9 October, 2016
What is the franchising scene like in Singapore? Is Singapore’s legal and economic framework a help or hindrance to franchisors or franchisees? Singapore is conducive to franchising, including restaurant and food retail franchising. It strikes a good balance between permissiveness and protection.[1]
Permissiveness
Singapore has a permissive franchising environment. There are no specific restrictions for franchising. By contrast, countries like the United States and Malaysia have special franchising laws. These laws are often designed to protect franchisees from franchisors’ imposing extensive and one-sided rights in franchise contracts. Also, Singapore has no exchange controls, no taxes on capital gains and no restrictions on foreign ownership.
Singapore has a large number of foreign and home-grown restaurant and food retail franchises. Examples include McDonald’s, Starbucks, Ben and Jerry’s, BreadTalk, Old Chang Kee, Din Tai Fung, Komala’s and Sakae Sushi. Recent market entrants include Hong Kong concepts Tim Ho Wan, Mak’s Noodle and Honolulu Café.
There are many ways to enter the Singapore market, though the three most common are direct franchising, master franchising and regional franchising.
Direct franchising, also called unit franchising, is a small-scale approach. An example is a Singapore business becoming a single Subway sandwich outlet franchisee. Master franchising is a larger-scale approach where a franchisor grants a franchisee the right to operate in an entire country. Singapore’s BreadTalk Group operates Taiwan’s Din Tai Fung restaurants in Singapore. Master franchising helps franchisors cut costs and ensure more stable cash flow from franchise royalties, compared with being direct operators.
Regional franchising is where a foreign franchisor grants a franchisee the right to operate in a region. For example, Aspac F&B Sdn. Bhd. operates Carl’s Jr. franchises in Singapore and Malaysia.
The popularity of master franchising and regional franchising was illustrated when The Straits Times newspaper reported in July 2016 that McDonald’s is planning to sell 20-year franchise rights in Singapore and Malaysia for its restaurants.
Protection
Two key types of legal protection in Singapore for franchisors and franchisees are via contract and the legislative and regulatory environment.
Contract
A well-structured contract protects the interests of both franchisors and franchisees. Singapore’s contract law is based on English contract law, with aspects supplemented by legislation. It is underpinned by a large body of English, Singapore and commonwealth case law.
Contract – Legal Protection for Franchisors
Franchisors focus on protecting their intellectual property (including trademarks) and their franchise business system. The protections implemented are designed to ensure uniformity between outlets and a consistent quality of service.
Intellectual property. Intellectual property can be protected in the franchise contract through various franchisee obligations—for example, including a contractual term that all goodwill and other rights from the use of the franchisor’s trademarks vests in the franchisor.
Apart from the franchise contract, franchisors should also consider safeguarding their intellectual property using other strategies. For additional protection, franchisors can register their trademarks in Singapore. Also, trade secrets are best protected if they are not revealed to franchisees. For example, essential materials used in a restaurant or food retailing can be black-boxed: in other words, made to a secret formula or secret process, then supplied to
franchisees ready-made.
Business system. A franchisor’s business system is protected in a number of ways in the franchise contract. The contract can state that all intellectual property in the operating manual will remain the exclusive property of the franchisor and that the contents of the operating manual are confidential. Franchisors can also include franchisee restrictions in the franchise contract. For example, franchisees can be subjected to non-compete restrictions during the term of the franchise and for a short period after.
In addition, franchisees can be subject to restrictions on any proposed sale of the franchised business. This gives franchisors the right to buy the business from the franchisee or vet the proposed incoming franchisee. Furthermore, franchisees can be made to indemnify franchisors for any breaches of the franchise contract.
Contract – Legal Protection for Franchisees
Franchisors, particularly those with an established trade name and business format, often have a stronger bargaining position. They typically offer standard franchise contracts to potential franchisees on a take-it-or-leave-it basis.
Notwithstanding, franchisees may want to protect their interests and, in particular, can focus their attention on certain important areas. These areas include territorial protections, fees payable to franchisors, the franchise’s advertising and promotional fund, a franchisee’s restrictions in selling its franchise business and termination of a
franchise contract.
Territorial protections. A franchisee negotiating a country franchise should consider asking for exclusivity. Otherwise, it is possible for a franchisor or other country franchisees to set up competing outlets that wage a price war against the franchisee’s outlets, potentially causing losses to the franchisee’s business.
Some franchisors resist granting exclusive territories on the basis that the franchisee could under-exploit the potential market in a country. A compromise is possible in such a case. For example, the master franchise contract can contain a mechanism that converts an exclusive territory to a non-exclusive one, where a master franchisee fails to follow the agreed development schedule (or other targets).
Fees payable to franchisors. A franchisee should be aware of its full payment obligations to a franchisor. There are two aspects to this. First, royalty payments or franchise fees payable to franchisors may be subject to deduction of tax at source, and franchisors may require a gross-up payment. Singapore has a 10-percent withholding tax on royalties paid to non-residents. However, taxes may be reduced if there are applicable tax treaties. Second, a franchisee should consider the true rate of royalty payments. For example, a franchisor may impose a seemingly low royalty fee and recoup the difference from high profits on bundled items sold to the franchisee.
Advertising and promotional fund. A franchisee may need to contribute to an advertising and promotional fund managed by the franchisor. If the franchisor is entitled to use contributions to recoup excess expenditure from earlier marketing campaigns, a franchisee’s contributions may not benefit itself or the franchise network. Also, it may be expensive for a franchisee if a franchisor requires a franchisee to use a specific advertising agent or public relations consultant in local campaigns.
Restrictions in selling franchise business. A franchisor usually requires a right of first refusal on a franchisee’s proposed sale of its franchised business. Whether or not the franchisor assists in the sale process, he may request a sales commission or transfer fee. Also, the purchaser of a franchised business may need to pay a training fee, which will reduce the net sale price. To avoid potential surprises, franchisees can negotiate, in the franchise
contract, a cap to any sales commission or transfer fees.
Further, a franchisee selling its restaurant or food retail business may need to take into account the issue of landlord consents for change in lessee or a change in control of the lessee company. Landlords may use the request for consent to extract a transfer fee or revised rent. Franchisees can negotiate adjustments to such clauses in leases by changing a consent requirement to a notification requirement only. This will depend on relative bargaining power.
Landlords in Singapore typically have strong bargaining positions and often reject requested adjustments to terms in
their standard leases.
Termination of a franchise contract. The circumstances under which a franchisor can terminate the franchise contract are of significance. The franchise contract should distinguish clearly between terms that are of the essence of the contract and minor terms. Only breaches of terms that are of the essence of the contract should allow for termination.
Legislative and Regulatory Environment
Singapore has a strong legislative and regulatory environment, which is conducive to franchised businesses.
Legislation. The Unfair Contract Terms Act prohibits or restricts franchisor or franchisee liability exclusion clauses unless these clauses are deemed “reasonable.” The Misrepresentation Act entitles a party who entered a franchise contract in reliance on a negligent misrepresentation to claim damages.
Agreements, such as the United States–Singapore Free Trade Agreement, give certain franchisors additional protection for intellectual property, including trademarks and copyright.
Singapore’s robust intellectual property protection is likely to be beneficial to franchisors. A franchisor’s control of the business trademarks, trade name and distinctive business “set-up” ensures uniformity of the product that customers experience. This protects the goodwill of the business as it is developed.
The Intellectual Property Office of Singapore notes that Singapore’s intellectual property regime is one of the best in the world. There are a number of intellectual property statutes in force, including the Trademarks Act and the Copyright Act.
Dispute Resolution. Singapore has a respected, efficient and effective dispute resolution framework.
The Singapore Supreme Court has a specialist Intellectual Property Court, presided over by Judges and Judicial Commissioners with intellectual property law experience, along with a division named the Singapore International Commercial Court that deals with transnational commercial disputes. According to the Singapore Supreme Court’s 2014/2015 Annual Report, the Supreme Court received a total of 14,396 new civil and criminal matters in 2014, with a 100-percent clearance rate within the year.
Apart from the courts, other well-established institutions include the Singapore Mediation Centre and Singapore International Arbitration Centre. According to the Singapore Mediation Centre, it has mediated over 2,700 matters, with a settlement rate of about 75 percent. Of cases that are settled, more than 90 percent are concluded within one working day. In addition, the Singapore International Arbitration Centre stated that its active caseload as of 1 June 2016 is about 600 cases. In 2015, it received 271 new cases from parties from 55 jurisdictions. Its case filings have increased by over 300 percent in the last 10 years.
The various choices available are complemented by Singapore’s reputation for having a strong rule of law and low corruption.
The World Economic Forum’s Global Competitiveness Report 2014-2015 named Singapore as the second-most competitive economy in the world, including ranking second globally in terms of having a transparent and efficient institutional framework. In 2016, the World Bank Group ranked Singapore first for doing business in East Asia and the Pacific. This includes a first-place recognition for enforcing contracts and protecting minority investors. Also, Singapore is consistently ranked first as the least-corrupt public sector in Asia in the Corruption Perceptions Index.
Come on Down to Singapore
Singapore is a competitive and lucrative market, balancing permissiveness and protection for franchisors and franchisees. Franchisors and franchisees are protected by well-designed contracts, underpinned by a strong legislative and regulatory environment. Franchise concepts honed in the crucible of competition in Singapore can be exported to other markets, and concepts established overseas can also be implemented in Singapore.
Franchisors and franchisees are welcome in Singapore, and many opportunities await.
[1] Adapted from a speech delivered by Mark See, the author of this Alert, on 23 August 2016: “Investing in Restaurants in Singapore, Vietnam and Myanmar: How Investors Can Establish and Invest in Restaurant Chains, Franchises, and Other Arrangements.” Jointly organised by Duane Morris & Selvam LLP and The Singapore Business Federation.
For further information, please contact:
Mark See, Director, Duane Morris & Selvam
msee@duanemorrisselvam.com
