This country-specific Q&A provides an overview to Franchise & Licensing laws and regulations that may occur in Azerbaijan.
Is there a legal definition of a franchise and, if so, what is it?
Franchising is defined by Article 723 of the Civil Code of the Republic of Azerbaijan as follows:
Franchising agreement is a mutual long-term liability undertaken by independent parties to perform specific actions contributing to production, sale of goods and provision of services, when necessary.
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.
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.
There are no specific registration requirements for franchisors and/or franchisees. However, franchisee may optionally register a franchising agreement in part where it contains licensing of trademarks, with the Patent Office of Azerbaijan. This could be done by way of registering whole franchising agreement or an extract from such agreement.
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 sub-franchisees) 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)?
Parties entering into franchising agreement must acquaint each other plainly and completely with conditions related to franchise, especially with franchise system (model) in an honest manner. There is no prescribed format. Parties are prohibited from disclosure in the event the agreement is not concluded.
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?
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?
Mis-selling is not regulated by the legislation of the Republic of Azerbaijan
Would it be legal to issue a franchise agreement on a non-negotiable, “take it or leave it” basis?
There are no restrictions set forth by the legislation of the Republic of Azerbaijan to issue a franchising agreement in this manner.
How are trademarks, know-how, trade secrets and copyright protected in your country?
Trademarks are protected by the Law on Trademarks and Geographical Indications;
Know-how and trade secrets are protected by the Law on Commercial Secrets;
Copyrights are protected by the Law on Copyright and Related Rights;
Administrative liability for violation of IPR is set forth by the Code of Administrative Offenses;
Criminal liability for violation of IPR is set forth by the Criminal Code.
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.
Chapter 35 of the Civil Code of the Republic of Azerbaijan, devoted to franchising, mostly covers the ongoing relationship between franchisor and franchisee in Azerbaijan.
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.
Chapter 35 of the Civil Code of the Republic of Azerbaijan does not contain on-going competition rules. However, it provides for post-term competition, which is given below.
Are in-term and post-term non-compete and non-solicitation clauses enforceable?
The parties must compete faithfully even after the contract is terminated. In this context, competition within the boundaries of a specific territory may be prohibited for a maximum of one year. If the prohibition of competition constitutes a threat to the professional activities of the franchisee, it must be awarded by a reasonable financial compensation.
Are there any consumer protection laws that are relevant to franchising? Are there any circumstances in which franchisees would be treated as consumers?
Is there an obligation (express or implied) to deal in good faith in franchise relationships?
Apart from the post-term fair competition rules there are no express obligations to deal in good faith. However, Article 724 of the Civil Code of the Republic of Azerbaijan obliges the Franchisor to provide the Franchisee with necessary information and assets (tangible and intangible) related to the franchise in the same manner as used by the Franchisor himself.
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?
There are no employment or labour law considerations which are relevant to the franchise relationship in the Republic of Azerbaijan.
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?
There is no immediate risk for that, however, pursuant to Article 731 of the Civil Code of the Republic of Azerbaijan, provisions applicable to commercial (trade) agents may apply to franchises, in which franchisees are permanently engaged in the distribution of franchisor’s goods or its affiliates.
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 strict regulations regarding royalties, however given royalty amount could be measured against average market rate by the Ministry of Taxes of the Republic of Azerbaijan.
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?
It is possible to impose contractual penalties as per the general provisions of the Civil Code of the Republic of Azerbaijan; however, absence of the court practice makes it quite hard to predict results of non-compliance with the set penalties.
What tax considerations are relevant to franchisors and franchisees? Are franchise royalties subject to withholding tax?
According to Article 124.1 of the Tax Code of the Republic of Azerbaijan, royalties obtained from an Azerbaijani source, are subject to a withholding tax at the rate of 14%.
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?
Pursuant to Article 728 of the Civil Code of the Republic of Azerbaijan, duration of the franchise agreement is determined by the parties considering the demand for the sale of goods and services, meaning at their own discretion. If the term of the contract is more than ten years, any party may cancel the contract via termination notification submitted 1 year in advance. If parties do not use their right to terminate the contract, the contract is extended automatically for the period of two (2) years. In the event of expiration or termination of the franchise agreement, parties shall try to preserve business relations on the same level until their factual termination, although there is no fixed mechanism for that.
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?
There is only one mandatory termination right applicable to franchise agreements with the term of ten (10) or more years described above.
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.
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?
There is a non-governmental organization called Azerbaijan Franchising Center (AFC) in Azerbaijan. AFC is engaged with commercial activities regarding franchising issues in Azerbaijan. Membership in the AFC is required. Members are divided into 4 categories.
A category – The world-famous franchising brand in Azerbaijan can become members.
B category – Members of the world-famous brands who want to show franchise in Azerbaijan. After the first franchising is formed in Azerbaijan, the members in category B will automatically belong to category A.
C category – Successful domestic franchises in Azerbaijan.
D category – Entrepreneurs who want to invest in franchise projects in Azerbaijan
Are foreign franchisors treated differently to domestic franchisors?
According to Article 6 of the Republic of Azerbaijan, civil rights subjects are equal. In this regard, discrimination in civil law relations is not permitted in Azerbaijan.
Are there any requirements for payments in connection with the franchise agreement to be made in the local currency?
There are not any requirements
Must the franchise agreement be governed by local law?
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?
Available DR methods:
Mediation (effective 1 July 2020);
Arbitration (ad-hoc and institutional)
While effectiveness of the mediation is not clear yet, the main disadvantage of the arbitration is execution of the foreign arbitral awards. It may be only executed if it doesn’t contradict legislation of the Republic of Azerbaijan.
Does local law allow class actions by multiple franchisees?
In this regard, legislation of the Republic of Azerbaijan does not contain any restrictions.
Must the franchise agreement and disclosure documents be in the local language?
Azerbaijani legislation does not have such a mandatory requirement. The parties may choose any language for the contract language. However, for the purposes described in questions 3 and 16 hereof, having Azerbaijani translation is a must.
Is it possible to sign the franchise agreement using an electronic signature (rather than a wet ink signature)?
Such possibility is provided on paper under the Law on Digital Signature and Digital Documents; however, its implementation is yet unavailable. The issue is that in order to be legally binding, digital signature must be accredited by the state. Currently, there is only two state-accredited signatures, both of them offered by the state itself and allowing access to the e-gov services. Integration is possible, however there’s been only one successful case as of recently.
Can franchise agreements be stored electronically and the paper version be destroyed?
As mentioned above, digital agreement can only be legally binding if signed by an accredited digital signature. In all others instances, it shall be executed in a paper form.
Please provide a brief overview of current legal developments in your country that are likely to have an impact on franchising in your country.
Azerbaijan expects adoption of a Competition Code in the near future, which is likely to positively impact franchising.