Features of franchising in Kazakhstan — be aware

In Kazakhstan, business development options based on franchising are now becoming more and more popular. There are hundreds of franchises, under agreements on which rights of various sizes of significance are transferred.

This includes food, spas, hairdressers, shops, cafes, and what not. Basically, this is connected with goods and services of everyday demand, but there are also entirely industrial areas. Most of these franchises, partners in such a relationship are chosen correctly, and discussed between the parties correctly, and formalized correctly, but not all and this is not all that is necessary.

For starters, not everyone who thinks about creating a business based on franchising understands what this word means, what kind of relationship is established between the franchisor and the franchisee. This is also due to the fact that the legislation and practice in the field of franchising in different countries is different and the content of this term is understood differently.

Even if we compare the similar legislation of Kazakhstan and Russia:

• in Kazakhstan, this is a complex business license agreement (for simplicity, we will call it a franchising agreement), according to which it is necessary to transfer the rights to use know-how and a trade name (everything else, including a trademark, can not be transferred),
• in Russia, this is a commercial concession agreement, according to which the rights to know-how and a trademark are required to be transferred. The rest — optional. We will not go into details of the differences, but if you are interested, please contact us.

The main thing is that the contract transfers the rights to use the franchisor's intellectual property (its trademarks, know-how, trade name, etc.) and its business rules, including the design of goods and services. The franchisor is obligated to train the franchisee on how to operate under the transferred franchise, to provide advice, to conduct training and to transfer the necessary materials. In return, the franchisee pays royalties and undertakes to fulfill the requirements of the franchisor specified in the contract, to ensure that its activities will not harm the franchisor.

The agreement may also provide for other, sometimes numerous, conditions for granting a franchise, a list of transferable rights, control by the franchisor of the franchisee's activities, pricing, financing, technical assistance, and features of the procedure for terminating relations.

In practice, especially large international corporations, develop their own "universal" treaties that are supposedly acceptable in all countries of the world, but this is not so, for almost every country adaptation to national legislation is needed.

In Kazakhstan, a franchise agreement must be registered with the National Institute of Intellectual Property of the Ministry of Justice of the Republic of Kazakhstan (“NIIP”), but only if it transfers rights to registered objects — trademarks, patents. If know-how and trade name use rights are transferred, no registration is required.

The agreement can be very voluminous and contain only a few pages regarding the transfer of registered intellectual property. In our opinion, there is no need to submit the entire franchise agreement for registration to NIIS, and for registration purposes, it is better to make appendices — trademark and patent license agreements. Separately for trademarks and patents — this is a legal requirement. I think there is no need to upload NIIS, which may be interesting, but not necessary for registration purposes. It is very important in a franchise agreement, as in any comprehensive agreement on the transfer of intellectual property objects for the provision of services, to distinguish between royalties and payment for services, for transferred materials, equipment. If this is not done, there will be questions from the tax authorities, which may lead to the need to pay extra taxes, pay fines.

If a franchise agreement is concluded on the basis of a master franchise agreement, for example, with a company from one Arab country, in which Kazakhstan is listed as one of the countries to which it applies, then all the same, this agreement must first be registered and only then transfer the rights to a Kazakh company, again under a registered sub- or sub-sub-franchising agreement.

At the same time, the right to enter into these sub-contracts must be present in all higher-level franchising agreements.

• Another tip: before coming to Kazakhstan or when expanding your business, check whether you are violating the rights of third parties and whether you protect your rights. The list below helps you understand what to do if you have already chosen what to do and even briefly familiarized yourself with the chosen business (franchisee) or the market you want to enter with your franchise (franchisor). So, let's look at the formalization of the transaction from two sides.

The latter is almost always very convenient, since the franchisee can sometimes avoid very long approvals and approvals from the franchisor, and for many types of rights violations, it is more convenient for the franchisor not to deal with these issues.

1. What should the franchisor do?

To start and after a general introduction to a new market or area, check:

• is everything that you want to transfer in favor of the franchisee, is designed as it should be in Kazakhstan;
• are there any violations of rights by third parties and, if any, eliminate these violations, preferably with the help of local lawyers — if it will be more expensive, but, most likely, both easier and faster;
• reputation and solvency of a potential partner, his technical and financial ability to become a franchisee in this project.

What should a franchisee do?

First check:

• does the trade mark being transferred have legal protection on the territory of the Republic of Kazakhstan and who owns it;
• whether a sub-franchisor (or master franchisee) has the right to enter into a sub-franchising or sub-sub-[…]-franchising agreement;
• whether the registration of this trademark has been disputed by third parties;
• are there trademark infringements.

Ways to get information:

• Internet;
• Media;
• direct contact with the franchisee;
• other sources.

2. Think over, agree on and fix the commercial and legal conditions for future cooperation.

3. Sign a confidentiality agreement.

4. After the conclusion of this agreement, the stage of mutual detailed checks (Due Diligence) begins, they are usually carried out by the franchisor and the franchisee with the involvement of their consultants, but, in the end, everything is at the expense of the franchisee. In complex cases, financiers, technical specialists and lawyers are involved in such checks, and the conclusion of a franchise agreement depends on the results of the checks.

5. The franchisor needs to make sure that the franchisee meets the declared economic, legal and technical parameters.

From the side of the franchisee, a certain verification of the transferred rights and the reputation of the franchisor is also needed.

First of all, you need to make sure that the — do they exist? Trademarks, patents registered in Kazakhstan? Are all other rights correct?

6. Prepare a standard package of contracts, usually developed by the franchisor. Prepare and offer for approval a franchising agreement or, additionally, related agreements, for example, a "Development Agreement"; ("Development Agreement").

On the part of the franchisee, read and analyze the proposed documents very carefully, note problem areas for yourself and think again, do you need this?

7. The main points that require attention in the process of coordinating documents:

• amount of transferred rights;
• applicable law;
• franchisor's liability and limitation of franchisor's liability;
• franchisor's control over the franchisee;
• requirements to maintain the franchisee's financial and other parameters;
• validity period, possibility and procedure for withdrawing from the contract;
• dispute resolution procedure.

8. Closing the deal (closing):

The closing of a deal means the signing (conclusion) of contracts, but the contracts themselves (if there are suspensive conditions) may not yet enter into legal force, for example, because this is expressly stated in the contracts or the transfer of rights to trademarks has not yet been registered. marks and patents. It is impossible to pay and receive royalties before the agreements come into force.

Of course, before signing contracts, you need to make sure that the signatories are authorized.

9. Suspension Conditions — these are the conditions agreed by the parties, the fulfillment of which is necessary for the entry into force of the contract:

• obtaining corporate approvals;
• granting powers of attorney;
• obtaining consent from government agencies;
• providing up-to-date financial documents;
• defects in legal documents;
• making initial payments;
• other.

Each party must confirm the fulfillment of the suspensive conditions.

10. Under "closing the deal" usually understand the beginning of the main performance — in the case of franchising, this is the beginning of the franchisee's use of the transferred set of rights.

The transaction is completed after the parties fulfill the last of the suspensive conditions.

The completion of the transaction can be recorded by the signing of a supporting document (act) and means the full entry into force of the contract.

11. Organize and bring to the attention of the franchisee a system for monitoring the implementation of the contract, check the use and rules for the use of trademarks and patents.

From the side of the franchisee, attention should be paid to the fact that international franchisors require strict compliance with the contract, and, as a rule, the contract contains a rigid default system that allows the franchisor to unilaterally withdraw from the contract, recover losses and / or penalties from the franchisee and prevent him from further use of rights.

In the event of technical defaults, you should in no case avoid contact, promptly contact the franchisor and explain the reason for the default.

12. A license agreement for the use of a trademark (or patent) must be registered. The main requirements for a trademark agreement are:

• an indication that the quality of the goods or services will not be inferior to the quality of the goods and services of the licensor,
• a statement that the licensor has the right to exercise control over the fulfillment of the above condition.

13. Franchise Agreement:

• should accurately identify the transferred intellectual property (list of patents or trademarks);
• can include several types of IP objects (patents, brands, etc.);
• must contain mandatory clauses;
• It is desirable to be able to deal with infringements of intellectual property rights yourself.

14. It should be noted that, by default, the burden of protecting trademark rights from infringement falls on the trademark owner.

At the same time, the franchise agreement may provide that:

• the licensee (or franchisee, which is not always the same) is required to notify the trademark owner of trademark infringement by third parties;
• The licensee has the right to take actions to protect the owner's rights to the trademark with the permission of the licensor (franchisor).

The latter is almost always very convenient, since the franchisee can sometimes avoid very long approvals and approvals from the franchisor, and for many types of rights violations, it is more convenient for the franchisor not to deal with these issues.

That's probably all for now, and this, in our opinion, is the most important thing. After shaking hands and expressing mutual sympathy for a business partner, do not forget about the formalities and the obligation of the written form of this transaction.