchisor has violated its disclosure obligations in its FDD.

The Franchise Rule specifies FDD disclosure compliance obligations as to who must be the one
to prepare the disclosures, who must furnish them to prospective franchisees, how franchisees
receive the disclosures, and how long franchisees must have to review the disclosures and any
revisions to the standard franchise agreement. The FDD underlies the franchise agreement (the
formal sales contract) between the parties at the time the contract is formally signed. This
franchise sales contract governs the long-term relationship – the terms of which generally range
from five to twenty years. The contracts cannot generally be changed unless there is agreement
of both parties
Franchise Disclosure Requirements

Bureau Order No. 10-24 Series of 2010 (Advisory on Due Diligence to be Undertaken by a
Prospective Franchisee) advises potential franchisees to require the franchisor to obtain the
following information:

 Franchisor's business address, e-mail address, internet home page or website, fax
numbers and other contact details.
 Copy of the franchisor's registration with the Department of Trade and Industry (DTI) or
Securities and Exchange Commission (SEC).
 Parent companies and affiliates, if any, and their respective roles in the franchise, and
franchisor's declaration on whether any affiliate is a supplier and what they will supply.
 Names of the members of the board of directors and officers, with a brief description of
their qualifications and background, ownership interests and references.
 Contact numbers and business locations of existing franchisees.
 Executed promotional/marketing materials.
 Description of the business concept, which includes brand image, brand personality,
unique selling proposition, target market, mission and vision.
 Basic information on training, commercial and/or technical assistance.
 Certificate attesting that the franchisor:
1. is a member in good standing of any franchisor association; and
2. has no pending administrative, civil or criminal cases against it.
 Initial fee amount that will be collected, and services covered by these fees.
 Training that will be provided, including number of persons trained, duration and training
modules.
 Number of years the franchisor company has been in operation and number of years it has
franchised the business, with corresponding numbers of company-owned branches and
franchised outlets.
 Draft franchise agreement.
 Full disclosure of the financial requirements of the franchise business.
 Whether there is a requirement on the franchise applicant to seek adequate legal and
financial counsel before signing the franchise agreement.
 Mechanism for dispute resolution.
Franchisees are also advised to consult any of the following:

 A franchisor association.
 The SEC.
 The DTI or the nearest DTI regional/provincial office.
 A certified franchise executive.
 A franchise consultant.
Laws Regulating Franchising in the Philippines

Franchise agreements are regulated by the applicable provisions of the:

 Intellectual Property Code (IPC).

 Civil Code.
 Corporation Code.
 Relevant special laws.

IPC

 Franchise agreements are categorized as Technology Transfer Arrangements (TTAs)

 Sections 87 and 88 of the IPC list the prohibited clauses and mandatory provisions of
technology transfer agreements.
 Sections 87 and 88 of the IPC are intended to prevent unfair competition and trade.
 The prohibited provisions are deemed prima facie to have an adverse effect on competition
and trade.
Civil Code

 The Civil Code contains the general law on contracts and human relations.
 Franchise agreements are subject to the general provisions of the Civil Code governing
obligations and contracts.
 Contracts between a franchisor and franchisee are also subject to the rules on
interpretation of contracts.
 Actions for remedies for breach, damages or recovery relating to franchise agreements are
treated as regular civil actions.
Corporation Code

 The Corporation Code sets out the requirements for registering a business in the
Philippines.
 A foreign corporation must apply to the Securities and Exchange Commission (SEC) for a
license to transact business in the Philippines.
 A foreign corporation that intends to conduct franchising operations in the Philippines has
the followings options:
1. Enter into a franchising agreement with an existing local entity.
2. Establish an entirely new corporation under Philippine laws.
Special laws

 Retail Trade and Liberalization Act prevents them from owning or wholly owning a business
below a certain amount of paid-up capital.
 The Foreign Investment Negative List and the Foreign Investments Act set out restrictions
and prohibitions on foreign investors in relation to the sectors they can invest in and how
much they can invest.