Russia: Franchise & Licensing17 March 2021
1. Is there a legal definition of a franchise and, if so, what is it?
Russian law does not operate the term “franchise”. Instead, the term “commercial concession” is used and provided in the local law to define the relationship of the parties concerning franchising.
According to Article 1027 of the Russian Civil Code, under the contract of commercial concession one party (rights holder) shall grant the other party (user), for a compensation and for a definite or indefinite term, the right to use in the business of the user a set of intellectual property (IP) rights owned by the rights holder, including trademark rights, service mark rights, and other intellectual property rights, in particular, trade name, secret of production (know-how).
The key element of the contract of commercial concession (hereinafter – “franchise agreement” or “franchise”) is a trademark. Other IP rights, including but not limited to trade names, copyrights, patents and know-how, must be included in the scope of the franchise in addition to the trademark.
2. Are there any requirements that must be met prior to the offer and/or sale of a franchise? If so, please describe and include any potential consequences for failing to comply.
The main requirement is to have a commercial establishment (entity) operating in good standing, since non-commercial entities or organizations are not authorized to do business in the format of franchising.
There is no need to set up and register a special business entity in Russia, or open a local branch office, as franchise can be offered and sold from abroad through a direct franchising or sub-franchising.
The second requirement is the protected trademark and other IP rights, as noted above. A franchise is always a grant of bundle of IP rights, where trademark is the most important licensed asset. Registration, whether on the national level or via international agreements, is required for only trademarks and patents.
Finally, it is crucial to have an appropriate and written form of agreement – franchise agreement. If the form of contract is not complied with, the franchise will be deemed invalid (void).
3. Are there any registration requirements for franchisors and/or franchisees? If so, please describe them and include any potential consequences for failing to comply. Is there an obligation to update existing registrations? If so, please describe.
Yes, registration of the grant to use IP rights, including trademarks, is required under every type of franchise. In other words, franchise or license grant, which is targeted at Russia, including the one governed by foreign applicable law, must be registered with the Federal Service for Intellectual Property (hereinafter – Rospatent). Importantly, a franchise or license that is not registered with Rospatent will be considered as nongranted.
There is a choice of documents which may be submitted to Rospatent in support of the application for registration. Parties or one of the parties may file the original franchise agreement, or the notarize excerpt from the original contract, or the notification. If the parties do not wish to disclose the original franchise agreement for certain reasons, the best option is to submit the excerpt or notification with Rospatent.
Before filing, it is vital to ensure that the document filed to Rospatent contains all of the mandatory clauses and terms, as required by Russian law and administrative regulations. Failure to provide such may result in the delay or refusal in franchise registration.
4. Are there any disclosure requirements (franchise specific or in general)? If so, please describe them (i.e. when and how must disclosure be made, is there a prescribed format, must it be in the local language, do they apply to sales to subfranchisees) and include any potential consequences for failing to comply. Is there an obligation to update and/or repeat disclosure (for example in the event that the parties enter into an amendment to the franchise agreement or on renewal)?
Pre-contractual disclosure is not mandatory under Russian law. Franchise amendment or renewal disclose is not obligatory either. The law only states that the rights holder (franchisor) shall provide technical and commercial documentation along with any other necessary information for the user (franchisee) to be able to develop franchise operations and instruct the franchisee and its employees on any aspects associated with the contracted rights.
At the same time, disclosure obligations may be established by the parties on the basis of the doctrine of culpa in contrahendo at the negotiation stage of a prospective deal. When negotiating franchising opportunities, parties may document their contractual negotiations by using a special form of agreement under Article 434(1) of the Russian Civil Code. Otherwise, the parties may be guided by the documentation normally used in the context of international franchise practice, if they have chosen foreign law as applicable.
The format of disclosure is not prescribed by Russian law or published by any governmental agency. Neither the disclosure is subject to any registration or governmental approval.
5. If the franchisee intends to use a special purpose vehicle (SPV) to operate each franchised outlet, is it sufficient to make disclosure to the SPVs’ parent company or must disclosure be made to each individual SPV franchisee?
Practically, it may be agreed by the parties that disclosure to the SPV’s parent company (master franchisee) will be sufficient for the purpose of franchising. However, if several franchisees or subfranchisees are contracted eventually, disclosure towards each one in contract is recommended.
6. What actions can a franchisee take in the event of mis-selling by the franchisor? Would these still be available if there was a disclaimer in the franchise agreement, disclosure document or sales material?
If franchisor is mis-selling and breaching under the executed franchise agreement, franchisee may claim the contracted performance of obligations from the franchisor and enforce the latter into fulfillment of breached obligation in court. If certain penalties are provided in the contract, penalties may also be claimed in addition to damages (if any). Finally, if mis-selling or other breach by franchisor is set out as the condition for termination of the franchise agreement, franchisee may claim termination on these particular grounds.
7. Would it be legal to issue a franchise agreement on a non-negotiable, “take it or leave it” basis?
Yes, it will be feasible since contracts of adhesion are legal in Russia. However, franchisee may claim amendment or termination of franchise agreement if it has certain deficiencies or encumbrances against franchisee, which it would not reasonably accept during negotiations and determination of terms and conditions of the contract. Parties must act in good faith and shall not mislead each other when entering into the deal. Fair dealing is always a priority.
8. How are trademarks, know-how, trade secrets and copyright protected in your country?
Trademark is a core element for every franchise transaction targeted at Russia. Trademark may be protected on a national or international basis. National marks must be filed and registered with the Federal Service for Intellectual Property (Rospatent). As Russia is a signatory to the Madrid Agreement and the Madrid Protocol, international registrations, which designate Russia, are also protected. To be registered, a mark must be new and distinctive. Distinctiveness may be inherent or acquired. A trademark can acquire distinctive character through intensive and actual use in commerce. Any words, pictures, three-dimensional configurations and other marks may be registered as trademarks. The registration of non-traditional marks (eg, sounds, colours and smells) is also permitted. Generally, use of the mark need not be claimed before registration. Proof of use need not be submitted before the trademark application is filed. However, the owner must use the trademark within three years of registration. If the mark is not used during three-year period after trademark registration, any interested person may apply for cancellation of the trademark protection on the grounds of non-use following a special pre-trial procedure. Registered trademarks are listed on the Trademark Register and are valid for 10 years.
Any proprietary and confidential information related to a business method or technology may be protected as a secret of production (also known as “know-how”). Knowhow is not subject to registration or deposit. Nevertheless, the owner of know-how must undertake certain reasonable measures to maintain the confidentiality of the relevant information. If such measures are not implemented, know-how protection will not be afforded to the confidential information. One of the proper legal ways to acquire know-how protection is the introduction of the so-called “trade secrets regime” as it is specified in Russian law. In brief, owners of confidential information must properly identify and list the confidential information, limit an access to the confidential information by establishing an appropriate procedure for dealing with the same, affix the notice “trade secret” and add the owner’s details to the media in which the confidential information is stored and follow up with the other required steps. Know-how will be protected for as long as it is kept secret by its owner, licensees and franchisees. When the confidentiality is lost, the exclusive rights lapse immediately.
Copyright subsists in any scientific, literary and artistic works fixed in any tangible medium of expression, regardless of benefits, purposes or methods of expression. To be copyrightable, a work of authorship must satisfy two fundamental criteria: it must represent a result of creative input of the author and it must be fixed in a tangible media (e.g., paper or CD-ROM). Texts, graphics, designs, audio-visual works and software are subject to copyright protection in Russia. Copyright vests in a work of authorship from the moment of its creation. No registration or compliance with any other formal steps is required to acquire, exploit, transact or enforce copyrights in Russia. The standard term of copyright protection is the life of the author plus 70 years after her or his death.
Generally, use of the mark need not be claimed before registration. Proof of use need not be submitted before the trademark application is filed. However, the owner must use the trademark within three years of registration. If the mark is not used during three-year period after trademark registration, any interested person may apply for cancellation of the trademark protection on the grounds of non-use following a special pre-trial procedure. Registered trademarks are listed on the Trademark Register and are valid for 10 years.
Any proprietary and confidential information related to a business method or technology may be protected as a secret of production (also known as “know-how”). Know-how is not subject to registration or deposit. Nevertheless, the owner of know-how must undertake certain reasonable measures to maintain the confidentiality of the relevant information. If such measures are not implemented, know-how protection will not be afforded to the confidential information. One of the proper legal ways to acquire know-how protection is the introduction of the so-called “trade secrets regime” as it is specified in Russian law. In brief, owners of confidential information must properly identify and list the confidential information, limit an access to the confidential information by establishing an appropriate procedure for dealing with the same, affix the notice “trade secret” and add the owner’s details to the media in which the confidential information is stored and follow up with the other required steps. Know-how will be protected for as long as it is kept secret by its owner, licensees and franchisees. When the confidentiality is lost, the exclusive rights lapse immediately.
Copyright subsists in any scientific, literary and artistic works fixed in any tangible medium of expression, regardless of benefits, purposes or methods of expression. To be copyrightable, a work of authorship must satisfy two fundamental criteria: it must represent a result of creative input of the author and it must be fixed in a tangible media (e.g., paper or CD-ROM).
Texts, graphics, designs, audio-visual works and software are subject to copyright protection in Russia. Copyright vests in a work of authorship from the moment of its creation. No registration or compliance with any other formal steps is required to acquire, exploit, transact or enforce copyrights in Russia. The standard term of copyright protection is the life of the author plus 70 years after her or his death.
9. Are there any franchise specific laws governing the ongoing relationship between franchisor and franchisee? If so, please describe them, including any terms that are required to be included within the franchise agreement.
The ongoing relationship between franchisor and franchisee is specifically regulated by Chapter 54 of Part II of the Russian Civil Code. Further, the general provisions of the Russian Civil Code, especially those that govern general aspects of contract law and obligations (Part I), intellectual property and licensing (Part IV), as well as real estate and property law (Parts I and II), may apply to franchising. Franchise relations may also be affected by local laws regarding consumer law and competition, advertising and data protection, tax and currency control.
Franchise agreements may contain various terms and conditions depending on the transaction specifics and negotiations. As required by law and practically crucial, franchise agreements will typically address the following material terms and essentials applicable to Russiatargeted deals:
- parties (ie, corporate names and addresses);
- subject matter (ie, trademark registration numbers and descriptions of other licensed IP rights);
- licensed products (ie, goods or services for which the trademarks are protected and licensed);
- scope of rights (ie, permitted manners of IP use and distribution of licensed goods or services, as well as the sphere of commercial activities);
- duties and covenants (eg, compliance with standards and manuals, product quality assurance, confidentiality and non-disclosure, site selection and approval);
- consideration (eg, franchise entrance fees, royalties);
- type of franchise (eg, exclusive or non-exclusive);
- term (ie, term of protection of licensed IP rights or certain specific period);
- territory (ie, the whole of Russia, specific regions, cities, streets);
- sub-franchising (eg, permitted or prohibited);
- franchise renewal (ie, possible or not, the franchisee’s right of first refusal);
- termination (eg, mutual or unilateral, for cause or convenience);
- post-termination (ie, franchisee obligations and liabilities following termination);
- miscellaneous (eg, governing law, jurisdiction); and
- signatures (ie, names and titles of signees).
10. Are there any aspects of competition law that apply to the franchise transaction (i.e. is it permissible to prohibit online sales, insist on exclusive supply or fix retail prices)? If applicable, provide an overview of the relevant competition laws.
The franchise agreement may contain certain restrictive covenants on the franchisee, including those from the competition perspective. More specifically, the franchisor may vote for the following covenants to be incorporated into the contract:
- the franchisee’s covenant not to compete with the franchisor in the licensed territory in relation to the franchised business and licensed IP rights;
- the franchisee’s refusal to accept similar 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, or provide services by exploiting franchised rights and applying prices fixed by the franchisor;
- the franchisee’s covenant to refrain from distributing similar goods, providing similar services using trademarks or trade names of other franchisors;
- the franchisee’s covenant to sell goods or provide services exclusively within the boundaries of certain territory; and
- the franchisee’s covenant to obtain approval from the franchisor for the location and exterior or interior design of commercial premises (units) used for the implementation of the franchised rights under the contract.
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. However, such restrictions may be recognized as invalid by the anti-monopoly service or other interested person, if they are found to contravene anti-monopoly laws, subject to the relevant market condition and economic status of the parties.
As to online trading, it is possible to oblige a franchisee to sell goods or provide services exclusively within a contracted territory. However, the relevant clause which obliges the franchisee to sell goods or provide services, including online, solely to the customers located or residing in the franchised territory will be null and void (Article 1033(2) of the Russian Civil Code). Therefore, as long as the franchisee restricts its franchising activities to its own (contracted) territory, it must sell goods or provide services to different customers, including those not necessarily resided in the franchised territory.
11. Are in-term and post-term non-compete and non-solicitation clauses enforceable?
In-term non-compete clauses are enforceable. In-term and post-term non-solicitation clauses are not enforceable.
12. Are there any consumer protection laws that are relevant to franchising? Are there any circumstances in which franchisees would be treated as consumers?
Consumer protection legislation is applicable to individuals who are acting as natural persons, but not commercial organizations or business entities. In other words, the local consumer protection law governs business-to-consumer (B2C) relations, while the franchise relationship may only be created in the business-to-business (B2B) sphere. Therefore, franchisees cannot be treated as consumers under the law, although consumer-related legislation will be primarily applied to relations between franchisee and third party consumers (individuals), who are buying goods and services from franchisee.
At the same time, there are situations in practice when franchisor bears subsidiary or even joint and several liability for third party product claims that may be addressed to franchisee. More specifically, pursuant to the provisions of Article 1034 of the Russian Civil Code, if a customer of a franchisee brings a claim alleging that the quality of the goods or services sold or delivered by the franchisee is insufficient or improper, the franchisor faces the risk of subsidiary liability for such a quality violation. With respect to the subsidiary liability, if a franchisee refuses to satisfy the claim of the customer, or a customer has not received, within a reasonable time, a proper response to the claim, then the claim may be filed by the customer directly against the franchisor. Moreover, if a customer of the franchisee brings a claim of insufficient quality of goods that are manufactured by the franchisee, in such an instance the franchisor will bear joint and several liability (together with the franchisee) for such a product quality breach. With respect to such joint liability, the customer has the right to present the claim to the franchisor and the franchisee jointly, and also to each of them separately, for the purpose of recovering the whole amount of debt, or part of the same.
13. Is there an obligation (express or implied) to deal in good faith in franchise relationships?
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, which are set out by Articles 1(3) and 10(5) of the Russian Civil Code. These principles are usually supported and enforced by local courts in all disputes involving domestic contracts and cross-border transactions, including in the context of franchising.
14. Are there any employment or labour law considerations that are relevant to the franchise relationship? Is there a risk that the staff of the franchisee could be deemed to be the employees of the franchisor? What steps can be taken to mitigate this risk?
Franchisor and 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 the Russian Civil Code, while labour and employment relations are regulated by the Russian Labour Code. Under the Russian Labour Code, employment relations between the employer and the employee may arise only under a labour agreement. Article 15 of the Russian 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 staff cannot be treated as employees of the franchisor.
15. Is there a risk that a franchisee could be deemed to be the commercial agent of the franchisor? What steps can be taken to mitigate this risk?
Franchising and commercial agency are two different contractual arrangements. In other words, functions of the franchisor or franchisee may not be compared with functions of the principal or agent according to Russian law. Even though the franchise agreement may sometimes be a ‘blended’ contract, with quite many commercial elements incorporated in it, the risk that a franchisor will be treated purely as a principal and the franchisee purely as the franchisor’s agent is very low. Usually, agency relations are mixed with product distribution models in Russia.
16. Are there any laws and regulations that affect the nature and payment of royalties to a foreign franchisor and/or how much interest can be charged?
There are no legal restrictions on the repatriation of franchise fees to a foreign franchisor. Neither there is a limitation in the amount of franchise fees to be charged. Parties may agree on any amount of franchise fees, as well as the payment procedure, but such fees should be based on the appropriate market value, including from the transfer pricing standpoint.
Also, the local currency control law does not prohibit the use of a foreign currency (e.g., US dollars) in the context of international franchising. The only requirement is that the Russian franchisee must have an appropriate currency account with the bank to be able to transfer monies in a foreign currency.
As a rule, the Russian franchisee must register the international contract with a competent bank to be able to remit the agreed franchise fees to a foreign franchisor. The above rule applies only to the corresponding franchise operation for the contracted amount equal to RUR 3,000,000 or more (for importrelated contracts). The bank will register and account the international transaction agreement if the underlying franchise agreement is translated into Russian, and the grant of franchise is registered with Rospatent. Absent the franchise registration with Rospatent and the competent bank, franchise fees – amounting to RUR 3,000,000 (or more) – cannot be wired to the benefit of the foreign franchisor.
17. Is it possible to impose contractual penalties on franchisees for breaches of restrictive covenants etc.? If so, what requirements must be met in order for such penalties to be enforceable?
Yes, it is possible to impose contractual penalties on franchisees for breaches of restrictive covenants, including obligations to pay franchise fees. Normally, interests on non-fulfilment of non-monetary obligations (penalties) are stated in fixed amounts in contracts, while penalties for non-fulfillment of monetary obligations are set forth as percentages of the amounts of the non-fulfilled obligations for each day of the corresponding delays. In practice, the rate of such default interest ranges from 0.05 to 0.3% (per day of delay). In the event that the interest on overdue amount appears to be excessive, the court can moderate and reduce the same at the request of the debtor (franchisee). If there is no agreed penalty amount stipulated in the contract, the franchisor may charge the late payment interest on the basis of Article 395 of the Russian Civil Code. The amount of such interest is determined at the key rate of the Russian Central Bank, which is effective in the relevant period.
18. What tax considerations are relevant to franchisors and franchisees? Are franchise royalties subject to withholding tax?
No specific franchise or licensing tax exists in Russia. Usually, a foreign franchisor must take into account the rules applicable to the value added tax (VAT) and corporate income tax (CIT) on the contracted franchise fees, while the local franchisee, as the franchisor’s tax agent, is responsible for withholding obligations.
Foreign franchisors must add 20% VAT on franchise fees payable by Russian franchisees under the franchise agreement. The licensing of patents, industrial designs, know-how, computer programs and databases are exempt from VAT, while trademark and copyright licences will be taxed under the underlying franchise agreements. Further, franchise fees payable to a foreign franchisor by a Russian franchisee are subject to 20% CIT, unless there is a special double tax treaty in place between Russia and the foreign state where the franchisor resides, as this would provide certain tax reliefs.
If the foreign franchisor does not have a permanent establishment or a representative office in Russia, the Russian franchisee acts as a tax agent for the foreign franchisor. Therefore, the Russian franchisee must withhold the corresponding VAT-amount from corresponding franchise fees (relating to trademark or copyright licences) stipulated by the relevant franchise agreement and remit that amount to the state budget.
Further, the Russian franchisee, acting as a tax agent for the foreign franchisor, must withhold the corresponding CIT-amount from the contracted franchise fees and remit this to the state budget, unless there is a special double tax treaty in place between Russia and the foreign state where the franchisor resides, as this would provide certain benefits. The franchisee may deduct the VATamount, as well as the amount of franchise fees, when paying its own CIT to the government.
Finally, parties should also observe local transfer-pricing rules. In brief, the amount of contracted franchise fees should comply with the corresponding market price level to avoid additional taxes and penalties.
19. Does a franchisee have a right to request a renewal on expiration of the initial term? In what circumstances can a franchisor refuse to renew a franchise agreement? If the franchise agreement is not renewed or it if it terminates or expires, is the franchisee entitled to compensation? If so, under what circumstances and how is the compensation payment calculated?
Yes, the franchisee has a “right of first refusal” under Russian law. If the franchisee has performed its contractual obligations in a timely and proper manner, it has a pre-emptive right to re-conclude the franchise agreement for a new term with the franchisor. When reentering into the franchise relationship, parties are free to amend or modify the terms and conditions of the underlying contract. If the franchisor refuses to enter into the franchise agreement for a new period with the former franchisee, and within a year it concludes a new franchise agreement granting the same rights to the other (third) party and under the same terms and conditions, the former franchisee is entitled (at its option) to claim in court the transfer of franchise in its favour and reimbursement of damages, or simply the reimbursement of damages. However, if the franchisor does not grant the same franchise to a third party by making a new franchise agreement within a year, or sells different franchise rights to a third party, or offers a franchise to a third party under non-similar (other) terms and conditions, the franchisee’s right of first renewal will not arise. The franchisor may refuse to renew the franchise agreement with the franchisee if the latter has failed to perform its obligations in compliance with the terms and conditions of the underlying contract.
20. Are there any mandatory termination rights which may override any contractual termination rights? Is there a minimum notice period that the parties must adhere to?
Franchisor may terminate a contract at any time if the franchise agreement has been concluded for an indefinite term. In such a case, a six (6) months’ written notice is required, unless the contract indicates a longer term for the advance termination notice. If the contract provides for a specific validity period, the franchisor must be guided by the terms of the franchise agreement.
Either party to the contract concluded or a definite or indefinite term, including the franchisor, 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.
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 effectuated.
21. Are there any intangible assets in the franchisee’s business which the franchisee can claim ownership of on expiry or termination, e.g. customer data, local goodwill, etc.
Russian law is tacit on this particular issue. Contract should normally provide further guidance and clearance as to what assets, including intangible, and by whom, i.e. franchisor or franchisee, will be allocated following the expiry or termination of the franchise agreement. Usually, customer data and local goodwill will stay with the franchisee.
22. Is there a national franchising association? Is membership required? If not, is membership commercially advisable? What are the additional obligations of the national franchising association?
A few national franchise and licensing associations operate in Russia. While membership is not required, it may, up to a certain extent, be commercially advisable.
Established back in 1997, the Russian Franchise Association is a local non-profit public organisation which helps its members to promote franchising activities in Russia. Although the Russian Franchise Association has no regulatory power, it may provide useful practical advice and guidelines on doing business through franchising. The same is applicable for Licensing Executive Society (LES) Russia that is in charge of promoting IP licensing on the local level.
More information about the Russian Franchise Association is available at: https://www.rusfranch.ru/en.
Further details on LES Russia can be viewed at: http://www.les-russia.org/en.
23. Are foreign franchisors treated differently to domestic franchisors?
No, treatment is the same indeed. International private law principles, as well as local case law or court practice, supports this fact unconditionally.
24. Are there any requirements for payments in connection with the franchise agreement to be made in the local currency?
Russian currency control law or civil law do not prohibit the use of a foreign currency in international franchising deals. According to Article 317 (3) of the Russian Civil Code, the use of a foreign currency under financial obligations is allowed in the territory of the Russian Federation.
25. Must the franchise agreement be governed by local law?
There is no legal requirement for the franchise agreement to be governed by the Russian law. Under the basic principles of international private law, the contracting parties are free to choose the relevant governing law when entering into a deal (or afterwards). Hence, the franchise agreement may be governed by the applicable foreign law (as chosen by the parties).
In the absence of a choice of law provision in the contract, the law of the country where the franchisee has been authorized to use the licensed IP rights shall be applied (Article 1211 (6) of the Russian Civil Code). At the same time, in cases where such use has been permitted in 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.
In any event, the law of the country that is more bound up with the contract may be applicable in the event that the nature and terms of the contract, or circumstances surrounding the transaction, clearly evidence such a fact (Article 1211 (9) of the Russian Civil Code).
26. What dispute resolution procedures are available to franchisors and franchisees? Are there any advantages to out of court procedures such as arbitration, in particular if the franchise agreement is subject to a foreign governing law?
Litigation is the most common dispute resolution procedure, especially for local franchisors and franchisees. Mediation and arbitration are also popular alternative dispute resolution mechanisms. If foreign governing law is chosen by the parties, arbitration will be certainly of advantage. Russia is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (hereinafter – New York Convention). Therefore, an arbitral award received from another jurisdiction that is a party to the New York Convention will be enforceable in Russia.
27. Does local law allow class actions by multiple franchisees?
Russian law permits class actions to be brought by a number of allegedly aggrieved claimants. Franchising is not an exception, however, there has to be several factors to be considered for a class action eligibility purpose:
- the defendant under such action must be one and the same towards each member of the group (franchisee),
- the subject matter of such action must concern common or similar rights and legitimate interests of group-member (franchisees),
- the grounds for such action must relate to similar factual circumstances, and
- franchisees must use one and the same remedy to protect their rights under such action.
Class action is possible if at least five (5) group-members have joined the class action.
28. Must the franchise agreement and disclosure documents be in the local language?
The franchise agreement as well as disclosure documents (if any) should be in Russian (or translated into Russian, at least). Rospatent will not accept any documents if they are filed for registration without the Russian translation.
In practice, bilingual versions are usually used in cross-border franchise deals. Sometimes, franchise agreements and disclosure documents are produced in a foreign language (e.g. English) and accompanied with a certified Russian translation.
29. Is it possible to sign the franchise agreement using an electronic signature (rather than a wet ink signature)?
Yes, it is possible to sign the franchise agreement using electronic signatures of the parties. However, Rospatent will accept either the original, or certified copy of the contract. Therefore, electronic signatures may not be advisable from the franchise registration (i.e. technical) perspective.
30. Can franchise agreements be stored electronically and the paper version be destroyed?
No, this is not recommended by practice. The franchise agreement should be signed using wet ink signatures of the parties and be stored on paper. Electronic versions may serve only as back-up copies, but shall not be a substitution.
31. Please provide a brief overview of current legal developments in your country that are likely to have an impact on franchising in your country.
Franchise business model is developing constantly and actively all over the world. Russia is not an exception, and it may be seen that many global businesses exploring the Russian market nowadays by offering new brands, systems, technologies and products in various industry sectors in this country.
Russian legal system has already implemented the main tools and benefits of international franchise law and practice, including from the civil-law perspective. New concepts and rules in the franchise area may appear in the future as soon as new legal amendments are required and come into play in Russia.
32. In your opinion, what are the key lessons to be learned by franchisors as a consequence of the COVID-19 crisis?
According to Article 401 of the RCC, unless otherwise provided by law or the contract, a person shall not be liable for non-performance or undue performance of its obligations assumed in the course of its entrepreneurial activities, if the performance of these obligations is impossible due to an “irresistible force”, i.e. an extraordinary and unavoidable event in the given circumstances (also known in practice as the “force majeure”). Such circumstances do not include, in particular, a breach of obligations on the side of the debtor’s counterparties, the absence of goods on the market necessary for execution (e.g. supply), or the lack of necessary monetary funds1.
The Supreme Court of the Russian Federation (the “Supreme Court”) has provided further interpretation and guidance to the concept of “force majeure” by clarifying that by virtue of Article 401 (3) of the Russian Civil Code, in order to recognize an event as a force majeure circumstance, it must be extraordinary, inevitable under the given conditions and external in relation to the debtor’s activity2.
The Supreme Court has also noted that the emergency requirement implies the exclusivity of the circumstance under consideration, the occurrence of which is not usual under specific conditions. Unless otherwise provided by law, a circumstance shall be deemed inevitable if any participant in the civil commerce carrying out activities similar to the debtor could not avoid the onset of this circumstance or its consequences, i.e. one of the characteristics of force majeure circumstances (along with emergency and inevitability) is its relative nature. Force majeure circumstances cannot be recognized, the occurrence of which depended on the will or actions of the party to the obligation, for example, the debtor lacking the necessary funds, breach of obligations by its counterparties, illegal actions of its representatives.
From the given explanations, it follows that recognition of the spread of COVID-19 as force majeure cannot be universal for all categories of debtors, regardless of the type of their activity, the conditions for its implementation, including the region in which the business operates, due to which the existence of force majeure event should be established taking into account the circumstances of a particular case (including the time period for fulfillment of the obligation, the nature of the unfulfilled obligation, reasonableness and good faith the debtor’s actions, etc.).
In relation to the rules of Article 401 of the Civil Code of the Russian Federation, the circumstances caused by the threat of the spread of COVID-19, as well as measures taken by state authorities and local self-government to limit its distribution, in particular, the establishment of mandatory rules of conduct when introducing a high alert or emergency, a ban on the movement of vehicles, restriction of the movement of individuals, suspension of enterprises and institutions, cancellation and rescheduling of mass events, the introduction of a regime of self-isolation of citizens, etc., may be recognized as force majeure, if it is established that they comply with the above criteria for such circumstances and the nexus between these circumstances and the default3.
Therefore, to summarize and to be excused for the nonperformance of obligation under a contract due to COVID-19, a party needs to prove that (a) the circumstances in question are extraordinary and beyond the control of the parties, and (b) that the nonperformance of the obligation is a direct result of these circumstances.
By the way, the official Decree No. 20-UM of the Mayor of Moscow dated 14 March 2020 “On Introduction of the High Alert Regime” (as amended) classifies the spread of COVID-19 as a force majeure event. The Chamber of Commerce and Industry of the Russian Federation has also declared that the measures taken against COVID-19 (not the pandemic itself) may be deemed as such circumstance. Therefore, Russian Government considers COVID-19 as force majeure.
In addition, Russian law generally permits parties to designate in the contract a list of events or circumstances, the occurrence of which could be regarded as grounds for releasing each party from liability for breach of the contract (or otherwise change the grounds for liability of the parties). In other words, parties are entitled to negotiate and agree on various force majeure issues.
In the light of the above, COVID-19 and all related consequences, depending on certain circumstances and mentioned criteria, can fall under the concept of “force majeure” event under the Russian law. Otherwise, epidemics and prohibitive measures of certain states and agencies, as well as other circumstances which are beyond the control of parties, can serve as grounds for releasing the party from liability for non-performance of its obligations by virtue of contract (e.g. supply, distribution or franchise agreement). Of course, when proving the force majeure event, especially in crossborder deals, a relevant certificate of force majeure, including the one issued by the Russian Chamber of Commerce and Industry will highly be recommended as documentary evidence.
From the point of view of practical and general recommendations for the contractual parties affected by COVID-19, the following legal actions can be recommended at this point: (1) reviewing the exact contractual terms, including force majeure clauses, and doing the appropriate legal risk analysis; (2) confirming with lawyers that COVID-19 is the force majeure event and securing a legal opinion, as well as additional pieces of evidence (e.g. obtaining an official certificate from Russian Chamber of Commerce and Industry); (3) evaluating a list of operable measures that can be made and discussed with the other side in connection with the pandemic situation; (4) notifying the other side and establishing communications on the issue; (5) considering the amendment or termination (as applicable) of the underlying contract; (6) proceeding to execution of amendment or termination and registration formalities (if needed). Otherwise, the parties will have to assess the possibility of going to the court.
- Article 401 (3) of the Russian Civil Code
- Section 8 of the Resolution of the Plenum of the Supreme Court of March 24, 2016 No. 7 “On the Application by Courts of Certain Provisions of the Civil Code of the Russian Federation on Liability for Breach of Obligations”
- See Question and Comment 7 of the “Review of selected issues of judicial practice related to the application of legislation and measures to counteract the spread of the new coronavirus infection (COVID-19) No. 1 in the Russian Federation” (Approved by the Presidium of the Supreme Court of the Russian Federation on 21 April 2020)
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