Franchise agreements

Common features and contractual requirements

What are the common elements of franchise agreements in your jurisdiction? Do any requirements or restrictions on contractual provisions apply?

Franchise agreements may contain various terms and conditions depending on the transaction structure and the parties’ negotiations.

As regards the most common elements, franchise agreements will typically address the following essentials applicable to Russia-targeted deals:

  • parties (ie, corporate names and addresses);
  • subject matter (ie, registration numbers of franchised trademarks and descriptions of other franchised IP rights such as copyrights and know-how);
  • franchised products (ie, goods or services for which the franchised trademarks are protected and licensed);
  • scope of franchised rights (ie, permitted manners of IP use and distribution of franchised goods or services, as well as the sphere of commercial activities);
  • franchisee duties and covenants (eg, compliance with standards or manuals, product quality assurance and non-compete obligations, confidentiality and non-disclosure covenants, site selection and approval);
  • consideration (eg, franchise entrance fees, lump sums and royalties);
  • type of franchise (eg, sole, exclusive or non-exclusive);
  • term (ie, term of protection of franchised IP rights or certain specific period);
  • territory (ie, the whole of Russia or specific regions);
  • sub-franchising (eg, permitted or prohibited, how many and to whom);
  • franchise renewal (ie, possible or not, franchisee’s right of first refusal);
  • termination (eg, mutual or unilateral, for cause or convenience);
  • post-termination (ie, franchisee obligations and liabilities following termination);
  • miscellaneous (eg, franchise amendments, governing law, jurisdiction or arbitration); and
  • signatures (ie, names and titles of signees).

Are parties to a franchise agreement subject to an implied or explicit duty of good faith?

Parties to a franchise agreement are subject to an implied duty of good faith. Good faith and fair dealing are the fundamental principles of the national civil law, as set out by Articles 1(3) and 10(5) of the Civil Code. These principles are usually supported and enforced by local courts in all disputes involving domestic contracts and cross-border transactions, including in terms of franchising.

Are franchise agreements subject to any formal or documentary requirements, including registration?

Franchise agreements must be made in writing and prepared or translated into Russian. In practice, bilingual versions are drafted in the context of cross-border deals. If the franchise agreement is produced and executed in a foreign language (eg, English), a certified Russian translation may be prepared and attached to the original contract.

Further, the underlying franchise or licence grants which are targeted at Russia, including those governed by applicable foreign law, must be registered with the Federal Service for Intellectual Property (Rospatent). A franchise or licence grant which is not registered with Rospatent will be regarded as invalid and unenforceable against third parties.

The types of documentation that may be submitted to Rospatent for recordal purposes are as follows:

  • the original franchise agreement;
  • a notarised excerpt from the original franchise agreement; or
  • the so-called ‘notification’ (ie, the statement of franchise).

If the parties do not wish to disclose the original contract along with agreed financial terms or other sensitive data, the best option would be to make, sign and file an excerpt from the franchise agreement or submit the notification. Before filing, it is essential to ensure that the document filed to Rospatent contains all of the essential elements (ie, mandatory clauses and points) as required by Russian law and applicable registration regulations.

Due diligence

What due diligence should both parties undertake before entering into a franchising agreement?

Normally, parties undertake the following types of due diligence before entering into a franchise agreement:

  • corporate and commercial;
  • banking and finance;
  • intellectual property and real estate; and
  • dispute resolution and litigation.

In certain instances, specific categories of due diligence may be conducted or required before starting a franchise deal, such as tax, insurance and employment.

Pre-contractual disclosure

Are franchisors subject to pre-contractual disclosure requirements? If so, do any exemptions apply? What remedies are available to franchisees in the event of breach of these requirements?

Pre-contractual disclosure is not mandatory under Russian law. The law states that the franchisor alone must provide technical and commercial documentation – along with any other necessary information for the franchisee to be able to develop the franchise operations – and instruct the franchisee and its employees on any aspects associated with the contracted franchising activities.

Disclosure obligations may be established by the parties on the basis of the doctrine of culpa in contrahendo at the negotiation stage of a prospective deal. When negotiating the franchise grant, parties may corroborate their contractual negotiations using a special form of agreement available under Russian law that is enforceable under Article 434(1) of the Civil Code.

The format of disclosure is not prescribed by Russian law or published by any governmental agency. Therefore, the parties to a contract may use and be guided by the documentation normally used in the context of international franchise practice.

Choice of law

May the parties freely choose the governing law of the franchise agreement?

There is no legal requirement for a franchise agreement, or part of the same, to be governed by the Russian law. Under the basic principles of the international private law, the contracting parties may choose the relevant governing law when entering into a deal (or afterwards). Hence, the franchise agreement may be governed by any applicable law – Russian or foreign.

Absent a choice of law provision stated in the franchise agreement, the law of the country where the franchisee has been authorised to use the franchised system and the licensed set of IP rights will apply. Further, where such use has been permitted on the territories of several jurisdictions including Russia, the law of the country where the franchisor is located or has its principal place of business will govern the parties’ relationship.

In any event, pursuant to Article 1211(9) of the Civil Code, the law of the country that is more bound up with the contract may apply in the event that the nature, or terms and conditions of the contract, or circumstances surrounding the transaction, clearly evidence such a fact.

Fees

What fees are typically charged under a franchise agreement?

No typical fees are charged under franchise agreements. Every contract has its own fee amount calculations and formulas, payment orders and details, as well as applicable terms and conditions which depend on the franchised business and the parties’ negotiations.

Renewal

Do franchisees have a right of renewal?

The franchisee has a right of first refusal under Russian law. If the franchisee has performed its contractual obligations in a timely and proper manner, it has a pre-emptive right to re-conclude the franchise agreement for a new term with the franchisor. When re-making the franchise relationship, parties are free to amend or modify the terms and conditions of the underlying contract.

On what grounds may a franchisor refuse to renew?

If the franchisor refuses to enter into the franchise agreement for a new period with the former franchisee, and within a year concludes a new franchise agreement granting the same rights to the other (third) party and under the same terms and conditions, the former franchisee is entitled (at its option) to claim in court the transfer of franchise in its favour and reimbursement of damages, or simply the reimbursement of damages. However, if the franchisor does not grant the same franchise to a third party by making a new franchise agreement within a year, or sells different franchise rights to a third party, or offers franchise agreement to a third party under non-similar (other) terms and conditions, the franchisee’s right of renewal will not arise. The franchisor may refuse to renew the franchise agreement with the franchisee if the latter has failed to perform its obligations in compliance with the terms and conditions of the underlying contract.

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

Franchise renewals may be governed by amendment or supplemental agreements and are subject to mandatory registration with Rospatent. Contract extension filing must be made before the initial period ends. Failure to file for franchise renewal on time will result in the automatic termination of franchise rights, and the parties will need to revive the relationship by entering into a new franchise agreement.

Termination

On what grounds may a franchisor terminate a franchise agreement? Are any remedies available to franchisees in this regard?

Under Russian law, a franchisor may terminate a contract at any time if the franchise agreement has been concluded for an indefinite term. In such a case, six months’ written notice is required, unless the contract indicates a longer term for the advance termination notice. If the contract provides for a specific validity period, the franchisor must be guided by the terms of the franchise agreement.

Either party to the contract concluded for a definite or indefinite term, including the franchisor, may terminate the franchise agreement by sending written notice to the other party within 30 days. This option is available only if the contract provides for the release of certain monetary compensation.

The franchisor may terminate the franchise agreement if the franchisee produces goods of inferior quality or the quality of its services does not correspond to what has been set out in the contract.  The franchisor may also repudiate from the franchise agreement if the franchisee does not follow the franchisor’s instructions and guidance aimed at compliance with the contractual provisions relating to the terms and conditions on the use of the franchised set of IP rights. The franchisor may cancel the franchise agreement if the franchisee fails to settle the franchise fees on the terms and conditions set out in the contract. Termination or repudiation by the franchisor is available if the franchisee fails to remedy the breach within a reasonable term, or has committed another breach within a year of receipt of the written notice from the franchisor.

Further, if the franchisee becomes insolvent (bankrupt) the franchise agreement must be dissolved.

The earlier termination of franchise agreement is subject to mandatory registration with Rospatent. Absent registration, the earlier termination will not be effective and enforceable against third parties.

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