January 09, 2017
Franchise Law Alert
Franchise Law Alert
This year, international franchisors should be aware of potential changes to franchise legislation in a number of countries. This alert highlights a number of these changes and how they may impact franchisors looking to expand to Canada, Angola, Ethiopia, Kuwait, Cuba and Thailand.
With the arrival of the 2017 New Year, international franchisors should be aware of potential changes to franchise legislation in a number of countries. This alert is a brief preview of such legislative changes and how they may impact franchisors entering or expanding into certain jurisdictions.
British Columbia (B.C.) is the second most populous province in Canada after Ontario. The new Franchises Act for B.C. received Royal Assent in November 2015. The Act brings the province in line with other Canadian provinces. The regulations to the Franchises Act were issued October 3, 2016, and were based on the Disclosure Documents Regulation of the Uniform Law Conference of Canada (ULCC) and also recommendations from the British Columbia Law Institute (BCLI). In accordance with the regulations, the Franchises Act will come into force February 1, 2017. Some highlights of the Franchises Act include the following:
Franchise-specific regulations have been in force in Angola since 2003. Law 18/03, of August 13, 2003, governs franchise transactions in Angola, as well as distribution, agency and commercial concession agreements.
Due to the increasing relevance of franchise arrangements in the Angolan market, the Ministry of Commerce Dispatch 78/15 of March 2, 2015, created the Technical Multidisciplinary Group to review new proposed Angolan franchising regulations. These regulations are expected to be approved in the near future.
Ethiopia does not currently have a body of law specifically governing the franchise sector. In fact, the term “franchise” or “franchise law” does not appear in the Commercial Code. The use of the term franchise and the manner of registration of franchise businesses in Ethiopia appeared for the first time in the Commercial Registration and Business Licensing Proclamation adopted by Parliament on August 5, 2016 (2016 CRBL Proclamation).
The 2016 CRBL Proclamation provides a definition of what constitutes a franchise agreement. It defines it as an agreement concluded for consideration between the franchisor and the franchisee in order to undertake business activities by using the trade name of the known product or service in order to share the nature and experience of the work under the leadership of the owner of the recognized products and services.
The 2016 CRBL Proclamation legislation, though encouraging, has been criticized for being too general. Despite this critique, it provides an important general principal: the franchisee is required to function on the same standards as the franchisor and the consumer must obtain the same products and services from the franchisee as they would have received from the franchisor. Until the issuance of the 2016 CRBL Proclamation, review of published legal commentaries on the Commercial Code and contract law also reveal no reference to franchise law. However, there exist patchworks of disparate laws that collectively affect the activities of franchisors in Ethiopia.
The 2016 CRBL Proclamation indicates that registration of franchises will be required pursuant to regulations to be issued by the Council of Ministers. The regulations have yet to be issued but could issue later this year.
For more than fifty years, commercial agencies in Kuwait were governed by Law No. 36 of 1964. As of March 13, 2016, this long-standing law has been overturned and superseded. After years of deliberation and research, the Kuwait National Assembly has ratified a new Commercial Agency Law (CAL), Law No. 13 of 2016, to address the evolving issues and questions that relate to the country’s commercial agencies.
Under the new law, the definition of “commercial agency” has been amended and clarified to specifically include the terms “franchisee” and “licensee.” Due to their inclusion in the commercial agency definition, franchisees and licensees are now treated as commercial agents and are expressly subject to any restrictions or requirements as well as the protections of the new law.
The newly enacted commercial agency law includes core elements of the prior Law No. 36 of 1964. Nevertheless, those companies or individuals that may engage in commercial activity within Kuwait, particularly those interested in licensing and franchising, should be aware of the important changes made to this new rule. The Ministry of Commerce will issue executive regulations to Law No. 13 of 2016 within six months from March 13, 2016. No such executive regulations have been issued to date but they could be issued in 2017.
Cuba’s Ministry of Tourism reports that with a record four million tourists in 2016, up 13% over 2015, the island set a record for international visitors, exceeding projections by approximately six percent. Tourism is the second source of revenue in Cuba, following the export of doctors and other medical services.
One factor contributing to the increase in visitors is the surge in U.S. visitors resulting from the restored relations with the United States—a thaw first announced by U.S. President Barack Obama and Cuba’s President Raul Castro almost two years ago. President Obama has eased many trade and travel restrictions, which has opened access to the communist island for many Americans. Nearly 137,000 Americans came to Cuba in the first half of 2016, an 80% surge from the same period in 2015.
The growth in the tourism industry could pave the way for increased franchising on the island in 2017. In general, franchising contracts in Cuba are atypical. They are not mentioned in Cuban legislation, but rather in an internal regulation of the Cuban Ministry of Tourism. This internal regulation is not published in the Official Gazette of the Republic and it only applies to franchises in the tourism sector. The regulation covers the main features of franchising and outlines the entire process for the negotiation of a franchise contract, including the required information that a foreign franchisor must submit to the government.
Cuban foreign investment laws were reformed in 2014. The publication of Law No. 118, March 29, 2014, “Regarding Foreign Investment,” (Law No. 118), established the current framework for foreign investment in the country. It is an attempt to instill greater confidence in foreign investors with the hope that foreign capital will soon follow and strengthen the Cuban economy. Under Law No. 118, foreign investment must adopt one of the following three forms: (i) a mixed joint venture with state-owned companies, (ii) a 100% foreign owned company, or (iii) an international economic association partnership contract—the typical structure for energy contracts and hotel management arrangements in Cuba.
Currently, Cuba does not have any specific franchise laws, such as registration or disclosure requirements. The foreign investing mode of choice for the Cuban government is the joint venture, with the foreign investor as one partner and the state-owned companies as the other. This is also the preferred choice of the Cuban government when structuring franchise arrangements. If relations with the U.S. continue to thaw in 2017, franchisors should monitor the opportunities for franchising, as the Cuban government continues to update and revise its foreign investment laws and franchising regulations.
Thailand has no specific legislation or set of regulations that deal with franchising. Accordingly, the ordinary principles of contract and the common law will apply to franchises in Thailand.
However, the country has a draft Franchising Business Act, which was first released to the public in 2006 and held a public hearing in March 2011, organized by the Ministry of Commerce. The most recent draft of the new franchise legislation defines a franchise as:
[...] the operation of a business in which one party called a “franchisor” agrees to let the other party, the “franchisee,” use its intellectual property rights, or to use its rights to operate a business during a specified time or in a specified area, such operation being under the direction of the franchisor’s business plan, and the franchisee having a duty to reimburse the franchisor.
It remains to be seen if, and when, such legislation will be enacted in the country in 2017.
Globalization has led to rapidly changing laws and greater scrutiny on foreign investment across the world. It is imperative that prospective franchisors and franchisees perform thorough due diligence on the legal and business environment before proceeding into a franchise relationship to ensure proper compliance. The jurisdictions explored here may be ripe for change and their legislative developments should be monitored.
This alert was based on excerpts from International Franchising 2016: Legal and Business Considerations, a book edited and co-authored by Kendal H. Tyre, Executive Editor, as well as Diana V. Vilmenay-Hammond and Keri A. McWilliams, Managing Editors, and Pierce Haesung Han and Nia D. Newton, Assistant Editors.
To view a video book trailer of the book, click here.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.