What is a franchise business?

According to the 2019 notification, a franchise is a business transaction in which one party, called a franchisor, contracts with another party, called a franchisee:

➤ To use the franchisor's business method, model, system, procedures and intellectual property rights (or any business method, intellectual rights...) that the franchisor has the right to license
➤ In a specific time and place
➤ Where the business operation is under the support and business plan of the franchisor
➤ And the franchisee has an obligation to pay royalties to the franchisor

It is important that a contract be well drafted to ensure the protection of both the franchisor and the franchisees. Both parties have different issues to consider, the franchise agreement must strike a good balance between the two interests.

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What are the regulations for franchising in Thailand?

First of all, Thai law does not impose any notification or registration requirement for a franchisor/franchisee relationship.

The relationship between the franchisee and the franchisor is essentially contractual, but this contractual relationship is subject to various laws and regulations:

➤ The provisions of the Thai Civil and Commercial Code governing contracts
➤ The Unfair Contract Terms Act B.E.2540
➤ Intellectual property laws, in particular the Trademark Act
➤ The Trade Secrets Act B.E.2545
➤ The law on consumer protection and "controlled contracts"
➤ Laws governing the specific commercial activity that is the subject of the franchise, such as the Food Law or the Cosmetics Law
➤ The law on commercial competition

In addition, on December 6, 2019, the Notification Regarding the Guidelines for the Consideration of Unfair Trade Practices in Franchise Businesses was issued to prevent franchisors from adopting overly restrictive and unfair contractual terms that are deemed to potentially cause harm to franchisees. The notification will take effect on February 4, 2020.

What obligations does the notification put in place?

The notification imposes two main obligations on the franchisor:

The obligation to disclose material information relating to the franchise. Before entering into a franchise agreement, the franchisor must disclose material information to the franchisee, such as details about:

➤ The royalty and other mandatory payments associated with the operation of the franchised business
➤ The business model of the franchise
➤ Intellectual property rights
➤ Renewal and termination of the franchise agreement

The obligation to notify and offer the right of first refusal to the nearest franchisee. If the franchisor intends to open and operate a new branch in the vicinity of the franchisee’s area of operation, the franchisor is required to first offer the franchisee in that area the right to operate the branch.
It is recommended that franchisors carefully implement their franchise systems, and follow the notification guidelines. It is advisable to look to the Commission’s decisions and the Thai Supreme Court cases that have set a precedent for “unfairness”.

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What does the Notice prohibit?

The Notice outlines and compiles in one place a number of requirements that mirror provisions already set out in other laws and regulations.

The franchise activities prohibited by the guidelines are:

➤ Setting conditions on franchisees' rights without valid business reasons
➤ Setting additional conditions after the contract is executed without good cause
➤ Prohibiting franchisees from purchasing products or services from manufacturers, distributors or other service providers (who offer the same standards and are less expensive than what is offered by the franchisor) without good cause
➤ Prohibit franchisees from selling perishable products at a discount without good reason
➤ prohibit franchisees from selling discounted perishable products without good reason
➤ Not treating all franchisees equally by setting different terms for each franchisee
➤ Setting inappropriate contract terms for franchisees that are not related to maintaining the franchisor's reputation, quality and standards

Contractors failing to comply with the guidelines may be subject to an administrative fine of up to 10% of annual sales in the year of violation. Violations are brought as claims by the franchisee under the franchise agreement, with a one-year statute of limitations to bring a claim.   In addition, the Commission would have broad authority to suspend, cease or modify a violator from continuing any franchise business in Thailand, pursuant to Section 60 of the Business Competition Act (2017).

What are the benefits for foreigners?

For an incoming foreigner just arriving in the country, start a franchise business in Thailand has many business advantages:

➤ New entrants are often unfamiliar with the Thai market
➤ They may not know the local supply chains, rental markets, potential customers...
➤ Local franchisees are often more familiar with local supply chains, rental market and potential customers
➤ Spreading the risk

This type of business relationship also has interesting legal advantages:

➤ Foreigners will not have to deal with Thai restrictions on foreign entrants
➤ They are not subject to Thai legal restrictions on foreign parties: such as the Foreign Business Act, the Tourism Act, and other local laws, permits and regulations. This is done by the franchisee, not the franchisor
➤ Their contract will be concluded under the specific local laws such as Thai labor law

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