Franchise Agreements in Ukraine

Franchise agreements are not prescribed by Ukrainian legislation, it (through the Civil Code and the Commercial Code of Ukraine) regulates commercial concession agreements that correspond to a single-unit franchise agreements.
Inasmuch as under the franchise agreement the objects of intellectual property rights are granted, the franchise relations shall be regulated not only by the provisions of the Civil Code and the Commercial Code directly governing the franchise agreements, but also by chapters 35, 36, 38-44, 46 of the Civil Code of Ukraine and special legislation, namely the laws of Ukraine �On protection of rights to trademarks for goods and services�, �On protection of rights to inventions and utility models�, �On protection of rights to industrial designs�, �On copyright and associated rights� .
Although the Civil Code and the Commercial Code of Ukraine provide that the franchisor shall supply the franchisee with its business reputation among other components of �scope of rights�, in reality, the business reputation cannot be handed over. What is in fact meant is that the enterprises of the franchisee are associated (connected) with the enterprises of the franchisor.
Franchise agreements are governed by the competition legislation of Ukraine, namely by the Law of Ukraine �On protection of economic competition� and the respective instructions issued by the Anti-Monopoly Committee of Ukraine for the enforcement of this law.
The franchise agreement belongs to the category of payable and consensual agreements, i.e. the rights and obligations of the parties shall arise at the moment of adjustment of all essentials. The Civil Code of Ukraine, Article 638, prescribes that the essentials are: the conditions as to the subject of agreement, other conditions defined by the legislation as substantive or necessary for the agreement of the respective type, as well as any other conditions which at least one of the parties to the agreement considers necessary to be adjusted.
According to the provisions of the Civil Code and the Commercial Code of Ukraine governing franchise agreements, the subject of the agreement is the only substantive condition of the franchise agreement. The codes of Ukraine do not prescribe any other essentials for this type of agreements.
Taking into account the present-day practice of the application of franchise agreements we may define the number of issues (given below) which any of the parties to the agreement may ask for adjustment. Amendments to these matters by the parties and their inclusion into the agreement are considered as substantive from the moment of adjustment.
1) The price. In accordance with the definition of the franchise agreement, it belongs to the payable agreements. While concluding the agreement the parties adjust the price of the agreement. The adjustment of the price implies the determination of franchise payments or royalties for usage of objects of intellectual property rights, the amount of the franchisee�s investment in its own enterprise, the amount of payment for services rendered by the franchisor and the amount of its contribution to the advertising activities carried out by the franchisor;
2) The term. Under the franchise agreement the franchisor grants the franchisee intellectual property rights the term of protection of which is fixed by the legislation. Termination of the certificate or patent for objects of intellectual property rights may lead to a change of its category to know-how of franchisor and, subsequently, to a change of the subject of the agreement, which may result in a reluctance of the franchisee or franchisor to continue the fulfillment of the agreement;
3) The regime of granting usage rights for objects of intellectual property;
4) The territory for usage of the rights granted if the franchisee receives an exclusive or single license for usage of objects of intellectual property rights;
5) The list of limitations to the parties� rights under the agreement and the term of such limitations.
The Civil Code of Ukraine determines a specific requirement for the parties to the franchise agreement, namely the Code authorizes the subjects of entrepreneurial activities only to conclude the franchise agreements. It provides for the successor of the franchisor to be allowed to continue the fulfillment of the franchise agreement only if it is registered as the subject of entrepreneurial activities, which corresponds to the above mentioned rule.
The Commercial Code of Ukraine does not contain such a direct requirement within the chapter governing the franchise agreements; however, it may be argued that under the Commercial Code of Ukraine only business entities may be parties to the franchise agreement. The Commercial Code of Ukraine, Article 55, defines business entities as the citizens of Ukraine, foreigners or stateless persons which maintain entrepreneurial activity and are registered as entrepreneurs in accordance with the legislation.
The Civil Code and Commercial Code of Ukraine prescribe the requirements to the franchise agreements. The Codes require that the franchise agreement should be made in writing. The Civil Code of Ukraine, Article 207, envisages that the franchise agreement is made in writing if the subject-matter of the agreement is fixed in one or some documents, letters, telegrams exchanged by the parties, or if the parties� will is expressed by teletype, electronic or any other technical type of communication.
The Commercial Code of Ukraine stipulates that the franchise agreement should be made as a single document. Non-compliance with this requirement shall result in the annulment of the agreement.
The franchise agreement shall come into force from the moment defined in the agreement. This requirement is not directly prescribed by the Codes; it derives from exclusions made by the Codes as to the right of parties to refer to the agreement in their relation with third parties.
The Codes require that the franchise agreement should be registered by the body registering the franchisor if the latter is registered in Ukraine or by the franchisee if the franchisor is registered in any other country. In accordance with the general rule envisaged by the Civil Code of Ukraine, Article 210 par.1, the transactions which, under the legislation are to be registered, shall come into force from the moment of such registration. The Codes expressly provide that, in relations with third persons, the parties to the franchise agreement are allowed to refer to the agreement from the moment of its registration only. The parties to the agreement are authorized to define the moment of conclusion of the agreement themselves. The Codes do not prescribe the procedure for registration of franchise agreements.
The Civil Code of Ukraine, Article 210 par. 2, provides that the procedure of registration and management of the respective registries shall be regulated by a separate law. Such a law has not yet been adopted. Until a law is adopted, the franchisor and the franchisee can make the franchise agreement without any registration.
The Civil Code and Commercial Code of Ukraine note two types of franchise agreements: single-unit franchise agreements and sub-franchise agreements.
The Codes provide that, under the sub-franchise agreements, �the right to use the scope or part of the scope of rights granted� may be granted to the sub-franchisee.
If the franchisee is entitled to make contracts with third parties � sub-franchisee - with the right to hand over for further usage the scope of rights granted by the franchisor, so its agreement with the franchisor may be considered as either the franchise agreement or the master franchise agreement although there is no separate notion of the master franchise agreement in any of the Codes. Whereas under the Civil Code of Ukraine, Article 11, civil rights and obligations arise from the actions of persons, prescribed by the civil legal acts, as well as from the actions of persons which are not prescribed by these acts, but give rise to civil rights and obligations by analogy, entrepreneurs are entitled to conclude agreements which, in essence, are similar to those used in the area of franchising.
In contrast with legislative systems in western countries, the Ukrainian legislation in force does not prescribe any requirements to the franchisor as to the information disclosure about the franchise object. However, it does provide for some other requirements regarding the obligations of the parties to the franchise agreement.
ABOUT THE AUTHOR: Anna Tsirat
Doctor of Law, attorney, member of International Bar Association, member of Kiev City Bar Association, member of Center for International Legal Studies (Salzburg, Austria). Dr. A. Tsirat collaborates with the International Institute for the Unification of Private Law (UNIDROIT), Rome, Italy.