Ukraine: Recent Developments in Franchise Regulation
DLA Piper Ukraine LLC
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DLA Piper is a global law firm with offices throughout the Americas, Asia Pacific, Europe and the Middle East, which provides a broad range of legal services to local, regional and international clients. In 2008, 2012 and 2014, DLA Piper was acknowledged as Foreign Law Firm of the Year in Ukraine (Legal Awards Ceremony, Ukraine).
Areas of practice in Ukraine
Corporate and M&A: set up and termination of businesses, corporate governance, M&A, including due diligence, corporate restructuring and reorganization; corporate investigations and compliance, and legal support of day-to-day operations.
Finance and Projects: M&A and regulatory work in the banking and finance sector, asset, debt and capital markets transactions, structured finance, project finance, real estate finance, aviation finance, debt restructuring, infrastructure and PPP projects, litigation in debt and insolvency-related matters.
Real estate and construction: acquisition/sale and lease transactions for real estate and land; registration of associated rights; establishment of business presence, expansion and structuring of retail business, construction and planning matters, industrial and infrastructure projects, real estate due diligence, structuring of real estate transactions and construction investment projects, real estate contracts, mortgage lending and environmental issues.
Tax: corporate tax, VAT and customs, tax driven restructurings (domestic and international), as well as M&A transactions from the tax perspective, tax due diligences, reviews of tax profiles of entities, tax controversy, litigation and transfer pricing.
IP and Technology: registration and protection of IP in Ukraine and overseas, IP portfolio management, IP due diligence, structuring of IP ownership and commercialization of IP, unfair competition issues, parallel import and counterfeits, licensing and assignment agreements, IT outsourcing, internet, e-commerce, domain names and telecommunications, data protection, software and hardware, technology transfer.
Competition law and regulatory: permits for concentrations; for concerted practices, leniency program advice; advice on protection from unfair competition, compliance advice and audits, obtaining of preliminary conclusions from the AMCU; abuse of dominance advice; advice on commercial agreements and trade practices, natural monopolies and public procurement; support during investigations by the AMCU, as well as competition litigation.
Franchise as a business model is still under development in Ukraine. According to data supplied by the Franchising Association of Ukraine, at the end of 2014 there were approximately 400 companies expanding their franchise chains over the territory of Ukraine, and about 145 companies have recently started their business and are currently on the lookout for potential franchisees. At the same time, there is definitely potential for more franchises to be rolled out in Ukraine as it still represents a rather unsaturated market compared to other jurisdictions.
As regards legal regulation, a franchise is a relatively new institution for Ukrainian legislation. The Civil and Commercial Codes of Ukraine that came into effect in 2004 represent the first-time legal regulation of franchises in Ukraine. Both the Civil and Commercial Codes stipulated the general terms and conditions of its regulation. Instead of the generally accepted definitions of “franchise”, “franchise agreement”, “franchisor”, “franchisee”, the Civil and Commercial Codes set such terms as “commercial concession”, “commercial concession agreement”, “right holder”, “user”.
Abolition of registration requirement for franchise agreements
Over the past year there has been legislative activity which eliminated the long-standing problem in the regulation of franchise agreements. Among other terms and requirements applicable to franchise agreements, both the Civil and Commercial Codes of Ukraine established the requirement according to which franchise agreements were subject to mandatory state registration. The failure of parties to comply with this requirement used to result in negative consequences set under the law, in particular, the parties had no rights to refer to an unregistered agreement, including amendments thereto, in relations with third parties or in case of a dispute.
Notwithstanding the mandatory legal requirement to register franchise agreements, there was no registration procedure stipulated or a relevant register of franchise agreements adopted. This legal uncertainty raised significant concerns regarding the ability of the parties to rely on such agreements in case of disputes between them, and in their relations with third parties, such as tax authorities, even though the failure to register a franchise agreement did not result in the nullity or invalidity of the agreement as such under the law.
Due to the lack of a relevant procedure, the competent state authorities in major cases used to refuse the parties in registration of such agreements. The parties to franchise agreements, in an attempt to comply with the then existing mandatory registration requirement, created a certain court practice where they sought to oblige authorities to register franchise agreements on the basis of a court decision. However, this option was not completely safe and, therefore, the parties normally preferred to avoid structuring their franchise relationship in Ukraine on the basis of franchise agreements and in practice opted for other types of agreements (mostly license and services agreements were put in place to substitute the franchise agreement). This equivocal legal regulation used to undermine the development of franchise in Ukraine. Therefore, there was a great need for changes in this area of legal regulation.
In order to eliminate the legal uncertainty that resulted from the lack of the relevant mechanism regulating the registration of franchise agreements, the Ukrainian Justice Ministry put forward an initiative and by its Order as of 29 September 2014 No. 1601/5 approved the Procedure of State Registration of Commercial Concession (Sub-concession) Agreements (“Procedure”) which was published on 21 October 2014. It was expected that the Procedure would come into effect on 21 April 2015.
Nevertheless, on 12 February 2015 the Verkhovna Rada of Ukraine (the Ukrainian Parliament) adopted the On Amending Certain Legislative Acts of Ukraine Focused on Simplification of Conduct of Business (Deregulation) No. 191-VIII Act of Ukraine (the Act) which came into effect on 5 April 2015, i.e. before the Procedure became effective, whereby, among other changes, it excluded from the Civil and Commercial Codes of Ukraine the requirement of the mandatory state registration of franchise agreements, as well as the provisions that prevented the parties thereto to refer to unregistered franchise agreements in case of a dispute and in relations with third parties. Thus, the effective legislation of Ukraine no longer contains the requirement to register franchise agreements and an Order from the Ukrainian Justice Ministry on the cancellation of the effect of the Procedure is expected in the near future.
The abolition by the Act of the requirement of mandatory state registration of franchise agreements eliminated the legal uncertainty which existed until recently and permitted the parties to enter into fully enforceable franchise agreements. Such legal changes will definitely have a positive effect on the future development of the Ukrainian franchise market.
Other issues of Legal Regulation of Franchise in Ukraine
In Ukraine, theoretically, any business can offer its franchise provided that it has certain intellectual property rights, such as title to a trademark, know-how, etc, and an efficient business model which it can share with other parties.
The offer and acceptance of franchise in Ukraine is not specifically regulated under the law. A potential franchisor is not obliged to comply with pre-sale or pre-contractual disclosure due to the absence of this requirement under Ukrainian law. The law requires that the franchisor provides the franchisee with technical and commercial information and any other information necessary for the franchisee to exercise its rights granted under the franchise agreement. At the same time, the said norm is usually understood as obligation of the franchisor to provide the said information to the franchisee when the franchise agreement is already concluded. Therefore, as of now, pre-sale and pre-contractual disclosure in Ukraine remains a matter for negotiation between the franchisor and the franchisee.
The parties regulate their franchise relationship to under franchise agreement which shall be executed in writing in the form of a single document. The conclusion of an agreement in a simplified way, i.e. by way of exchange of letters, telegrams, etc. between the parties is not allowed. Failure to observe this requirement will render the agreement null and void under the law. In the light of the recent legislative changes described above, no state registration of such agreement is required.
As mentioned above, a franchise agreement in Ukraine is defined as commercial concession agreement and is regulated under Chapter 76 of the Civil Code and Chapter 36 of the Commercial Code of Ukraine. The scope of rights that are granted under a franchise agreement includes the right of franchisee to use franchisor’s intellectual property, commercial experience (usually in the form of know-how/trade secret) and business reputation.
The intellectual property is a key element of a franchise agreement. The Civil Code of Ukraine provides for a list of intellectual property that may be included in the scope of a franchise agreement. The list is not exhaustive and covers, among other things, trademarks, utility models, inventions, trade secret (know-how) etc. By so doing, the law gives only examples of intellectual property that may be included by the parties to the scope of agreement without limiting their right to include another type of intellectual property.
Pursuant to Ukraine law, only valid intellectual property can be granted to third parties for use. Hence, prior to inclusion of any intellectual property to the scope of a franchise agreement, the franchisor shall ensure that its intellectual property is properly registered in Ukraine (where applicable), and its validity is not terminated or expired as of the date of such franchise agreement. The registration of intellectual property can be obtained in Ukraine in two ways: either by applying directly to the State Intellectual Property Service of Ukraine or through an international procedure of registration (via World Intellectual Property Organization).
Ukrainian law provides for certain restrictions that may be applied by the parties under a franchise agreement. In particular, such restrictions may include conditions establishing territorial exclusivity, non-compete obligations of the franchisee with regard to franchisor itself, or prohibitions on dealing with other franchisors, etc. Although these restrictions are sometimes permitted under Ukrainian law, in certain cases they can still be found illegal. Thus, it should be analysed in line with Ukrainian competition law whether they may be included in the franchise agreement.
Being a complex business relationship, a franchise may touch upon different legal issues in various areas of law, such as currency control, tax, real estate, etc. It is, therefore, important to review the legal framework in place so as to clarify which laws and to what extent may be applicable to a franchise agreement and to ensure compliance with them.