January 1, 2015
Understanding The Legal Aspects Of Franchising In Singapore
With more than 500 different franchised systems operating in Singapore, one would think the franchising industry is governed by specific franchise laws.
However there are no specific laws governing franchising in Singapore. A franchise relationship is governed by general business laws in Singapore.
Singapore law allows franchisors from any country to offer their franchises here, and it is not necessary for a foreign franchisor to have a physical presence in Singapore.
This open and easy way of engaging in franchising in Singapore is one of the reasons for the growth of the franchising industry in Singapore as the costs for starting a franchise are significantly lower than the costs in a country where there are specific franchising laws.
However, for an investor who is looking to invest in a franchise, the lack of specific franchising laws can be a little unsettling. As Singapore does not require a potential franchisor to register the franchise concept with the authorities or to make any specific disclosure before it can offer the franchise to an investor, the onus is on the investor to do his/her own due diligence on the franchisor and to check the credibility of any offer.
So what should an investor look out for when entering into a franchise relationship?
Conducting business in Singapore
While franchisor companies can be located anywhere, a franchisee is required to register a vehicle to conduct business in Singapore. The entity may be a sole proprietorship/partnership or a company registered with the Accounting & Corporate Regulatory Authority (ACRA). Registration can be done on-line at ACRA’s website and payment may be made via credit card. While incorporating a company is an easy process, there are many statutory requirements relating to the operation of a company, such as the filing of annual returns. Penalties are imposed for failure to comply with these statutory requirements. While there are fewer statutory requirements relating to a sole proprietorship/partnership, it may not offer limited liability for the investor. Therefore, it is important to carefully consider the type of vehicle to be set up to carry out the franchised business.
A foreign franchisee (being a foreign registered company) wishing to carry out the franchised business in Singapore may do so by registering a branch in Singapore.
For an individual investing in a franchise business, it is important to ensure that in the event the business fails, his liability is limited to the amount of investment he puts in. This is the concept of limited liability.
If an individual enters into a franchise agreement in his personal capacity, he will have unlimited liability. If the business fails, he may potentially be sued by his franchisor or landlord, and his personal assets may be seized to meet any monetary award that he is unable to pay for.
Other than setting up a limited liability vehicle to carry on the franchise business, it is therefore important to scrutinise the franchise agreement carefully to ensure that the individual signing the agreement does not undertake personal liability.
Unfortunately, many foreign franchisors insist that the key person for the franchisee undertakes some personal liability. Franchisees should weigh the risks before accepting personal liability.
Parties are free to negotiate the terms of the franchising agreement. The agreement may be in any language, and may generally be governed by the law of the parties’ choice. The parties may also choose the method applicable to settle disputes (for example, court proceedings, arbitration or mediation).
Agreements may be signed by the parties without any need for witnesses, notarisation or legalisation. There is no requirement to stamp the agreement or register it with any authority.
The general laws of Singapore may affect the enforceability of the franchise agreement.
For example, the Unfair Contract Terms Act provides that certain clauses which restrict liability are void unless they satisfy the requirement of reasonableness.
Clauses which are in restraint of trade, such as clauses which prohibit the franchisee from carrying on a competitive business may be void unless they are reasonable in scope and duration.
The laws of Singapore also prohibit certain clauses, for example, the Competition Act prohibits an agreement which has the object or effect of preventing, restricting or distorting competition within Singapore.
Trade marks are protected on a country by country basis. A trade mark registered in the franchisor’s home country will not afford any protection to the trade mark in Singapore. In order to be protected in Singapore, the trade mark has to be registered with the Intellectual Property Office of Singapore (IPOS).
While the laws of Singapore also protect unregistered trade marks, the protection is only afforded to those marks which enjoy goodwill in Singapore. Marks used in franchise concepts which are new to Singapore are likely not to be protected unless they are registered with IPOS. It is advisable, from the franchisee’s point of view, to ensure that the franchisor’s trade mark is registered.
Franchisees should note that the filing of an application with IPOS is not the same as having registered the mark. An application filed with IPOS is examined by IPOS, and when the application meets the legal requirements for registration, IPOS will issue the certificate of registration. It is only when the certificate of registration is issued that the trade mark gets protection under the trade mark laws.
If a trade mark is registered, it reduces the chances of the franchisee being held liable for unlawful use of another party’s trade mark. As many businesses use marks which have some degree of similarity to each other, it is not inconceivable that another party may consider that the mark used in the franchised business is infringing its rights.
As the trade marks usually are the most valuable assets in the franchised concept, it is important for the franchisor to register the trade mark. If a franchisor does not register its trade mark, it is indicative of the fact that the trade mark is not registrable because it is either too generic for registration, in which case, the likelihood is that other businesses will be using very similar marks which will cause brand confusion, or the trade mark may not be registrable due to its similarity with earlier marks on the trade mark register. On the other hand, it may simply be due to the fact that the franchisor has not made plans to enter the Singapore market, and hence, has not filed any application to register the mark in Singapore.
Payment of royalties
Franchisees may make royalty payments to a franchisor without having to comply with any formalities. Royalties may be freely converted to foreign currency for payment to a foreign franchisor.
However, withholding taxes are payable to the Inland Revenue Authority of Singapore (IRAS) by local franchisees on royalties to be paid to a non-resident franchisor. The current rate of withholding tax is 10%, but this may be varied if there is an agreement for the avoidance of double taxation between Singapore and the franchisor’s home country
Countries that have entered into agreements for avoidance of double taxation with Singapore include Australia, Canada, China, France, Germany, Italy, Japan, Korea and United Kingdom.
A final word
Franchising is an increasingly important part of Singapore’s economy. There is an increasing number of international franchise concepts coming to Singapore to take advantage of Singapore’s open economy and multi-racial society in order to test out their franchise concept in Asia.
There are also an increasing number of home-grown companies choosing franchising as a means of growing their business. The fact that Singapore does not have specific franchising laws is a strategic decision by our lawmakers, which has brought Singapore’s franchising industry to where it is today. Potential franchisees in Singapore should increase their knowledge in order to avoid pitfalls.
The author is also an Honourary Legal Advisor to the Franchise and Licensing Association