Legal restrictions on franchise contracts and the relationship between the parties

Franchise relationship laws

Are there specific laws regulating the ongoing relationship between franchisor and franchisee after the franchise contract comes into effect?

Apart from the draft Franchise Act, there are no specific laws that govern the entire on-going relationship between the franchisor and franchisee after the contract comes into effect. The Thai Courts’ interpretation of the UCTA and the TCA is that after the termination of the agreement, the competition clause may survive termination for a period between two to three years depending on the jurisdiction and facts concerned. During the term of the franchise contract, if the contract is deemed a standard contract in the view of a Thai Court, certain terms unreasonably favourable to the franchisor may be considered an unfair contract term and will, therefore, be adjusted as considered fair and appropriate by the Thai Courts.

Operational compliance

What mechanisms are commonly incorporated in agreements to ensure operational compliance and standards?

The law does not prohibit or restrict the franchisor from inspecting and auditing the franchisee to ensure operational compliance and standards. On the contrary, the law encourages the franchisor to ensure that the quality of the products or services provided reaches the franchisor’s satisfaction. This is evidenced by the TA even specifying that a licensor has the obligation to investigate, audit and inspect the licensee’s operation to ensure that the standards are consistent.

Amendment of operational terms

May the franchisor unilaterally change operational terms and standards during the franchise relationship?

If the change is within the scope of the franchisor’s reserved right or agreed with the franchisee in the franchise agreement, there is nothing to prohibit the franchisor from unilaterally changing the operational terms and standards. However, the franchisor should be aware that under the UCTA, standard forms contracts are generally deemed unfair by the Thai Courts. Therefore, if the change clearly prescribed the franchisor with an unreasonable advantage over the franchisee, the terms may be rendered enforceable only to the extent considered reasonable by the Thai courts.

However, considering that the franchisor and franchisee are both business operators, they should be of similar standing and have equal bargaining power. If this is the case, the chance of the changed terms being rendered unfair is relatively low. Further, if the change is to ensure compliance with industry practice, there is minimal risk for franchisor to be considered liable under the UCTA.

Other laws affecting franchise relations

Do other laws affect the franchise relationship?

The legislations listed in question 11 may affect the franchise relationship. However, the degree of relevance will depend on the facts.

Policy affecting franchise relations

Do other government or trade association policies affect the franchise relationship?

No specific policies exist that would significantly affect the franchise relationship. Nevertheless, it should be noted that the government has a general policy of supporting agreements between private parties, including franchise agreements, because these agreements encourage economic growth and development.

Termination by franchisor

In what circumstances may a franchisor terminate a franchise relationship? What are the specific legal restrictions on a franchisor’s ability to terminate a franchise relationship?

There are no specific circumstances or requirements under which a franchisor may terminate a franchise relationship. Nevertheless, if the franchisee breaches the franchise agreement, the franchisor may have the right to terminate the relationship under regular contract law. Similarly, contract law would require the franchisor to compensate the franchisee for early termination of the franchise agreement, if it is a termination without cause.

However, the draft Franchise Act contains a provision whereby the right to terminate the franchise agreement by either party must be detailed in the franchise agreement.

Termination by franchisee

In what circumstances may a franchisee terminate a franchise relationship?

Current legislation provides no specific circumstances under which a franchisee can terminate a franchise agreement.

Similar to question 32, a franchisee may also terminate the franchise agreement with cause if the franchisor breaches an agreed material provision, if any, of the franchise agreement.

The draft Franchise Act allows the franchisee to terminate the franchise agreement in the following events: (i) if all necessary information has not been disclosed by the franchisor within 60 days of the execution of the agreement; (ii) when the franchisor’s business is transferred (inclusive of when there is a transfer of majority shares issued by the franchisor); or (iii) if the franchisor’s licence is cancelled or not renewed by the authority, without any fault on the part of the franchisee.

Renewal

How are renewals of franchise agreements usually effected? Do formal or substantive requirements apply?

As there is no specific law governing this issue, this depends mainly on the contractual agreement between the franchisor and the franchisee.

Under the draft Franchise Act, the franchise agreement must contain certain provisions, one of which must deal with the renewal or the non-renewal of such agreement. Nonetheless, the franchise licence will be valid for five years and renewable until the Registrar objects.

Refusal to renew

May a franchisor refuse to renew the franchise agreement with a franchisee? If yes, in what circumstances may a franchisor refuse to renew?

This depends mainly on the contractual agreement between the franchisor and the franchisee, as there is no specific statutory law governing the issue. However, in case the trademark licensing registration is required, kindly note that the trademark registration will be valid for 10 years. The franchisor must, therefore, renew the trademark registration on a timely basis so that its related trademark licensing and franchising continues to be valid.

See question 34 for further detail.

Transfer restrictions

May a franchisor restrict a franchisee’s ability to transfer its franchise or restrict transfers of ownership interests in a franchisee entity?

Yes. Under the terms of a franchise agreement, a franchisor may restrict a franchisee’s ability to transfer its franchise or ownership interests, as long as the restriction was initially agreed upon in the franchise agreement. Currently, there are no laws empowering the franchisor to restrict the franchisee’s ability to transfer its franchise or restrict transfers of ownership interest. Therefore, parties are generally free to agree on such restrictions.

On the contrary, the draft Franchise Act restricts a franchisor’s ability to transfer its franchise business or its intellectual property (IP) rights to others. The transferee of such business or right must be binding upon the franchise agreement previously done between the transferor (ie, ex-franchisor) and the franchisee. The franchisor must notify the Registrar at least seven days before the execution of the business or IP rights transfer agreement with the third party transferee. The franchisor must also notify the franchisee 60 days prior to the transfer of the business or IP rights to a third party transferee.

Fees

Are there laws or regulations affecting the nature, amount or payment of fees?

Under current law, there is no law regulating the nature, amount or payment of fees. Under the draft Franchise Act, although payment of fees are required, it does not specify the nature or amount of those fees. The draft Franchise Act only prohibits the franchisor to call for any fee or deposit before signing of the franchise agreement, except for necessary expenses (eg, fee for registering the franchise agreement with the Registrar).

Usury

Are there restrictions on the amount of interest that can be charged on overdue payments?

There are no restrictions on the amount of interest upon default that can be charged if such amount or rate is set forth in the franchise agreement. If the interest rate upon default is not agreed in the agreement, the statutory default interest rate of 7.5 per cent will apply (but in all case not exceeding 15 per cent per annum).

In addition, the parties may agree in advance that the franchisee pays a monetary penalty (ie, a liquidated damage) for non-performance or improper performance of the franchisee, that is, for late or overdue payments. However, if the rate of the penalty is unreasonably high, Thai courts are empowered to adjust the penalty rate to an appropriate figure. Thai courts have complete discretion as to whether or not the penalty is considered ‘high’.

Foreign exchange controls

Are there laws or regulations restricting a franchisee’s ability to make payments to a foreign franchisor in the franchisor’s domestic currency?

Currently, there is no requirement under Thai law or the draft Franchise Act requiring payment to be made in Thai baht. Therefore, the payments can be made in a different currency if agreed by both parties. However, if the payments are to be remitted to any foreign country, the Thai foreign exchange control would apply. Purchase of foreign currency from authorised banks is generally allowed upon submission of documents indicating international trade and investment.

Confidentiality covenant enforceability

Are confidentiality covenants in franchise agreements enforceable?

Yes. Confidentiality covenants in franchise agreements are generally enforceable as Thailand allows for freedom of contract. Additionally, the TSA provides added protection for the trade secrets of franchisors.

The draft Franchise Act provides even more protection regarding confidentiality. Under the draft Franchise Act, a franchisee and its representative are prohibited from disclosing any confidential information as required by the franchisor under the franchise agreement. Non-compliance with the aforementioned would expose the franchisee and its representative to criminal punishment.

Good-faith obligation

Is there a general legal obligation on parties to deal with each other in good faith during the term of the franchise agreement? If so, how does it affect franchise relationships?

Yes. Under section 5 of the CCC there is a fundamental legal obligation on parties to deal with each other in good faith. This requirement affects franchise relationships in the same way it does all other areas of law. If a party does not deal in good faith, the Thai courts may find the franchise agreement to be void or void them at the request of the other party.

There is no specific obligation for the parties to maintain good faith during the term of the franchise agreement, therefore whether or not the parties maintain good faith depends on the party. However, the parties will be subject to duties that are specified in the franchise agreement and this could include maintaining good faith. If a party wishes to change the purpose of the franchise agreement, the party should amend or terminate the franchise agreement.

Franchisees as consumers

Does any law treat franchisees as consumers for the purposes of consumer protection or other legislation?

The Consumer Protection Act 1979 (CPA) will apply to the contracts and advertisements made between the franchisee and the consumers. However, as both the franchisee and franchisor are business operators, they are not considered as a ‘consumer’ under the CPA. Therefore, such seller-consumer relationship does not arise between the franchisor and franchisee.

Language of the agreement

Must disclosure documents and franchise agreements be in the language of your country?

Disclosure documents and franchise agreements can be in Thai or in another language. However, if the documents are to be registered or provided to Thai governmental authority or Thai courts, they must be translated into Thai to be admissible. Nevertheless, the draft Franchise Act requires that the franchisor must prepare and provide the franchisee with a ‘business operation manual’. The business operation manual must be made in Thai and in line with the details described by the Minister of the MOC.

Restrictions on franchisees

Describe the types of restrictions placed on the franchisees in franchise contracts.

There are currently no specific restrictions on provisions in franchise contracts. Nevertheless, the draft Franchise Act prohibits a franchisor from forcing a franchisee to buy, rent or hire-purchase equipment, goods or any services from, or as designated by, the franchisor. In addition, the draft does require at least the following to be provided:

  • the date of the contract and the date the contract becomes effective;
  • rights, duties and responsibilities of the franchisor;
  • rights, duties and responsibilities of the franchisee;
  • period and area in which the franchisor gives permission to the franchisee to use its intellectual property rights in operating its business;
  • deposits, fees and other costs that the franchisee must pay the franchisor; and
  • agreements regarding contract renewal, termination, transfer of rights and return of money in the event that the franchisor breaches the contract.

See also question 45 for additional requirements under the TCA.

Competition law

Describe the aspects of competition law in your country that are relevant to the typical franchisor. How are they enforced?

The TCA prohibits or restricts any business operator (franchisor) from entering into an agreement with another business operator (franchisee) in the same market to conduct any act amounting to a monopoly, reduction of competition or restriction of competition in the market of any particular good or a service, such as:

  • fixing selling prices or restricting the sale volume;
  • fixing buying prices or restricting the purchase volume;
  • fixing conditions to enable one party to win a bid or tender or to prevent one party from participating in a bid; or
  • restricting geographical areas or customers to whom each business operator may sell goods or provide services, etc.

The above will not apply to the conduct of business operators related to each other owing to a policy or commanding power as prescribed in the Commission’s notification.

Under the recent TCA, although the following activities are prohibited to be taken by business operators, they are allowed in case of a franchise:

  • establishing conditions (ie, fixing selling or buying price or limiting the sale or purchase volume among business operators that are not competitors in the same market);
  • reducing the quality of goods or services to a condition lower than that previously produced, sold, or provided;
  • appointing or assigning any one person to exclusively sell the same goods or provide the same services, or of the same type;
  • setting conditions or practices for purchasing or producing goods or services so that the practice follows what is agreed; and
  • entering joint agreements in other manners as prescribed in the Commission’s notification.
Courts and dispute resolution

Describe the court system. What types of dispute resolution procedures are available relevant to franchising?

The Thai court system is similar to the court system in other civil law jurisdictions. Other dispute resolution procedures, such as mediation and arbitration, are also available to parties engaged in a franchising agreement.

Arbitration – advantages for franchisors

Describe the principal advantages and disadvantages of arbitration for foreign franchisors considering doing business in your jurisdiction.

Foreign franchisors contracting with Thai local franchisees often choose arbitration, whether foreign or domestic, as the dispute settlement mechanism. The main reasons for such a decision are as follows: (i) expedited hearing (in comparison with the Thai court process); (ii) less formality; and (iii) the ability to choose a more familiar language. The foreign arbitration award can be enforceable in the Thai Courts according to the Arbitration Act 2002.

Nevertheless, even though this expediency and flexibility is advantageous, the arbitration award must be submitted to a Thai court for enforcement if the adverse party refuses to comply - the award has no enforcement power of its own. The room for challenging the award when it is being enforced through the Thai courts is relatively low.

National treatment

In what respects, if at all, are foreign franchisors treated differently from domestic franchisors?

Other than the different legal requirements for business entity formation and taxation, as discussed, foreign franchisors operating franchise businesses in Thailand are treated in the same way as domestic franchisors. Under the draft Franchise Act, for foreign franchisors operating businesses offshore, unlike for domestic franchisors, a franchise licence is not required, provided that related franchise agreement is duly registered in Thailand.