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This article was originally published on June 1, 2022 and has been updated to reflect recent legal developments.

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of a lawyer or you may directly contact and consult Alburo Alburo and Associates Law Offices to address your specific legal concerns, if there is any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

AT A GLANCE:

A franchising agreement is governed primarily by the Civil Code of the Philippines. While there is no comprehensive franchising law in the Philippines, Executive Order No. 169 (2022) provides minimum terms for MSME franchise agreements, while the Department of Trade and Industry (DTI) issuances offer additional guidance.

As discussed in previous articles, franchising agreements in the Philippines are not governed by a single comprehensive statute. Instead, they operate within a framework of general commercial and intellectual property laws.

Although there is no specific franchising law, a franchising agreement is still a contract, and is therefore primarily governed by the Civil Code of the Philippines. Throughout the years, however, the matter has been addressed by the Department of Trade and Industry (DTI) advisory under DTI Bureau Order No. 10-24, Series of 2010 and recently, last May 12, 2022, under the Executive Order (E.O.) No. 169 by the then President of the Philippines, Rodrigo Roa Duterte.

Definition of Terms under Executive Order (E.O.) No. 169 (2022)

While there is no comprehensive franchising statute, E.O. No. 169 (2022) provides for definitions and regulatory standards, particularly for franchising arrangements involving micro, small and medium enterprises (MSMEs).

The Executive Order recognizes that the franchising industry plays a crucial role in sustaining the country’s economy by creating job opportunities, boosting consumption, and promoting tourism.

Under Section 1(a) of E.O. No. 169, a “franchise” is defined as a a contract or agreement between a franchisor and a franchisee where: 

1. the franchisor grants to the franchisee the right to operate a business according to the franchise system and during a term as determined by the franchisor; 
2. the franchisor grants the franchisee the right to use a mark, or a trade secret, or any confidential information or intellectual property owned by the franchisor or relating to the franchisor;
3. the franchisor possesses the right to control the administration over the franchisee’s business operation during the franchise in accordance with the franchise system; and 
4. in return for the grant of the above rights, the franchisee is required to pay a fee or other form of consideration.

While, Section 1(b) also defines a “franchise agreement” as a written contract or agreement between a franchisor and franchisee by which the former grants the latter the right to engage in the business of offering, selling, or distributing goods or services under a marketing system, technology transfer arrangements included, for a certain consideration. Unless otherwise provided, said right includes the use of a trademark, service mark, trade name/business name, know-how, logo-type advertising or other commercial symbols associated with a particular business.

What should be included in the franchising agreement?

Generally, the contents of a franchising agreement depend on the agreement of the parties pursuant to Article 1306 of the Civil Code of the Philippines which provides:

“Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.”

Thus, the parties are generally free to determine the contents of a franchising agreement, subject to these limitations.

For MSMEs, however, Section 2 of E.O. No. 169 provides that the following constitute the minimum terms and conditions of franchise agreements:

1. Name and description of the products or services under the franchise;
2. Specific rights granted to the MSME franchisee, such as but not limited to the right to use the mark or any other intellectual property rights duly registered with the Intellectual Property Office of the Philippines (IPOPHIL);
3. Full disclosure of any pre-signing, initial or recurring fees, such as but not limited to, franchise fee, promotion fee, royalty fee or any related type of fee which may be imposed on the MSME franchise;
4. Detailed responsibilities of the franchisor, which shall include the enumeration of the types and particulars of assistance and the submission of the franchise agreement to the DTI;
5. Detailed responsibilities of the MSME franchisee;
6. Non-discrimination provisions;
7. Duration of the franchise and the terms and conditions for renewal;
8. Effects of and ground for pre-termination, termination or expiration of the franchise agreement;
9. Provision on “cooling off” period where the MSME is given the option to terminate the agreement;
10. Mechanism for dispute resolution which shall include a stipulation that parties may seek voluntary mediation under RA No. 9285 or the “Alternative Dispute Resolution Act of 2004”; and
11. Remedies of the parties in case of any violation of the terms and conditions of the franchise agreement

For non-MSME franchisees, franchisors may consider the minimum terms and conditions provided herein as best practice, and incorporate the same in their respective franchise agreements.

Compliance with the inclusion of the foregoing minimum terms and conditions in  the franchise agreement may entitle the franchisor to incentives or benefits to be provided by the National Government.

Additional guidance may be drawn from DTI Bureau Order No. 10-24, Series of 2010. It states that the issuance is merely advisory and does not impose mandatory requirements. However, it encourages disclosure of relevant information to protect prospective franchisees and prevent fraudulent schemes. Under the order, DTI advises the prospective franchisee to ask disclosure information from the Franchisor, as follows:

1. Business address, email address, internet home page/website, fax numbers and other contact details
2. Copy of DTI or SEC Registration
3. Parent companies and affiliates, if any, and their respective roles in the Franchise, and Franchisors declaration if any affiliate is a supplier and what they will supply.
4. Names of the Board of Directors and officers with a brief description of their qualifications and background, ownership of interests and references
5. The contact number and business location of existing Franchisees
6. Executed promotional / marketing materials
7. Description of the business concept, which includes brand image, brand personality, unique selling proposition, target market, mission and vision, among others
8. Basic Information on training, commercial and /or technical assistance
9. Certificate that the Franchisor is a member in good standing of any franchisor association and that the franchisor has no pending administrative, civil or criminal case.
10. Declaration of the Initial Fee, amount that will be collected and services covering these fees.
11. Training that will be provided, number of persons, how long and training modules
12. Number of years the company has operated and number of years it has franchised with corresponding numbers of company owned branches and franchised outlets.
13.  Draft Franchise Agreement
14. Full disclosure of the Financial requirements of the franchise business
15. A provision that requires the franchise applicant to seek adequate legal and financial counsel before signing the Franchise Agreement
16. Mechanism for dispute resolution

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 09175772207/ 09778050020.

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