All questions

Franchise law

i Legislation

The Civil and Commercial Codes of Ukraine provide specific regulation of the ongoing relationship between franchisor and franchisee. In particular, these laws set forth some default ongoing franchisor obligations, which may be varied in the franchise contract. Namely, the franchisor is obliged to control the quality of goods produced by the franchisee and to regularly provide technical and consultancy support and training for the franchisee's personnel.

Competition law has to be taken into consideration and may substantially affect the franchise relationship. Specifically, Ukrainian competition law prohibits concerted actions that impose prices or other hardcore restrictions such as limitation of production or technical development, territorial markets and supplier allocation, and tying. The franchise agreement requires careful consideration in this regard, and further relations between the franchisor and franchisee must be constantly controlled for compliance.

When providing payments to a foreign franchisor in foreign currency, currency control laws must be under constant consideration.

ii Definition of a franchise

Ukrainian law does not use the term 'franchise'; instead it provides a definition for a 'commercial concession agreement', which is the equivalent of a franchise agreement in Ukraine. It may be logically inferred that a franchise is a legal relationship based on an agreement under which one party (title-holder) undertakes an obligation to grant for remuneration to the other party (user) the right to use a set of rights of the title-holder with the purpose of production or sale of certain goods and services. Pursuant to further provisions of Ukrainian law, the franchise agreement implies the use of a title-holder's rights, business reputation and commercial experience in the agreed scope, with or without reference to the territory and to particular areas of commercial activities.

iii Pre-contractual disclosure

Ukrainian law does not require formal pre-contractual disclosure in a franchise transaction. The parties decide on the information to present to each other and are not obliged to follow any particular procedure.

A franchisor does have to provide a copy of the technical and commercial documentation and other information necessary for performance of the franchisee's rights under the commercial concession agreement. However, this obligation only arises after the contract has been concluded.

iv Registration

Registration of franchise agreements is no longer required under Ukrainian law. The statutory registration requirement was abolished as of 5 April 2015, in the wake of the business deregulation policy pursued by Ukrainian government.

Nevertheless, to ensure better legal protection, the franchisee may (but is not obliged to) apply for and procure registration of the assignment or transfer of the trademark rights assigned to the franchisee by the franchisor under a franchise or trademark licence agreement. Such an assignment of trademark rights is registered with the State Trademarks Register of Ukraine and the franchisee is issued a registration certificate.

v Mandatory clauses

In general, provisions in franchise contracts should not contradict the statutory provisions of Ukrainian civil and commercial law. Even though some deviation from statutory provisions is generally allowed according to the principle of freedom of contract, this should not be a substantial deviation. Otherwise, there is a risk that the court would render a deviating contractual clause unenforceable and choose to apply a statutory provision instead.

vi Termination of the franchise agreement

If a franchise contract is conducted for an indefinite period, both parties are entitled to its unilateral termination upon a six-month notice unless the contract envisages a longer notice period.

If a franchise contract is conducted for a defined period, termination is only possible upon mutual consent of the parties or on the basis of a court decision. Court ability to terminate the franchise relationship is limited to the general restrictions available in the laws on contract termination. In particular, the court may terminate the franchise contract if the franchisor proves a substantial breach on the part of the franchisee. In some limited circumstances, the franchisor may also claim a substantial change due to unforeseen and irremediable circumstances.

The franchise contract also terminates under operation of law in the following cases: when a franchisor loses its title to the trademark, without substitution; or in the case of the bankruptcy (insolvency) of the franchisor.

vii Guarantees and protection

Guarantees are often necessary to protect the foreign franchisor against the lack of adequate creditor protection rules in Ukraine. Foreign franchisors usually request a surety from beneficial owners or affiliated business entities or, less often, a bank guarantee to secure financial obligations. It should be taken into account, however, that Ukrainian currency regulations may have specific regulatory requirements for the outbound payment under the surety agreement by an individual resident or a Ukrainian legal entity (other than a bank) in foreign currency, which may turn out to be rather problematic.