IDI Country report on franchising - Russia

1. Legal Sources
2. Notion of Franchising Contract
3. Pre-Contractual Disclosure Obligations
4. Obligation of the Franchisor to Test the Business Formula
5. Formalities Regarding the Franchising Contract and Its Modifications
6. Other Provisions Which May Have an Impact on Franchising
7. The Franchisee's Obligation Not to Compete
8. Exclusivity
9. Responsibility of the Franchisor for Acts of the Franchisee
10. Franchisor's Control Over the Franchisee's Activity
11. Intellectual Property and Confidentiality
12. Term and Termination of the Contract
13. Goodwill Compensation (Indemnity)
14. Limitation of Action
15. Applicable Law
16. Jurisdiction and Enforcement of Foreign Judgments
17. Arbitration

1. Legal Sources

What are the rules governing commercial franchising agreements (if any) in your country?

Franchising is specifically regulated by Chapter 54 of Part II of the Civil Code.

Further, the general provisions of the Civil Code – especially those that govern general aspects of contract law and obligations (Part I), intellectual property and licensing (Part IV) and real estate and property law (Parts I and II) – may apply to franchising.

Franchise relationships may also be affected by local laws regarding:

• commercial law and competition;
• consumer and data protection;
• labour and employment;
• advertising and promotion; and
• tax and currency control.

Other rules and regulations may also apply to franchising deals.

2. Notion of Franchising Contract

2.1 General notion of franchise contracts

Which agreements are normally qualified as franchising agreements in your country?

Franchise agreement (legally named as “commercial concession”) is defined in Civil Code. According to Article 1027(1) of the Civil Code, under a franchise agreement, the rights holder grants the user, for consideration and for a definite or indefinite period, a right to use a set of IP rights, including trademarks and other IP rights, to operate its business – in particular, trade names and secrets of production (know-how).

The key element of every franchise agreement is a protected (ie, registered) trademark. Without this, the contract may not be treated or interpreted as a franchise agreement.

2.2 Agreements which are covered by special rules on pre-contractual disclo-sure

Which are the agreements to which special rules on pre-contractual dis-closure (if any) apply?

Pre-contractual disclosure is not mandatory under Russian law. The law only states that the franchisor alone must provide technical and commercial documentation – along with any other necessary information for the franchisee to be able to develop the franchise operations – and instruct the franchisee and its employees on any aspects associated with the contracted franchising activities.

Disclosure obligations may be established by the parties on the basis of the doctrine of culpa in contrahendo at the negotiations stage of a prospective deal. When negotiating the franchise grant, parties may corroborate their contractual negotiations using a special form of agreement available under the provisions of Article 434(1) of the Civil Code.

The format of disclosure is not prescribed by Russian law or published by any governmental agency. Therefore, the parties to a contract may use and be guided by the documentation normally used in the context of international franchise practice.

Also, parties to a franchise agreement are subject to an implied duty of good faith. Good faith and fair dealing are the fundamental principles of the national civil law, as set out by Articles 1(3) and 10(5) of the Civil Code. These principles are usually supported and enforced by local courts in all disputes involving domestic contracts and cross-border transactions, including in terms of franchising.

2.3 Distinctive criteria with respect to employment contracts

According to the law of your country, in what situations could a franchisee be considered as an employee of the franchisor?

The franchisor and the franchisee are separate business entities operating under the franchise agreement. Each has their own labour and employment obligations in relation to their respective employees, but not in relation to each other.

The terms and conditions of the franchise agreement are primarily governed by civil law (ie, the Civil Code), while the labour and employment relations of entities doing business in Russia are regulated by the Labour Code.

Under the Labour Code, employment relations between the employer and the employee may arise only under a labour agreement. Article 15 of the Labour Code stipulates that the conclusion of civil law agreements which de facto govern the relationship between the employer and the employee are not allowed.

Therefore, the franchisee or even the franchisee’s employees cannot be treated as the employees of the franchisor for liability or other purposes. However, in certain cases as cited by law, franchisors may bear subsidiary or even joint and several liability under product-related claims of third parties, but not related to employment issues.

2.4 Distinctive criteria with respect to distributorship contracts

According to the law of your country, how are franchising contracts dis-tinguished from distributorship contracts?

Franchise and distribution are two different business models, although they are sometimes ‘blended’ together, especially in product franchising deals. Specifically, if franchisor and franchisee are involved in product-purchase-sales as well as supply and re-sales relationship, relevant distribution clauses may be incorporated into the franchise agreement, or the distribution contract may be attached to the franchise agreement. Importantly, there is no such contractual model as the distribution contract in Russian civil law, and, in practice, such agreement will mix different aspects of product purchase and re-sale, while franchising is more about trademark and IP licensing, as noted above.

2.5 Possible application of rules on commercial agency

Is there a risk of application of the rules or case-law principles provided for commercial agents also to franchisees?
Can you provide details of the relevant circumstances and application by case-law?
Is there anything that can be done to help mitigate this risk?

Usually, agency relations are mixed with distribution, but not with franchising. Franchisors would not appoint their franchisees as commercial agents. In fran-chising relationship, parties would normally use regular sub-franchising models, if appropriate.

2.6 Possible reference to other contracts with respect to the sale of goods (for distribution franchising contracts)

Is it possible to include in the franchising contract rules whereby the fran-chisor puts the contractual products (which remain his property until they are sold to the end user) at the franchisee's disposal, and the franchisee sells the goods for the account of the franchisor (like a commission agent)? If so, does this modify the nature of the franchising agreement?

Yes, it is possible, but such arrangements are rarely implemented in product franchising deals. In this case, such commission or agency relationship are simply incorporated into franchise agreements, unless separate agreements are entered into by the parties.

2.7 Requirements concerning the performance of the franchise activity

Is there any condition required by the laws of your country for being al-lowed to perform the franchising activity (e.g. citizenship)?
Are there any registration requirements or other formalities required as a pre-condition to establish and/or manage a franchise system in your juris-diction?

No, there is no special citizenship, location or registration formality to establish and manage a franchise system in Russia. Franchisor can be a foreign entity, while franchisee can be a local one. Formation of Russian business entity is not necessary to set us a franchising or sub-franchising business.

3. Pre-Contractual Disclosure Obligations

3.1 Rules on disclosure in general

Which rules govern precontractual disclosure obligations in your country?

Pre-contractual disclosure is not mandatory under Russian law, as noted above. Disclosure obligations may be established by the parties on the basis of the doctrine of culpa in contrahendo at the negotiations stage of a prospective deal. When negotiating the franchise grant, parties may corroborate their contractual negotiations using a special form of agreement available under the provisions of Article 434(1) of the Civil Code. Also, parties to a franchise agreement are subject to an implied duty of good faith. Good faith and fair dealing are the fundamental principles of the national civil law, as set out by Articles 1(3) and 10(5) of the Civil Code. These principles are usually supported and enforced by local courts in all disputes involving domestic contracts and cross-border transactions, including in terms of franchising.

3.2 The rules contained in the specific statute (if any) on disclosure

Which information is to be provided to the prospective franchisee before signing the contract?

N/A

How often must the disclosures be updated?

N/A

3.3 Consequences of the non-respect of the rules regarding pre-contractual disclosure

What are the consequences of the non-observance of the rules on pre-contractual disclosure?

Except for the rules described above, as well as the contractual penalties, which may be set forth by the agreement governing negotiations of the parties, there are no liability implications for non-observance of pre-contractual disclosure. Again, pre-contractual disclosure is not compulsory under Russian law.

3.4 Choice of law and mandatory rules on disclosure

Are the rules on disclosure to be observed in any case, even if the parties have chosen to submit the franchising contract to a law other than the law of your country?

No. Please see the above.

3.5 Possible translation into the local language

Is there a requirement for disclosure documents to be translated into the local language?

Disclosure documents, if they are submitted should be accompanied by the cor-responding Russian translations to make them clear to the franchisees. Howev-er, there is no requirement to do so, as disclosures are not imperative.

4. Obligation of the Franchisor to Test the Business Formula

Is it necessary that the franchising formula has been tested before proposing it to prospective franchisees?

It is not necessary that the franchising formula must be tested before proposing it to prospective franchisees. Also, there is no imperative to establish a local business entity as a pre-condition for doing franchise business in Russia. International companies are free to offer and sell franchises directly or indirectly to local business entities. When entering the Russian market through franchising, foreign companies should comply with the relevant national laws and regulations governing franchise-related deals and general civil law principles.

5. Formalities Regarding the Franchising Contract and Its Modifications

5.1 Formalities required by law

Is any formality (written form, notarisation, registration, etc.) required for the validity of a franchise contract in your country? If so, what are the consequences of the non observance of the above for-malities?

Written form

According to Article 1028 (1) of the Civil Code a franchise agreement must be made in writing. Non-compliance will make the franchise agreement null and void (invalid).

Also, the franchise agreement must be translated into Russian. In practice, bilingual versions are drafted in the context of cross-border deals. If the franchise agreement is produced and executed in a foreign language (eg, English), a certified Russian translation may be prepared and attached to the original contract.

Registration (where applicable)

Under Article 1028 (2) of the Civil Code a franchise grant must be registered with the Federal Service for Intellectual Property (Rospatent). The franchise grant which is not registered with Rospatent will be regarded as invalid against third parties.

The types of documentation that may be submitted to Rospatent for recordal purposes are as follows:

• the original franchise agreement;
• a notarised excerpt from the original franchise agreement; or
• the so-called ‘notification’ (ie, the statement of franchise).

If the parties do not wish to disclose the original contract along with agreed financial terms or other sensitive data, the best option would be to make, sign and file an excerpt from the franchise agreement or submit the notification.

Before filing, it is essential to ensure that the franchise agreement as well as the document filed to Rospatent contains all of the essential elements (ie, mandatory clauses) as required by Russian law and applicable registration regulations.

The usual registration period will be 2-3 months, provided that no office actions or Rospatent inquiries are issued in the course of examination.

5.2 Contractual requirement of written form for modifications

In case the contract requires the use of writing for possible future amend-ments, what are the consequences of non observance?

Amendments or modifications are also subject to written form and registration with Rospatent. Registration is required, provided that modifications concern the change in the franchise grant (i.e. type of franchise, term, territory, etc.).

5.3 Specific acceptance of onerous conditions contained in non-negotiated contracts

Acceptance of any franchise-related terms and conditions, including onerous ones, must be made by way of signature of the contract. In other words, a franchise agreement shall represent a written instrument that is signed by both parties.

5.4 Form requirements and applicable law

How is the law governing the form of the franchising contract to be deter-mined under the law of your country?

In cross-border franchising deals involving the Russian element a written form of the contract will always apply, even though a foreign applicable law is chosen. This practice is based on the provisions of Article 1209 (3) of the Civil Code which expressly stipulate that if a transaction or creation, transfer, limitation or termination of rights under the transaction is subject to the official registration in the Russian Federation, the form of such transaction is submitted to the Russian law. Again, according to Article 1028 (1) of the Civil Code a franchise agreement must be made in writing. Non-compliance will make the franchise agreement null and void (invalid).

6. Other Provisions Which May Have an Impact on Franchising

6.1 Antitrust rules

Are there any antitrust rules which should be taken into consideration when drafting (or carrying out) a franchising contract?

Generally, the national competition law, prevents monopolistic (anticompetitive) activities, ‘cartels’ and abuse of dominance. The law further prohibits any types of unfair competition, including misrepresentation and passing off. Unauthorised IP acquisition and use may also be treated as unfair behaviour and, therefore, sanctioned. Importantly, the law allows ‘vertical’ contracts, including franchise agreements, whether made between foreign or domestic companies.

Franchise agreement may impose different obligations and covenants on the franchisee, particularly those listed in Article 1033 (1) of the Civil Code. Theoretically, these covenants, to the extent they are incorporated in the franchise agreement, may be declared invalid by Federal Antimonopoly Service (or other interested person), if they are found to be contradictory to anti-monopoly laws, subject to the relevant market conditions and economic status of the parties.

6.2 Good faith

Is there a general legal obligation on parties to deal with each other in good faith? If so, how does it affect franchise relationships?

There is a specific legal provision in the Russian Civil Code to the effect that the parties, while exercising their rights and performing their duties, should act in good faith. There is also a general civil law principle that the actions of private persons and legal entities are not allowed if they are carried out with the sole purpose of causing damages to other persons. Neither abuse of rights, nor unfair competition are allowed.

6.3 Consumer protection

Does any law provision treat franchisees as consumers for the purposes of consumer protection or other legislation?

There is no law that would treat franchisees as consumers. The Law on Protec-tion of Consumers’ Rights covers the rights of individual consumers acting as physical persons (not business entities). Franchisee will always be a business en-tity or entrepreneur.

6.4 Possible other rules

Which other rules of general nature should be considered when dealing with franchising?

As mentioned above, the franchise relationship may generally be regulated and affected by the local laws on:

• franchising and IP licensing;
• IP and IT;
• real estate and property law;
• competition and commercial law;
• labour and employment;
• consumer law and data protection;
• advertising and promotion; and
• tax and currency control.

Other related Russian laws and regulations may also apply depending on the nature of franchising deal.

7. The Franchisee's Obligation Not to Compete

7.1 Non competition during the contract

If there is no contractual provision prohibiting the franchisee to sell com-peting goods or to engage with competing franchising networks, does it mean that the franchisee is free to act for competitors of the franchisor?

If there is no contractual provision prohibiting the franchisee to compete, the franchisee is free to act for competitors of the franchisor. Therefore, it is usually recommended providing a special non-competition clause in the franchise agreement.

To what extent are contractual non-competition clauses admissible?

The franchise agreement may contain non-compete and other restrictive covenants. These may be imposed on the franchisee as allowed under Russian law. The franchisor may elect inter alia for the following covenants to be incorporated into the contract:

• the franchisee’s covenant not to compete with the franchisor in the franchised territory in relation to the franchised business and franchised set of IP rights;
• the franchisee’s refusal to accept analogous rights under franchise agreements from actual and potential competitors of the franchisor;
• the franchisee’s covenant to distribute and sell the manufactured or purchased goods, perform works or provide services by using the franchised rights and applying the prices fixed by the franchisor;
• the franchisee’s covenant to refrain from distributing analogous goods, performing analogous work and providing analogous services using the trademarks or trade names of other franchisors.

The above restrictive covenants are permitted under Russian law and may be enforced if not complied with, especially during the course of the franchise agreement.

Is it possible to extend the franchisee's non competition obligation to non competing goods?

No, as the law does not permit this covenant.

7.2 Post-contractual non-competition obligation

Is it possible to agree with the franchisee an undertaking not to compete in the period after contract termination? If so, is this obligation subject to specific conditions (i.e. time limit, territorial extension, etc.)?

Yes, it is possible to agree with the franchisee a covenant not to compete in the period after the termination of the contract, provided that such covenant survives the termination under the agreement. Non-competition obligation shall be specific and limited to certain territory and concrete period of time (e.g. 3 years). Perpetual non-competition clause may be held invalid from the antitrust perspective.

8. Exclusivity

8.1 Rights of the franchisee in the absence of contractual rules on exclusivity

If there is no written contract or if the contract does not state anything about the franchisee's exclusivity, does it mean that the franchisor is free to appoint other franchisees and to sell the products or services in compe-tition with the franchisee?

A franchise may be sole, exclusive or non-exclusive. If the granted franchise is sole, the franchisor loses its right to use the franchised set of IP rights in the franchised territory on its own and loses the right to offer and sell the same franchise to third parties in the franchised territory. If the granted franchise is exclusive, the franchisor may reserve the right to use the franchised set of IP rights in the franchised territory on its own. However, it loses the right to offer and sell the same franchise to third parties in the franchised territory. If the granted franchise is non-exclusive, the franchisor is free to franchise the already franchised set of IP rights to others in the franchised territory and can use the franchised set of IP rights in the franchised territory on its own.

8.2 What is actually covered by exclusivity clauses?

What are the franchisor's obligations under a clause granting a territorial exclusivity to the franchisee?

The franchise agreement may provide for the franchisor’s obligation not to grant third parties analogous sets of IP rights for their use in the contracted territory, or refrain from self-analogous business activity in such territory. The franchise agreement may also stipulate the franchisee’s obligation to sell goods and provide services exclusively within the boundaries of certain territory. Therefore, if the franchise is fully exclusive by territory, the franchisor is deprived of the right to use the franchised set of IP rights on such territory and cannot also grant third parties the same franchised set of IP rights on such territory (i.e. only the franchise get all the rights).

9. Responsibility of the Franchisor for Acts of the Franchisee

Under which circumstances the franchisor may be held responsible for acts of the franchisee? In which cases customers or employees of the franchisee may have a direct action against the franchisor?

The franchisor’s liability for third party claims addressed to the franchisee may be joint and/or subsidiary. More specifically, the franchisor shall bear subsidiary liability for the claims made to the franchisee for the inconsistency of the quality of the goods (services), which are sold (provided) by the franchisee under the franchise agreement. Under claims made to the franchisee as the manufacturer of the products (goods) of the franchisor, the franchisor shall be jointly liable with the franchisee. There rules are imperative by operation of the law.

10. Franchisor's Control Over the Franchisee's Activity

10.1 General limitations

Are there any rules of case law principles limiting the franchisor's right to impose a specific conduct upon the franchisee?

Generally, there are no rules or principles limiting the franchisor’s right to impose a specific conduct upon the franchisee. The franchisee must follow the standards and instructions of the franchisor towards the business, the system and the licensed IP rights.

Also, unless there is an agreement to the contrary, the franchisor is obliged to control the quality of the goods (services) which are manufactured (provided) by the franchisee on the basis of the franchise agreement. The exercise of control can be specifically described in the contract.

10.2 Obligation to sell from the franchised outlet

Would the franchisee's obligation to sell only from the franchised outlet be lawful under the law of your country?

Yes, the franchisee’s obligation to sell only from the franchised outlet will be lawful. However, the franchisee’s obligation to sell goods or provide services exclusively to customers (clients) having the location or residence in certain territory (i.e. the obligation to select customers) will be void.

10.3 Prohibition to change the place of the outlet

Would a prohibition to change the place of the outlet without the franchi-sor's approval be valid under your law?

The franchise agreement may contain the franchisee's obligation to approve the place of disposition of commercial premises used for the exercise of rights under the contract. Therefore, the franchisor may prohibit the franchisee to change the place of outlet, without the franchisor’s approval.

10.4 Use of Internet

Is the franchisor free, under the law of your country, to sell through the In-ternet in competition with his franchisees?

The franchisor is free to sell through the Internet, unless otherwise is provided by the contract. If the granted franchise is exclusive, which prohibits the franchisor to use the same set of IP rights and grant same franchise to others in the same territory, the franchisor will not be able to sell through the Internet by way of a website targeted at Russia (e.g. by having a Russian web-page).

Is the franchisor entitled, under the law of your country, to prohibit the franchisee to sell through Internet (or otherwise limit his right to promote his business through the Internet)?

Yes, the franchisor is entitled to prohibit the franchisee to sell through the Internet. This is the question of scope of rights that may be established by the contract.

10.5 Limitations as to the customers to whom the franchisee may sell

Are possible limitations as to the customers to whom the franchisee may sell lawful under the law of your country?

The provisions of the franchise agreement stipulating the franchisee’s obligation to sell goods (provide services) exclusively to customers (clients) having location or residence in the contracted territory will be null and avoid (Article 1033 (2) of the Civil Code). The obligation to sell only to end users or only to other franchisees may be lawful and shall not be regarded as anti-competitive.

10.6 Resale prices

Would a clause which obliges franchisees to respect certain resale prices of the products supplied by the franchisor be lawful under the law of your country?

Under the law the franchisee’s covenant to distribute and sell the manufactured or purchased goods (provide services) by using the franchised rights and applying the prices fixed by the franchisor will be valid.

11. Intellectual Property and Confidentiality

11.1 Use of the trademarks and symbols during the contract

Would a use of the franchisor's trademarks which does not conform to the franchisor's indications be a substantial breach, justifying contract termi-nation?

The franchisee may use the franchisor’s trademark only within the scope which is granted by the franchisor and only by such means as determined by the contract. If the trademark use does not conform to the franchisor’s indications, it will be considered as a substantial breach of contract, which may lead to contract termination.

11.2 Obligation to cease using trademarks after contract termination

Are clauses which require the franchisee to remove and cease using the franchisor's trademarks, after contract termination enforceable in your country?

After the contract is terminated, the franchisee must cease any use of the franchisors’ trademarks. Otherwise, the franchisee’s actions will be considered as trademark infringement. Further penalties can established by the contract.

11.3 Domain names

Are there any limitations on a franchisor being able to require a former franchisee to assign local domain names to the franchisor on the termina-tion or expiry of the franchise agreement?
In the absence of a contractual provision regulating domain names, is the franchisor entitled to claim the transfer of possible domain names regis-tered by the franchisee/master, which include the franchisor’s trademark, in your jurisdiction?

Registration and use of a domain name that includes a trademark of the franchi-sor is not allowed without the consent of the latter. If permitted, it may be done, but only pursuant to the provisions of the agreement, and during its term. After expiration or termination of the franchise agreement, the franchised trademark cannot be used in the domain name.

Franchisee may either deregister the same or assign it to the franchisor. If not, the franchisor can claim prohibition of such (unauthorized) use in local court. Positive and effective court decision will be a legal basis for Domain Registrar to proceed with domain name transfer.

11.4 Confidentiality

Is the franchisee obliged to treat the information received from the fran-chisor as confidential?

Subject to the essence and features of the business carried out by the franchisee under the franchise agreement, the franchisee is obliged not to disclose trade secrets (know-how) of the franchisor and other confidential (commercial) information received from the latter. This obligation may be enforced through various sanctions, including contractual penalties, which are imposed by franchisors. Of course, it is critical to define what specific information, that is transferred to the franchisee, is confidential and proprietary.

12. Term and Termination of the Contract

12.1 Contract for a fixed period or for an indefinite period

Is it possible to choose between a contract for a fixed term and a contract for an indefinite period? What are the main differences?

Yes, it is possible to make a contract for a fixed term (e.g. 5 years) or indefinite term. Indefinite term shall be equal to the term of protection of the franchised set of IP rights, including trademark rights. If the franchise agreement is tacit about the term, and the term is not defined in the agreement at all, the contract will be valid for five (5) years (i.e. the franchise grant will be recorded for five years).

12.2 Contract for a fixed period (without automatic renewal clause) which con-tinues to be performed after its expiry

What happens, under your law, if a contract concluded for a fixed term (and not containing a clause for automatic renewal) continues to be per-formed after its term?

If a contract that is concluded for a fixed term continues to be performed after its term, the franchisee may found itself infringing the franchisor’s rights. If the renewal agreement is not signed prior to the expiration of the franchise agreement, and the renewal is not recorded, the rights and obligations will be ceased. Automatic prolongation is not available under the law.

12.3 Termination notice (contract for an indefinite period)

Does the legislation of your country require a minimum period of notice for the parties to terminate a franchise contract made for an indefinite term?
If so, is such period mandatory? For both parties?
If no period of notice is required by law, will it be fixed by the courts?
In the latter case, will the courts intervene only if no period of notice has been agreed contractually? Or will the courts establish a reasonable peri-od if the period agreed in the contract is considered too short?

Under the law, a franchisor may terminate a contract at any time if the franchise agreement has been concluded for an indefinite period. In such a case, six months’ written notice is required, unless the contract indicates a longer term for the advance termination notice. Either party to the contract that is concluded for an indefinite term may terminate the franchise agreement by sending written notice to the other party within 30 days. This option is available only if the contract provides for the release of certain monetary compensation.

12.4 Form of the notice of termination and effectiveness

Is there a form (e.g. registered letter) that must be respected for the termi-nation notice to be effective?

Termination notice should be sent by all possible means, including the registered mail. Email letter, without the official notice to be mailed, will not be sufficient.

Is the termination considered to have been validly given when it is sent or when it is received?

Termination notice shall be regarded as legal notice under the law. Legal notices are considered to have been validly given (delivered) when they reach the addressees, even though the latter has not reviewed the notices on the reasons depending on them.

If the addressee is a company, is there a specific person to whom the noti-fication must be made in order to be effective?

Termination notice should be addressed to the director of the company. If the contract provides for certain other people to be notified (e.g. legal department), they must be coped as well.

In case the form imposed by law or prescribed in the contract has not been respected, what are the consequences?

In this case, the termination notice will not be regarded as validly given. Therefore, contract termination may be challenged by the other side (addressee).

12.5 Earlier termination

Which reasons can normally justify earlier termination by the franchisee and/or by the franchisor?
Can a party terminate the contract for a breach which such party has tol-erated in the past without complaining?
If the answer is no, would the result be different if the contract contains a «waiver clause» (e.g. a clause saying that «Any waiver on the part of either party hereto of any right or interest shall not imply the waiver of any other right or interest, or any subsequent waiver»)?

The franchisor may terminate the franchise agreement if the franchisee produces goods of inferior quality or the quality of its services does not correspond to what has been set out in the contract. The franchisor may also repudiate from the franchise agreement if the franchisee does not follow the franchisor’s instructions and guidance aimed at compliance with the contractual provisions relating to the terms and conditions on the use of the franchised set of IP rights. The franchisor may cancel the franchise agreement if the franchisee fails to settle the franchise fees on the terms and conditions set out in the contract. Termination or repudiation by the franchisor is available if the franchisee fails to remedy the breach within a reasonable term, or has committed another breach within a year of receipt of the written notice from the franchisor. Further, if the franchisee becomes insolvent (bankrupt) the franchise agreement must be dissolved.

The earlier termination of franchise agreement is subject to mandatory registration with Rospatent. Absent registration, the earlier termination will not be effective and enforceable against third parties.

12.6 Unjustified earlier termination

What is the effect of an unlawful earlier termination of a franchising con-tract under the law of your country?

In case a party to the contract did not send the notice on termination of contract as established by the law or sent the notice later than the prescribed 6 months before termination, the contract will remain valid and all the rights and obligations of the parties will continue.

In case a party to the contract sent the notice on termination not later than 30 days before the termination, but did not pay a cancellation compensation within the agreed term, the non-breaching party is entitled to request from the breaching party to execute the initial obligation.

In case the franchisor/franchisee repudiated from the contract on the grounds which are not provided by the law or contract, such termination will be null and void. The contract as well as all the rights and obligations of the parties will remain in force.

12.7 Compensation for unjustified earlier termination

Please, explain if there are legal rules (or principles established by case law) for calculating the amount of compensation for unjustified earlier termination.

According to Article 393 (1) of the Civil Code a debtor shall be obliged to compensate the creditor for losses caused by the failure to perform or improper performance of an obligation. Losses imply the expenses that the person whose right had been violated incurred or will have to incur in order to restore the violated right, the loss or damage of his property (actual damages), as well as lost revenues this person could have received under the normal course of business, had his right not been violated (lost profits). If the breaching party made profits in consequence of this, the non-breaching party has the right to demand that, besides other losses, the lost profits be recovered in the amount of no less than such profits (Article 15 (2) of the Civil Code).

12.8 Possible other cases of illicit termination by the franchisor

Are there other types of protection of the franchisee provided either by law or by case-law in your country protecting the franchisee at the end of the contractual relationship?

As noted above, in certain cases, a cancellation compensation must be provided and paid in exchange for termination. If the terminating party is in breach of can-cellation compensation clause, termination can be challenged by the other party, and the contractual relations shall resume after the effective court decision. No other (financial) types of protection of the franchisee and its investments are provided by the law.

Are Courts in your countries entitled to apply the principle of good faith and fair dealing, challenging the franchisor’s termination of the contract and possibly granting damages to the franchisee?

Yes, these principles are always assessed and applied by local courts.

If so, under which circumstances and how do they assess and calculate damages?

N/A

Is there a notion of “abuse of law or “abuse of economic dependence” in your jurisdiction?

No.

Does it apply to franchising contracts? If yes, under which circumstances and how do they assess and calculate damages?

N/A

13. Goodwill Compensation (Indemnity)

Does the law or jurisprudence of your country recognise a goodwill compensa-tion to the franchisee?

Russian law does not recognize a goodwill compensation to the franchisee payable at the end of the contract which is due even where the contract termination has been lawful.

14. Limitation of Action

Does your legislation provide limitation periods (or similar systems) for the ex-ercise of the rights of the parties under a franchise agreement and which is their duration?

Limitation periods do vary depending on the circumstances as well as types of actions. More specifically, the general (main) limitation period is three years, however, there are certain special periods, such as one-year and ten-year terms, which are set forth by the law (Article 181 of the Civil Code).

Can the limitation periods be contractually modified according to your law?

Limitation period cannot be contractually modified.

15. Applicable Law

15.1 Legal sources

What are the rules of your legal system concerning applicable law to fran-chising contracts?

Pursuant to Article 1210 (1) of the Civil Code, the contracting parties are free to choose the relevant governing law, which is applicable to their rights and obligations, when entering into a contract or afterwards. The agreement for the choice of applicable law must be express or implied from contractual provisions or set of circumstances of the matter (Article 1210 (2) of the Civil Code). Therefore, the franchise agreement may be governed by the applicable foreign or national law, as agreed between the parties.

15.2 Applicable law in the absence of choice

If there is no choice of law by the parties, which criteria are used by the courts of your country for determining the applicable law in case of a fran-chising contract with a foreign counterpart?

In the absence of a choice of law provision in the franchise agreement, the law of the country where the franchisee has been authorized to use the franchised system and IP rights shall be applied (Article 1211 (6) of the Civil Code). Also, in cases where such use has been permitted on the territories of several jurisdictions, the law of the country where the franchisor is located or has its principal place of business will govern the parties’ relationship under the franchise agreement.

15.3 Effectiveness of a choice of law excluding the law of the franchisee's country

Is it possible to submit the contract with a franchisee belonging to your country to the law of a foreign country?

Yes, it is possible. However, the enforcement aspect has to be primarily assessed.

16. Jurisdiction and Enforcement of Foreign Judgments

16.1 Legal sources

What are the rules of your legal system concerning jurisdiction as well as recognition and enforcement of foreign decisions?

A court judgment obtained from another jurisdiction may be enforceable in Russia, provided that recognition and enforcement of the foreign court judgment is stipulated by both the relevant international treaty to which Russia is a party and federal law. Russia is a signatory to many multilateral and bilateral international treaties for recognition and enforcement of foreign judgments. Absent the relevant international treaty, a Russian court may recognise and enforce a foreign judgment on the basis of the international principle of reciprocity and comity (comitas gentium).

The Civil Procedure Code provides for certain formal and mandatory requirements for recognition and enforcement of foreign judgments. These include the following criteria:

• effectiveness of the court judgment under the law of the jurisdiction in the territory on which it has been issued;
• compliance with the statutory three-year period for filing a motion for recognition and enforcement of the foreign court judgment; and
• consistency of the foreign court judgment with the Russian public policy.

If these requirements are not met, a Russian court may refuse to recognise and enforce a foreign judgment.

16.2 Jurisdiction without a choice of jurisdiction clause

If there is no valid jurisdiction clause, is a franchisee of your country enti-tled, under the procedural rules of your country to bring a claim before his courts against a foreign franchisor?

If there is no valid jurisdiction clause in the contract, a Russian franchisee is entitled to bring a claim against a foreign franchisor before the Russian court in case:
1) the defendant is present or resides in the territory of the Russian Federation, or the defendant's property is located in the territory of the Russian Federation;
2) a managing body, a representative or branch office of the foreign person is located in the territory of the Russian Federation;
3) a dispute arises from a contract, which is performed or should be performed in the territory of the Russian Federation.

There are other events established by Article 247 of Civil Procedure Code which may determine the Russian jurisdiction.

If there is no valid jurisdiction clause, is a franchisor of your country enti-tled, under the procedural rules of your country to bring a claim before his courts against a foreign franchisee?

If there is no valid jurisdiction clause in the contract, a Russian franchisor is entitled to bring a claim against a foreign franchisee before the Russian court in case:
1) the defendant is present or resides in the territory of the Russian Federation, or the defendant's property is located in the territory of the Russian Federation;
2) a managing body, a representative or branch office of the foreign person is located in the territory of the Russian Federation;
3) a dispute arises from a contract, which is performed or should be performed in the territory of the Russian Federation.

There are other events established by Article 247 of Civil Procedure Code which may determine the Russian jurisdiction.

16.3 Effectiveness of a jurisdiction clause in favour of foreign courts.

Do judges of your country have exclusive jurisdiction to settle disputes concerning franchisees, who carry out their activity between the bounda-ries of your country?

No.

Would a clause included in a contract between a foreign franchisor and a franchisee of your country under which a foreign court has jurisdiction on disputes arising out of the contract be valid and effective in your country?

Yes, it would be valid in the Russian Federation.

Would the answer change if the franchisee is an individual?

Franchisee is always a business entity or entrepreneur.

16.4 Recognition - enforcement

Is it possible to recognise and enforce a foreign judgment against citizens of your country?

There are no restrictions concerning the recognition and enforcement of a foreign judgment against citizens of the Russian Federation.

Russian commercial courts consider the cases on the recognition and enforcement of foreign judgments with regard to disputes involving businesses and entrepreneurs, including those arising from franchising, if such recognition and enforcement are stipulated in the international treaty where the Russian Federation is a party, or in the federal law of the Russian Federation. However, the Russian commercial court refuses to recognize and enforce a foreign court judgment in full or in part, if:
1) the judgment has not entered into force, according to the law of the state, on the territory of which it was adopted;
2) the party, against which the decision was adopted, was not timely and properly notified on the time and place of the proceedings, or could not give its explanations to the court for other reasons;
3) according to an international treaty where the Russian Federation is a party or a federal law, the proceedings fall under the exclusive competence of a court in the Russian Federation;
4) there is an effective court decision in the Russian Federation, adopted following a dispute between the same persons on the same subject matter and on the same grounds;
5) there is a case concerning a dispute between the same persons, on the same subject matter and on the same grounds under consideration of a court in the Russian Federation, which commenced prior to the institution of proceedings in a foreign court, or if a court in the Russian Federation was the first to accept an application for its consideration;
6) the term for the enforcement of the foreign court judgment has expired, and this term was not restored by the commercial court;
7) the enforcement of the foreign court judgment would contradict the public policy of the Russian Federation.

If enforcement is possible, how long does the proceeding take?

If enforcement is possible, the proceeding may take about 4-8 months to be accomplished. Appeal proceedings are also possible.

17. Arbitration

17.1 Legal sources

Is your country part of the Convention on the Recognition and Enforce-ment of Foreign Arbitral Awards (New York, 1958)?

Yes, Russia is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). Therefore, an arbitral award received from another jurisdiction that is a signatory to the New York Convention may be enforceable in Russia.

Are there other rules applicable to international arbitration provided by the law or jurisprudence of your country?

International arbitration is regulated in the Russian Federation by the Law on International Commercial Arbitration dated 07.07.1993 No. 5338-1. Moreover, Russian Federation is a country part of the European Convention on International Commercial Arbitration 1961. Absent the relevant international treaty, a Russian court may recognise and enforce an arbitral award on the basis of the international principle of reciprocity and comity (comitas gentium).

17.2 Arbitrability

Are franchising contracts considered a subject matter capable of settle-ment by arbitration, according to your legislation?

Yes, arbitration may be applied to franchising contracts, provided there is an agreement of the parties (i.e. arbitration clause).

If so, does this apply to all franchise agreements or only to certain situa-tions (e.g. franchisees who are not individuals)?

All franchise agreements.

17.3 Arbitration clauses

Would an arbitration clause providing for arbitration abroad, included in a franchising agreement be valid and effective in your country?

Yes, such arbitration clause will be valid in the Russian Federation.

Would the courts of your country refuse jurisdiction with respect to a franchising contract providing for such a clause?

The Russian court may accept or refuse (depending on the circumstances) the jurisdiction of a franchising contract containing an arbitration clause.

17.4 Recognition of foreign awards

Would a foreign arbitration award dealing with a franchising agreement be recognised by the courts of your country?

The Civil Procedure Code provides for certain formal and mandatory requirements for recognition and enforcement of arbitral awards. These include the following criteria:

• effectiveness of the arbitral award under the law of the jurisdiction in the territory on which it has been issued;
• compliance with the statutory three-year period for filing a motion for recognition and enforcement of the arbitral award; and
• consistency of the arbitral award with Russian public policy.

If these requirements are not met, a Russian court may refuse to recognise and enforce the arbitral award.