Philippines: Franchise & Licensing

Definition of a franchise under Executive Order No. 169

On 12 May 2022, the Office of the President issued Executive Order No. 169 (titled, Strengthening the Franchising Industry for the Protection of Micro, Small and Medium Enterprises) which defined “franchise” as a contract or agreement between a franchisor and a franchisee where:

• The franchisor grants to the franchisee the right to operate a business according to the franchise system and during a term as determined by the franchisor;
• The franchisor grants the franchisee the right to use a mark, or a trade secret, or any confidential information or intellectual property owned by the franchisor or relating to the franchisor;
• The franchisor possesses the right to control the administration over the franchisee’s business operation during the franchise in accordance with the franchise system; and
• In return for the grant of the above rights, the franchisee is required to pay a fee or other form of consideration.

The said EO also defined “franchise agreement” as a written contract or agreement between a franchisor and a franchisee by which the former grants the latter the right to engage in the business of offering, selling or distributing goods or services under a marketing system, technology transfer arrangements included, for a certain consideration. Unless otherwise provided, said right includes the use of a trademark, service mark, trade name/business name, know-how, logo-type advertising or other commercial symbols associated with a particular business.

Franchise Agreements under the Intellectual Property Code

In addition, under the Intellectual Property Code of the Philippines (“IP Code”), franchise agreements are categorized as “technology transfer arrangements (“TTAs”). TTAs are defined in the IP Code as contracts or agreements that involve either:

• Transfer of systemic knowledge for the manufacture of a product, the application of a process or rendering of a service, including management contracts.
• Transfer, assignment, or licensing of all forms of IP rights, including the licensing of computer software (except computer software developed for a mass market).

There are generally no requirements to be met prior to the offer and/or sale of a franchise.

The law does not require the registration of franchisors with a professional or regulatory body before setting up a franchise system. However, Bureau Order No. 10-24 Series of 2010 (Advisory on Due Diligence to be Undertaken by a Prospective Franchisee) advises potential franchisees to require the franchisor to obtain a certificate of good standing from the Securities and Exchange Commission, and a certificate stating that the franchisor is a member of any franchisor association and has no pending cases against it. See also Question 4.

Registration of Franchise Agreements under the Intellectual Property Code

Franchise Agreements are considered TTAs under the Intellectual Property Code. Generally, TTAs need not be registered if it contains all the necessary mandatory provisions and does not have any of the prohibited provisions under the IP Code (Section 87 and 88, respectively). However, if a franchise agreement contains provisions relating to the franchisee’s use of the franchisor’s registered trademark, the franchise agreement will need to be recorded with the Bureau of Trademark. Otherwise, the provisions pertaining to the use of the trademark will have no effect against third parties. Furthermore, if the franchisor intends to avail of tax treaty relief on royalty income derived from the franchise agreement, the application for tax treaty relief will need to be supported by either a DITTB registration, or a certificate of compliance issued by the DITTB.

Registration of Franchise Agreements under Executive Order No. 169

Executive Order No. 169 mandates the registration of Franchise Agreements entered with Micro, Small, and Medium Enterprises (MSME). MSMEs cover businesses whose total assets range from less than Fifty Thousand Pesos (Php 50,000.00) up to Twenty Million Pesos (Php 20,000,000.00).

Under EO 169, franchisors are responsible for registering their franchise agreements with the Department of Trade and Industry (DTI). Only franchise agreements that incorporate the minimum terms and conditions prescribed under the Executive Order shall be granted registration.

Franchisors that are members of duly registered franchise associations are required only to register a ‘Standard Franchise Agreement’ and execute an undertaking that all future franchise agreements with MSME franchisees shall incorporate the minimum terms and conditions prescribed under the said Executive Order.

It should be noted that, as of the date of writing, Executive Order No. 169 has not yet come into full effect as the DTI has yet to issue its Implementing Guidelines.

There is no law requiring any formal pre-contract disclosure in the Philippines. However, potential franchisees are advised to exercise due diligence before engaging in franchising business with a franchisor. In particular, franchisees are advised to obtain the following information on the franchise/franchisor before entering into a contract:

• Franchisor’s business address, e-mail address, internet home page or website, fax numbers, and other relevant contact details.
• Copy of the franchisor’s registration with the Department of Trade and Industry (“DTI”) or Securities and Exchange Commission (“SEC”).
• Parent companies and affiliates, if any, and their respective roles in the franchise, and franchisor’s declaration on whether any affiliate is a supplier and what they will supply.
• Names of the members of the board of directors and officers, with a brief description of their qualifications and background, ownership interests, and references.
• Contact numbers and business locations of existing franchisees.
• Executed promotional/marketing materials.
• Description of the business concept, which includes brand image, brand personality, unique selling proposition, target market, mission and vision.
• Basic information on training, commercial and/or technical assistance.
• Certificate attesting that the franchisor:
  • Is a member in good standing of any franchisor association; and
  • Has no pending administrative, civil or criminal cases against it.
• Initial fee amount that will be collected, and services covered by these fees.
• Training that will be provided, including number of persons trained, duration and training modules.
• Number of years the franchisor company has been in operation and number of years it has franchised the business, with corresponding numbers of company-owned branches and franchised outlets.
• Draft franchise agreement.
• Full disclosure of the financial requirements of the franchise business.
• Whether there is a requirement on the franchise applicant to seek adequate legal and financial counsel before signing the franchise agreement.
• Mechanism for dispute resolution.

Franchisees are also advised to consult any of the following:

• A franchisor association.
• The SEC.
• The DTI or the nearest DTI regional/provincial office.
• A certified franchise executive
• A franchise consultant.

These recommendations, while not mandatory, are set out in the DTI’s Advisory Bureau Order No. 10-24, Series of 2010.

See Question 4. There is no law requiring any formal pre-contract disclosure in the Philippines.

Prospective franchisees must rely on their own due diligence. The franchisee is expected to exercise the usual care and attention as is expected by an ordinary person similarly situated. If there are open and patent defects that could have easily been discovered by the prospective franchisee, it is assumed that there was no misrepresentation on the part of the franchisor and the principle of caveat emptor (buyer beware) applies.

However, under the Civil Code all persons must observe honesty and good faith and the failure to disclose facts, when there is a duty to reveal them constitutes fraud. Therefore, a franchisor may be held liable for purposefully concealing or failing to disclose a material fact, even if there was a disclaimer in the franchise agreement, disclosure document, or sales material.

Depending on the nature of the fraud or deception, a franchisee can either file:

• A civil action for breach of contract and an action for recission or specific performance.
• An action to set aside the contract for being voidable.

The franchisee can also file a criminal action for swindling. Regardless of the action taken, the franchisee (if successful) will usually recover damages from the franchisor.

Yes, the franchisor may issue a franchise agreement on a non-negotiable “take it or leave it” basis. The franchisor and franchisee are free to include and negotiate terms that they deem proper, as long as they are not contrary to law, morals, good customs, public order or public policy.

Intellectual property rights are governed by the IP Code.

With regard to trademarks and patents, the Philippines follows the first-to-file rule. The rights over trademarks and patents are acquired through registration made validly in accordance with the provisions of the IP Code.

For copyright, original intellectual creations in the literary and artistic domain are protected from the moment of their creation, irrespective of their mode or form of expression, as well as of their content, quality and purpose.

The Philippine IP Code recognizes the protection of ‘undisclosed information’ as an intellectual property right but does not contain any specific provisions relating to its protection. However, certain provisions of the Revised Penal Code penalize the “revelation of industrial secrets” and “the revelation of secrets with abuse of office”. Trade secrets may also be protected by contractual provisions in agreements with employees, consultants, customers. and business partners

There are no specific laws governing franchising in the Philippines. Franchise agreements are regulated by the applicable provisions of the:

• Intellectual Property Code (IPC).
• Civil Code.
• Corporation Code.
• Relevant special laws.

IPC

Sections 87 and 88 of the IPC list prohibited and mandatory provisions of technology transfer agreements, including franchise agreements (see Question 3). Failure to conform to these provisions (that is, the inclusion of prohibited provisions or the exclusion of mandatory provisions in a franchise agreement) will render the agreement unenforceable. Sections 87 and 88 of the IPC are intended to prevent unfair competition and trade. The prohibited provisions are deemed prima facie to have an adverse effect on competition and trade.

The mandatory provisions under Section 88 of the IP Code are as follows:

• That the laws of the Philippines shall govern the interpretation of the Agreement and in the event of litigation, the venue shall be the proper court in the place where the licensee/franchisee has its principal office;
• Continued access to improvements in techniques and processes related to the technology shall be made available during the period of the Agreement;
• In the event the Agreement shall provide for arbitration, the procedure of arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply, and the venue of arbitration shall be the Philippines or any neutral country.
• The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor/franchisor.

Civil Code

The Civil Code contains the general law on contracts and human relations. Franchise agreements are considered to be ordinary contracts. Therefore, franchise agreements are subject to the general provisions of the Civil Code governing obligations and contracts. For example, when offering a franchise, a franchisor must observe honesty and good faith. Additionally, offers are only deemed accepted if they are accepted unconditionally. Contracts between a franchisor and franchisee are also subject to the rules on interpretation of contracts.

Actions for remedies for breach, damages or recovery relating to franchise agreements are treated as regular civil actions.

Corporation Code

The Corporation Code sets out the requirements for registering a business in the Philippines. Before it can conduct trade or business in the Philippines, a foreign corporation must apply to the Securities and Exchange Commission (SEC) for a licence to transact business in the Philippines.

A foreign corporation that intends to conduct franchising operations in the Philippines has the followings options:

• Enter into a franchising agreement with an existing local entity.
• Establish an entirely new corporation under Philippine laws.
• Register a branch office with the SEC.

The third option is only available to corporations from countries that provide reciprocal treatment to Filipinos for doing business in their country.

Special laws

There are some special laws that affect franchising, such as follows:

• While foreign corporations are generally governed in the same manner as domestic corporations, the Retail Trade and Liberalisation Act prevents them from owning or wholly owning a business below a certain amount of paid-up capital.
• The Foreign Investment Negative List and the Foreign Investments Act set out restrictions and prohibitions on foreign investors in relation to the sectors they can invest in and how much they can invest.
• The Philippine Competition Act prohibits:
  • anti-competitive agreements; and
  • one or more entities from abusing their dominant position by engaging in conduct that would substantially prevent, restrict or lessen competition.
• The Data Privacy Act of 2012 protects individuals from unauthorized processing of personal information by regulating the collection, recording, organization, storage, updating or modification, retrieval, consultation, use, consolidation, blocking, erasure or destruction of personal data.
• Executive Order No.169 prescribes minimum terms and conditions for franchise agreements, provides for the registration of franchise agreements, the creation of a franchise registry, and encourages membership in franchise associations. However, as of the date of writing, Executive Order No. 169 is not yet in full effect as the Department of Trade and Industry has yet to issue the implementing guidelines for Executive Order No. 169.

The Philippine Competition Act (PCA) prohibits two general acts:

• Anti-competitive agreements (section 14).
• Abuse of dominant position (section 15).

The agreements between or among competitors that are considered anti-competitive agreements are further divided into the following two categories:

• Agreements that are per se prohibited, which are those that:
  • Restrict competition as to price, or components of the price, or other terms of trade; and
  • Fix price at an auction or in any form of bidding (bid manipulation).
• Agreements that are prohibited only if they have the object or effect of substantially preventing, restricting or lessening competition. These include agreements that:
  • Set, restrict or control production, markets, technical development or investment; and
  • Divide or share the market, whether by volume of sales or purchases, territory, type of goods or services, buyers or sellers or any other means.

Agreements other than those specified above which have the object or effect of substantially preventing, restricting or lessening competition are also prohibited. However, agreements that contribute to improving the production or distribution of goods and services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits, may not necessarily be deemed contrary to the PCA.

The following acts are considered an abuse of dominant position and are prohibited:

• Selling goods or services below cost with the object of driving competition out of the relevant market.
• Imposing barriers to entry or committing acts that prevent competitors from growing within the market in an anti-competitive manner.
• Making a transaction subject to acceptance by the other parties of other obligations which, by their nature or according to commercial usage, have no connection with the transaction.
• Setting prices or other terms or conditions that discriminate unreasonably between customers or sellers of the same goods or services, where:
  • these customers or sellers are contemporaneously trading on similar terms and conditions; and
  • the effect may be to lessen competition substantially.
• Imposing restrictions on the lease or contract for the sale or trade of goods or services in relation to where, to whom or in what forms goods or services can be sold or traded (such as fixing prices, giving preferential discounts or rebate on the price or imposing conditions not to deal with competing entities), where the object or effect of the restrictions is to prevent, restrict or lessen competition substantially.
• Making supply of particular goods or services dependent on the purchase of other goods or services from the supplier, which have no direct connection with the main goods or services to be supplied.
• Directly or indirectly imposing unfairly low purchase prices for the goods or services of, among others, marginalised agricultural producers, fisherfolk, micro-, small- and medium-scale enterprises, and other marginalised service providers and producers.
• Directly or indirectly imposing unfair purchase or selling price on competitors, customers, suppliers or consumers.
• Limiting production, markets or technical development to the prejudice of consumers.

Exemptions

The PCA does not prohibit or render unlawful:

• Permissible franchising, licensing, exclusive merchandising or exclusive distributorship agreements, such as those that give each party the right to unilaterally terminate the agreement.
• Agreements protecting IP rights, confidential information or trade secrets.

Generally, any barrier to entry, price differential, limit on production or technical development which develop in the market as a result of or due to a superior product or process, business acumen or legal rights or laws are not considered an abuse of dominant position.

Non-compete and non-solicitation clauses have been found to violate section 87.9 of the Intellectual Property Code which prohibits the inclusion of terms which restrict the use of the technology supplied after the expiration of the agreement, except in cases of early termination due to reasons attributable to the licensee/franchisee. However, the Director General of the Intellectual Property Office of the Philippines has stated that a non-compete clause can be valid provided that the period is limited to one year from the termination of the agreement (re: Pre-Clearance of a Shop Franchise Agreement, 20 October 2003). Following this, Franchise Agreements which contain in-term and post-term non-compete and non-solicitation clauses may seek an exemption from the Prohibited Clauses of the IP Code with the Philippine IPO’s Documentation, Information, Technology Transfer Bureau (DITTB).

Executive Order No.169, was issued on 12 May 2022 as a means of protecting of Micro, Small and Medium Enterprises (MSMEs) that wish to enter into franchise agreements as a franchisee. It prescribes minimum terms and conditions for franchise agreements, the registration of franchise agreements and the creation of a franchise registry and encourages membership in franchise associations.

However, as of the date of writing, Executive Order No. 169 is not yet in full effect as the Department of Trade and Industry has yet to issue the implementing guidelines for Executive Order No. 169.

Every person must, in the exercise of their rights and in the performance of their duties, act with justice, give everyone what they are due, and observe honesty and good faith (Civil Code).

Obligations of the franchisee

There are no obligations specifically imposed on the franchisee by local law. The agreement is the law between the parties. The parties to a franchise agreement are free to include the terms that they deem proper, provided that these terms are not contrary to law, morals, good customs, public order or public policy.

Obligations of the franchisor

As with franchisees, there are no obligations specifically imposed on the franchisor by local law. The terms of the contract will determine the obligations of both parties, provided that these terms are not contrary to law, public policy, public order or morals.

Franchise agreements, in theory and in practice, do not usually establish employer-employee relationships. Under Philippine Labour Law, the following factors are taken into account to determine the existence of an employer-employee relationship:

• The employer has the right to hire or select the employee.
• The employer pays the wages of the employee.
• The employer has the power to dismiss or discipline the employee.
• The employer has the power to control the means and methods by which the employee’s work is to be accomplished.

Of the elements listed above, the most important is the last element, i.e., control. If the circumstances of the franchising relationship show that the franchisor in fact exercises control not only on the ends to be achieved, but also on the manner and means to be used by the franchisee to achieve such ends, then there is a risk that the franchise agreement may be deemed to have establish an employer-employee relationship.

The Court has, however, acknowledged that franchising involves the use of an established business expertise and as such, the franchisee is required to follow established systems. Accordingly, franchisors are allowed to impose guidelines that may restrict the franchisees conduct. Such guidelines and restrictions are not the same as the ‘control’ contemplated in an employer-employee relationship. Control in an employer-employee relationship addresses the details of day-to-day work and is concerned with how the work is done, not just the result.

To mitigate the risk, a statement or provision specifically disclaiming the existence of an employer-employee relationship may be added to the franchise agreement. It should be noted, however, that such a disclaimer will not preclude the courts from ruling that an employer-employee relationship exists if there is enough evidence to support such a finding.

As a rule, a franchisee will not automatically be deemed an agent of the franchisor, unless stated in the franchise agreement. To emphasize the franchisee’s independence from the franchisor, a franchise agreement can include a provision stating that the franchisee is not an employee, business partner, agent or representative of the franchisor. It is also recommended that a provision explicitly prohibiting the franchisee from holding himself out as having authority to bind the franchisor be included in the agreement.

There are no laws or regulations that would specifically affect the nature and payment of royalties to a foreign franchisor. These are matters that may be determined by mutual agreement of the parties.

It should be noted, however that the Bangko Sentral ng Pilipinas (BSP) regulates the cross-border transfers of Philippine pesos and foreign currencies. Under the BSP’s current Foreign Exchange Regulations, individuals and corporations that are Philippine residents may purchase foreign currency from Philippine banks without need of prior approval from the BSP in order to service the payment of royalties, franchise fees, and/or licensing fees. However, if the foreign currency to be purchased exceeds US$500,000 for individuals or US$1,000,000 for corporations, the application to purchase foreign exchange will need to be accompanied by supporting documents. In the case of royalties, the application will need to be accompanied by (1) a billing statement; and (2) a copy of the contract/agreement, or other equivalent document.

Under Philippine law, the parties are free to stipulate the interest to be charged on royalties, provided that such interest rates are not unconscionable. The standards for unconscionable interest rates are determined on a case-by-case basis and by jurisprudence.

Yes, it is possible to impose contractual penalties on franchisees for breaching the terms of the franchise agreement. In general, such penalties are considered as substitutes for damages and the payment of interests in case of noncompliance, unless there is a stipulation to the contrary.

The law does not impose any specific requirements for such penalties to be enforceable. However, the courts can reduce the amount of penalty or liquidated damages if the amount is found to be excessive. The determination of whether the penalties imposed are ‘excessive’ is left to the discretion of the courts which may evaluate the penalties under the rule of reason.

The IP Code expressly provides that Philippine taxes on all payments relating to the franchise agreement must be borne by the licensor/franchisor.

Under Philippine tax law, income sourced from the Philippines by a foreign corporation is taxed at source. In general, the corporate income tax rate for non-resident foreign corporations (on gross income, including royalties, derived from sources within the Philippines) is set at 25%. The franchisee must withhold the appropriate amount and pay it to the Bureau of Internal Revenue.

Foreign franchisors can benefit from preferential tax treatment or lower tax rates if the franchisor is a resident of a country that either entered into a bilateral or multi-lateral tax treaty with the Philippines or allows a reciprocal credit for taxes paid in the Philippines. When applying for tax treaty relief on royalty income derived from a Franchise Agreement, a DITTB registration or certificate of compliance must be submitted to the Philippine Bureau of Internal Revenue in support of the application for tax treaty relief.

Philippine law does not provide for any restrictions concerning the use of e-commerce in relation to franchising. The terms of the contract can provide for e-commerce restrictions, provided that they are not contrary to law, public order, public policy or morals.

The Data Privacy Act of 2012 (“DPA”) protects individuals from unauthorised processing of personal information by regulating the collection, recording, organisation, storage, updating or modification, retrieval, consultation, use, consolidation, blocking, erasure, or destruction of personal data. The Data Privacy Act and the IRR created the National Privacy Commission (“NPC”) to administer and implement the provisions of the Data Privacy Act. This law is applicable to entities within the Philippines, which include franchisors and franchisees.

The NPC also regulates acts or practices by entities, including franchisors and/or franchisees, outside the Philippines if:

• The act, practice or processing relates to personal information about a Philippine citizen or a resident.
• The entity has a link with the Philippines, and the entity is processing personal information in the Philippines or even if the processing is outside the Philippines as long as it is about Philippine citizens or residents such as, but not limited to, the following:
  • A contract is entered in the Philippines;
  • A juridical entity unincorporated in the Philippines but has central management and control in the country;
  • An entity that has a branch, agency, office or subsidiary in the Philippines and the parent or affiliate of the Philippine entity has access to personal information and the entity has other links in the Philippines such as carrying on business in the Philippines and the personal information was collected or held by an entity in the Philippines.

The DPA protects individuals from unauthorized processing of personal information by regulating the collection, recording, organization, storage, updating or modification, retrieval, consultation, use, consolidation, blocking, erasure or destruction of personal data. It does not have specific implications for the franchisor/franchisee relationship.

The franchisor is permitted to restrict the transfer of the franchisee’s rights and obligations under the franchise agreement. The franchisor is also permitted to restrict the transfer of ownership interests in the franchise. However, Section 87 of the IP Code specifically prohibit provisions that are deemed to have an adverse effect on competition and trade, and which appear to be onerous to the franchisee’s exercise of its IP rights and interests in the franchise agreement. These prohibited provisions include but are not limited to: full or partial purchase options in favor of the franchisor, free grant-back provisions in favor of the franchisor, and restrictions on the use of the transferred IP rights after expiration of the agreement.

In determining whether a provision in a technology transfer arrangement establishes a full or partial purchase option in favour of the licensor prohibited under Section 87.6 of the IP Code, the DITTB shall take into consideration if there is an option for the licensor to purchase the licensee’s business. An option to purchase the remaining amount of stocks or inventory after the term of a technology transfer arrangement may be allowed. However, an option to purchase all or substantially all of the licensee’s assets or equity is a prohibited clause.

Parties are free to agree on the term of the franchise agreement, provided that it is not contrary to the law, public order, public policy, morals or good customs. In practice, the usual term of a franchise agreement is five to ten years. Under EO 169, the franchise agreement must contain a provision stating the terms and conditions for renewal. However, as of the date of writing, Executive Order No. 169 has not yet come into full effect as the DTI has yet to issue its Implementing Guidelines.

Franchising agreements usually contain a right to renew the contract without having to execute a new franchise agreement. Most franchisors require that certain minimum requirements be met, such as minimum paid-up capital or full compliance with certain requirements. Renewal fees can also be required.

The right of renewal is a contractual right under Philippine law. The right to refuse to renew, the fees to be paid, and the conditions to be met can all be stipulated in the contract. If the parties agree to a right of renewal and the franchisor reneges on this obligation, the franchisee can sue for breach of contract.

The franchisor and franchisee are free to contractually stipulate on termination rights, provided that it is not contrary to the law, public order, public policy, morals or good customs.

But consideration must be made to EO 169 which prescribes that all franchise agreements must:

• Provide effects of and grounds for pre-termination, termination or expiration of the franchise agreement;
• Provision on “cooling off” period where the franchisee is given the option to terminate the agreement;
• Provide a mechanism for dispute resolution, which shall include a stipulation that parties may seek voluntary mediation under the Alternative Dispute Resolution Act; and
• Provide remedies of the parties in case of any violation of the terms and conditions of the franchise agreement.

Compliance with the inclusion of the minimum terms and conditions in the franchise agreement, in accordance with EO 169, may entitle the franchisor to incentives or benefits to be provided by the Philippine government.

It should be noted that, as of the date of writing, Executive Order No. 169 has not yet come into full effect as the DTI has yet to issue its Implementing Guidelines.

The parties are free to contractually stipulate on the ownership of intangible assets upon expiry or termination, provided that it is now contrary to law, public order, public policy, morals or good customs.

However, Section 87.9 of the IP Code specifically provides that the franchisor cannot restrict the use of the technology transferred after the expiration of the franchise agreement, except in cases of early termination due to the fault of the franchisee.

Prospective franchisors and franchisees must rely on their own due diligence. The parties to a franchise agreement are expected to exercise the usual care and attention as is exercised by an ordinary person similarly situated. If there are open and patent defects that could have easily been discovered by the prospective franchisor/franchisee, it is assumed that there was no misrepresentation, and the principle of caveat emptor (buyer beware) applies.

For franchisees, the DTI’s Advisory Bureau Order No. 10-24, Series of 2010 provides a list of information that a franchisee should obtain before entering into a franchise agreement. See also Question 4.

The franchising market has been growing in relation to the following sectors:

• Education, including pre-schools, review schools, specialty schools and math or reading programmes.
• Health and fitness (for example, Anytime Fitness clubs).
• Healthy food (for example, Salad Stop or Juju Eats).
• Convenience stores (for example, 7-Eleven, FamilyMart and AlfaMart).
• Pharmacies and drug stores (for example, Generika Drug Store and The Generics Pharmacy).
• Food outlets and restaurants (for example, Potato Corner).

According to the Philippine Statistics Authority 2019 Update on the List of Establishments, 99.5% of businesses in the Philippines are micro, small, and medium enterprises (“MSMEs”), 68% of which are into franchising. Franchising has become increasingly popular with Filipinos because it allows them to have their own business while enjoying an established brand (and possibly a pre-existing customer base), a ready-made operating system, and franchisor support, which can all lead to faster return of investment.

There is no national franchising association in the Philippines.

Two of the biggest voluntary self-regulating bodies for franchising in the Philippines are the Philippine Franchise Association (“PFA”) and Association of Filipino Franchisers, Inc. (“AFFI”). These private franchising associations have their respective regulations and code of ethics.

Executive Order No. 169 encourages membership in franchise associations, but as of the date of writing, Executive Order No. 169 has not yet come into full effect as the DTI has yet to issue its Implementing Guidelines. Hence, the benefits of membership in franchise associations under Executive Order No. 169 is unclear at the moment.

International or overseas franchisors investing in the Philippines often choose to enter the Philippine market through joint venture or master franchising agreements. This is mostly because while there is no special law regulating franchising, Philippine law prohibits foreign nationals and foreign corporations from owning land in the Philippines and from entering into certain sectors of the market. For example, under the Philippine Constitution, no foreign national or foreign corporation can own or manage a media company or engage in retail trade below a certain amount of paid-up capital. The exploitation of natural resources, advertising and public utilities are also limited to Filipino citizens and corporations that are owned by a Filipino majority.

The Retail Trade and Liberalization Act, the Foreign Investment Negative List, and the Foreign Investments Act also provide guidance on the restrictions and prohibitions on foreign investors.

There are no currency requirements or exchange control regulations specifically applicable to franchise agreements.

Under the IP Code it is mandatory that the franchise agreement contain a provision stating that Philippine law shall govern the interpretation of the agreement, and, in the event of litigation, the venue shall be the proper court in the place where the franchisee has its principal office.

In the event of arbitration, it is mandatory under the IP Code that:

• The arbitration proceedings must be governed by the Procedure for Arbitration of the Arbitration Law of the Philippines, the Arbitration Rules of the UNCITRAL, or the ICC Rules of Conciliation and Arbitration; and
• The venue of the arbitration must be the Philippines or any neutral country.
  • “Any neutral country” is defined as “any third country, other than the Philippines, where neither the licensor nor the licensee was organized, registered or existing, and one where neither party has a direct connection or legal ties.”

Some of the advantages of out of court proceedings over court litigation in the Philippines include more simplified rules of procedure and evidence, confidentiality, and a shorter timeframe.

There are no prohibitions on class actions by multiple franchisees under Philippine law. The Philippine Rules of Court allows class suit when the subject matter of the controversy is one of common or general interest to many persons so numerous that it is impracticable to join all as parties.

The law does not require franchise agreements and disclosure documents to be in the local language. The parties may agree to use any language they wish. It is, however, common for franchise agreements and other relevant documents to be in English as English is one of the official languages of the Philippines.

Yes, it is possible to sign the franchise agreement using electronic signatures. Electronic signatures are legally recognized in the Philippines and are provided for under the E-Commerce Act.

Under the E-Commerce Act, electronic documents shall have the legal effect and enforceability as any other document or legal writing. Electronic franchise agreements create rights and imposes obligations upon the franchisor and franchisee just like a written or paper instrument. However, if the franchise agreement is originally executed in hard copy with a wet ink signature, it is recommended that the original version bearing the wet ink signature be retained.

The recently issued EO 169 last May 2022 now requires the registration of franchise agreements with the Department of Trade and Industry (“DTI”) in addition to the IPO recordation. However, the EO’s implementing rules and regulations have yet to be finalized. Once it takes effect, another registration procedure may be required.

The COVID-19 pandemic brought about adjustments and prompted significant changes within the franchising business. According to the Philippine Franchise Association, over 70% of franchise businesses were hit hard by the health crisis. But as the economy recovers, the franchising industry’s revitalization also appears imminent. The franchising industry contributes to more than 7.8% of the Philippines’ gross domestic product and employs more than two million people. Every franchise helps open more opportunities for Filipinos who, as a result of the pandemic, may have lost their jobs or may have chosen to take a different career path. COVID-19 has opened opportunities for entrepreneurs and franchisors who have willingly adapted to the adjusting consumer preferences brought about by the pandemic. One such change in consumer preferences is the more widespread adoption of e-commerce, online purchases, and home deliveries by Filipino consumers.