Thailand updates franchising guidelines
Sher Hann Chua of Tilleke & Gibbins Thailand discusses the latest revision to Thailand’s guidelines on franchising, focusing on the changes to the first-refusal requirement
Before the issuance in late 2019 of the Trade Competition Commission of Thailand’s Guidelines on Unfair Trade Practices in Franchise Businesses, which took effect in February 2020, Thai law made little mention of franchising as a business model – despite the great popularity of franchising in the country.
The guidelines, which were issued under the Trade Competition Act B.E. 2560 (2017), partly made up for the absence of a single, codified franchising law in the country. They offered valuable direction on how franchisors and franchisees should operate in compliance with Thai law.
One of the most significant conditions introduced by the original guidelines in February 2020 was a requirement for franchisors to provide a right of first refusal to their existing franchisees before opening a new franchise outlet within the current franchisees’ operating vicinity.
Revisions to the guidelines
An update to the guidelines addressing the right of first refusal was issued in August 2020. Most recently, a second update was announced on July 13 2021. It was published in the Government Gazette on August 19 2021, and came into force on the following day.
The August 2021 update further revised this provision, and the updated guidelines now adopt a less restrictive approach for franchisors in relation to this first-refusal requirement.
Under the updated guidelines, a franchisor who decides to open a new outlet, whether it will be operated by the franchisor or by another franchisee or person, must notify the existing franchisee located in closest proximity to the intended location. They must also provide the franchisee with a right of first refusal for a period of 30 days.
However, the franchisor does not have to provide the closest franchisee with a right of first refusal if the franchisee’s existing performance does not meet the franchisor’s criteria as specified and communicated to the franchisee in advance.
In determining what constitutes “closest proximity”, consideration is given to the demand for the goods and services, the geographical area, and the competition in the market.
If a franchisor cannot grant rights to operate a new outlet to an existing franchisee due to existing area development rights or other contractual obligations, the franchisor must consider granting the right to open the new outlet to other suitable franchisees based on reasonable commercial justifications.
Franchisors should also be mindful of all other requirements stipulated in the guidelines, such as the mandatory precontractual disclosure requirements.
Under these rules, franchisors must disclose the following information to prospective franchisees before entering into a franchise agreement:
Information on applicable payments and expenses relating to the franchise, such as franchise fees, royalties, marketing expenses, training costs, costs of mandatory equipment, and materials, as well as their respective calculation methods, payment details, and conditions for reimbursement;
Information on the franchise business model, including matters relating to assistance, training, and advisory services to be provided by the franchisor, as well as information regarding the existing and future branches (and their respective locations) operated by other franchisees in the vicinity, and information on sales and promotion;
Information on IP rights, such as trademarks, patents, and copyright, including their respective terms of protection, and their licensing scope and restrictions; and
Information on the renewal, amendment, cancellation, and termination of the franchise agreement.
Additionally, the guidelines prohibit franchisors from engaging without justification in trade practices deemed capable of causing damage to franchisees under the Trade Competition Act, such as the imposition of purchasing restrictions and other restrictive conditions, and the stipulation of discriminatory conditions among franchisees.
Need to comply
Non-compliance with the guidelines and the subsequent amendments, including those introduced in the most recent update, may subject business operators to penalties under the Trade Competition Act. These include administrative orders and fines, and civil claims for damages.
Hence, franchisors in Thailand should ensure that their franchise agreement templates and disclosure documents to be used in the country are in full compliance with all local requirements, including the requirements imposed under the updated guidelines.