Franchise (Commercial Concession) Agreements in Ukraine

Franchising is an excellent method for the distribution of products and services for a business. This article describes in brief peculiarities of franchise (commercial concession) agreements in Ukraine.

The franchise agreement is the legally binding document for the franchisee and franchiser, laying out the rights and obligations of each. Commercial Code of Ukraine does not have such term as “Franchising” and operates “Commercial Concession” instead.

Pursuant to Commercial Code of Ukraine a franchise agreement is a method of distribution of goods by granting to a franchisee a right to use objects of intellectual property rights, business reputation, business experience and know-how of franchiser and to be paid by franchisee.

According to current Ukrainian legislation, the subject of the agreement is the only essential condition of the franchise agreement. However, on practice it is recommended to stipulate the following conditions:
1) price - determination of franchise payments or royalties for usage of objects of intellectual property rights, the amount of the franchisee’s investment in its own enterprise, the amount of payment for services rendered by the franchisor and the amount of its contribution to the advertising activities carried out by the franchisor;
2) term of the agreement. The Civil Code of Ukraine provides opportunity to conclude franchise (commercial concession) agreements for a definite or for unfixed terms;
3) The territory, which is covered by agreement.

The Civil Code of Ukraine provides that a franchise agreement must be executed in writing as a single document, otherwise it may be found null and void.

The Code requires franchise agreement to be registered by the competent state body. In relations with the third parties, the parties to the agreement of commercial concession shall have the right to refer to the agreement only after its state registration. Absence of the state registration of the agreement shall divest the parties of the right to refer to this agreement. But procedure for such registration is not defined, so state registration is not mandatory at the moment.

Reward in agreements of commercial concession may be paid by the franchisee to the franchiser as a lump sum or in installment payments, or in other forms envisaged by the parties. It must be noted that tax indemnification provisions shall not be enforceable in the Ukrainian courts. The same relates to obligatory price setting by franchisor instead of franchisee.

Main obligations of franchisor include:
- provide the franchisee with technical and commercial information, or other information necessary to implement the rights given thereto according to the agreement of commercial concession, instruct with regard to the issues pertinent to the implementation of the said rights;
- issue the licenses (permits) to the franchisee, as envisaged by the agreement, ensure formalization thereof in accordance with the procedure established by law;
- ensure registration of the agreement of commercial concession;
- provide the franchisee with ongoing technical and consulting support, including training and improvement of the staff's qualifications; and
- control the quality of goods (works/services) produced (performed or delivered) by the franchisee.

Main undertakings of franchisee are:
- use the trade mark and other brands of the franchisor in the activities envisaged by the agreement in accordance with the procedure established by the agreement;
- ensure the compliance of the quality of goods produced, and works/services performed on the basis of the agreement, with the quality of similar goods (works/services) produced (performed) directly by the franchiser of the right;
- adhere to the instructions and guidelines of the franchisor of the right aimed at compliance with the nature, methods and conditions of use of the set of rights given to the user;
- provide buyers (customers) with additional services they could count on when buying (ordering) goods (works/services) directly from the franchiser of the right;
- inform buyers (customers) in the most appropriate way of the use of trade marks and other brands of the franchisor of the right according to the agreement of commercial concession;
- keep commercial secrets of the franchiser of the right or other confidential information received from the franchisor of the right; and
- pay to the holder of the rights the amount specified in the agreement.

The franchise agreement may envisage restriction of the rights of the parties, such as:
- the right holder's obligation not to give similar rights to other entities to be used on the territory assigned to the user or to refrain from similar actions on this territory;
- the user's obligation to refrain from the competition with the holder on the territory where the franchise agreement is applied with regard to the business activities exercised by the user with the use of the holder's rights;
- the user's refusal from receipt of similar rights according to the franchise agreements of from the holder's competitors (potential competitors); and
- the user's obligation to agree with the holder upon the location of production facilities to be used in the process of implementation of the rights provided according to the agreement, as well as the internal and external arrangement of these facilities.

Restricting conditions may be recognized invalid if they contradict legislation.
Current Ukrainian legislation permits signing sub-franchise agreements and contains no pre-sale disclosure requirements for franchisors.

In addition, holder of the rights shall have subsidiary responsibility on the claims presented to the user of commercial concession in case of noncompliance with the quality requirements to the goods (works/services) sold (performed/delivered) by the user. Therefore, the law directly en¬visages the joint responsibility of franchisee and franchiser as regards to de¬fects in goods covered by franchise.

If the holder of the right changes a trade mark or other brands that the franchisee has the right to use according to the agreement, this agreement shall remain valid with regard to the new brands of the franchisor, unless the user claims termination of the agreement. In case of extension of the agreement, the franchisee shall have the right to claim proportional reduction of the reward to the franchiser. If a right given in accordance with the agreement of commercial concession was terminated, the agreement shall remain valid, with the exception of provisions pertinent to the right that was terminated, and the franchisee shall have the right to claim reduction of the franchisor 's reward, unless otherwise envisaged by the franchise agreement.

Foreign franchisers who intend to expand to Ukraine may find Ukraine's regulatory framework complicated and tricky, especially, for inexperienced ones. As franchise is costly. long-term and complex, there are many practical issues to consider before signing franchise (commercial concession) agreements in Ukraine. Therefore, proper transaction structuring, contract drafting and knowing which documents are necessary will save a great deal of time and money for franchisers.