All questions

Franchise law

i Legislation

There are two key areas of legislation that franchisors need to be aware of when entering the Kazakhstan market. The Law of the Republic of Kazakhstan No. 330-II on Complex Entrepreneurial Licence (Franchise) (the Franchise Law) was passed in 2002, and is a law specifically regulating franchises in Kazakhstan. The legislation defines a franchise (a 'complex entrepreneurial licence') as 'entrepreneurial activity, in which a holder of the complex of exclusive rights provides it into use on a paying basis to another individual or entity'. The legislation also sets out the general rights and obligations of a franchisor and franchisee, in particular in relation to the requirement for the franchisor to provide to the franchisee a set of exclusive rights (such as know-how, trademarks, service marks, etc.) for the franchisee to utilise in its entrepreneurial endeavours.

The Civil Code of the Republic of Kazakhstan also sets out general principles of contract law that apply to every commercial agreement, and the Civil Code (Special Part) No. 409-I dated 1 July 1999 requires certain businesses to obtain a business licence before commencing operations.

ii Disclosure

There is a pre-contractual disclosure requirement under the Franchise Law, which is specific and unusual. Under the Franchise Law, a franchisor must provide the franchisee with details of the bundle of exclusive rights being granted to the franchisee, and must inform the potential franchisee of the confidential nature of this information. This provision of the Law, however, can be interpreted by courts both as a franchisor's right and as a franchisor's obligation, as the case may be. The Franchise Law does not prescribe how much information has to be provided, however, nor how much detail has to be given or what format the information is to be provided in. Best practice, therefore, is to provide as much information as the franchisor considers sufficient to allow the prospective franchisee to make an informed decision on the viability of the franchised business. Franchisors contemplating master franchise arrangements should also be aware that master franchisees will need to provide similar information to their sub-franchisees.

The absence of a comprehensive pre-contractual disclosure requirement does not give franchisors a 'free pass' with regards to pre-contractual sales and recruitment activity, however. Franchisors may be held liable for losses suffered by a franchisee as a result of fraud or wilful misrepresentation by the franchisor. The franchise agreement may also be held invalid if the franchisee can demonstrate it entered into the arrangement either based on an error material to the transaction, or as a result of fraud. A consequence of invalidity of the agreement may, at the court's discretion, be that the parties are obliged to return to the other all benefits received during the relationship, or financially compensate the other party where such a return is not possible. Damages may also be awarded in addition.

iii Registration

Pursuant to the Civil Code of the Republic of Kazakhstan and the Law on Franchising, franchise agreements are subject to registration with the NIIP.

The new IP Amendment Law has significantly simplified and accelerated the registration process – though franchisors should still note that to register the agreement, the relevant trademarks being licensed must themselves first be registered with the NIIP. Under the new IP Amendment Law, the requirement for the franchise agreement to be submitted to the NIIP within six months of the signing date has been abolished – there is no time requirement now – and the time it takes for the NIIP to register franchise agreements following submission has been reduced from two months to 10 business days. Moreover, the IP Amendment Law envisages the simplification of the requirements for execution of franchising contracts. Only one copy of the contract is now required for registration, rather than four as before, and formalities such as having to include a title page in the contract, use a paper seal, stamp the document and have the signatures of both parties on the submitted contracts have also been abolished. This should make it much easier for franchisors to enter into franchise agreements and register them with the NIIP.

In accordance with these amendments, a franchising contract should be submitted for registration in Kazakh or Russian (choice of language is at the discretion of the parties). Foreign names and nominations of legal entities should be provided in Kazakh or Russian transcription

iv Mandatory clauses

Franchisors and franchisees are generally free to determine the terms of the agreement between them in accordance with the principle of freedom to contract. This includes the ability for the parties to elect that the agreement is governed by a foreign law and subject to a foreign jurisdiction.

There are some restrictions, however, on this general freedom. One key area often found to be of concern to foreign franchisors is the limitation on the scope of the franchisee's indemnity to the franchisor for liability to third parties. This is a common clause in many international franchise agreements, but under Kazakhstani law non-contractual liability to third parties falls on the person responsible for the action causing the third party's loss, which may be the franchisor or franchisee.

Another key area is in relation to provisions in the agreement dealing with intellectual property. As mentioned above, a franchisor may only license a trademark to a franchisee if the trademark itself is registered in Kazakhstan and the period of protection for such a trademark will determine the term of the agreement. The franchise agreement should also clearly define what intellectual property rights are being transferred or licensed, the scope of any exclusive territory, the specific purposes for which the rights may be used and when the grant of the rights will expire. The franchisor should also be sure to include audit and inspection rights in respect of goods and services provided by the franchisee and any premises from which the franchisee operates to ensure they are adequate and comply with brand standards.