Practical aspects of franchise agreements registration

23 August, 2012 Exclusive

Commercial concession is a widely used instrument for doing business, which has gained its popularity in the world, but is not widely used in Ukraine in full, mostly because of numerous gaps in legal regulation. The terms “franchising” and “commercial concession” will be used in the same meaning hereinafter.

Along with the gaps in legislation that prevent active implementation of this agreement in Ukraine (for example, the absence of legal regulation on the procedure of disclosure of information on the subject of the agreement by franchiser which is unfavorable for the establishment of certain international corporations in the Ukrainian market), common problem of who and how must register the commercial concession agreement is not solved.

Part II of Article 1118 of the Civil Code of Ukraine envisages that the commercial concession agreement shall be the subject to state registration by the body which has registered the right holder.

Only the subject of entrepreneurial activity shall be the right holder (or the Party in general) under Article 1117 of the Civil Code of Ukraine.

Article 5 of the Law of Ukraine “On State Registration of Legal Entities and Individual Entrepreneurs” No. 755 – IV of May 15, 2003 envisages that “the state registration of legal entities and individual-entrepreneurs shall be carried out by the state registrar only in the executive committee of the city council of regional significance or in the regional councils, in Kyiv and Sevastopol State Administrations according to the location of the legal entity and residence of the individual entrepreneur”.

Since the right holder shall be the subject of entrepreneurial activity under the commercial concession agreement and the registration is carried out by the state registrar, the latter is also entitled to register the franchise agreements.

The state registrar is the official of respective executive committee of council or administration, but the question arises whether this official can be considered the authority, since, as it has been mentioned before, according to Part 2 of Article 1118 of the Civil Code of Ukraine, the commercial concession agreement is the subject to registration of the particular authority which carried out state registration of one of the parties.

What consequences the unregistered franchise agreement may have?

Part 4 of Article 1118 of the Civil Code of Ukraine envisages that “in relations with the third parties, the parties of the commercial concession agreement have the right to refer to such agreement only from the moment of its state registration”.

Therefore based on the literal interpretation of this rule, the Parties may not apply to the court to defend their rights before the state registration of the agreement, or claim the termination of exercising their intellectual property rights by the third party under the agreement, etc.

Though, according to Part 1 of Article 210 of the Civil Code of Ukraine “the deal shall be the subject to state registration only in the cases envisaged by law. Such deal is valid only from the moment of its state registration”.

The Uniform State Register of Court Decisions contains numerous court cases on annulment of franchising agreements referring to Part 1 of Article 210 of the Civil Code of Ukraine with the ground as if they are not concluded.

Though, the courts refuse to substain such claims in general. In particular, the High Commercial Court of Ukraine in its Decision No.7/57 pd (13/188 pd) of January 20, 2010 concluded the following:

“When refusing to substain the claim in the part of termination of the commercial concession agreement (franchising agreement) <…> the court proceeded from the absence of the state registration of the mentioned agreement, which is unconcluded and does not provide any rights or obligations for the parties, since according to Part 1 of Article 210 of the Civil Code of Ukraine the deal is the subject to state registration only in cases envisaged by law and such deal is valid from the moment of its state registration.

However, we cannot agree with the court decision, since the system analysis of Article 1118 of the Civil Code of Ukraine indicates that the moment of conclusion of the commercial concession agreement for its parties is prescribed by the general rule of Part 1 of Article 638 of the Civil Code of Ukraine from the moment of mutual consent as for all substantial conditions of the agreement. The said agreement has its legal value for the third party only from the moment of state registration”.

Thus, proceeding from the court practice the commercial concession agreement is valid from the moment of its conclusion, but it should be registered in order to be referred to the third party.

According to Part 4 of Article 1118 of the Civil Code of Ukraine the third party is any other entity but for the parties of the agreement. Therefore, the state tax authorities are also referred to as the third party. Due to this, tax authorities can take up a position (which is very wide-spread as for void contracts) while carrying out tax audit that unregistered agreement and documents tailed under such agreement, cannot prove expenses (tax credit) of the taxpayer.

The procedure of state registration of the commercial concession agreements is not regulated for now. The state registrars usually follow two ways: 1) refuse to register referring to the absence of legal regulation on the procedure of state registration of the commercial concession agreements; 2) “register” such agreement approving and sealing it. Whether such actions of the registrar may be considered as “registration” is a disputable question, since the registration usually envisages including respective data bout the object of registration to particular register.

What concerns refusal of the state registrar, we advice to receive it (at least in a written form), like a proof of the fact that the party has carried out all possible actions, aimed at fulfillment of the rules of the Civil Code of Ukraine for registration of such deal.

After receiving the written refusal it is possible to appeal against it in court in the order of administrative legal proceedings claiming to the executive committee of the respective council or administration on acknowledgment of unlawfulness of the actions and obligations to carry out respective actions.

Courts sustain such claims and, according to the court decision, the state employee registers the commercial concession agreement (in particular, see: Volyn Administrative Court Decision № 2а/0370/283/12 dated 23 February 2012 and Lutsk Municipal Regional Court (Volyn region) Decision № 2а-3193/11 dated June 20, 2011) or by means of endorsement or sealing (what has been mentioned before) or by means of registration in a separate register of commercial concession agreements, which is created for this purpose by the state registrar

In particular, the Dnipropetrovsk Commercial Court of Appeal in its decision No. 5013/181/12 dated June 14, 2012 states the following:

“according to the state registrar certificate of the Lutsk City Administration of Volyn region <…> the commercial concession agreement <…> is registered by the state registrar of the Lutsk City State Administration in the Commercial Concession Agreements book…”.

Therefore, the registration of the commercial concession agreement is possible but it will probably take a lot of time and efforts.

In practice one commercial concession agreement is usually substituted by several commercial agreements, for example, license agreements which provide for the right to use particular objects of intellectual property. The legal regulation of license agreements is more developed in Ukraine that is why it is better to use this tool for registration.

Due to the advent of the foreign investors to the market, who begin to use this legal tool, the question arises whether it is obligatory to register the commercial concession agreement with non-resident.

According to Part 3 of Article 1118 of the Civil Code of Ukraine registration of the commercial concession agreement is executed by the state authority which has registered the user even if the right holder is registered in the foreign country.

That is, if the franchiser is non-resident, the agreement anyway is the subject of registration in Ukraine. Even if the foreign state legislation is applied to such agreement, we deem it necessary to register such agreement in Ukraine, since according to Part 1 of Article 14 of the Law of Ukraine No. 2709-IV “On Private International Law” dated June 23, 2005 the rules of this law do not limit the imperative legal norms of Ukraine which adjust respective relations irrespective of this law application.

Current legislation does not provide for the definition of “imperative legal norm” for the national law purposes but according to the definition used in the general legal theory, “it is a legal norm which accurately determines the maxim and categorical injunctions”1. Court practice uses the term “imperative” identical to “imperative legal norm” and denotes obligatory code of conduct which must be obeyed by the subjects of legal relations are obliged to follow not regulating these relations by their own way.

The requirement to the state registration of the commercial concession agreement is imperative proceeding from the abovementioned definition as well as from the current court practice. Therefore, even if the foreign legislation is applied to the franchise agreement, it shall be registered anyway.

Unfortunately, the draft Law of Ukraine “On Franchising” No 8241 of November 8, 2001 does not cancel the obligatory demand for state registration of the Franchising Agreements. However, subpara.3 of Part 3 of Article 4 of the Draft states that the franchise agreement on application of the object protected under the Patent Legislation of Ukraine is also the subject of registration in the Central Body of the Executive Power on the issues of Patents and Samples of goods and services. Subpara. 6 of Part 2 of the said article envisages that the procedure of registration of franchise agreements shall be determined by the executive body, specially empowered by the Cabinet of Ministers of Ukraine.

Another Draft Law of Ukraine “On Franchising” represented on March 1, 2012 by Oleg Laschuk, the President of Federation of development of franchising, hospitality and infrastructure during the session of the Intellectual Property Rights Committee of The American Chamber of Commerce, contains the provisions that such agreement is not liable to state registration. Though, the draft law still requires profound improvement. But in case of its adoption, the barrier on the way of development of this important legal instrument as the commercial concession, will be at last removed.
The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.
References:
1 Law Encyclopedia, Volume 2, K.: “Ukrainian Encyclopedia”, 1999, p.664.

Kind regards,

© TOV "KM Partners", 2012

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