Insights on Franchising: A Singapore Perspective
12 September 2017
Singapore is a multiracial and a multicultural country that demands variety in all aspects of its marketplace. Recently, news of the imminent departure of bubble tea franchise Gong Cha from Singapore has directed attention towards a new beverage brand, LiHo, started by a former franchisee of Gong Cha. While some Singaporeans are looking forward to exploring the new brand, existing fans of the old brand are pining for a relaunch of the Gong Cha franchise.
Likewise, Singapore gives enormous opportunity for both local and foreign franchisors to expand their business through franchising. Franchising and branding can work in tandem to facilitate development of the intellectual property portfolio of a business. Before setting up a franchise in Singapore, franchisors should take the necessary legal measures, such as registering and protecting their trademarks locally and putting in place a strong franchise agreement with franchisees.
Singapore does not have franchise-specific legislation or franchise registration requirements. General laws of contract govern the relationship between the franchisor and the franchisee. Alongside this, the Franchising and Licensing Association of Singapore (FLA) Code of Ethics regulates franchising affairs between its members. However, registration with FLA is not compulsory for franchisors.
Before commencing franchising operations, it is pertinent for a franchisor to protect, by way of registration and/ or any necessary enforcement actions, their intellectual property rights. These IP rights can include their trademarks, know-how, training techniques and such other unique features of the franchisor’s business. Unlike in the United States, Singapore has no legal requirement for a franchisor to disclose their franchise system and other details to their franchisees.
Staple Elements Forming a Franchise Agreement
Upon completion of the negotiations on the franchise agreement, the terms and conditions agreed between the parties should be succinctly drafted into a franchise agreement. Certain key elements of franchise agreements are as follows:
(a) Rights and Know-How
The grant of the franchise usually involves the franchisor granting the franchisee the right to use the trademarks and know-how of the franchisor for a specified duration. The agreement may provide for the term to be renewed. It is important for the agreement to specify the extent of the rights being granted to militate against any unauthorized use of the franchisor’s rights and know-how. The agreement should provide that, upon its termination, the franchisee’s right to use the licensed IP and know-how similarly terminates.
(b) Royalties and Fees
In exchange for the right to use the franchisor’s IP and know-how, the franchise agreement will typically provide that the franchisee pays royalties to the franchisor. Franchisors may also require the franchisee to pay a lump-sum initial franchise fee as compensation for use of the franchisor’s brand, training of the franchisee’s staff, etc.
(c) Running of the Franchise
Franchisors often take pains to create a unique identity and brand for their business. For example, the Singaporebased BreadTalk chain of bakery outlets has created its own identity through their open-kitchen concept and bread quality. It is important for franchisors to insert clauses into the franchise agreement to obligate the franchisee to maintain the quality standards and uniformity of the franchise. The franchise agreement may also detail the approach towards executing franchise operations, training, advertising rules and other administrative matters.
The Importance of Trademarks in Franchises
Trademarks are very important intellectual property rights within a franchise. The entire business of franchising is based on the franchisee’s ability to leverage on the goodwill and custom tied to a franchisor’s trademarks. The more popular the franchise, the more royalties the franchisor is likely to receive. As such, it is in the interest of both franchisors and franchisees to protect their respective interests in the licensed trademarks.
Under the Singapore Trade Marks Act, the licensing of a trademark is required to be in writing. The exclusive franchise licensee of a registered trademark has the right to bring a trademark infringement action against unauthorized use of the trademark by any third party. Franchisees are strongly advised to record the licence of a registered trademark with the Singapore Trade Marks Registry in order to protect their rights and interests in the licensed trademark. Failure to do so may result in the licence being ineffective against a person acquiring a conflicting interest in the same trademark.
For franchisors that are planning to open franchise outlet(s) in Singapore, it is advisable to conduct a freedom-tooperate (FTO) search on whether their trademarks can acquire protection (if not already registered) in Singapore. In instances where a third-party squatter has registered an identical or similar trademark to that of the franchisor, the franchisee can – in appropriate cases – seek to revoke the trademark on the ground of bad faith.