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?

The relations between the franchisor and the franchisee under the effective (registered) franchise transaction are basically regulated by the Russian Civil Code.

Operational compliance

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

Franchise agreements usually contain standard audit and reporting provisions. In addition, trademark control (use) provisions, quality control clauses, system and standards compliance conditions, as well as confidential information non-disclosure duties are normally stipulated. The franchisor reserves the right to check for compliance with these provisions. Failure to abide by the contractual obligations will give the franchisor the right to terminate the franchise agreement and claim the associated damages or penalties. Further, the contract may provide for technical or operation suspension (eg, deactivation of software access), at least for the period of a breach. Non-compliance with post-termination operational terms and standards may lead to IP infringement actions that may be brought by franchisors.

Amendment of operational terms

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

Operational terms and standards usually form the integral part of underlying franchise agreements, which may be amended or modified on the basis of the agreement of the parties during the contracted term. Unilateral changes to the contractual provisions, including those relating to operational compliance or standards, are permitted only if explicitly allowed by contract. Otherwise, the franchisor may be restricted from performance of unilateral operational changes during the course of the franchise relationship.

Other laws affecting franchise relations

Do other laws affect the franchise relationship?

The franchise relationship may be affected by the local laws on intellectual property and information technology, advertising, competition, consumer protection and other laws, including on tax and real estate.

Policy affecting franchise relations

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

The Russian Franchise Association (RFA) is a non-profit-making organisation that helps its members to promote franchising business in Russia. Although the RFA does not have any regulatory power, it may give certain practical recommendations and tips regarding carrying on franchising business on the Russian market. There are currently over 300 members of RFA. More information about RFA can be found at www.raf.ru (in Russian).

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?

The franchisor may terminate a franchise relationship at any time if the franchise agreement has been concluded without specifying a definite term. Six months’ prior notice is required in this case, unless the contract indicates a different term for advance notification. If the contract provides for a specific period of validity, the parties should be guided by the terms of the franchise agreement.

Either of the parties to the franchise agreement concluded for a term or without indication of the term may repeal the agreement by providing 30 days’ advance notice to the other party. This option is only available if the contract provides for financial compensation for early release.

The franchisor may also terminate the franchise agreement if the franchisee produces goods of inferior quality or the quality of its services does not correspond to what is set forth in the contract. The franchisor may repeal the franchise agreement if the franchisee does not follow its instructions aimed at compliance with the terms of the contract. Finally, the franchisor may cancel the franchise agreement if the franchisee does not pay the contractual compensation as provided by the contract.

Early termination or amendment of the franchise agreement has to be registered with Rospatent.

If the right to a franchised trademark or trade name is lost for whatever reason the franchise agreement terminates accordingly. If the franchisor or the franchisee becomes insolvent (bankrupt) the franchise agreement is also terminated.

Termination by franchisee

In what circumstances may a franchisee terminate a franchise relationship?

Either party may terminate a contract of finite or indefinite duration with 30 days’ notice if the franchise agreement provides for financial compensation for such release. Other conditions for terminating the contract by the franchisee may be also included in the franchise agreement (eg, the franchisor does not share the contracted information and documents with the franchisee without which performance of obligations in a proper manner is not possible).

Renewal

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

Renewals are usually agreed by and between the parties. Renewals will be subject to recordal and must be filed prior to the expiry of the initial terms, as agreed between the parties.

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?

The franchisor may refuse to renew the franchise agreement with the franchisee if its performance has not been in compliance with the terms of the contract. The franchisor may also refuse to extend the term of the franchise agreement at any time and without explanation. In this case, however, the franchisor should not conclude a franchise agreement on the same terms with another person for one year. Otherwise, the former franchisee may demand that the new franchise agreement be transferred in its favour along with the reimbursement of damages or simply claim for the payment of damages. Generally, the franchisee that has been duly performing its obligations under the franchise agreement has a pre-emptive right to renew the expired contract.

Transfer restrictions

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

The franchisee may be allowed or prohibited by the franchisor from transferring its franchise to a third party. The franchisor may restrict transfers by the franchisee of ownership interests in a franchisee’s entity to a third party if the franchisor has acquired corporate control over the franchisee’s business.

Fees

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

The Russian Civil Code sets forth that payments under the franchise agreement can be made in any manner, including as lump sums or periodical payments or otherwise, as the parties negotiate. The parties may agree on the amount of franchise fees in any applicable manner, but such fees should be based on the appropriate market value of the franchised intellectual property in question. Should the franchise fees be obviously below or above the market figures or specifically deviate by more than 20 per cent from the corresponding market prices, the local tax authority may correct the contractual payments.

Usury

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

There is no mandatory limitation on the amounts of interest to be paid on overdue payments. In practice, the parties usually provide that a set fraction of the figure of overdue payment should be included in the contract. If the interest charged is too high, the courts may moderate it. In addition to damages and contractual default interests, late payment percentages under franchise agreements may be also recoverable.

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?

The franchisee is not restricted by law from making payments of franchise fees to the foreign franchisor. The only requirement is that the franchisee should have an appropriate currency account with the Russian bank to transfer moneys in a foreign currency. As has been mentioned above, the franchise under the agreement must be registered with Rospatent. Without that registration the competent bank will not record and account the contract, and without such bank recordal moneys cannot be wired overseas. The bank recordal is required in cross-border franchising transactions amounting to or exceeding 3 million or 6 million roubles (as applicable).

Confidentiality covenant enforceability

Are confidentiality covenants in franchise agreements enforceable?

The confidentiality covenants in franchise agreements are generally enforceable. By operation of law, franchisees are obliged to keep the franchised trade secrets (know-how) or other confidential commercial information in confidence. The information will be regarded as confidential if the corresponding legal data protection requirements are duly observed. The breach of confidentiality or disclosure of confidential information must be proved to seek an award of damages in court.

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?

There is a specific legal provision in the Russian Civil Code to the effect that the parties, while exercising their rights and performing their duties, should act in good faith. There is also a general civil law principle that the actions of private persons and legal entities are not allowed if they are carried out with the sole purpose of causing damages to other persons. Neither abuse of rights nor unfair competition are allowed.

Franchisees as consumers

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

There is no law that would treat the franchisee as a consumer. The Law on Protection of Consumers’ Rights covers the rights of individual consumers acting as physical persons (not business entities).

Language of the agreement

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

Any document that may fall into the hands of a government agency must be worded in Russian. If the document is in a foreign language, a translation into Russian can be made and attested by a notary public or certified translator when necessary. Since the franchise is subject to state registration, the agreement should be in Russian. In practice, bilingual versions of documents are filed for registration with Rospatent. Otherwise, franchise agreements are originally signed in applicable foreign languages and supported by bilingual registration notifications, which are submitted to Rospatent. Disclosure documents should be accompanied by the corresponding Russian translations to make them clear to the franchisees.

Restrictions on franchisees

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

The franchise agreement may contain different restrictions and covenants on franchisees as per the provisions of the Russian Civil Code. The franchise agreement may impose a non-compete covenant on the franchisee that may be extended to the franchised territory and IP rights. The franchise agreement may also impose an obligation on the franchisee to refuse to enter into similar agreements with competitors of the franchisor. The franchisee may be obliged to sell goods or provide services at the prices fixed by the franchisor and refrain from selling similar goods or providing similar services from competitors of the franchisor. The franchisee may be also obliged to sell goods exclusively within certain contracted territory. The franchisee may be obliged to get approval for the location as well as the interior or exterior of the contracted commercial premises for implementing franchising business. The restrictions incorporated in the franchise agreement may be deemed invalid by the anti-monopoly body or other interested person if they are found to contravene the anti-monopoly laws subject to the relevant market condition and the economic status of the parties.

Competition law

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

Competition is regulated by the Law on Protection of Competition. It prevents monopolistic (anticompetitive) activities, including cartels and prohibits abuse of dominance as well as unfair competition. The law basically admits vertical agreements, including franchise contracts. The provisions of the law may be applied to franchise agreements concluded between domestic and foreign persons and to their actions if they affect competition on the Russian territory. Currently, standard contractual restrictions and covenants on the parties that are provided in franchise agreements and made in line with the Russian Civil Code, are acceptable from the antitrust perspective, and there is no case to date when the franchise agreement has been challenged as running afoul of the relevant competition laws.

The law prohibits unfair competition, including dissemination of false information that may damage the operating business entity. It prohibits marketing of goods if intellectual property subject matters are unlawfully or illegally used. It also prohibits unfair competition in cases when other persons acquire and use intellectual property rights in bad faith.

Competition-related cases, even those related to unfair competition, are examined and enforced by the Federal Antimonopoly Service (FAS) or its territorial divisions. The FAS (or responsible divisions) issues ordinances to persons violating the competition laws ordering them to stop infringements and to pay severe administrative fines in favour of the state.

Courts and dispute resolution

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

The Russian court system has two branches of courts: commercial and common. Commercial courts examine cases involving legal entities and individual entrepreneurs engaged in economic activities on the market. Common courts consider cases where at least one of the parties is a private (physical) person. It follows from the above that the bulk of franchising as well as IP-related cases will be considered by commercial courts. To initiate an action and start litigation in the course of civil procedure a statement of claims has to be filed with the competent court and supported by the evidence of breach of the contract or infringement.

The structure of both branches of courts is similar. The commercial courts include four instances: the courts of first instance, the appellate courts, the cassation courts and the Supreme Court. There is also a specialist IP Court (located in Moscow) operating within the framework of commercial courts as the court of first instance and cassation court (depending on the subject matter of a dispute). Franchising and IP-related disputes as well as certain unfair competition conflicts may fall under the jurisdiction of the IP Court at the cassation stage.

There are various types of dispute resolution procedures available and relevant to franchising. Instead of resorting to litigation in local courts, the parties can contractually agree on the arbitration of the franchising dispute. Arbitration may be conducted in any jurisdiction and by any forum chosen by the parties. If there is no arbitration clause in the contract, the contract may not be submitted to arbitration. Mediation is also available as an alternative method of resolution of a franchising dispute.

Arbitration – advantages for franchisors

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

Arbitrators’ vast experience in dealing with cross-border transactions, including in the franchising sphere, can be one of the principal advantages, especially when the underlying contract is governed by a foreign law. The parties are free to choose the panel of experienced professional arbitrators who will be in charge of settling the franchising dispute. Another advantage would be the timing factor, as it may take longer for a franchising dispute to be considered by all local court instances and enforced by the Supreme Court due to the right of appeal belonging to the losing party. Confidentiality may be the third advantage of arbitration.

The disadvantage of arbitration may be the additional requirement of recognising and enforcing the arbitral award. Russian law provides certain formal requirements for recognition and enforcement of arbitral awards. If these requirements are not observed, the Russian courts will refuse to recognise and enforce arbitral awards. At the same time, the Russian courts may recognise and enforce arbitral awards on the basis of the New York Convention or the international principle of reciprocity and comity. The decisions of local courts do not need additional recognition and enforcement to be entered into force.

The monetary aspect must also be taken into account and weighed up before choosing the right forum for settlement of conflicts arising out of or in connection with franchise agreements.

National treatment

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

According to the basic civil law principle, foreign legal entities as well as individual entrepreneurs are equal to domestic ones. The laws related to franchising do not provide any exceptions on this point. Therefore, there is no difference whatsoever in the treatment of domestic and foreign parties, specifically franchisors, by the Russian courts and government agencies. The Russian IP Court, for example, which started examination of disputes in July 2013, has around 40 per cent of the cases with participation of foreign companies, and it is not possible to discern any bias with regard to them. According to the official statistics, the claims are satisfied in 70 per cent of cases.

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01 July 2020