Contract law

In Singapore, there are no franchise-specific legislation or franchise registration requirements. The relationship between the franchisor and franchisee is governed by general contract law.

Franchising and Licensing Association of Singapore

The Franchising and Licensing Association of Singapore (FLA), was established in 1993 to develop Singapore’s franchising industry. The FLA has issued a Code of Ethics 2017, which regulates franchising affairs between its members. However, it is not compulsory for franchisors to register and be a member of the FLA.

Generally, the franchisor and franchisee must comply with the terms of the franchise agreement. If the franchisor is a member of the FLA, the franchisor must also comply with the Code of Ethics, which includes the following provisions:

• Written agreement: all matters material to the franchise must be in writing.
• No misleading promotion: members must not promote any franchise, product or service in a misleading manner.
• Full information on investment requirements: the investment requirements of a franchise must be detailed to avoid being misleading.
• Disclosure: the franchisor must disclose all its operations, the investment required, performance records and any other material information to the franchisee at least seven days before execution of the franchise agreement.
• Legal advice: the franchisor must advise a prospective franchisee to seek professional legal and financial advice.
• Contact existing franchisees: the franchisor should encourage a prospective franchisee to contact existing franchisees to gain a better understanding of the business.
• No imitation of other’s trademarks: members cannot imitate the trademark or business name of another business.
• Proper selection of franchisees: the franchisor should only accept a franchisee with the necessary skills and resources.
• Provision of proper training: the franchisor must provide proper training to help franchisees improve.
• Business guidance: the franchisor must provide guidance.
• Accessibility of franchisor: the franchisor should be responsive to communication from franchisees.
• Transferability of franchise: the franchisor shall not withhold approval of a transfer of a franchise if the transferring franchisee is compliant with the franchise agreement, the proposed transferee meets the current requirements of the franchisor and the franchisor does not wish to exercise the right of first refusal.
• Standards of conduct: fairness shall characterise all dealings between a franchisor and its franchisee.
• Notice of breach and time for remedy: the franchisor shall give notice of breach and grant reasonable time to remedy the fault.
• Termination with good cause: a franchise agreement may only be terminated with good cause.
• Dispute resolution: the franchisor should make every effort to resolve conflicts with the franchisees in good faith through negotiation.

Tax

Where the franchisor is a foreign franchisor, royalties paid are likely to be levied at a 10 per cent withholding tax.

Competition law

In Singapore, the Competition and Consumer Commission of Singapore administers the Competition Act 2004 (the Competition Act), which prohibits agreements between undertakings that have as their object or effect the prevention, restriction or distortion of competition within Singapore (the Section 34 Prohibition). However, according to paragraph 8 of the Third Schedule to the Competition Act, the Section 34 Prohibition generally does not apply to vertical agreements (the exclusion). Vertical agreements are agreements entered into between two or more undertakings each of which operates at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain products. This exclusion includes intellectual property right (IPR) provisions contained in such agreements, provided that they do not constitute the primary object of the agreements and are directly related to the use, sale or resale of products.

According to the CCCS Guidelines on the Treatment of Intellectual Property Rights, the exclusion covers agreements that concern the purchase or redistribution of products, such as a franchise agreement where the franchisor sells to the franchisee products for resale. This includes IPR provisions contained in the franchise agreement, such as the trademark and know-how that the franchisor licenses the franchisee to market the products.

Agreements with IPR provisions that do not fall under the exclusion under paragraph 8 of the Third Schedule, such as agreements that have as their primary object the assignment or the licensing of IPRs for the manufacture of products, will be assessed in accordance with the following framework:

• Step 1: CCCS will first distinguish if the agreement is made between competing or non-competing undertakings. Agreements between non-competitors pose significantly smaller risks to competition. CCCS will examine whether the undertakings would have been actual or potential competitors in the absence of the agreement.
• Step 2: CCCS will then consider whether the agreement and the licensing restraints restrict actual or potential competition that would have existed in their absence.
• Step 3: CCCS will consider whether an agreement that falls within the scope of the Section 34 Prohibition may, on balance, have a net economic benefit. An agreement may have a net economic benefit where it contributes to improving production or distribution or promoting technical or economic progress and it does not impose on the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the good or services in question.

Considerations under a franchise agreement

Some key considerations when preparing a franchise agreement include the following:

• intellectual property;
• royalties and fees;
• operations; and
• non-compete.

Intellectual property

It is crucial for a franchisor to protect its IPRs before entering into a franchise agreement. IPRs include trademarks, patents, know-how and other valuable features of the franchisor’s business. IPRs, such as trademarks and patents, can be protected by registration.

Typically, a franchisor would grant a franchisee the right to use the franchisor’s trademarks and know-how for a specified duration. Under the Trade Marks Act 1998, the licensing of a trademark is required to be in writing and signed by or on behalf of the grantor. An exclusive franchise licensee of a registered trademark may bring a trademark infringement action against unauthorised use of the trademark by any third party.

It is advisable for franchisees to record the licensing of a registered trademark with the Singapore Trade Marks Registry to protect their rights in the licensed trademark. Failure to do so may result in the licence being ineffective against a person acquiring a conflicting interest in the same trademark in ignorance of the licensing transaction.

The franchise agreement should specify the extent and scope of the rights being granted to prevent any unauthorised use of the franchisor’s rights and know-how. Most agreements also provide that upon termination, the franchisee’s right to use the licensed IPRs and know-how similarly terminates.

Franchisors may require a grant-back of the improvements or ancillary IPRs developed by the franchisee to the franchisor for use in its network.

Royalties and fees

The Franchise agreement should also specify the way payment is to be made to the franchisor. Payment may be in the form of royalties or a lump sum. Franchisors may also require the franchisee to pay an initial franchise fee for the use of the franchisor’s brand and training of the franchisee’s staff.

Operations

Franchisors usually include clauses that require the franchisee to maintain the quality, standards and uniformity of the franchise. The franchise agreement may also specify the approach towards executing franchise operations, training, advertising and other administrative matters relating to the operations of the franchise.

Non-compete provisions

Franchisors may also include a non-compete clause to protect their interests. Notably, however, all covenants in restraint of trade are prima facie void. However, they can be held to be valid if the party seeking to rely on the restrictive covenant can show that, firstly, the clause is reasonable in the interests of the parties and, secondly, the clause is also reasonable in the interests of the public. Additionally, there must be a legitimate proprietary interest to be protected. The court will only enforce the covenant if it goes no further than necessary to protect the legitimate interests. Although there is no single decisive factor, the courts have generally approached this issue by considering three main factors: the trade restrained, the geographical area and the duration of the restraint. The courts generally adopt a relatively stricter approach towards restraint of trade covenants in the employment context as opposed to that in a business context, where a franchise agreement is entered into between corporate entities.

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This article is an extract from GTDT Practice Guide Franchise 2022

LEXOLOGY (Makarim & Taira S.)