Franchising Regulations in Macau (III)

IV. The Franchise Contract

A franchise contract must be in writing, and its term should be no shorter than 3 years if a term is fixed. Absent an agreed term, the contract is presumed to last for an undetermined period of time. And no cooling off period is available for a franchisee, which means that once the contract is signed, a franchisee cannot back out of it without a material breach by the franchisor.

As a general principle, the MCC recognizes a contractual duty of good faith and fair dealing. Thus, the franchisor must:

1. allow the franchisee to use its intellectual property associated with the franchise;
2. allow quiet and peaceful enjoyment of such IP;
3. update the know-how and technology associated with franchise system to ensure its competitiveness;
4. provide adequate training to the franchisee and its associates;
5. conduct advertising of the franchise system at the international and regional level;
6. supply requisite goods or products for the operation of a franchise;
7. compensate the franchisee for a post contract NDA;
8. not compete with the franchisee in the agreed territory absent express agreement to the contrary;
9. inform the franchisee of any changes, modifications that are material to the operation of a franchise.
10. not engage in tying arrangements with respect to the operation of a franchise unless the use of certain goods and equipment are strictly for maintaining the industrial and intellectual property rights of the franchisor; and
11. to the extent such goods and equipment are required, provide warranty for such goods and equipment (critical point for franchisors to consider b/c of liability)

Similarly, a franchisee is also obligated by contract to perform its duties and obligations in good faith, to wit:
1. pay royalties to the franchisor;
2. use the intellectual property of the franchisor in a manner consistent with the rights conferred upon the franchisee;
3. maintain the quality of goods and services in a uniform fashion as required in the franchise system;
4. obtain permission from the franchisor prior to changing the premise of the franchise unit;
5. furnish information that may be requested by the franchisor concerning the operation of the franchised unit;
6. comply with the recommended price for goods and /or services as recommended by the franchisor;
7. allow the franchisor and /or its agents to inspect the premise;
8. attend training sessions as required by the franchisor;
9. grant and authorize the franchisor the right to use any improvement know-how gained in the course of operating the franchised unit;
10. submit all adverting material to the franchisor for pre-approval;
11. keep confidential the information related to the operation of a franchised unit;
12. report to the franchisor any breach or misuse of the intellectual property of the franchisor; and
13. maintain minimum volume of sale as required by the franchisor in the contract.

(note: the above are all based on the MCC)

V. Registration

As far as I know, there is no administrative registration requirement to franchise in Macau.

Franchising Regulations in Macau, SAR (II)

III. Mandatory Pre-sale Disclosure

Pre-sale disclosure by a franchisor to prospective franchisees is mandatory. As is the norm in many franchise regulations in the world, a franchisor must deliver a written disclosure document detailing the franchised business in accordance with Article 680 of the MCC. A franchisor, however, must note that the MCC does not stipulate a bright-line rule on how many days the disclosure must predate the execution of a franchise contract. The code only requires “adequate advance” disclosure. In comparison with a bright-line 30-day rule in China’s franchise regulation, the flexibility inherent in this rule could potentially cause trouble for a franchisor because a franchisee could always allege that disclosure was not adequately advance. Therefore, a franchisor should keep detailed records of the date when initial negotiations for a franchise, the date of delivery of disclosure, and of course the date of contract. In fact, for those franchisors used to the old FTC Rule (with a tricky trigger disclosure requirement), this MCC requirement should not be difficult to keep up with.

Information disclosure under Macau’s franchise regulation, to a certain extent, resembles that of the disclosure requirements under the Chinese franchise Disclosure Guidelines. The MCC does not prescribe a rigid format for disclosure, such as the Uniform Franchise Offering Circular ("UFOC") in the United States new FTC Rule; rather, it only stipulates a few categories of information to be provided in a truthful manner to prospective franchisees. Here they are:

a) the identification of the franchiser;
b) the franchiser's annual accounts of the last two accounting periods;
c) any judicial proceedings in which the franchiser, the holders of trademarks, patents and other industrial or intellectual property rights related to the franchise are or have been involved, as well as their sub-franchisers, which may directly or indirectly come to affect or render impossible the functioning of the franchise;
d) a detailed description of the franchise;
e) the profile of the ideal franchisee regarding previous experience, level of education and other characteristics that compulsorily or preferably he must have;
f) the necessity and extent of the franchisee's personal and direct participation in the exercise of the franchise;
g) the specifications as to the estimated sum of the initial investment needed for acquisition, installation and entry into functioning of the franchise;
h) the value of the periodic payments and other amounts to be paid by the franchisee to the franchiser or to third parties indicated by him, specifying the respective bases of calculation and what these remunerate, or the purpose for which they are destined;
i) the composition of the franchise network, lists of franchisees, sub-franchisees and sub-franchisers of the network, as well as of those who have left the network in the last 12 months;
j) the profitability of the franchisees' enterprises and the incidence of bankruptcies;
l) the professional experience gained, his know-how and entrepreneurial methods;
m) any services that the franchiser obliges himself to render to the franchisee for the duration of the contract.

See Article 680 (1).

In addition, a franchisor should also provide a sample contract (including relevant addendum) to a prospective franchisee in connection with the disclosure document. A failure to disclose information required in this article constitutes breach by the franchisor of the commercial code, which entitles a franchisee to annulment of the franchise contract. See Article 680 (3).

Relatively speaking, information disclosure as required in Article 680 is by no means expansive in comparison with disclosure in the United States and China. (A detailed comparison is beyond the scope of this post.)

--to be continued...

Franchising Regulations in Macau, SAR

Rivaling Las Vegas in grandeur, Macau is poised to be a major tourist attraction in Asia for those eager to try their fortune. Critical to the formation of a tourist hot spot is the growth of complementary service industry, and a proven method of growth in the service industry is franchising. I want to introduce the basics of franchising regulations in Macau in a few posts.

I. Introduction

Franchising is permissible in Macau, and an entire Title in the Macau Commercial Code (“MCC”) is devoted to the regulation of franchising. (Title VIII). Compared to franchise regulations in mainland China and other Asian countries, such as South Korea and Malaysia, Macau’s regulation seems pretty straight forward. The regulation can be roughly divided into three sections: franchisor disclosure, franchise contract, and franchisor-franchisee relationship.

II. Definition of Franchising

Franchising in Macau, in essence, is a form of expansion through a contract, and, under the MCC, a franchise contract is defined as:

A franchising contract is that by which one of the parties, against a direct or indirect payment, grants to the other, in a certain zone and in a stable manner, the right to produce and or to sell certain goods or services under his entrepreneurial image, according to his know-how, with his technical assistance, and subject to his control. See Article 679

A commercial franchise contract bears three basic features, a grant to use intellectual property of the franchisor, control by the franchisor, and a fee element. From the above definition, one can easily spot the IP and control elements (“entrepreneurial image”, “know-how”, “subject to his control”). Article 692 provides the fee element, as it states: “A franchiser is obliged to adequately compensate the franchisee for new experience gained, in accordance with article 697, in the running of the franchise.”

III. Mandatory Pre-sale Disclosure

(to be continued…)