Franchise lawi Legislation
There is no dedicated franchise act in Russia. Franchising activities are specifically regulated by the Russian Civil Code (Chapter 54 of Part II). In addition, the general provisions of the national civil law, especially those that govern the law of contracts and performance of obligations (Part I of the Russian Civil Code) and intellectual property law (Part IV of the Russian Civil Code), may also apply to franchise operations. Finally, the ongoing franchise relationship may also be affected by local laws on competition and commercial law, labour and employment, real estate and property law, tax and currency control, information technology and data protection, advertising and consumer protection, as well as other effective Russian laws and regulations.ii Pre-contractual disclosure
Pre-contractual disclosure is not mandatory under Russian law. Nor does Russian law require the franchisor to provide disclosure updates within the term of the franchise agreement. The law only states that the franchisor shall provide technical and commercial documentation and any other necessary information for the franchisee to be able to develop the franchised business, and to instruct the franchisee and its employees on the aspects associated with franchising activities. However, this does not necessarily mean 'pre-contractual disclosure' in the sense understood in international franchise practice.
The foregoing disclosure obligations may be established by the parties on the basis of the doctrine of culpa in contrahendo and the principle of good faith at the stage of negotiations pertaining to a prospective franchise transaction.
The format of disclosure is not prescribed by Russian law or published by any governmental agency. Hence, the parties to a contract are free to use and be guided by the documentation normally used in overseas franchising deals.iii Registration
Every franchise agreement has to be made in writing. In addition, the grant of franchise contemplated by the underlying franchise agreement must be registered with Rospatent. A franchise that is not registered with Rospatent will be invalid.4 As a result, the parties will not be able to enforce the contracted rights or obligations against third parties in the event of a non-registered franchise grant. Hence, registration shall not be waived, whether in the context of domestic or cross-border franchising.
Russian law does not set a specific limitation period within which the franchise grant has to be registered with Rospatent. Unless there is an agreement to the contrary, the registration obligation vests with the franchisor, who must prepare and file the appropriate set of documents with Rospatent.
There are various options regarding documents that may be submitted to Rospatent in support of the concluded transaction in addition to the power of attorney authorising the local representative (e.g., a trademark attorney) to make the filing. It is, therefore, possible to provide: (1) the original franchise agreement; (2) a notarised excerpt from the same; or (3) the statement of franchise (notification), executed by the parties. Before filing, it is essential to ensure that the original franchise agreement, as well as the document that has been chosen for submission to Rospatent, contains all essential elements (mandatory clauses) required by Russian law and dictated by local practice. Importantly, if the parties do not wish to disclose the original contract along with stated financial information or any other sensitive data, the best option would be to make and file an excerpt from the agreement, or present the notification.
In practice, the registration process may take about two to three months in the absence of office actions or Rospatent enquiries.iv Mandatory clauses
The franchise agreement may contain various terms and conditions depending on the transaction structure and the parties' negotiations.
In general, a contract of this type will usually contain a section on the parties and a statement of their intentions, definitions and interpretation, the franchise or licence grant, term and renewal, franchise fees and payment order, the franchisor's and franchisee's duties, site selection or construction and approval, training and education, inspections and audits, accounting and records, advertising and promotion, protection of franchised assets and confidential information, default and termination, the franchisee's rights and obligations upon termination, franchise transfer and sub-franchising, and governing law and dispute resolution, as well as other general clauses.
As regards Russian law and registration, the franchise agreement must address the following essential elements (points):
- parties (i.e., corporate names and addresses);
- subject matter (i.e., registration numbers of the franchised trademarks and description of the other franchised IP rights (e.g., copyrights, know-how));
- franchised products (i.e., goods or services for which the licensed trademark is protected and licensed);
- scope of franchised rights (i.e., permitted manners of IP use and distribution of franchised goods or services);
- franchisee's duties and covenants (i.e., compliance with standards or manuals, quality compliance, confidentiality obligations, non-compete, site selection and approval, customers' support, etc.);
- consideration (i.e., franchise entrance fee, lump sum, royalties, etc.);
- type of franchise (i.e., sole versus exclusive versus non-exclusive);
- term (i.e., term of protection of franchised IP or certain specific period);
- territory (i.e., whole of Russia or certain specific areas);
- sub-franchising (i.e., permitted or prohibited, how many versus to whom, etc.);
- franchise renewal (i.e., franchisee's right of first refusal);
- termination (i.e., mutual or unilateral, for cause or convenience, etc.);
- post-termination (i.e., franchisee's rights, obligations and liabilities following termination); and
- signatures (i.e., names and titles of signees).
In the context of franchising, a franchisee can resort to different types of guarantees and protection measures to secure its contractual obligations to a franchisor. First of all, the franchisee can obtain insurance coverage from an insurance company for the risks associated with the development of the franchised business. Second, the franchisee may guarantee the performance of its duties through the agency of a third party, including the director general or company owner. In addition, the franchisor can be secured by way of engagement of a bank or other commercial organisation providing an independent guarantee over the transaction. Finally, the parties may negotiate the payment of security deposits or default interests to ensure the payment of franchise fees. Other guarantees and protection can be agreed in the course of parties' negotiations.