Franchising in Ukraine


Business Dictionary defines franchising as an arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to particular specifications. In Ukraine this procedure is defined by legislator as a commercial concession.

Civil Code of Ukraine determines that under commercial concession agreement one party (rightholder) obliges to grant another party (franchisee) right to use rightholder's compex rights to produce or market particular goods and/or services for fixed payment. Commercial concession agreement can be concluded between natural persons and legal entities, who are subjects of entrepreneurial business. The agreement should be made in writting. In case of disregard of written form of the agreement it is null and void.

According to Civil Code of Ukraine, the agreement is registered by state agency, that has registered the rightholder. If the rightholder is registered in a foreign state, the agreement is registered by an authority that conducted registration of a franchisee. Only subjects of entrepreneurial activity can be parties of the agreement of commercial concession. Due to Ukrainian legislation, the registration of subjects of entrepreneurial activity is made by state registrar in executive board of municipal council. However, in practice, state registrars do not have such functions as registration of commercial concession agreement. Very often they abandon to register such agreements or just seal them without entrance in special register of the agreements, because they do not have one. Moreover, under Civil Code the registration of the agreement is needed only in relations with third persons. The absence of registration does not make the agreement null and void for the parties. As we see the procedure of registration of the agreement of commercial concession is not properly regulated in our country.

According to commercial concession agreement rightholder has the following obligations towards franchisee:
- to turn over technical and commercial documents and give information necessary for exercising rights granted by the agreement and inform franchisee and his workers on matters concerning these rights;
- to ensure state registration of the agreement;
- to provide franchisee constant technical and consultative assistance including facilitating in studying and advanced training of workers;
- to control quality of goods (works, services), that are produced (provided).

Having in mind peculiarities of franchisee's activity under commercial concession agreement, franchisee has the following obligations:
- to use a trademark and other denominations of rightholder by the method specified by the agreement;
- to provide inline of quality of goods (works, services) that are produced (provided) under the agreement according to those goods (works, services) that are produced (provided) by rightholder;
- to abide instructions of rightholder towards assurance of appropriateness of nature, methods and conditions to the complex of given rights;
- to provide customers additional services on what they could reckon purchasing (ordering) goods (works, services) at rightholder;
- to inform customers by the most obvious method about usage of trademark and other denominations of rightholder under commercial concession agreement;
- to keep in secret rightholder's production and other confidential information received from him.

Commercial concession agreement can forsee special requirements, such as:
1) rightholder's obligation not to allow others to a similar set of rights for use in the territory assigned to the franchisee or to refrain from self similar activities in the area;
2) franchisee's obligation not to compete with rightholder in the territory covered by the agreement on business activity carried out by a franchisee;
3) franchisee's obligation not to receive similar rights of competitors (potential competitors);
4) franchisee's obligation to negotiate with rightholder concerning placement facilities for the sale of goods (works, services) under the agreement, as well as their internal and external design.

Furthermore, the agreement determines the category of customers and the territory of marketing (providing) goods (works, services).

Civil Code of Ukraine stipulates the responsibility of rightholder for suits that are brought to the franchisee, namely, the right holder shall bear subsidiary liability for claims that are presented to the franchisee due to the lack of quality of goods (services) marketed (performed, provided) by the franchisee. According to the requirements imposed on the franchisee as a producer goods of rightholder, the rightholder shall be liable jointly with the franchisee.

Finally, commercial concession agreement allows rightsholders to develop their business more economically, saving the need to branch out and create new entities in remote areas and to bear the cost of acquisition of fixed assets, at the same time providing to rightholder the opportunity to exercise almost complete control over the activities of the franchisee. Franchisee also receives a number of benefits that reduce business risks and accelerate the development of their business what is provided by the use of good commercial reputation of rightholder in particular business dimension.

If you are interested in Franchise legal support in Ukraine, contact our experts.