Franchising in Singapore, in a nutshell
(Written by: Rachel Woo)
Franchising is a method of distributing products or services involving a franchisor, who establishes the brand’s trade mark or trade name and business system, and a franchisee, who pays royalties and often an initial fee for the right to do business under the franchisor’s name and system. Generally, a franchise is based on a franchise agreement between the franchisor and the franchisee whereby the franchisor grants the franchisee access to use the proprietary knowledge, processes, technical know-how and other intellectual property rights of the franchisor.
In this regard, unlike some of our neighbouring countries, Singapore neither has specific legislation governing franchising, nor a franchise registration system. As such, franchise agreements in Singapore are principally governed by Singapore’s contract and commercial law. Consequently, for parties to protect themselves, the franchise agreement should be in writing and have comprehensive dispute resolution clauses. Nonetheless, while Singapore does not have statutes governing franchising, the Franchising and Licensing Association of Singapore (FLA) maintains a Code of Ethics which FLA members are required to abide by. On the other hand, for parties to franchises that are not members of the FLA, there is no obligation to abide by the Code of Ethics, although adherence is recommended. Additionally, among other preliminaries which may apply to a particular case, franchisors should seek to register their relevant trade marks, being key intellectual property assets used in the course of a franchise.
As a result of the lack of a franchise registration system in Singapore, the registration of relevant trade marks of the franchisor is of even greater importance, as the registration of the trade marks would provide the franchisor with the ability to institute infringement proceedings against third parties. Without the registration of the franchisor’s marks, the franchisor has no statutory right to institute infringement proceedings and may only proceed on the basis of the common law tort of passing off, which is a far less straightforward claim as it typically involves a heavy evidential burden of proof to discharge.
Separately, franchisees should also ensure that they have the necessary licenses of the intellectual property rights under the franchise agreement before exploiting the intellectual property rights pursuant to the agreement. Under such licenses, it is also possible to provide under licence terms that, where the franchisee becomes aware of an infringement of relevant intellectual property rights, the franchisee is entitled to bring infringement proceedings against the infringer in their own name.
When it comes to the franchise agreement itself, while all franchises impose some degree of product tying as a result of the need for quality control, there may generally be potential for this to be regarded as anti-competitive conduct, whereby the franchise agreement imposes an obligation to purchase certain products from a particular manufacturer or supplier which is a third party to the contracting parties, i.e., the franchisor and franchisee. Nonetheless, in the Singapore context, such product tying requirements in franchise agreements appear to have so far not led to competition issues.
When entering into a franchise agreement, parties should ensure that the terms of the agreement adequately address the need for intellectual property assets under the franchise to be properly protected and regulated through registration and licenses, and that the terms would not cause the franchise agreement to fall foul of other laws such as Singapore’s Competition Act. Professional franchise legal assistance would be helpful in ironing out any lingering issues or doubts concerning franchise contract terms and other aspects of franchising, and help parties to avoid pitfalls that may lurk as they embark on their franchising journey with the aim of realising envisaged mutual commercial benefits and returns.