LEGAL CONSIDERATIONS IN FRANCHISING

The Franchising Contract (Franchise Agreement)

 Franchise Agreement is the legal document which details the rights and obligations of the franchisor
and the franchisee.
 Department of Trade and Industry (DTI)’s Advisory on Due Diligence to be Undertaken by a
Prospective Franchisee defines a franchise agreement as a written contract or agreement between
two or more parties 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 or concept, for a
certain consideration. Unless otherwise provided, this right includes the use of a trade mark, service
mark, trade name/business name, know-how, logo-type advertising, or other commercial symbols
associated with a particular business.

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.
1. 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.
2. Royalties – Royalties are usually a percentage of the franchisee’s sales and are typically paid weekly,
biweekly or monthly.
3. 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 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.
  The Philippine Competition Act prohibits anti-competitive conduct that would substantially prevent,
restrict or lessen competition.
 The Data Privacy Act of 2012 protects individuals from unauthorized processing of personal
information.

Regulatory Authority for Franchising

 Documentation, Information, and Technology Transfer Bureau (DITTB), an agency under the
Intellectual Property Office of the Philippines (IPOPHL) – Technology transfer arrangements (TTAs)
 Philippine Competition Commission (PCC) – anti-competitive agreements, abuses of dominant
position and anti-competitive mergers and acquisitions.
 National Privacy Commission (NPC) – Data Privacy Act