For at least the past two decades, Thailand has been on the verge of enacting a franchise law. Law firms would issue bulletins to their clients announcing that a new law was about to be enacted on franchising relationships. The announcements would often say that the draft law would be enacted by year’s end. We are now approaching the end of 2020, and Thailand does not yet have a franchising act. And there have been no announcements that one will be enacted by year’s end or even anytime soon.
Instead, in December of last year – after Thailand’s passed a new Trade Competition Act on 5 October 2017 (the “2017 Act”) to replace a trade competition law that had been enacted in 1999 (the “1999 Act”) – the Office of Trade Competition Commission, under the 2017 Act, issued guidelines to regulate franchise businesses. Those guidelines were issued under Section 57 the 2017 Act and came “into force” earlier this year.
Although longer in text, Section 57 of the 2017 Act appears to be a progeny of Section 29 of the 1999 Act. Section 29 was a controversial catch-all provision aimed at restricting undefined “unfair business practices”. In practice, it appears to have been aimed at purported vertical restraints on trade by multinational companies on local parties in the same supply chain. Specially, section 29 of the 1997 Act was used to challenge restrictions on distributors. For example, in an investigation on alleged restraints on motorcycle dealerships, the Bangkok Post reported in 2013 that an: “investigation [by the trade competition authorities] confirmed that AP Honda’s policy of prohibiting its motorcycle dealers from selling other brands was a violation of the trade competition law and the firm should be indicted, said the minister”. The Bangkok Post later reported that the Thai Attorney General’s office decided to drop the case.
The guidelines issued pursuant to Section 57 of the 2017 Act (the “Franchise Guidelines”), like Section of the 1999 Act, are aimed at purported vertical restraints on trade, albeit this time with references to franchisor/franchisee relationships. The Franchise Guidelines prohibit franchisors from imposing various conditions on franchisees without having a “valid” reason.
The Franchise Guidelines repeatedly state that a franchisor must have a “valid” reason for taking various actions, such as “setting additional conditions after contractual execution”, prohibiting “franchisees from purchasing products or services from manufacturers, distributors or other service providers” even if the “same standards” apply (but who decides and by what measure that the standards are the same?). These prohibitions apply to distributors or manufacturers higher in the supply chain and appear to be aimed at protecting local franchisees. And it is not clear what constitutes a “valid” reason. Protection or harm to consumers does not appear to enter into the calculus of determining if a reason is “valid”.
Indeed, it is not clear how the Franchise Guidelines protect consumers or prevent monopolistic practices. The Franchise Guidelines regulate vertical trade relationships. They do not regulate horizontal restraints on trade, such as fixing the sales price of goods or services at the same level, fixing the purchase of goods or services at the same level or entering into agreements to control a market, all of which harm are recognized as monopolistic practices that harm consumers.
What Should Franchisors Do?
Franchisors that received competent advice before the Franchise Guidelines were promulgated should have sensible agreements that provide for reasonable trade practices and international arbitration to help avoid being “hometowned” in Thailand. Unfortunately, the Franchise Regulations are a game changer. A clause requiring that disputes between franchisors and franchisees be arbitrated in a neutral arbitral forum should be enforceable. Regulatory action by a governmental body is not. This means that franchise agreements concluded before the Franchise Regulations require fresh review.