Kazakhstan: Some Legal İssues Of Franchising In Kazakhstan

Last Updated: 7 January 2019
Article by Zhussipova Ainur

A franchise is a legal and commercial relationships between the owner of the brand (the Franchisor) and someone who seeks to use that identification in a business (the Franchisee). A franchise could be used as a strategy of expanding a business and distributing goods and services through a licensing relationship.

In other words, francising is a continuing relationship in which a franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing and managing in return for a monetary consideration. The franchisee uses these items in order to establish and conduct business. 

In Kazakhstan, franchising legal relations are regulated, firstly, by Chapter 45 of the Civil Code of the Republic of Kazakhstan, wherein the franchise agreement is also called the Comprehensive Entrepreneurial License Agreement. The provisions of the Civil Code of the Republic of Kazakhstan on the license agreement are also applicable to the agreement of an comprehensive entrepreneurial license, as to the type of the license agreement. Moreover, the country has a special Law of the Republic of Kazakhstan dated June 24, 2002 "On the comprehensive entrepreneurial license (franchising)". Depending on the subject of the agreement, its legal regulation may be subjected to other regulatory acts, in particular, the Laws of the Republic of Kazakhstan "On Trademarks", "On Copyright", "Patent Law".

It should be noted that according to international private law and by agreement of the parties, you can select the law of which country the agreement will be governed, unless otherwise provided by Kazakhstan legislation. The civil legislation of Kazakhstan gives tangible freedom in relation to contractual relations with foreign participation, so according to Art. 1112 of the Civil Code of the Republic of Kazakhstan, it is possible to elect the applicable law, both for the agreement as a whole and for its parts; it is also possible to determine the regulated law, both at the time of the conclusion of the agreement, and in further, and you can also change the law applicable to the contract at any time by agreement of the parties. In cases of working with foreign Franchisors or Franchisees, it is necessary to study the agreement carefully, as well as to analyze possible risks in election the law applicable to the contract.

According to Kazakhstan law, a franchise agreement is a binding, bilateral, compensated agreement, the mandatory condition of the validity of which is its written form. Franchising agreements require mandatory registration if, according to the agreement, an exclusive rights to trademarks and patents are transferred in aggregate or separately. In other words, if the contract transfers the rights to those intellectual property objects, which are subjected to mandatory registration with the expert organization, then the fact of granting the rights must be registered. Another important condition is the presence of registration of the specified objects. These specified objects should be registered with the expert organization on the territory of Kazakhstan, otherwise the fact of granting rights to the specified objects will not be properly registered, which will entail the nullity of such transaction in general or in terms of transfer of rights to objects that subject to mandatory registration.

This is a very important point that you need to pay attention to, since in the absence of such registrations, and accordingly the nullity of the transaction de jure, payments under such agreement will be illegal.

The issues on the rights and obligations of the parties of the franchising is a little more complicated than on the subject. Naturally, in accordance with the principle of agreement freedom, such provisions are determined by the parties themselves, but number of regulatory acts of Kazakhstan set limits on such provisions. So, according to Art. 900 of the Civil Code of the Republic of Kazakhstan, the Franchiser cannot issue other similar franchises for use on the territory assigned to the Franchisee, and is also obliged to refrain from direct independent activities in this territory, in turn, the Franchisee cannot receive other franchises from competitors (potential competitors) of the Franchiser, also Franchisee must coordinate with the Franchiser the location of the premises used for the exercise of the exclusive rights provided for by the agreement, as well as their external and internal design.

It should be noted that according to the Civil and Entrepreneurial Codes of Kazakhstan, the Franchiser does not have the right to determine the selling price of the goods to the Franchisee or the price of works (services) performed (rendered) by the Franchisee, or to set the upper or lower limit of the specified prices; and the Franchisee is not entitled to sell goods, perform works or render services exclusively to a specific category of buyers (customers) or exclusively to buyers (customers) that have a location (place of residence) in a territory specified in the agreement. Also, according to the Franchising Law, the Franchiser's obligation for training is limited to clause 2, article 15 : to carry out training, advice Franchisees on issues related to the exercise of these rights. While under the laws of Russia, Ukraine and Belarus, if the agreement of the commercial concession does not provide otherwise, the right holder is obliged to provide the user with ongoing technical and consultation assistance, including assistance in training and improving the skills of workers. This difference in formulation can lead to the fact that the Franchiser, while continuing to receive royalties, will cease to provide support and improve the skills of Franchisee's workers, and reduce the level of control. This may lead to the fact that the franchise agreement on the comprehensive entrepreneurial license in reality will be transferred to the standard licensing agreement. Therefore, the participation of qualified lawyers in the drafting and analysis of the agreement will increase the protection of the Franchisee's rights.

Such restrictions exist even if one of the basic principles of franchising activities is the ability of the Franchiser to establish uniform prices across the entire franchise network in a particular region, which allows all network subjects to conduct joint marketing campaigns and act as a single brand, despite the fact that the brand represents different companies.

In addition, it should be noted that the Franchiser bears subsidiary liability for the requirements imposed on the Franchisee about the non-conformity of the quality of goods (works, services) sold (performed, rendered) by the Franchisee under the comprehensive entrepreneurial license agreement.

In accordance with the general provisions of the contract law, the contract can be terminated by agreement of the parties, by a court decision, and the party of the contract might withdraw from it unilaterally. The franchise agreement is terminated upon expiration, termination and unilateral withdrawal from the agreement. Provisions on term must be agreed upon in the agreement itself.

We highly recommend that you specify in the agreement a specific period, or prescribe that the agreement is perpetual, otherwise, according to Kazakhstan law, after 5 years the contract will automatically expire. In addition, according to Art. 908 of the Civil Code of the Republic of Kazakhstan, the party to the agreement has the right to refuse the perpetual franchise agreement, informing the other party about it within six months, unless the agreement provides for a longer period of notice.

If the fact of the transfer of exclusive rights under the franchise agreement was registered in the manner described earlier, then the fact of the termination of the granting of such rights is also subject of registration. Although the detailed description of the procedure for termination of a registered agreement is not legally regulated, but according to established practice, the expert organization must be provided with the proof that the agreement is terminated. In cases of termination by agreement of the parties and/or by court decision, the agreement on termination/court decision shall be sent to the expert organization accordingly. The unilaterally termination of the franchise agreement must be prescribed in the terms of the agreement, especially if the agreement is not perpetual. Then, the party, in accordance with the terms of the franchise agreement, can submit a petition to the expert organization, indicating the reason for termination of the agreement unilaterally. If the terms of the agreement do not have such provisions, then none of the parties will be able to submit applications for termination of the agreement without the participation of the other party.

Franchise agreements are usually quite complicated and written in a legalese and boilerplate language, in addition to the clauses mentioned in this article, the agreement may affect issues of labor relations, personal data protection, taxation, trade, customs and other legal relations, as well as provisions for dispute resolutions. If you decide to expand the boundaries of your business by selling franchises, or you want to purchase an existing franchise, you will have to deal with the franchise agreement. In this case, support of experienced lawyer might prevent you from a variety of risks and real problems. Each party to the agreement will try to make the agreement as profitable as possible for its part. However, having developed the agreement of high standard, everyone will benefit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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