LEGAL CONSIDERATIONS IN FRANCHISING 2.

Royalties - Royalties are usually a percentage of

the franchisee's sales and are typically paid weekly,
The Franchising Contract (Franchise Agreement) biweekly or monthly.
3. Marketing contribution - System-wide marketing
A Franchise Contact is: contributions are also based on the percentage of
-legal document which details the rights and franchisee's sales.
obligations of the franchisor and the franchisee. Training and Support - The FA should state the kind
- A written contract or agreement which details the rights of training and support the franchisor will provide.
and obligations of the franchisor and the franchisee. Purchase of Products - Products and supplies used in
- By which a Franchisor grants the Franchisee the right to the franchise system should maintain consistency.
engage in the business of offering, selling or distributing Hence the Franchise Agreement specifies that the
goods or services under a marketing plan, system, franchisee may only buy from suppliers accredited
concept, for a certain consideration.
by the franchisor. A detailed list of approved
-Unless otherwise provided, said right includes the use of a
trademark, service mark, trade name, business name, suppliers is also provided in the Operations Manual.
logo-type advertising, or other commercial symbols Territory -The Territory determines the geographical
associated with a particular business. boundaries a franchisee may operate, or within
which no other unit of the franchisor's businesses
may compete.
• Department of Trade and Industry Termination - The Franchise Agreement carries in it
the grounds for termination of the contract.
(DTI)'s Advisory on Due Diligence to be Undertaken
by a Prospective Franchisee defines a franchise Franchise Disclosure Requirements
agreement as a written contract or agreement Bureau Order No. 10-24 Series of 2010 (Advisory on
between two or more parties by which a franchisor Due Diligence to be Undertaken by a Prospective
grants the franchisee the right to engage in the Franchisee) advises potential franchisees to require
business of offering, selling, or distributing goods or the franchisor to obtain the following information:
services under a marketing plan, system or concept,
for a certain consideration. Unless otherwise Franchisor's business address, e-mail address,
provided, this right includes the use of a trade mark, internet home page or website, fax numbers and
service mark, trade name/business name, know- other contact details.
how, logo-type advertising, or other commercial
symbols associated with a particular business. • Copy of the franchisor's registration with the
Department of Trade and Industry (DTI) or Securities
What is included in the Franchise Agreement? and Exchange Commission (SEC). Parent companies
and affiliates, if any, and their respective roles in the
Terms of Agreement - The Franchise Agreement franchise, and franchisor's declaration on whether
carries a contract explanation detailing the type of any affiliate is a supplier and what they will supply.
relationship a franchisee is entering into with the • Names of the members of the board of directors
franchisor. and officers, with a brief description of their
Renewal - Renewal period grants the franchisor the qualifications and background, ownership interests
chance to review the Franchise Agreement thus and references.
enabling him to decide whether to renew the • Contact numbers and business locations of existing
agreement or not. franchisees.
Investment Amount and Fees - This part of the
Franchise Agreement explains the total investment Executed promotional/marketing materials.
cost and its inclusions, as well as the date a
franchisor is to be paid Description of the business concept, which includes
1. Franchise fees -The initial franchise fee, which brand image, brand personality, unique selling
may be non-refundable, is paid at the start of a proposition, target market, mission and vision. Basic
franchise relationship thus giving the franchisee the information on training, commercial and/or
right to engage in the business using the franchisor's technical assistance. Certificate attesting that the
name and business system. franchisor:
 1. is a member in good standing of any franchisor -Franchise agreements are subject to the general
association; and provisions of the Civil Code governing obligations
2. has no pending administrative, civil or criminal and contracts.
cases against it. Contracts between a franchisor and franchisee are
also subject to the rules on interpretation of
Initial fee amount that will be collected, and services contracts. Actions for remedies for breach, damages
covered by these fees. Training that will be provided, or recovery relating to franchise agreements are
including number of persons trained, duration and treated as regular civil actions.
training modules. Corporation Code
• The Corporation Code sets out the requirements
Number of years the franchisor company has been in for registering a business in the Philippines. A foreign
operation and number of years it has franchised the corporation must apply to the Securities and
business, with corresponding numbers of company- Exchange Commission (SEC) for a license to transact
owned branches and franchised outlets. business in the Philippines. A foreign corporation
that intends to conduct franchising operations in the
Draft franchise agreement. Philippines has the followings options:
Full disclosure of the financial requirements of the
franchise business. 1. Enter into a franchising agreement with an
Whether there is a requirement on the franchise existing local entity.
applicant to seek adequate legal and financial 2. Establish an entirely new corporation under
counsel before signing the franchise agreement. Philippine laws.
Special laws
Mechanism for Dispute Resolution. Retail Trade and Liberalization Act prevents them
Franchisees are also advised to consult any of the from owning or wholly owning a business below a
following: certain amount of paid-up capital.
A franchisor association. The Foreign Investment Negative List and the
• The SEC. Foreign Investments Act set out restrictions and
• The DTI or the nearest DTI regional/provincial prohibitions on foreign investors in relation to the
office. sectors they can invest in and how much they can
• A certified franchise executive. invest.
• A franchise consultant. • The Philippine Competition Act prohibits anti-
competitive conduct that would substantially
Laws Regulating Franchising in the Philippines prevent, restrict or lessen competition.
Franchise agreements are regulated by the The Data Privacy Act of 2012 protects individuals
applicable provisions. from unauthorized processing of personal
Intellectual Property Code (IPC) information.
Civil Code. Regulatory Authority for Franchising
Corporation Code • Documentation, Information, and Technology
Transfer Bureau (DITTB), an agency under the
Relevant special laws of the IPC Intellectual Property Office of the Philippines
•Franchise agreements are categorized as (IPOPHL)-Technology transfer arrangements (TTAs)
Technology Transfer Arrangements (TTA) Philippine Competition Commission (PCC) - anti-
• Sections 87 and 88 of the IPC list the prohibited competitive agreements, abuses of dominant
clauses and mandatory provisions of technology position and anti-competitive mergers and
transfer agreements. acquisitions.
Sections 87 and 88 of the IPC are intended to • National Privacy Commission (NPC)-Data Privacy
prevent unfair competition and trade. The Act
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.
Different Legal Aspects of Franchising Free Consent
Both parties must accept the agreement willingly
Franchise Agreement – Contracts Act and be fully aware of all aspects of the arrangement. There
can be no misrepresentation, confusion or undue pressure
This is the founding document of a franchise. It is the to agree to the offer for either party.
equivalent of a certificate of incorporation or a partnership
agreement. It is the constitution of the business. It details INTELLECTUAL PROPERTY LAWS
the entire structure of the franchise, its objectives
and modus operandi. It defines the roles and
This is probably the most critical of all the legal aspects of
responsibilities of the parties involved in the franchise, the franchising business agreement. This is the very essence of
financial arrangement between the parties and the the agreement.
exchange of information and intellectual property
between the parties. But in essence, the Online Franchise
Agreement is a contract between two private parties. As far as the franchisee is concerned, this is the lawful
Hence, it is governed by the provisions of the Contract Act, consideration they receive upon accepting the agreement.
1872. Intellectual property law is taken rather seriously in the
business community. For a franchisor, the goodwill
The contract act regulates the validity of a franchise enjoyed by his brand and his trademark attracts the
business agreement. Some of the essentials of a valid customers and franchisors alike towards the brand. So it is
contract, according an extremely valuable asset. The different intellectual
property laws that come into play in a franchise are as
Offer and Acceptance follows.
There has to be an offer that precedes an
agreement and an acceptance to that offer which Trademark Act, 1999
completes the agreement. All the clauses and provisions of
A trademark is the identity of a business. It is the
an agreement are essentially offers and counter offers. A
brand under which the business operates. The brand can be
franchisee offers to run their business in the franchisor’s
a name, a logo, a tagline or a combination of all. Customers
name. Or the franchisor offers his brand and intellectual
bear goodwill and trust towards a trademark. It is this
property to a franchisor in exchange for a fee. The
goodwill and trust that the franchisee harnesses to boost
signature of the parties at the end of an agreement
their own business. This law protects the franchisor’s rights
indicates acceptance.
over their trademark.

Legal Relationship
Patents Act, 1970
The agreement should create and define a legal
A patent is an original invention or innovation by
relationship between the parties. In this case, the
a person or organisation that has been duly registered
relationship between a franchisor and a franchisee is
under this act and is protected for its uniqueness by the
defined in detail in the Franchise Business agreement.
provisions of this act. A patent gives an organisation an
edge in the market. It makes the manufacture and delivery
Lawful Consideration of a product or service unique in terms of utility and
experience for the customer. So if part of operating a
There has to be an exchange of consideration
franchise involves having access to the franchisor’s patents,
between the parties for the benefits each receives from the
then the provisions of this act govern the exchange of
other party, and the consideration has to be lawful. The
patent-related information. Alternatively, it is also possible
franchisor receives a monetary franchise fee from the
that a franchisee offers some personal patent to enhance
franchisee. And the franchisee receives the licence to use
the franchisor’s product in return for using the franchisor’s
the franchisor’s intellectual property to conduct their
brand name. All patent-related transactions fall under the
business.
provisional jurisdiction of the patents act.

Competency of the Parties Copyright Act, 1957

Both parties have to be sound of mind and Copyright is an exclusive right to use and licence
competent when making the agreement. any original artistic content reserved by the creator of such
content. A franchisor may licence a musical jingle for the
brand, some interesting written content as marketing
material, some video movie as an advertisement, or
something to engage the customers. Any transaction These regulate the working days of the
involving the exchange or licensing of the copyrighted employees and the paid holidays they are entitled to .
material is subject to the Copyright Act’s provisions.

( We can take KFC Franchise  and Bata Franchise for

reference )
Consumer Protection Act
Shops and Establishment Act
This, of course, applies to all businesses. This act protects
the interests of consumers from fraud and exploitation. It
Most franchises involve a physical space like a
creates provisions to address consumer grievances and
showroom or an eatery. A physical space allows the
provides a forum where consumers can complain against
franchisee to publicly display the franchisor’s brand to
unfair and dubious trade practices. In the case of a
harness its power and attract customers. Having a physical
franchise, it can sometimes get tricky to establish who the
space involves getting registration under the Shops and
blame lies, the franchisor or franchisee. For instance, if the
Establishments act. The shops and establishments outline
grievance is against the product, it could be the
the standards and requirements to be met while opening
franchisor’s burden. But if there is a grievance regarding
and operating a physical commercial space. It includes
poor service or experience, the burden may lie with the
things like fire safety, availability of drinking water, basic
franchisee.
facilities for the staff etc. This is a mandatory requirement,
although different states have different requirements.
Income Tax and GST Act
Employment Related Laws
A franchise is considered an independent entity for
taxation and hence has to register separately for a PAN
Many laws have been established to protect
and TAN if necessary to file its annual Income tax
workers’ rights and prevent exploitation. The laws are
returns. Also, it must register under the Goods and
Services Tax Act to collect GST from its customers.
Contract Act
This regulates the employment agreement or Dispute Resolution
contract where the nature of the employment, roles and
responsibilities and remuneration are detailed.
This is critical from the standpoint of a franchise because a
Minimum Wages Act franchise is usually opened in a location other than the
This regulates the basic remuneration payable to location of the original brand’s outlet. That is the principle
all employees of the franchise under which a franchise revolves.

Occupational Safety, Health and Working Conditions The franchisee can leverage the brand power, and the
franchisor can open more outlets in remote locations
Code
without the business risk or the investment.
This regulates all the preliminary conditions the
employer must meet at the workplace before hiring any
employee. Given that the two parties of a franchise business
agreement are almost always going to be in different
The Sexual Harassment of Women at Workplace
geographical locations, the laws regarding disputes and
(Prevention, Prohibition and Redressal) Act outlines the
claims also might differ in the two places. So the parties
measures and provisions that the employer must put in need to agree on the jurisdiction under which the
place at the franchise, especially if there are women agreement falls so that in the event of a dispute, each
workers in employment. party would know under what laws the dispute will be
resolved.
Employment Retirement Benefits
Acts regulating schemes like Provident Fund,
Employee State Insurance etc. have to be integrated into
the payroll system.
Weekly Holiday Act