Resale price maintenance and other limitations
Franchisee's rights after franchise agreement ends
Unilateral termination
Remuneration
Remaining restrictions
In July 2011 the state authorities approved a number of business-friendly amendments to the Civil Code regarding franchise agreements. The amendments, which will come into effect on October 21 2011, will bring Russia's franchise law framework more closely into line with those of Western jurisdictions, simplifying market entry for non-Russian companies.
Resale price maintenance and other limitations
At present, Russian law contains contradictory provisions on resale price maintenance. Competition legislation allows a franchisor to set minimum and maximum resale prices, whereas the code's provisions on franchising prohibit the setting of such prices and do not allow for the limitation of sales to a pre-defined group of customers. The amendments eliminate this contradiction by dropping the restrictions in the code and allowing franchisors to impose such limitations.
The code also prohibits an operator from limiting sales to certain customers in a defined territory. This limitation remains in force.
Franchisee's rights after franchise agreement ends
A significant disadvantage of Russian franchise law is that a franchisor remains subject to far-reaching restrictions following the expiry of a franchise agreement. Provided that the franchisee duly performed its obligations while the agreement was in effect, it retains a statutory right of first refusal to renew the agreement for a new term, on the same conditions, when the agreement expires. The franchisor's only alternative to renewal is to refrain from entering into a franchise agreement with another party in the same territory for three years.
The amendments ameliorate - but do not eliminate - these restrictions. A former franchisee will still enjoy a right of first refusal, but will no longer be automatically entitled to renew on identical terms and conditions; rather, the franchisor will be able to propose new terms and conditions in accordance with market demands. However, if the parties fail to reach agreement on the terms of renewal, the franchisor may not grant a third party the same franchise rights, on the same conditions as those stipulated in the previous franchise agreement, until one year has elapsed. If the franchisor ignores this restriction, the former franchisee may demand that such rights be transferred to it and may claim for losses incurred as a result of the franchisor's refusal to renew.
The retention of the franchisee's right of first refusal and the provision on demanding the transfer of rights under a new franchise agreement with a third party are presumably based on the argument that franchisees typically invest considerable time and effort in establishing their business, and that as long as they have performed their role as required during the initial term of the agreement, they should enjoy a measure of protection from abandonment by the franchisor.
Unilateral termination
The amendments broaden the parties' ability to terminate the franchise agreement, particularly in favour of the franchisor.
The parties may contractually agree that either party may withdraw from the agreement before its expiry with 30 days' notice on payment of a fixed and specified sum.
The franchisor can terminate the franchise agreement, in full or in part, if the franchisee:
- breaches quality requirements for goods manufactured, services rendered or work performed;
- deviates from the franchisor's instructions regarding intellectual property; or
- fails to pay the franchisor on time.
On the first instance of such a breach, the franchisee must be given reasonable notice and opportunity to cure it. However, if the same breach recurs within one year, the franchisor may withdraw from the franchise agreement.
Remuneration
Under the existing law, a franchisor may receive remuneration from the franchisee as either a fixed lump-sum payment or in royalties, but not both. The amendments eliminate this restriction.
Franchise agreement registration and required scope of IP rights
All franchise agreements in Russia must be registered with the Patent and Trademark Office in order to be legally valid. A franchise agreement can be submitted for registration only once the underlying trademark has been registered in Russia. Even then, compliance with the registration requirement entails the Patent and Trademark Office undertaking a line-by-line review of the proposed agreement to check for compliance with mandatory provisions of Russian law. An agreement that is fully compliant can take up to two months to be registered.
Franchisor's liability for claims against franchisee
Franchisors and franchisees remain jointly and severally liable for defects in goods and services produced under the franchise agreement. The franchisor is secondarily liable for defects in goods provided to the franchisee pursuant to the franchise agreement, even if the franchisor has no direct control over the franchisee's actions.
The amendments were originally intended to eliminate joint liability and limit several liability, but these proposed changes were omitted from the final version.
For further information on this topic please contact Natalya Babenkova at Noerr by telephone (+7 495 799 56 96), fax (+7 495 799 56 97) or email ([email protected]).