Jonathan J Uchima

PriceSanond, Bangkok

juchima@pricesanond.com

Introduction

Franchising has been prevalent in Thailand for a number of years, but until recently no specific laws or regulations applied to the offer and sale of franchises (or the franchise relationship) in Thailand other than the existing web of underlying general contract rules, intellectual property laws, trade secret regulations, unfair competition and unfair contract terms regulations and other generally applied laws, rules and regulations relating to marketing, products and tax issues.

However, in 2019 the Thailand Trade Competition Commission (TCC) introduced new franchise guidelines and then later updated the franchise guidelines in 2020 (‘Franchise Guidelines’). Under the Franchise Guidelines, several mandatory terms and conditions now specifically apply to franchise arrangements, although at present there remain no specific government registration requirements or approval processes for franchise agreements in Thailand. Notwithstanding same, practitioners still recommend that short recordal extracts of trademark license agreements be registered to ensure that the underlying trademark licenses are enforceable. The Franchise Guidelines apply to all franchise agreements signed on or after 5 February 2020.

The Franchise Guidelines implement several franchisor duties and responsibilities, including a pre-sale franchise disclosure requirement. In addition, the Franchise Guidelines require that franchise agreements contain several mandatory provisions. Finally, the Franchise Guidelines provide franchisees certain mandatory rights of first refusal that have not been part of franchising in Thailand before.

Definitions under the Franchise Guidelines

‘Franchise’ means a business operation in which one entity called the ‘Franchisor’ enters into a written agreement for another entity called the ‘Franchisee’ to operate a business using the former’s models, systems, procedures and intellectual property rights or those which the former is entitled to license to others in order to operate a business within a designated period of time and/or area. Such business operation is under the promotion and control in accordance with the Franchisor’s business plans and the Franchisee is obliged to pay consideration to the Franchisor.

‘Franchisor’ means an entity which grants the right to operate a Franchise business.

‘Franchisee’ means an entity which is granted the right to operate a Franchise business.

Duties, responsibilities and violations

Mandatory disclosures

The Franchise Guidelines implement a pre-sale disclosure obligation to prospective franchisees, requiring a franchisor to disclose information regarding:

1. expenses of business operations, such as (but not limited to) all franchise fees, royalty fees, marketing expenses, training expenses and expenses for the purchase of equipment necessary for the business operations, how expenses are calculated and details on payment and the refund conditions;
2. the franchise business plans, such as (but not limited to) provision of management assistance, trainings, advice, the number and locations of existing and future planned franchisees in the surrounding areas and sales promotion details;
3. rights to related trademarks, patents and copyrights, the effective periods, scope of licensing and restrictions; and
4. renewals, amendments, termination and revocation of the franchise agreement.

Prohibited conditions in a franchise agreement

The Franchise Guidelines also prohibit certain provisions or restrictions from being contained in a franchise agreement, as follows:

1. imposing any conditions which restricts the rights of a Franchisee without appropriate reasons, such as requiring a Franchisee to purchase non-related goods or services or accessory goods or services only from the Franchisor or parties only designated by the Franchisor or imposing quotas requiring a Franchisee to purchase goods or raw materials in greater quantities than needed and prohibiting the return of excess goods or raw materials;
2. imposing additional conditions on a Franchisee after signing a franchise agreement without appropriate commercial reasons or reasonable necessity to maintain the reputation, quality and standards of the Franchise business;
3. prohibiting a Franchisee from purchasing goods or services from other manufacturers, distributors or service providers which sell same of equal quality at lower prices;
4. prohibiting a Franchisee from discount selling perishable goods or goods which are about to expire without appropriate reasons;
5. imposing differing conditions amongst Franchisees without appropriate reasons, which leads to unfair trade discrimination; or
6. imposing any other inappropriate conditions for any purposes other than to maintain the reputation, quality and standards of the Franchisor under the agreement.

Franchisee right of first refusal

One unique concept set forth in the Franchise Guidelines relates to the franchise relationship and the proximity of locations. Under the Franchise Guidelines, if a franchisor wishes to develop and operate its own franchisor-owned location or offer and sell a new franchised location to a third party, the franchisor must (subject to certain conditions) notify an existing franchisee located in the ‘closest area’ and give that existing franchisee the right of first refusal to open the new franchise before developing the new location itself or through a different new franchisee. In determining the ‘closest area’, the demand for goods or services, the relevant geographical area and the competitive environment in the market must be taken into consideration, which is of course extremely vague. Given the lack of specificity of the Franchise Guidelines (and lack of more detailed guidance from the TCC to date), the exact definition of ‘closest area’ should be disclosed and expressly agreed with the franchisee as part of the franchise disclosure process and franchise agreement negotiation.

Trademark licensing in franchise businesses

Trademark (and possibly other intellectual property) licensing is inevitably involved in franchise arrangements. Generally speaking, in order to be enforceable, at least a recordal extract of the relevant trademark license agreement (or the relevant provisions within the applicable franchise agreement), which includes certain mandatory terms and conditions and adequate identification of the trademarks which are licensed, must be registered with the relevant authorities in Thailand. This is especially important to ensure enforceability of the license agreement if the franchisor or affiliated licensor entity collects royalty fees from the franchisee for the use of such trademarks.

Violations

If a franchisor fails to comply with the Franchise Guidelines, an administrative fine of not more than ten per cent of the turnover in the year in which the offence was committed may be imposed. In addition, the TCC has discretionary authority to order suspension, amendment or cessation of any offending franchise business activities.

In cases where an offence is committed within the first year of business operations, an administrative fine of not more than 1m Thai Baht (approximately USD 32,000) can be imposed.

In addition, if the offender is a corporate entity with offence being committed under instructions or through conduct of a director, manager or any person responsible for the operations of such corporate entity, or in cases where a person has the duty to instruct or perform certain conduct but fails to do so; such person shall also be subject to the same punishment as the offending corporate entity.

Finally, third parties who suffer damages as a result of a violation of the Franchise Guidelines may file a civil lawsuit against the franchisor.