Restrictions on Unfair Trade Practices in Franchise Businesses

Commissioner Santichai Santawanpas of the Office of Trade Competition Commission or OTCC announced last month that new guidelines on unfair trade practices of franchise businesses would be enforced starting February 4, 2020. He said that the change aims at ensuring good governance, establishing business practice standards, and protecting small-scale franchise holders from bigger ones. At present, there are no specific franchising laws in Thailand to regulate businesses. More than 10 distinct acts and regulations govern and control the establishment and operations of franchises. The essence of the new guidelines is to restrain franchises from buying goods or raw materials unrelated to the nature of their products beyond what is actually needed; demanding extra and unjustifiable conditions after the signing of the contract, and prohibiting the purchase of products or services from other service providers, distributors or manufacturers.

The new guidelines will prohibit the imposing of conditions that can develop into unfair business practices. They will oblige franchisers to offer discounts and conditions equally to all their franchisees. They will ban other unfair and improper conditions and impose conditions of transparency and fairness. Basically, they will have to reveal key business information, such as compensations, expenses, trademark rights, franchisee revocations, business plans and renewals of contracts to franchisees before contracts are signed with them. The Commissioner added that franchisers will need to inform those in their prospective area of operation before establishing their branch in it.

Existing franchisees in a given area will also be given priority for opening new branches in the area. He urged franchise business operators to study the new guidelines very well, especially Section 57 of the Trade Competition Act Violations. Violations of this specific provision alone will impose an administrative fine of 10% from the annual revenue of the business for the year of the violation. President Boonprasert Pupan of the Franchise and License Association Thailand, speaking for the Association, agreed to the new guidelines. He, however, appealed that to regulators of the guidelines to add a translated version in Thai for the comprehension of local franchisers as well as assure the balance of benefits between the parties.

Thailand has 531 brand franchises as of this time. The valuable work of the late and prominent economic Deunden Nikomborirak at the Thailand Development Research Institute provided disturbing information and insights on the deeply embedded causes of business corruption, monopolies and unfair trade practices in Thailand. She exposed the weakness of the 1999 Trade Competition Act and its enforcement failures. It failed to prevent collusion, unfair trade practices and market dominion. These failures led to prevalent unfair trade policies and monopolies for many years. She explained that business and government representatives comprised the committee appointed to implement the law at the expense of small businesses that could not compete with larger investors and the public itself had limited choices of products and services.

The committee appointed to enforce the law was composed of interlinked business and government representatives. Her unrelenting exposes triggered the changes that led to the drafting and implementing a new trade competition law in October 2017.

The New Guidelines

These consist of requirements from provisions of other existing laws and regulations. They include the Unfair Contract Terms Act, ministerial Regulation 25 of the Patent Act, and the Civil and Commercial Code. The longstanding draft of the Franchising Business Act may modify the interpretation of this notification on the restrictions if the draft is signed into law.

Two Major Obligations

The franchisor must reveal all important information on the franchise. Before the agreement, the franchisor must relay relevant details on the royalty fee and other compulsory operational payments for the business; the business model of the franchise, the business’ intellectual property rights, if any; and the duration, termination, and renewal of the agreement.

The franchisor must also offer the nearest franchisee the right of first refusal and notify him about it. To illustrate, if a franchisor intends to open and run a branch of his firm in the franchisee’s location, the former must offer the right to do so to that franchisee. In addition, the franchisor is prohibited from performing specific acts, which are damaging to the franchisee, such as:

• Imposing unjustifiable conditions like compelling the franchisee to make exclusive purchases of certain products or services unrelated to the latter’s business and from a specific source or operator;
• Adding, changing or removing unjustifiable or merely verbal conditions in the agreement that the franchisor obliges the franchisee to comply with after the agreement has been signed;
• Unjustifiably prohibiting the franchisee from buying goods or services from other operators or manufacturers of parallel-quality products and at a cheaper price;
• Unjustifiably prohibiting the franchisee from providing discounts for goods that are either perishable or with proximate expiry dates;
• Unjustifiably exacting discriminatory conditions on franchisees; and
  Setting any other improper conditions aimed at achieving goals other than preserving the reputation and standards of the business consistent with the provisions of the agreement.

Clarifications and Exemptions

The Ministry of Commerce, however, announced that three categories or types of foreign services businesses will be exempt from licensing requirements. According to Ministerial Regulation number 4 on the matter, these shall be between juristic persons who shall enter into a business agreement adjudged to be eligible for the exemption. These are those engaged in leasing office space, extending domestic loans, and consultancy. Consultancy services shall cover the fields of administration and management, human resources, information technology or marketing.

Ministerial Regulation number 4 also clarifies that an eligible relationship between juristic persons shall comply with at least one of these requirements:

• One party shall comprise more than half of the total number of shareholders or partners as the other in equal proportion;
• The shareholders or partners of one juristic person shall hold and control at least 25% of that juristic person’s capital and that of the other juristic person;
• One of them has to be a shareholder or partner keeping or controlling at least 25% of that of the other juristic person; or
• The directors or partners of one juristic person shall exercise more than half of the controlling power of his business and of the other juristic person in the same proportion.

Limitation on Domestic Loan Exemption

The change in the implementation of this exemption is worth serious notice by foreign businesses. The Foreign Business Commission carefully considered the probability of a negative impact of international loans between foreign businesses on the economy of Thailand. It was also wary of the risk of tax avoidance wherein one of the business companies may pay dividends to a loan made in its country of origin or citizenship. These new guidelines, therefore, will limit the exemption to domestic loans. Furthermore, a company that grants loans or guarantees to associate businesses or affiliates outside of Thailand must first secure a foreign business license or certificate before it can do so.

 
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Category: Business in Thailand, Company Law, Company Registration

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