The Franchise Business in Thailand is now Controlled by the Trade Competition Act

The franchise business has been a popular business to run over recent years. It is an easy way for business starters to initiate their business with a reputable brand that already has a successful business model. How this business model works is that one person called the “franchisor” allows another person called the “franchisee” to do business using the forms, system, process and rights in intellectual property of the franchisor. In said model, the franchisor has to support and control the business operation while the franchisee has to pay the franchisor in return.

 

The franchise business is normally controlled by a franchise agreement in order for the franchisor to oversee the quality of the goods and services, and to ensure that the brand will not be devalued. However, please note that a franchise agreement may be used as a tool to sabotage a franchisee or to take advantage of him/her. For instance, the franchisor may impose a condition on the franchisee to buy more goods than necessary from the franchisor or prevent the franchisee from selling other brands of goods. or from providing other services.

 

In B.E. 2559 (2016), Thailand attempted to enact the Draft of the Franchise Business Operation Act B.E. …, in order to control said unfair conducts, and required, that the franchise business must be registered. In addition, the franchisor must have Thai nationality and the details of the franchise business must be disclosed. However, said draft Act was not enacted due to concerns that it duplicated and overlapped the Trade Competition Act, which was enacted in B.E. 2560 (2017) (“TCA”).

 

At the time the TCA was enacted, there was no particular provision about the franchise business. Nevertheless, under Section 57 of the TCA, the aforementioned conducts may fall within the scope of unfair conducts which damage other business operators. Said Section 57 prohibits any business operator from acting in a way that would result in damage to other business operators, by unfairly obstructing the business operation of other business operators; unfairly utilising superior market power or superior bargaining power; unfairly setting trading conditions that restrict or prevent the business operation of others; or acting in other ways prescribed in the Commission’s Announcement. Thereafter, the Trade Competition Commission promulgated the Announcement regarding the guidelines for considering actions that are damaging to other business operators, dated 1 November B.E. 2561 (2018); in order to determine which action violates Section 57 of the TCA. This Announcement also provides the definitions of “market power” and “superior bargaining power”. Nevertheless, it is, again, not a special rule for operating a franchise business.

 

On 6 December B.E. 2562 (2019), the Thai Royal Gazette published a new announcement regarding the guidelines for consideration of unfair trade practice in the franchise business under the TCA. The Announcement was issued under Section 57 of the TCA to impose guidelines for considering which conduct is unfair in the franchise business, which will be effective as of 4 February B.E. 2563 (2020) (“New Announcement on Franchise Business”). The purpose of the New Announcement on Franchise Business is for the franchise business operation to be able to compete freely and fairly, and to ensure that a franchisor will not conduct any activities which may cause damage to a franchisee. The exploitable conducts in the franchise business are regarded as a loophole in unfair trade practice within said business which occurred for a long time in Thailand, and there was still no legislation until the New Announcement on Franchise Business was finally promulgated. The New Announcement on Franchise Business could be summarised as follows:

 

  • The duties of the franchisor

 

–           Before making a franchise agreement, the franchisor has a duty to disclose details of his/her business operation to the franchisee in order to provide free, fair and transparent competition. Such details that are required to be disclosed are, for example, the cost of the business operation, i.e. franchise fee, royalty fee and marketing fee; franchise-business operation plan including the number and place of other franchisees; the essence of the trademark, patent or copyright which is imposed in the franchise agreement; and the clauses in relation to the renewal, amendment and revocation in the agreement.

 

–           Prior to any branch expansion to be managed and operated by the franchisor, the franchisor must first inform the franchisees who have their branches nearest to those areas, and give such franchisees the right to open a new branch first with a proper period of time to reply to the franchisor.

 

  • Guidelines to consider which trade practices may cause damage to the franchisee

 

–           Imposing conditions which limit the franchise rights without reasonable grounds. For instance, imposing the franchisee to purchase any other goods or services which are not related to the franchise goods or services, or supplemental goods or services, from the franchisor or from the producers, suppliers or service providers indicated by the franchisor only; or imposing a quota of which the franchisee must purchase goods or raw material(s) over the amount of the actual demand, as well as prohibiting the return of the leftover goods or raw material(s).

 

–           Imposing additional conditions which the franchisee shall comply with after mutually signing the franchise agreement. For example, the franchisee has to purchase other goods or services, or conduct business other than as described in the franchise agreement, except where there are reasonable grounds regarding business or it is necessary to maintain the reputation, quality and standard of the franchise business. Such additional conditions must be provided in writing.

 

–           Prohibiting the franchisee from purchasing goods or services from other producers, suppliers or service providers who sell such goods with the same quality and at a cheaper price; while compelling the franchisee to purchase such goods from the franchisor or the producers, suppliers or service providers indicated by the franchisor only without reasonable grounds.

 

–           Prohibiting the franchisee from reducing the price of perishable goods or goods that are nearly expired without reasonable grounds.

 

–           Imposing different conditions among franchisees without reasonable grounds, which results in discrimination by way of unfair trade practice.

 

–           Imposing inappropriate conditions with the objectives other than to maintain the reputation, quality and standard of the franchisor.

 

If the franchisor fails to comply with the New Announcement on Franchise Business, he/she shall be subject to an administrative fine of not more than 10% of the turnover in the year in which the offence was committed. In a case where it is an offence committed in the first year of the business operation, the person committing the offence shall be subject to an administrative fine of not more than Baht 1,000,000 (one million Thai Baht). In addition, if the offender is a juristic person whereby such offence is committed under an instruction or through the conduct of a director, manager or any person responsible for the operation of such person, or in a case where a person has the duty to instruct or perform certain conduct, but fails to do so; such person shall also be subject to the same punishment as a juristic person.

 

According to the New Announcement on Franchise Business, it only establishes the guidelines for protecting the franchise system to be free and fair; by stipulating the disclosure duty of the franchisor and which conditions should be contained in the franchise agreement. However, it does not strictly force the franchisor, particularly when the franchisor has reasonable grounds based on free and fair completion, to explain as to why he/she will not follow the New Announcement on Franchise Business. Therefore, the franchisor would be allowed to conduct prohibited practices. At present, the franchisor has a chance to examine his/her franchise agreement and amend it to be in compliance with the New Announcement on Franchise Business before the effective date, in order to avoid a huge administrative fine.