Franchising in Philippines: overview

by Ferdinand M Negre and Samantha Wesley K Rosales, Bengzon Negre Untalan Intellectual Property
Attorneys

A Q&A guide to franchising in the Philippines.

The Q&A provides an overview of the main practical issues concerning local and international franchising,

including: current market activity; franchising regulatory framework; contractual issues relating to franchising

agreements (analysing pre-contract disclosure requirements, formalities, parties' rights and obligations, fees

and payments, term of agreement and renewal, termination and choice of law and jurisdiction); Operations

Manual; liability issues; intellectual property; real estate; competition law; employment issues; dispute

resolution; exchange control and withholding; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Franchising: Country Q&A tool.

This Q&A is part of the global guide to franchising law. For a full list of jurisdictional Q&As

visit www.practicallaw.com/franchising-guide.

Market
1. What have been the main developments in the franchising market over the past 12 months?

The franchising market has been growing in relation to the following sectors:

 Education, including pre-schools, review schools, specialty schools and math or reading programmes.

 Health and fitness (for example, Anytime Fitness clubs).

 Healthy food (for example, Salad Stop or Juju Eats).

 Convenience stores (for example, FamilyMart and 7-Eleven).

2. What are the most commonly used methods of local and international franchising?

Local franchising
Direct, single-unit franchising has always been one of the most common forms of franchising in the Philippines.

Lately, however, franchisors have begun to explore other options. An increasing number of franchisors are

becoming interested in large scale, multi-unit franchising formats such as development agreements and master

franchising agreements. Others are exploring joint ventures and innovative new methods, including:

 Conversion franchising, where an independent store owner in a similar business converts his store into a

franchise.

 Passive franchising, where the franchisee is interested in providing capital but not in managing the

franchise.

International franchising
International or overseas franchisors investing in the Philippines often choose to enter the Philippine market

through joint venture or master franchising agreements. This is mostly because while there is no special law

regulating franchising, Philippine law prohibits foreign nationals and foreign corporations from owning land in

the Philippines and from entering into certain sectors of the market. For example, under the Constitution, no

foreign national or foreign corporation can:

 Own or manage a media company.

 Engage in retail trade below a certain amount of paid-up capital.

The exploitation of natural resources, advertising and public utilities are also limited to Filipino citizens and

corporations that are owned by a Filipino majority.

3. Are there any specific reasons for an overseas franchisor to use a separate entity for
entering into a franchise agreement with a franchisee in your jurisdiction?

There are no reasons specific under the laws or practices in the Philippines for a franchisor to use a separate

entity for entering into a franchise agreement with a Philippine franchisee.

Regulation of franchising
4. What is the legal definition of franchising and/or a franchise?

There is no statutory definition of franchising in the Philippines. Instead, franchise agreements are categorised

as technology transfer arrangements (TTAs). TTAs are defined in the Intellectual Property Code of the

Philippines as contracts or agreements that involve either:

 Transfer of systematic knowledge for the manufacture of a product, the application of a process or

rendering of a service, including management contracts.

 Transfer, assignment or licensing of all forms of IP rights, including the licensing of computer software

(except computer software developed for a mass market).

On 17 November 2010, the Department of Trade and Industry (DTI) released a non-binding advisory under

Bureau Order No. 10-24 Series of 2010 (Advisory on Due Diligence to be Undertaken by a Prospective

Franchisee). This Advisory defines a franchise agreement as a written contract or agreement between two or

more parties by which a franchisor grants the franchisee the right to engage in the business of offering, selling,

or distributing goods or services under a marketing plan, system or concept, for a certain consideration. Unless

otherwise provided, this right includes the use of a trade mark, service mark, trade name/business name,

know-how, logo-type advertising, or other commercial symbols associated with a particular business.
5. What are the laws regulating franchising?
There are no specific laws governing franchising in the Philippines. Franchise agreements are regulated by the

applicable provisions of the:

 Intellectual Property Code (IPC).

 Civil Code.

 Corporation Code.

 Relevant special laws.

IPC
Sections 87 and 88 of the IPC list prohibited and mandatory provisions of technology transfer agreements,

including franchise agreements (see Question 4). Failure to conform to these provisions (that is, the inclusion of

prohibited provisions or the exclusion of mandatory provisions in a franchise agreement) will render the

agreement unenforceable. Sections 87 and 88 of the IPC are intended to prevent unfair competition and trade.

The prohibited provisions are deemed prima facie to have an adverse effect on competition and trade.

Civil Code
The Civil Code contains the general law on contracts and human relations. Franchise agreements are

considered to be ordinary contracts. Therefore, franchise agreements are subject to the general provisions of

the Civil Code governing obligations and contracts. For example, when offering a franchise, a franchisor must

observe honesty and good faith. Additionally, offers are only deemed accepted if they are accepted

unconditionally. Contracts between a franchisor and franchisee are also subject to the rules on interpretation of

contracts.

Actions for remedies for breach, damages or recovery relating to franchise agreements are treated as regular

civil actions.

Corporation Code
The Corporation Code sets out the requirements for registering a business in the Philippines. Before it can

conduct trade or business in the Philippines, a foreign corporation must apply to the Securities and Exchange

Commission (SEC) for a licence to transact business in the Philippines.

A foreign corporation that intends to conduct franchising operations in the Philippines has the followings options:

 Enter into a franchising agreement with an existing local entity.

 Establish an entirely new corporation under Philippine laws.

 Register a branch office with the SEC.

The third option is only available to corporations from countries that provide reciprocal treatment to Filipinos for

doing business in their country.

Special laws
There are a few special laws that affect franchising, as follows:

 While foreign corporations are generally governed in the same manner as domestic corporations, the Retail

Trade and Liberalisation Act prevents them from owning or wholly owning a business below a certain

amount of paid-up capital.

 The Foreign Investment Negative List and Foreign Investments Act set out restrictions and prohibitions on

foreign investors in relation to the sectors they can invest in and how much they can invest.

 The Philippine Competition Act prohibits:

 anti-competitive agreements; and

 one or more entities from abusing their dominant position by engaging in conduct that would

substantially prevent, restrict or lessen competition.

6. What is the regulatory authority responsible for enforcing franchising laws and
requirements in your jurisdiction?

Technology transfer arrangements (TTAs) are primarily regulated by the Documentation, Information, and

Technology Transfer Bureau (DITTB), an agency under the Intellectual Property Office of the Philippines

(IPOPHL). The DITTB is responsible for reviewing all TTAs, including franchise agreements, to determine their

compliance with the requirements of the Intellectual Property Code (IPC) before the TTA's recordal with the

IPOPHL. The DITTB also determines whether a particular TTA can be granted an exemption from any of the

requirements under the IPC.

On 21 July 2015, the Philippine Competition Act (PCA) was signed into law. The PCA created the Philippine

Competition Commission (PCC), which is tasked to promote and maintain market competition by regulating

anti-competitive conduct (that is, anti-competitive agreements, abuses of dominant position and anti-

competitive mergers and acquisitions). The PCA regulates all entities, including franchisors and/or franchisees

engaged in either:

 Trade, industry or commerce in the Philippines.

 International trade, industry or commerce having direct, substantial and reasonably foreseeable effects in

the Philippines, including those that result from acts done outside the territory of the Philippines.
7. Must the franchisor be registered with a professional or regulatory body before setting up
a franchise system?

The law does not require the registration of franchisors with a professional or regulatory body before setting up

a franchise system. However, Bureau Order No. 10-24 Series of 2010 (Advisory on Due Diligence to be

Undertaken by a Prospective Franchisee) advises potential franchisees to require the franchisor to obtain a

certificate of good standing from the Securities and Exchange Commission, and a certificate stating that the
franchisor is a member of any franchisor association and has no pending cases against it. See also Question

11.
8. Is there a code of ethics or other means of promoting ethical franchising in your
jurisdiction?

There is no statutory code of ethics for franchising, although any franchise agreement that is contrary to law,

morals, good customs, public policy or public order is automatically void.

However, private franchising associations can establish their own code of ethics, which are binding among their

members. For example, the Philippine Franchising Association has a Code of Ethics and Fair Franchising

Standards that binds over 100 member franchisors.

9. Do franchisees benefit from any laws designed to protect consumers or small businesses?

Republic Act No. 10644, known as the Go Negosyo Act, contains provisions that assist micro, small and

medium enterprises that seek to enter into technology transfer arrangements (TTAs).

The Go Negosyo Act provides for the establishment of Negosyo centres in all provinces, cities and

municipalities in the Philippines. These Negosyo centres assist micro, small and medium enterprises by

facilitating business registration and renewal. They also help these enterprises with entering into TTAs through

their partnerships with the Philippine Franchise Association and the Association of Filipino Franchisers.
10. Are there any other requirements which must be met before a business can sell a
franchise?

There are no other requirements that must be met before a business can sell a franchise.

Franchise agreement
Pre-contract disclosure requirements
11. Is the franchisor subject to any general or formal pre-contract disclosure requirements?

There is no law requiring any formal pre-contract disclosure in the Philippines. However, potential franchisees

are advised to exercise due diligence before engaging in franchising business with a franchisor. In particular,

franchisees are advised to obtain the following information on the franchise/franchisor before entering into a

contract:

 Franchisor's business address, e-mail address, internet home page or website, fax numbers and other

contact details.

 Copy of the franchisor's registration with the Department of Trade and Industry (DTI) or Securities and

Exchange Commission (SEC).

 Parent companies and affiliates, if any, and their respective roles in the franchise, and franchisor's

declaration on whether any affiliate is a supplier and what they will supply.

 Names of the members of the board of directors and officers, with a brief description of their qualifications

and background, ownership interests and references.

 Contact numbers and business locations of existing franchisees.

 Executed promotional/marketing materials.

 Description of the business concept, which includes brand image, brand personality, unique selling

proposition, target market, mission and vision.

 Basic information on training, commercial and/or technical assistance.

 Certificate attesting that the franchisor:

 is a member in good standing of any franchisor association; and

 has no pending administrative, civil or criminal cases against it.

 Initial fee amount that will be collected, and services covered by these fees.

 Training that will be provided, including number of persons trained, duration and training modules.

 Number of years the franchisor company has been in operation and number of years it has franchised the

business, with corresponding numbers of company-owned branches and franchised outlets.

 Draft franchise agreement.

 Full disclosure of the financial requirements of the franchise business.

 Whether there is a requirement on the franchise applicant to seek adequate legal and financial counsel

before signing the franchise agreement.

 Mechanism for dispute resolution.

Franchisees are also advised to consult any of the following:

 A franchisor association.

 The SEC.

 The DTI or the nearest DTI regional/provincial office.

 A certified franchise executive.

 A franchise consultant.

These recommendations, while not mandatory, are set out in the DTI's Advisory Bureau Order No. 10-24

Series of 2010.
12. Must the franchisor disclose fairly and in good faith all facts material to the prospective
franchisee's decision to enter into the arrangement, or must the prospective franchisee rely
on its own due diligence?
See Question 11. Prospective franchisees must rely on their own due diligence. The franchisee is expected to

exercise the usual care and attention as is exercised by an ordinary person similarly situated. If there are open

and patent defects that could have easily been discovered by the prospective franchisee, it is assumed that

there was no misrepresentation on the part of the franchisor and the principle of caveat emptor (buyer beware)

applies.

However, it is a general rule of the law that all persons must observe honesty and good faith. Therefore, a

franchisor can be held liable for purposefully concealing or failing to disclose a material fact.

Formalities
13. What are the formal contractual requirements to create a valid and binding franchise
agreement?

There are no special laws governing franchise agreements, which are governed by the general law on

contracts. For a contract to be valid, there must be consent, consideration and a valid object. However, to be

enforceable, a franchise agreement must:

 Be written.

 Contain all the mandatory provisions required by the Intellectual Property Code (IPC).

 Not contain any of the prohibited provisions under the IPC.

Parties' rights and obligations

14. Is there a general obligation to behave fairly, reasonably or in good faith to the other party
during the term of the franchise agreement?

Every person must, in the exercise of their rights and in the performance of their duties, act with justice, give

everyone what they are due, and observe honesty and good faith (Civil Code).

Obligations of the franchisee

There are no obligations specifically imposed on the franchisee by local law. The agreement is the law between

the parties. The parties to a franchise agreement are free to include the terms that they deem proper, provided

that these terms are not contrary to law, morals, good customs, public order or public policy.

Obligations of the franchisor

As with franchisees, there are no obligations specifically imposed on the franchisor by local law. The terms of

the contract will determine the obligations of both parties, provided that these terms are not contrary to law,

public policy, public order or morals.

15. Does local law require that particular provisions must be expressly included in a
franchise agreement?
All technology transfer arrangements (TTAs) (such as franchise agreements) must include a provision stating

all of the following (Intellectual Property Code):

 The laws of the Philippines govern the interpretation of the TTA, and in the event of litigation the venue

must be the proper court of the place where the licensee has its principal office.

 Continued access to improvements in techniques and processes related to the technology must be made

available during the period of the agreement.

 In the event of arbitration:

 the arbitration proceedings must be governed by the Procedure for Arbitration of the Arbitration Law of

the Philippines, the Arbitration Rules of the United Nations Commission on International Law

(UNCITRAL Arbitration Rules 1976) or the Rules of Conciliation and Arbitration of the International

Chamber of Commerce; and

 the venue of the arbitration must be the Philippines or any neutral country.

 Philippine taxes on all payments relating to the TTA must be borne by the licensor (franchisor).
16. Are exclusion and entire agreement clauses enforceable in your jurisdiction? If so, are
they effective to protect the franchisor?

The terms of a contract have force of law between the parties. Entire agreement and exclusion clauses are

generally valid provided that they are not contrary to law, public order, public policy, morals or good customs.

For example, a provision that excludes a party's liability in the case of fraud is void for being against law.

However, it is strictly prohibited to include in a franchise agreement provisions that exempt the franchisor from

either or both (section 87.14, Intellectual Property Code):

 Liability for non-fulfilment of his responsibilities under the technology transfer arrangement.

 Liability arising from third-party claims brought about by the use of the licensed product or the licensed

technology.

Barring any fraud on the part of an overseas franchisor, an overseas franchisor that is not party to the local

franchise agreement may be sufficiently protected by exclusion and entire agreement clauses if the sub-

franchisor commits any fraud or defaults on its obligations.

17. Can the franchisor impose product tying or other purchasing restrictions and non-
compete obligations on the franchisee during the term of the agreement?

Restrictions on purchasing and product tying

Product tying is not permitted. There is a prohibition on agreements that impose on the franchisee the

obligation to (Intellectual Property Code (IPC)):

 Acquire from specific sources capital goods, intermediate products, raw materials and other technologies.
 Permanently employ personnel indicated by the franchisor.

Non-compete obligations and transfer restrictions

Restrictions on the use of the technology supplied after the expiration of the technology transfer arrangement

are prohibited, except in cases of early termination due to reasons attributable to the franchisee (section 87.9,

IPC). The Director General of the Intellectual Property Office of the Philippines held that non-compete clauses

violate section 87.9 of the IPC. However, in the same case, the Director General stated that a non-compete

clause can be valid provided that the period is limited to one year from the termination of the agreement (re:

Pre-Clearance of a Shop Franchise Agreement, 20 October 2003).

Fees and payments

18. What fees are usually payable by the franchisee? Are there any restrictions on the parties'
freedom to set the fees and payments, or any other payment requirements?

The fees that are payable, including initial fees, royalties, marketing fees, or any other charges, are wholly

determined by the terms of the franchising agreement between the parties.

The law, however, provides that interest rates must not be unconscionable. The standards for unconscionable

interest rates are determined on a case-by-case basis and by the jurisprudence.

Term of agreement and renewal

19. Are parties free to agree on the term of the franchise agreement? What is the typical term
of a franchise agreement in your jurisdiction?

Parties are free to agree on the term of the franchise agreement, provided that it is not contrary to the law,

public order, public policy, morals or good customs. In practice, the usual term of a franchise agreement is five

to ten years.
20. What rights of renewal are usually included in the franchise agreement? Are fees paid on
renewal?

Commercial practice
Franchising agreements usually contain a right to renew the contract without having to execute a new franchise

agreement. Most franchisors require that certain minimum requirements be met, such as minimum paid-up

capital or full compliance with certain requirements. Renewal fees can also be required.

Local law
The right of renewal is a contractual right. The right to refuse to renew, the fees to be paid, and the conditions

to be met can all be stipulated in the contract. If the parties agree to a right of renewal and the franchisor

reneges on this obligation, the franchisee can sue for breach of contract.

Termination
21. Are there any limitations on the right of a franchisor to terminate the agreement?

Neither party can unilaterally terminate the agreement unless either:

 There is a valid reason for termination.

 Both parties consented to a term allowing one party to unilaterally withdraw from the contract.

The grounds for termination are usually set out in the agreement itself. Some common grounds for termination

found in franchise agreements are:

 Expiration of the term.

 Default.

 Breach of contract.

 Insolvency.

 Failure to meet performance milestones.

 Change in ownership.

Contractual penalties and liquidated damages are enforceable. However, the courts can reduce the amount of

penalty or liquidated damages if they find that the total amount is excessive.
22. Are post-term restrictive covenants enforceable?

Non-compete clauses have been found to violate section 87.9 of the Intellectual Property Code. However, the

Director General of the Intellectual Property Office of the Philippines allowed non-compete clauses provided

that the duration is limited to one year from the termination of the agreement (see Question 17, Non-compete

obligations and transfer restrictions). Payment to the franchisee is not required as a condition for the validity or

enforceability of non-compete post-term covenants.

Non-disclosure/confidentiality provisions are valid in the Philippines. Payment to the franchisee is not required

as a condition for the validity or enforceability of a non-disclosure/confidentiality provision.

23. Can the franchisor or a replacement franchisee continue to sell to the former franchisee's
customers?

The franchisor or a replacement franchisee can continue to sell to the former franchisee's customers. There is

no law prohibiting or regulating this practice.

Choice of law and jurisdiction

24. Will local courts recognise a choice of foreign law in a franchise agreement for a business
operating in your jurisdiction?

Local courts will not recognise a choice of foreign law in a franchise agreement for a business operating in the

Philippines, unless they are granted an exemption by the Documentation, Information, and Technology

Transfer Bureau. Technology transfer arrangements (which include franchise agreements) must contain a

provision stating both that (Intellectual Property Code):

 The laws of the Philippines govern the interpretation of the contract.

 In the event of litigation, the venue must be the proper court of the place where the franchisee has its

principal office.
25. Will local courts recognise a choice of foreign jurisdiction in a franchise agreement for a
business operating in your jurisdiction?

See Question 24. The law also provides that jurisdiction is determined by law, not by the parties.

Operations Manual
26. How does the franchisor ensure that the franchisee complies with the business standards,
systems and requirements?

The obligation to comply with the standards or the Operations Manual is set out in the terms of the agreement.

A franchisee's failure to comply with these requirements may be a cause for termination of the franchise.
27. Can the franchisor change the Operations Manual unilaterally, as is usually required?

Franchising agreements usually provide that the Operations Manual is subject to modification based on

changes or improvements in technology, systems, operating standards or marketing variables. However, if the

modification of standards or requirements is so great that the franchisee cannot reasonably be expected to

comply with the change, this may be considered invalid for being a potestative condition (that is, a condition or

term of a legal agreement that is completely within the power and control of one of the parties and that makes

the agreement unenforceable for lack of mutuality of obligation). The law provides that the validity of, or

compliance with, a contract cannot be left to the will of one of the parties.

Liability issues
28. What are the franchisee's remedies against the franchisor for deceptive or fraudulent
selling practices?

Depending on the nature of the fraud or deception, a franchisee can either file:

 A civil action for breach of contract and an action for rescission or specific performance.
 An action to set aside the contract for being voidable.

The franchisee can also file a criminal action for swindling. Regardless of the action taken, the franchisee (if

successful) will usually recover damages from the franchisor.

29. How can third-party claims against the franchisee be brought successfully against the
franchisor?

Indemnity
The right to indemnification of either the franchisor or the franchisee will depend on the terms of the contract.

However, section 87.14 of the Intellectual Property Code prohibits provisions that exempt the franchisor from

liability:

 For non-fulfilment of its responsibility under the franchise agreement.

 Arising from third-party suits brought about by the use of the licensed product or technology.

Precautions
To emphasise the franchisee's independence from the franchisor, a franchise agreement will typically include a

provision stating that the franchisee is not an employee, business partner, agent or representative of the

franchisor. Most franchise agreements also contain a provision explicitly prohibiting the franchisee from holding

himself out as having authority to bind the franchisor.

Intellectual property
30. What provisions are usually made in relation to intellectual property rights (IPRs),
including know-how?

Generally, franchisees are granted the right to use the franchisor's trade mark. The franchisee can only use the

trade mark for a limited time or for the duration of the franchise agreement, and only for the use it was intended.

Additionally, the trade mark must always:

 Conform to the branding standards of the franchisor.

 Maintain a uniform look throughout the franchise.

As franchise agreements typically grant the right to use the franchisor's trade mark, they must comply with

section 150 of the Intellectual Property Code (IPC), which requires a franchise agreement to provide for

effective control by the franchisor of the quality of the franchised goods or service.

A franchisor's know-how usually comes in the form of an Operations Manual and training. The use of the

Manual and information acquired in training are determined by the contract, not the law. Most franchise

agreements contain a confidentiality clause prohibiting the disclosure of such information. For example, the
franchise agreement may provide that, during the period of the agreement, the franchisee cannot divulge

confidential information or reproduce the Manual in any way.

There are some limitations on the ability of a franchisor to limit the use of IPRs and confidential information or

to carve out express reservations from the rights granted. These limitations are listed as prohibited clauses,

which are clauses that (section 87, IPC):

 Reserve the right of the licensor to fix the sale or resale prices of the products manufactured on the basis of

the licence.

 Contain restrictions regarding the volume and structure of production.

 Prohibit the use of competitive technologies in a non-exclusive technology transfer agreement.

 Establish a full or partial purchase option in favour of the licensor.

 Obligate the licensee to transfer for free to the licensor the inventions or improvements that may be

obtained through the use of the licensed technology.

 Prohibit the licensee to export the licensed product, unless justified for the protection of the legitimate

interests of the licensor (such as exports to countries where exclusive licences to manufacture and/or

distribute the licensed product(s) have already been granted).

 Restrict the use of the technology supplied after the expiration of the technology transfer arrangement

(TTA), except in cases of early termination of the TTA due to reason(s) attributable to the licensee.

 Require that the technology recipient cannot contest the validity of any of the patents of the technology

supplier.

 Restrict the research and development activities of the licensee designed to absorb and adapt the

transferred technology to local conditions or to initiate research and development programmes in

connection with new products, processes or equipment.

 Prevent the licensee from adapting the imported technology to local conditions, or from introducing

innovation to it, as long as this does not impair the quality standards prescribed by the licensor.
31. What are the registration requirements for licensing IPRs?

Licences over IPRs are separate and distinct from the IPRs themselves. Licence agreements are considered

as technology transfer arrangements (TTAs) which, like franchise agreements, must comply with the provisions

of the Intellectual Property Code (IPC) on mandatory and prohibited clauses (see Question 30).

Licences over IPRs are submitted to the Documentation, Information, and Technology Transfer Bureau for

review and pre-clearance before submission to the Bureau of Trade mark or Bureau of Patent for recordal.

Licence agreements concerning IPRs are registered separately from the IPRs themselves.

A trade mark licence agreement has no effect against third parties unless the licence is recorded with the

Bureau of Trade mark (IPC).

A franchise agreement need not be registered if it contains all the necessary mandatory provisions and does

not have any of the prohibited provisions under the IPC. However, if a franchise agreement contains provisions

relating to the franchisee's use of the franchisor's registered trade mark, the franchise agreement will need to

be recorded with the Bureau of Trade mark. Otherwise the provisions pertaining to the use of the trade mark

will have no effect against third parties.

Real estate
32. Are consents from landlords difficult to obtain when transferring leases or granting
subleases from a franchisor to a franchisee?

There are no real estate laws particularly relevant to franchising. The difficulty of transferring leases or granting

subleases will depend on the terms of the lease agreement.

33. How can a franchisor prevent the franchisee from occupying the premises after the
franchise agreement has ended?

While there has not yet been a ruling on this matter, the authors believe that any provision in the franchise

agreement requiring the franchisee to vacate the premises after the franchise agreement has ended may be

considered adverse to competition and trade and prohibited under section 87.15 of the Intellectual Property

Code.

However, if the real property is owned or leased by the franchisor, and the franchisee refuses to leave, the

franchisor can file an ejectment suit with the courts.

34. How can the franchisor effectively acquire the franchisee's premises at the end of the
franchise relationship?

The imposition of a full or partial purchase option in favour of the franchisor is prohibited (section 87.5,

Intellectual Property Code). Consequently, the franchisor cannot require the franchisee to sell or otherwise

transfer ownership of the premises at the end of the franchise relationship.

35. If the franchisor leases or subleases its own site to its franchisee, can it pass on all
related costs to the franchisee? Can the franchisor charge its franchisee tenant a rent
expressed as a percentage of the franchisee's sales?

There is no law prohibiting either of these stipulations. Both options are valid provided that they are included in

the franchise agreement.

Competition law
36. What is the effect of competition law rules on franchising agreements? Are there any
available exemptions?

Competition law
The Philippine Competition Act (PCA) prohibits two general acts:

 Anti-competitive agreements (section 14).

 Abuse of dominant position (section 15).

The agreements between or among competitors that are considered anti-competitive agreements are further

divided into the following two categories:

 Agreements that are per se prohibited, which are those that:

 restrict competition as to price, or components of the price, or other terms of trade; and

 fix price at an auction or in any form of bidding (bid manipulation).

 Agreements that are prohibited only if they have the object or effect of substantially preventing, restricting or

lessening competition. These include agreements that:

 set, restrict or control production, markets, technical development or investment; and

 divide or share the market, whether by volume of sales or purchases, territory, type of goods or services,

buyers or sellers or any other means.

Agreements other than those specified above which have the object or effect of substantially preventing,

restricting or lessening competition are also prohibited. However, agreements that contribute to improving the

production or distribution of goods and services or to promoting technical or economic progress, while allowing

consumers a fair share of the resulting benefits, may not necessarily be deemed contrary to the PCA.

The following acts are considered an abuse of dominant position and are prohibited:

 Selling goods or services below cost with the object of driving competition out of the relevant market.

 Imposing barriers to entry or committing acts that prevent competitors from growing within the market in an

anti-competitive manner.

 Making a transaction subject to acceptance by the other parties of other obligations which, by their nature or

according to commercial usage, have no connection with the transaction.

 Setting prices or other terms or conditions that discriminate unreasonably between customers or sellers of

the same goods or services, where:

 these customers or sellers are contemporaneously trading on similar terms and conditions; and

 the effect may be to lessen competition substantially.

 Imposing restrictions on the lease or contract for the sale or trade of goods or services in relation to where,

to whom or in what forms goods or services can be sold or traded (such as fixing prices, giving preferential
 discounts or rebate on the price or imposing conditions not to deal with competing entities), where the

object or effect of the restrictions is to prevent, restrict or lessen competition substantially.

 Making supply of particular goods or services dependent on the purchase of other goods or services from

the supplier, which have no direct connection with the main goods or services to be supplied.

 Directly or indirectly imposing unfairly low purchase prices for the goods or services of, among others,

marginalised agricultural producers, fisherfolk, micro-, small- and medium-scale enterprises, and other

marginalised service providers and producers.

 Directly or indirectly imposing unfair purchase or selling price on competitors, customers, suppliers or

consumers.

 Limiting production, markets or technical development to the prejudice of consumers.

Exemptions
The PCA does not prohibit or render unlawful (section 15(e), PCA):

 Permissible franchising, licensing, exclusive merchandising or exclusive distributorship agreements, such

as those that give each party the right to unilaterally terminate the agreement.

 Agreements protecting IP rights, confidential information or trade secrets.

Generally, any barrier to entry, price differential, limit on production or technical development which develop in

the market as a result of or due to a superior product or process, business acumen or legal rights or laws are

not considered an abuse of dominant position.

Online/e-commerce restrictions
There are no online/e-commerce restrictions under the PCA and the Intellectual Property Code. The terms of

the contract, however, can provide for such restrictions provided that they are not contrary to law, public order,

public policy or morals.

Employment issues
37. Can a franchisee be regarded as an employee of the franchisor?

Under Philippine Labour Law, the following factors are taken into account to determine the existence of an

employer-employee relationship:

 The employer has the right to hire or select the employee.

 The employer pays the wages of the employee.

 The employer has the power to dismiss or discipline the employee.

 The employer has the power to control the means and methods by which the employee's work is to be

accomplished.
The most important element is the last element (that is, control). Franchise agreements, in theory and in

practice, do not usually establish employer-employee relationships. However, if the circumstances of the

franchising relationship show that the franchisor in fact exercises a sufficient measure of control over the

franchisee, the franchise may be said to establish an employer-employee relationship. There has not yet been

a ruling on this matter.

Dispute resolution
38. How are franchising disputes typically dealt with? What provisions for handling disputes
are usually included in domestic franchise agreements?

The parties can stipulate in the franchise agreement that any dispute will be subject to arbitration. However, if

the franchise agreement provides for arbitration, the law requires that both:

 The arbitration procedure must be governed by the:

 Procedure of Arbitration of the Arbitration Law of the Philippines;

 UNCITRAL Arbitration Rules 1976; or

 Rules of Conciliation and Arbitration of the International Chamber of Commerce.

 The venue of the arbitration must be the Philippines or any neutral country.

The ability to choose a neutral country other than the Philippines as the venue for arbitration proceedings is

one of the advantages of arbitration over court proceedings.

If the dispute goes to court, there are mandatory mediation and judicial dispute resolution proceedings that

must be complied with before the case undergoes a full-blown trial. Arbitration and mediation are preferable to

regular court proceedings as court proceedings can be expensive and protracted.

Under Philippine law, a franchise agreement must include a provision stating both that:

 The laws of the Philippines govern the interpretation of the franchise agreement.

 In the event of litigation, the venue must be the proper court of the place where the franchisee has its

principal office.

Therefore, requirements for an overseas governing law and an overseas forum for litigation are not enforceable.