Franchising in Thailand – Chapter 1: Things to Consider before Buying into / Selling a Franchise in Thailand

THAILAND BUSINESS, INVESTMENT & CORPORATE LEGAL – FRANCHISING IN THAILAND

Short Foreword

Thailand is a member of a number of Free Trade Agreements / Regional Trade Agreements:

  • the China-ASEAN Free Trade Agreement (CAFTA)
  • the ASEAN-India Trade in Goods Agreement / ASEAN-India Free Trade Agreement (ASEAN-India TIG / AIFTA)
  • the Japan-Thailand Economic Partnership Agreement (JTEPA)
  • the ASEAN-Japan Comprehensive Economic Partnership Agreement (AJCEPA)
  • the ASEAN-Korean Free Trade Agreement (AKFTA)
  • the Thailand-New Zealand Closer Economic Partnership (TNZCEP)
  • the Thailand-Australia Free Trade Agreement (TAFTA)
  • the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA)
  • the Thailand-India Free Trade Agreement (TIFTA)
  • the Thailand-Peru Free Trade Agreement (TPFTA)
  • the Bay of Bengal Initiative for Multi-Sectoral, Technical and Economic Cooperation (BIMSTEC)

Copies of the Agreements may be found here at the Department of Trade Negotiations website.

Just in 2010, Thailand’s membership of CAFTA’s effects can already be observed, where CAFTA represents the 3rd largest regional agreement in the world in terms of economic value, third after the North American Free Trade Agreement (NAFTA) and the European Union (EU).

With the ASEAN Economic Community (AEC) at the door, the ASEAN economy is clamoring to boom.

THAILAND FRANCHISING

…………………………..

Statistics-wise, as of 2011, there were over 11,000 franchisees in Thailand with more than 250 franchises.

With international trade at a high, franchising in Thailand is playing a role that is ever growing in significance. Franchising is such a popular medium today for marketing concepts, international transfer of intellectual property, business ideas, etc., and Thailand is not left out. Thailand’s rigorous efforts to attract foreign franchisors and / or franchisees are noteworthy with a plethora of Thai campaigns, awareness / exposure programs, franchise opportunities, exhibitions becoming more and more wide scale with Thai participation increasingly visible in overseas franchise trade shows, exhibitions and conventions Thai industries such as retail, tourism, health, food, hospitality and its Creative Economy have been receiving favorable response. Franchises for foreign goods / services can be expected to blossom in Thailand and conversely, franchises for Thai goods / services internationally. With eyes on Thai franchising, it is fundamental that proper, comprehensive franchise models are used.

Chapter 1:  Things to Consider before buying / selling a Franchise in Thailand

.

Absence of Specific Legislation – Freedom of Contract

There is no specific statutory legislation in relation to Franchising in Thailand.

Thailand as a civil law jurisdiction gives much recognition to the Freedom of Contract and accordingly much heed to the true intent of the contracting parties, particularly in the absence of specific statutory address as in the case of franchising. The ‘canvas’ for exercise of such freedom is such core / overarching legislation regulating commercial operation, commercial relationships,  contractual agreements, etc. which are applied and broadly interpreted to govern the franchisor-franchisee legal relationships. This needs to be given much cognizance and caution especially by foreign entities which are not familiar with commercial / contractual principles of Thailand as these ‘general’ legislation have far-reaching effects and consequences, e.g. mandatory terms or terms that are in contravention with these laws could leave the Franchisor or Franchisee’s rights thoroughly affected with little or no recourse.

Notwithstanding, the Thai Ministry of Commerce has long anticipated introducing specific legislation for Thailand franchising but it remains to be seen, and observed whether  Thailand will follow China’s Model as set out in its 2007 Franchise Regulations and 2005 Ministry of Commerce’s Administrative Measures on Commercial Franchising – which may be calculated to have a significant impacts, e.g. one pertinent requirement is that of having the franchisor prove its franchise by measure of profitability before sale of the franchise contract. At present, a clear, accessible regime for franchising relationships is still lacking in Thailand, but the recent dispositions of the franchising climate in Thailand is estimated to persuade a clear, accessible legal and business regime for franchising in Thailand.

Governing Legislation

  • Civil and Commercial Code (“CCC”)
  • Unfair Contract Terms Act B.E. 2540 (A.D. 1997)
  • Trade Competition Act B.E 1999 (A.D. 2542) (“TCA 1999”)
  • Trade Secrets Act B.E. 2545 (A.D. 2002)
  • Trade Mark Act B.E. 2534 (A.D. 1991)
  • Patent Act B.E. 2522 (A.D. 1979)
  • Product Liability Act B.E. 2551 (A.D. 2008)

These statutes are further expanded and consisted by way of Ministerial Regulations.

Franchise Due Diligence

Similar to all other breeds of Due Diligence, it is imperative for the franchisee to be completely aware of what it is buying into. This knowledge is particularly crucial where there lacks any disclosure requirement in Thailand, as is necessitated in other jurisdictions such as Australia. There are many fundamental aspects of Franchise Due Diligence, and these include:

Corporate Characteristics

  • Searches with the Ministry of Commerce to determine accuracy of characteristics such as corporate debt, registered / paid-up capital, shareholdings, directorship, etc.

Franchise Agreement

  • Fundamentally, the offer (as encompassed in the Franchise Agreement being sold) if drafted by the Franchisor has to be digested & determined thoroughly and its localization in Thailand has to be accurate, thoroughly reflective of the parties’ intention, and accordingly wholly enforceable in Thai law

Intellectual Property

  • The essence of a franchise agreement, the intellectual property rights of the franchisor, have to be duly audited, and especially in case where it is inbound franchising, for instance, it has to be determined (i) whether such rights which require local registration to optimize utility are available for registration; (ii) whether such foreign intellectual property rights are available for use and are not in conflict with local IPRs; (iii) whether the trade dress, reputation and good will of the franchise had been diluted locally and if so, whether there are any avenues for recourse moving forward; (iv) whether the franchisor’s know how and trade secrets have been sufficiently composed so as to enable proper implementation and to set in place adequate protection; and (iv) so forth.

Legal Proceedings

  • As Thai Court Searches have to be performed in the respective, individual Courts, such searches should be conducted in relevant areas to reveal actual, pending or threatened litigation or other disputes concerning the parties. The nature, jurisdiction, cause(s) of action  and statuses of such disputes should be investigated along with any other settlements or administrative actions

Regulatory

  • Authority approvals, licenses, registrations,  etc.  received in regulatory / compliance matters should be identified and verified. Due compliance has to be ensured

Acquisition Process

  • Proper understanding of the procedures of the takeover and transitional arrangements

6 Main Aspects

  • the Franchising Agreement – Localization
  • the Intellectual Property Aspects of the Agreement – Registration
  • the Tax Aspects – Implications
  • the Trade Competition Aspects – Restrictions
  • the Franchisor’s Security – Protection
  • the Franchising Agreement – Enforcement

Tax Implications

Foreign Franchisors / Licensors – Franchise Fees / Royalties paid by Thai entities out to the Foreign entities

  • Withholding Tax – 15% (form of income tax reducible under some double-taxation treaties (“DTT”))
  • Where double-taxation treaties are applicable :
    • Credit Method: This tax as paid may be used as credit against the Franchisor / Licensor ‘s income tax payable on such fees / royalties in the resident country
    • Exemption Method: Franchise fees / royalties subjected to tax are exempt from income tax in the resident country
  • Withholding tax certificates may be required in application for tax credit in the payee’s country

Generally:

Franchise Fees, Marketing Expenses, Contributions to Funds allocated for Marketing, etc.

  •  15% WT prior to remittance to foreign franchisor (subject to DTT) + 7% VAT

Stamp Duty

  • None unless Revenue Department classifies Franchise relationship under ‘Hire of Work’ which will incur a stamp duty of 0.1% based on remuneration

Import Duty

  • Base value for calculation includes total of cost of goods imported, all handling and freighting, franchise fees / royalty, insurance premiums, etc.

Exchange Control

  • Generally, as a matter of proper procedure, payments to foreign franchisors will be subject to exchange control permission being granted by the remitting Thai bank (on behalf as a Central Bank of Thailand) for an outbound payment. All outbound payments are subjected to current exchange control regulations.
  • Currently, outbound payments are generally allowed but proof of the applicable contractual obligation to make such payment (i.e. in the Franchise Agreement) may be required by the remitting bank. The remitting bank may refer any doubt to the Thai Board of Trade.
  • Outbound payments in foreign currency will be as per average buy-sell rates of the remitting bank (on the date of such payment), such rates of which are based on rates advised by the Board of Trade or such other provided rate.

Local Franchisors / Licensors – Franchise Fees / Royalties paid by Foreign entities in to Thai entities

  • There is one point of caution here, in relation to such franchise arrangements where franchisors’ employees are sent to the franchisee in Thailand to coach the franchisees’ employees as to the operation. This may expose the franchisor to a claim by the Thai Revenue Department that the said franchisors’ employee(s) is in fact generating income for the foreign franchisor via the royalty stream. This may attract the imposition of Thai income tax vide Section 76 bis of the Thai Revenue Code with the consequential tax implication of 30% corporate income tax on net profits and 10% profit-remittance tax on such net post-tax profits as remitted / deemed remitted abroad

* Update 2012 – CIT reduced to 25% * *Update 2013 – CIT reduced to 20% *

Franchise Fees / Royalties paid within Thailand, i.e. local Franchisor, local Franchisee

  • 30% Corporate Income Tax on net profits (progressive rates of 15% – 30% may be granted to SMEs)  – CIT
  • 3% Witholding Tax – WT
  • 7% Value-added Tax  – VAT

* Update 2012 – CIT reduced to 25%; SME 15% – 25% * *Update 2013 – CIT reduced to 20%; SME 15% – 20% *

 Tax Grossing-up Clauses
  • Careful, proper drafting of tax grossing-up clauses are generally included in Franchise Agreements and are indeed enforceable under Thai law so as to prevent the Franchisor from unnecessarily losing monies.

Localization of the Franchise Agreement

While always tending toward Franchisors, Franchise Agreements may be overbearing  and despite Thai significance attached to ‘freedom to contract’, some contract terms are generally forbidden by the law and could have severe consequences upon or even be fatal to the contract. In particular, the main legislation aimed at catching and restricting these ‘overly’ preferential terms is Thailand’s Unfair Contract Terms Act B.E. 2540 (A.D. 1997) (“UCTA”).  The Thai Courts are bestowed considerable discretion in determining the enforceability (and extent thereof) of Contracts containing these ‘unfair clauses’.

Examples of terms that fall within the ambit of the Thai UCTA:

  1. Terms that attempt to restrict the applicability of the UCTA, either partly or wholly, shall be void (Section 11)
  2. Terms exposing the contract to termination without reasonable grounds or granting such right of termination even though the other party is not in material breach (Section 4(3))
  3. Terms excluding or limiting liability arising from breach of contract (Section 4(1))
  4. Terms granting a party the right not to comply with any clause of the contract or to comply with the contract only after a postponed period of time without reasonable grounds (Section 4(4))
  5. Terms granting a party the right to claim or compel the other party to carry more obligations than that which existed at the time of making the contract (Section 4(5))
  6. Terms excluding or limiting the liability of the business, trading or professional  operator for a defect or disturbance of right, except where the other party knew of the defect or the cause of such disturbance of right at the time of making the contract, in contracts between a party and a business, trading or professional operator involving payment of debt by delivery of property to the former (Section 6)

Generally, there is an overarching rule of ‘Reasonableness’ and guidelines for the Courts’ exercise of discretion are laid out in Section 10, i.e ‘ In determining to what extent the terms be enforceable as fair and reasonable’:

  • Section 10(1): Good faith, bargaining power, knowledge and understanding attributed to economic status, aptness, anticipation, precedent guidelines, alternatives, and all advantages / disadvantages of the contracting parties according to actual conditions
  • Section 10(2): Ordinary / Customary usages / contexts  applicable to such type of contract
  • Section 10(3): Time and place of making the contract or performing the contract
  • Section 10(4): The heavier burden borne by one contracting party as compared to that of the other party

Other Legislation with Far Reaching Consequences upon Terms of Contracts

Similarly, among other legislation, some provisions of the CCC and various Ministerial Regulations  also have far-reaching consequences upon terms of contracts. An example under Chapter II of the CCC is that agreements “.. made in advance exonerating a debtor from his own fraud or gross negligence is void .”. A Ministerial Regulation of particular importance is Ministerial Regulation No. 25 (1999) which was introduced in view of preventing contractual oppression by the party with more bargaining power. This Ministerial Regulation is discussed in more in detail in Patent Licensing Agreements – The Intricacies of Thai Patent Licenses.

Intellectual Property related Aspects of Franchising

Patents

Trademarks

  • According to Section 68 of the Thai Trademarks Act 1991, Trademark License Agreements or Franchise Agreements containing Trademark Licensing provisions are required to be in writing and to be registered with the Thai Department of Intellectual Property and the Courts have been very stringent about this requirement. For more information, please see the next chapter in the continuation of this write-up.

Confidentiality, Trade Secrets and Copyrights

  • Please see the next chapter in the continuation of this write-up.

Trade Competition Restrictions – Thailand’s Trade Competition Act 1999

The Trade Competition Act 1999 (‘TCA 1999’) has a significant bearing on Thai Agreements and is of especial importance to Franchise Agreements. Trade Competition disputes may be adjudicated at first-instance by the Trade Competition Board.

Price-Fixing

  • Where retail prices or price ranges are determined in franchise agreements, improper drafting of such terms that is essentially a limitation of franchisees’ freedom to determine its own selling prices may be deemed to violate the TCA 1999’s anti-price-fixing provisions.

Exclusive Supplier

  • Although this may generally be in the nature of Franchises, in Thailand, the TCA 1999 expressly forbids companies from ‘fixing persons from whom business operators may purchase goods or services’. Of significance and especial address to foreign-Thai agreements, exclusive local distribution rights are prohibited by the TCA 1999, where the Act expressly enables Thais to purchase directly from foreign suppliers and prohibits any agreement incorporating exclusive local distribution clauses.

Exclusive Line of Products

  • Again, despite this being a common feature of Franchises around the world, this type of provision may be in contravention of the anti-exclusivity provisions of the Trade Competition Act. One example is the Honda Motorcycles (Thailand) case where the motorcycle distributor refused to allow any of its resellers to carry non-Honda motorcycles so as to be deemed a violation of the TCA 1999 by the Trade Competition Board and causing the Board to initiate a formal criminal complaint with the public prosecutor.

Geographical Exclusivity

  • The TCA 1999 expressly prohibits agreements that constrict:
    • Distribution – “geographical areas in which each business operator may distribute . . . goods or services”; and similarly
    • Procurement – “geographical areas in which each business operator may purchase goods or services”.

Jurisdictional Issues – TCA 1999 & Foreign Franchisors

  • Enforcement of the TCA 1999 is directed at Thai entities and does not directly extend to contravening conduct of foreign entities that do not have a local presence in Thailand, in line with its historical interpretation of the intra-territorial applicability of Thai law. It flows that such foreign franchisors are free to enter into TCA 1999 – prima facie contravening agreements. While such foreign franchisors may not be held liable for such infringement – the same foreign franchisor will be unable to seek enforcement of such contradictory terms within Thailand, as such attempt would be perverse with regards to public policy and unenforceable due to conflict-of-law in regards to arbitration.

Foreign Business Restrictions

Security for Franchisors

Anti-Competition Clauses

Risk management necessarily covers the risk of competitive utility of the knowledge & experience of the franchise operation by the franchisee. Comprehensive and solid language is fundamental to protect the franchisor from infringement of Trade Secrets, Trademarks, Patents and other Intellectual Property Rights as these rights are extremely sensitive in franchise-type businesses and represent a dominant risk, and the purpose of franchising in the first place.

Nonetheless, absence of express provision is not necessarily fatal as there are many statutory provisions that confer protection of such IPRs which will be discussed in the next chapter. In any event, any proper, prudent and well contemplated franchise agreements should also adequately provide for subsequent or simultaneous establishments in competition with that of the franchisor’s / orignal franchise.

Non-compete clauses are generally enforceable by Thai Courts if they are reasonable and are not deemed to effectively prevent individuals from outright seeking employment and / or conducting a business in their particular profession or trade. For instance, Thai Courts are not likely to enforce non-complete clauses that restrict teachers to work in a competing academic institution or to establish such a competing academic institution.

A wide catch-all prohibition like this effectively prevents a teacher from subsequently seeking employment and /or operate such a business in the teacher’s profession / area of expertise or trade / industry and thus maims at his / her very livelihood. An example of statutory protection against this type of non-complete clause may be found in Section 5 of the UCTA, which gives that:

The terms restricting the right or freedom in professing an occupation or an execution of a juristic act related to the business, trading or professional operation which are not void, but being the terms that cause the person whose right or freedom has been restricted to bear more burden than that could have been anticipated under normal circumstances, shall only be enforceable to the extent that they are fair and reasonable according to such circumstances.

In determining whether the terms under paragraph one cause the person, whose right or freedom has been restricted, to bear more burden than that could have been anticipated, consideration shall be taken to the scope of the area and the period of restriction of right or freedom, including whose ability and opportunity to profess occupation or to execute juristic act in other form or with other person, as well as all legitimate advantages and disadvantages of the contracting parties.

Sufficient specificity and clarity such as illustrated below may save such a non-compete clause, where the Courts’ exercise of discretion with regards to the determination of validity of like non-compete clauses is generally stemmed from:

  • Specified restriction period which is reasonable in the circumstances, e.g. 1 year
  • Specified restriction as to the range of activity which is reasonable in the circumstances, e.g. teaching English to pre-school children
  • Specified restriction as to the type of employer / competing establishment which is reasonable in the circumstances, e.g. an English tuition centre
  • Specified geographical restriction which is reasonable in the circumstances , e.g. within a three-kilometer radius of the franchisor’s tuition centre

Thence, a delicate balancing exercise has to be cared for between the franchise’s need for protection and the franchisee’s rights and freedom.

Liens

  • There is an absence of statutory provision governing the securing of liens against personal property such as equipment, inventory or accounts receivables save for some limited provision for the registration of liens on machinery. Viz-a-viz a creditor’s claim in the case of a defaulting franchisee, the franchisor is handicapped in preventing equipment and inventory that are unique to the franchise from being given to third-party creditors.

Lease Assignments

  • Leases of real property in Thailand are not automatically assignable unless the lease agreement expressly provides for. It is crucial that a franchisor ensures that franchise-related leases e.g. retail space of the franchisee expressly provides authorization from the landlord for assignments back to the franchisor and subsequently to a new franchisee. In absence thereof, in the face of default by the franchisee – the franchisor is incapacitated from usurping possession of the franchise location.

.. to be continued

Please follow BANGKOK LEGAL BLOG (BLB) for more information on the Legal Aspects of Franchising in Thailand.

Next: Chapter 2: Things to Remember while Franchising in Thailand

.

.

For more information on the foregoing, please contact the author JOEL LOO SEAN EE, the Bangkok-based Senior Regional Counsel at Kelvin Chia Thailand and a member of Kelvin Chia Partnership’s Regional Practice Group at Joel.Loo@KCPartnership.com.

——————————————–

This article is published to provide general information only and is not offered as specific advice on any particular matter – This information is to be taken subject to proper consultation with a lawyer.

All written material on BANGKOK LEGAL BLOG (BLB) including this post are the Copyright of Joel Loo Sean Ee. Any attempt to plagiarize or reproduce these materials in whole or in part, in verbatim or in paraphrase, or in any other form that it can be conceivable that such attempt is being made is an offense in law and will be an invitation by offenders to face charges and prosecution in a Court of Law.
Advertisements

2 Comments

Filed under Thailand Business Investment & Corporate Legal, Thailand Company Incorporation, Thailand Intellectual Property