An Overview Of Franchising Law In Southeast Asia

I. Introduction

The popularity of the franchise business model has grown rapidly in mainland Southeast Asia in recent years, with some of the world’s top brands becoming common sights in the commercial districts and shopping malls of major regional cities in Cambodia, Laos, Myanmar, Thailand, and Vietnam.

Although these countries have not yet enacted franchising-specific laws, certain features of each country’s regulatory regime impact franchising. As such, well-prepared franchise business operations have comfortably adapted to each country’s regulatory framework, and the growth is poised to continue even as the global retail sector redesigns and redoubles its efforts in the wake of the COVID-19 pandemic. In fact, the franchise business model, which is both global and local at the same time, may offer retail entrepreneurs a solution in their quest to meet the challenges of the new retail economic realities.

This article explains the legal frameworks that impact the franchise business model in Cambodia, Laos, Myanmar, Thailand, and Vietnam. For each country, this article discusses relevant regulatory considerations for franchise agreements, how to protect intellectual property rights, and judicial and arbitral procedures for resolving disputes that might arise between a franchisor and a franchisee.

II. Cambodia

By Jay Cohen, Chandavya Ing, and Mealtey Oeurn

Cambodia’s steady, robust economic growth continues to draw foreign direct investment (FDI), in addition to increasing the purchasing power of the country’s population. The World Bank puts the growth rate of Cambodia’s economy at eight percent between 1995 and 2018,1 and, during that time, Cambodia transitioned from being classified as a low-income country to a lower-middle income country.2 Along with economic growth, and a welcoming investment framework, Cambodia has witnessed the entrance of a number of international franchise brands, especially in the food and consumer goods sectors.

Domestic franchising typically consists of direct franchising, often involving home businesses such as laundry services, whereby the franchisee is given training and provided with systems to operate successfully and economically. Most international franchising in the country takes place through master franchise agreements. Master franchising can save a franchisor the expense and uncertainty of establishing its own local infrastructure.

Cambodia has not yet enacted a comprehensive franchising regulatory scheme similar to the United States. Franchising is governed primarily by the Civil Code;3 the Law Concerning Marks, Trade Names and Acts of Unfair Competition, dated February 7, 2002 (Trademark Law);4 the Sub-Decree on the Implementation of the Law Concerning Marks, Trade Names and Acts of Unfair Competition, dated July 12, 2006 (Trademark Implementation Law);5 the Notification on the Recordal of License Contracts and Franchise Contracts, dated March 12, 2015;6 and the Prakas on the Recordal of License Contract Over Mark and Franchise Contract, dated 13 January 2020.7

A. Franchising in Cambodia

An overseas franchisor is not required to use a separate entity to enter into a franchise agreement with a franchisee in Cambodia, but they are permitted to do so if they desire.

For franchise agreements originally prepared in a foreign jurisdiction and according to the law of a country other than Cambodia, franchisors should focus on adapting the following provisions in the franchise agreement to ensure they are enforceable in Cambodia: pre-disclosure and guaranty provisions; non-compete obligations; fees and tax-related clauses; termination and damages; intellectual property provisions; dispute resolution clauses; and real estate provisions.

The articles addresses a few of the important aspects of these provisions below, but franchisors should work with local counsel to ensure that their full agreement is sufficiently adapted to comply with Cambodian law.

B. Pre-Disclosure & Guaranty

While Cambodian law does not provide any requirements on pre-contract disclosure, all of the information provided in the franchise agreement must be accurate. If a party enters into a contract on the basis of another party’s misrepresentation, the Civil Code stipulates that they are entitled to rescind the contract and make a claim for damages from the party who made the misrepresentation.8

Further, under the same legislation, a personal guaranty is invalid if the guarantor was not fully informed of all material information on the guaranteed obligation at the time that the guaranty was provided.9 Accordingly, the franchisor must ensure that the proper material information is provided at the time of the signing of the guaranty and should ensure that the guaranty contains an agreement that all material information was provided.

C. Non-Compete Obligations

Cambodia does not currently have specific competition legislation. Although the Ministry of Commerce is working on a draft Competition Law, there is no timeline for its enactment. However, it is common for foreign companies to insert non-competition provisions in their franchise agreements to restrict franchisees from engaging in any activities that compete with the franchisor. In Cambodia, employees may not be restricted by their former employers in any way,10 effectively prohibiting non-compete provisions in employment relationships. The franchise agreement should take into consideration this limitation when drafting a non-compete provision, as the clause may affect the mobility of employees post-employment with the franchisee.

D. Fees and Taxes

Initial fees, continuing fees (management charges or royalty fees), advertising contributions, required advertising spend, and other customary franchisee fees are common in franchise agreements in Cambodia. There is no restriction on the amount that can be charged for initial fees, continuing fees or charges, advertising contributions, or required advertising spend. However, for tax purposes, advertising contributions and required advertising spend paid directly to the franchisor will generally be treated as royalties payable to the franchisor, according to the current practice of the General Department of Taxation.

Interest on overdue payments is allowed under the Civil Code, with a default interest rate of five percent per year unless specified otherwise.11 There is no maximum interest rate that can be charged on overdue payments, except in the context of a loan.12 If interest accrues unpaid for over one year despite payment being demanded of the franchisee, the franchisor can add the overdue interest to the principal amount.13

E. Termination and Damages

There are no specific statutory limitations on the right of a franchisor to terminate a franchise agreement. Termination rights (including compensation for early termination) are governed by the terms of the agreement, and breach of a contractual provision concerning termination may result in a civil action for damages.14 Any contractual provision that purports to limit a defaulting party’s liability for intentional non-performance, or non-performance resulting from gross negligence, is deemed to be void and unenforceable.15

In addition, a contractual provision providing for the payment of liquidated damages does not preclude a claim for additional damages arising from a breach or termination of the contract.16 Typically, liquidated damages clauses are enforceable in Cambodia as long as the damages amount reasonably correlates to the anticipated losses resulting from a breach.17 Liquidated damages fixed by the parties that are deemed punitive or grossly higher than the amount of damages actually suffered may be lowered by the court.18 The court is likewise authorized to award additional damages if the actual damages exceed the liquidated damages provided under the contract.19

F. Intellectual Property

Intellectual property is another key part of franchise agreements, with franchisors typically granting franchisees the right to use trademarks, systems, logos, advertisements, patents and industrial designs, and know-how in connection with the franchised business.

Trademark owners need to register their trademarks with the Department of Intellectual Property Rights (DIPR) to receive protection under local law for a renewable term of ten years.20 Since Cambodia is a member of the Paris Convention for the Protection of Industrial Property, a trademark priority claim period of six months is applicable.21 To maintain registration and avoid cancellation, the owner of the trademark must file an Affidavit of Use/Non- Use for the mark within one year following the fifth anniversary of the date of registration (or of the renewal date).22 In 2015, Cambodia became a member of the Madrid System; thus, trademark registration applications initiated at a national or regional intellectual property office of another party to the system can also be designated for filing in Cambodia.23

Under Article 19 of the Trademark Law, any license agreement for trademarks, including a franchise agreement with provisions on trademark licenses, must impose the obligation on the licensor to effectively control the quality of the goods or services in connection with the mark used; otherwise, the contract will not be valid.24

In theory, trademark license agreements cannot be enforced against third parties if they have not been registered with the DIPR.25 That means, in practice, it is only necessary to register a trademark license agreement, or a franchise agreement that contains trademark license provisions, if the licensor wants to allow the licensee the right to enforce the agreement against third parties (e.g., persons in Cambodia infringing on the licensor’s trademarks). The official fee to record a franchise agreement is KHR 400,000 (approximately $100) per trademark.26

Similarly, patent and industrial design licenses should be registered with the Ministry of Industry and Handicrafts (MIH).27 Cambodia is a member of the Paris Convention for the Protection of Industrial Property,28 a contracting state of the Patent Cooperation Treaty (PCT),29 and a contracting party to the Hague Agreement on the International Registration of Industrial Design.30 Although Cambodia lacks the infrastructure to examine patent applications, the MIH has made it possible to obtain patent protection in Cambodia through a number of agreements with other governments that set out an accelerated process that can be completed in months, not years. These agreements have been made with the Intellectual Property Office of Singapore,31 the Japan Patent Office,32 the European Patent Office,33 the China National Intellectual Property Administration,34 and, more recently, the Korean Intellectual Property Office35 and the United States Patent and Trademark Office.36

Cambodia ratified the Berne Convention in 2020, and the government was authorized to take the necessary steps to accede to the convention.37 At the time of writing, Cambodia has not yet deposited the instrument of accession with the director general of the World Intellectual Property Organization (WIPO), and several legislative or regulatory updates may be introduced to bring the country’s copyright law in line with the Berne Convention, including provisions relating to the automatic protection of foreign copyrights. Therefore, until Cambodia officially accedes to the Berne Convention, foreign copyrights are not protected in Cambodia unless the work is created by a person who is resident in Cambodia, created by a legal person with a registered office in Cambodia, or first published abroad and registered in Cambodia within thirty days of the first communication to the public.38 This reality means that franchisors’ manuals and other similar materials may not be protected in Cambodia through copyrights, and other means of protection (e.g., by keeping it as a trade secret or through the patent process) should be sought.

Cambodia does not currently have any law governing trade secrets. Mostly, franchisors use non-disclosure clauses in their franchise agreements to secure and protect their know-how from third parties.

G. Dispute Resolution

Choosing a foreign country’s law as the governing law for a franchise agreement does not contravene Cambodian law. However, in the authors’ experience, local courts may be unwilling to apply foreign law to disputes before them. In addition, certain subject matter (such as advertisement approval requirements for certain services, like healthcare,39 or the owning of land)40 can only be governed by Cambodian law.

Foreign franchisors should carefully consider the dispute resolution mechanism provided in their franchise agreements. Under Cambodian law, foreign court judgments are not enforceable in Cambodia unless, among other requirements, there is a guarantee of reciprocity between Cambodia and the country in which the court is based.41 Cambodia has only entered into such an agreement with Vietnam.42

Cambodia is, however, a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, so foreign arbitration awards are enforceable in Cambodia.43 Further, Cambodia has its own domestic arbitration institution called the National Commercial Arbitration Center.44 Foreign parties almost always include arbitration clauses in their franchise agreements, and they usually require arbitration to be conducted under the rules of an established foreign arbitration body such as the Singapore International Arbitration Centre (SIAC).45 Nevertheless, most foreign parties tend to conclude their disputes with a Cambodian counter-party by arriving at a settlement.

H. Real Estate

In Cambodia, land ownership is limited to Cambodian nationals, or entities of Cambodian nationality, meaning that at least fifty-one percent of the company’s shares are held by Cambodian nationals or other companies of Cambodian nationality.46 Foreigners may, however, own up to seventy percent of the floor space on co-owned buildings (which are akin to condos and mixed used developments).47 Any real estate related provisions in a franchise agreement should adhere to these limitations, and care should be taken to ensure that mechanisms are in place for any real estate related to the franchise.

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Footnotes

1. Cambodia Overview, Worldbank, https://www.worldbank.org/en/country/cambodia/overview.

2. Cambodia, Worldbank, https://ida.worldbank.org/results/cambodia.

3. Civil Code (2007) [Cambodia] [hereinafter Cambodia Civil Code].

4. Law Concerning Marks, Trade Names, and Acts of Unfair Competition (2002) [hereinafter Cambodia Trademark Law].

5. Sub-Decree on the Implementation of the Law Concerning Marks, Trade Names and Acts of Unfair Competition (2006) [hereinafter Cambodia Trademark Implementation Law].

6. Notification on the Recordal of License Contracts and Franchise Contracts (2015).

7. Prakas on the Recordal of License Contract over Mark and Franchise Contract (2020).

8. Cambodia Civil Code, art. 345.

9. Id. art. 900.

10. Labor Law, art. 70.

11. Civil Code, art. 318.

12. Prakas on Interest Rate Ceiling on Loan (2017), https://www.nbc.org.kh/download_files/legislation/prakas_eng/Prakas-on-Interest-Rate-Cap-Eng.pdf.

13. Cambodia Civil Code, art. 586.

14. Id. ch. IV (Remedies for Breach of Contract).

15. Id., art. 403(2).

16. Id., art. 403(4).

17. Id., art. 403 (1).

18. Id., art. 403 (3)

19. Id., art. 403.

20. Cambodia Trademark Law, art. 12.

21. Id., art. 6.

22. Cambodia Trademark Implementation Law, art. 21.

23. See Prakas on the Procedure for International Registration of Marks Under the Madrid Protocol (2016), https://wipolex.wipo.int/en/legislation/details/19479.

24. Cambodia Trademark Law, art. 19.

25. Prakas on the Recordal of License Contract Over Mark and Franchise Contract art. 14 (2020).

26. Inter-ministerial Prakas on the Provision of Public Services at the Ministry of Commerce (2017).

27. Law on Patents, Utility Model Certificates and Industrial Designs, art. 16 (2003).

28. Paris Convention for the Protection of Industrial Property, as last revised at the Stockholm Revision Conference, Mar. 20, 1883; Paris Notification No. 186, Paris Convention on the Protection of Industrial Property: Accession by the Kingdom of Cambodia, June 22, 1998, available at https://www.wipo.int/treaties/en/notifications/paris/treaty_paris_186.html.

29. PCT Notification No. 210, Patent Cooperation Treaty (PCT): Accession by the Kingdom of Cambodia, Sept. 8, 2016, available at https://www.wipo.int/treaties/en/notifications/pct/treaty_pct_210.html

30. Cambodia Joins the Hague System, WIPO News (Nov. 25, 2016), wipo.int/hague/en/news/2016/news_0011.html.

31. Memorandum of Understanding (MOU) on the Co-operation in Industrial Property between the Ministry Industry and Handicraft and the Intellectual Property Office of Singapore, Jan. 20, 2015; Renewal of the MOU on the Co-operation in Industrial Property between the Ministry of Industry and Handicraft and the Intellectual Property Office of Singapore, Jan. 14, 2020.

32. Joint Statement of Intent on Cooperation for Facilitating Patent Grant of Cambodia-Related Patent Application (May 4, 2016).

33. Agreement Between the President of the European Patent Office and the Cambodian Ministry of Industry and Handicraft (Jan. 23, 2017).

34. Memorandum of Understanding (MOU) on Cooperation on Intellectual Property Between the Ministry of Industry and Handicraft and the State Intellectual Property Office of China (Sept. 21, 2017).

35. Memorandum of Understanding (MOU) on Patent Cooperation Between Ministry of Industry and Handicraft and the Korean Intellectual Property Office of the Republic of Korea (Aug. 16, 2019).

36. Memorandum of Understanding (MOU) on the Co-operation to expedite the issuance of patents in Cambodia Between the Minister of Industry, Science, Technology and Innovation and USPTO (Oct. 23, 2020).

37. Law on Ratification of Cambodia to Join the Berne Convention for the Protection of Literary and Artistic Works 1886 and its Amendment in 1979 (2020).

38. Law on Copyright and Related Rights, 2003, art. 3 [Cambodia].

39. Prakas No. 028 on Private Practice Advertisement in Medical, Paramedical and Medical Aid Practices, 2004.

40. Constitution of the Kingdom of Cambodia, Sept. 21, 1993, art. 44; Land Law (amended 2001), art. 9 [Cambodia].

41. Code of Civil Procedure, art.199 [Cambodia].

42. Agreement on Mutual Judicial Assistance in Civil Matters Between the Kingdom of Cambodia and the Socialist Republic of Vietnam (Jan. 21, 2013).

43. Law on the Ratification and Implementation of the UN Convention on Recognition of Foreign Arbitration Award (July 23, 2001).

44. Law on Commercial Arbitration (2006) [Cambodia].

45. Singapore Int’l Arb. Centre, https://www.siac.org.sg.

46. Constitution of the Kingdom of Cambodia, dated September 21, 1993, Article 44; Land Law (amended 2001), dated August 31, 2001, Article 9.

47. Law on Providing Foreigners with Ownership Rights Over Private Part of Co-Owned Buildings, 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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