Thailand does not currently have any specific law on franchise businesses per se. However, relationships between franchisors and franchisees are generally governed by the Trade Competition Act 2017 which includes a catch-all provision prohibiting the use of “unfair trade practices”, a vague concept which has seen problematic enforcement since 1999 when Thailand’s first trade competition law became effective.
In October 2019, the Trade Competition Commission (“TCC”) issued for the first time in the past 20 years specific regulations setting forth practices in franchise businesses which are considered unfair trade practices under the law. There is not much of a surprise contained in the 2019 regulations. For example, the regulations require franchisors to fully disclose details of franchise fees, royalty fees, and other expenses to franchisees prior to signing a franchise agreement. The regulations also prohibit franchisors from imposing unfair conditions on franchisees, such as, forcing franchisees to purchase excessive goods or services from franchisors. More details about the original 2019 regulations can be found in a previous article on our website: https://pisutandpartners.com/new-regulation-on-unfair-practices-in-franchise-businesses/
However, a noteworthy provision in the original 2019 regulations was its clause 4 which stipulated that, in cases where a franchisor would like to open a new franchise store in any given area and the franchisor itself would like to operate that new store, the franchisor must give its existing franchisee in the vicinity the right of first refusal to operate the new store instead. The said requirement was subsequently expanded, with effect from 23 September 2020, to also include scenarios where new franchise stores would be operated by third-party franchisees, as opposed to the franchisor itself.
The 2020 amendments to the franchise regulations raised an important issue to many franchisors who have been contractually bound by an area development or franchise expansion agreement with its major franchisees whereby such franchisees are granted exclusive rights to open and operate new franchise stores in a certain designated area in Thailand. That is because the franchisor’s compliance with the franchise regulations as amended in 2020 (i.e., to always offer a franchisor in the vicinity to operate a new store) could constitute a breach of its existing agreement with other franchisees. On the other hand, had the franchisor fully complied with its contractual obligations but not the franchise regulations, it could potentially face severe penalties under the Trade Competition Act, which is a maximum fine of up to 10% of its annual revenue in the year that the purported violation took place.
Fortunately for such franchisors, clause 4 of the franchise regulations were once again recently amended by the TCC’s notification on guidelines for consideration of unfair trade practices in franchise businesses (no.3), which has become effective from 20 August 2021, to specifically carve out the aforesaid scenarios where the franchisor is contractually bound by an agreement to grant the right to operate new stores to a certain franchisee instead of the franchisee in the vicinity. In other words, franchisors would no longer be in a violation of the franchise regulations for not granting the right to operate a new store to an existing franchisee in the vicinity if the franchisor is contractually bound by an agreement to grant the same to another franchisee. Nevertheless, the TCC also noted in the latest franchise regulations amendments that such agreements must be justified by business, marketing or economic reasons. As such, franchisors who wish to rely on the latest amendments to the franchise regulations in respect of their expansion should be prepared to provide relevant reasons to the TCC if and when it is required.
Written by Wayu Suthisarnsuntorn (wayu@aawut.com)
First published on 8 October 2021. ©
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