Franchising - Ukraine

Until recently, Ukrainian legislation did not explicitly recognize the concept of franchising, but this did not mean that franchise agreements could not be concluded in Ukraine. Article 4 of the Civil Code states that civil rights and liabilities may arise not only on the basis of national legislation, but also as a result of actions performed by natural and legal persons which are not explicitly regulated by law, but which give rise to rights and liabilities under general civil law principles.

Transfer of IP Rights

As a franchising agreement normally grants the franchisee the right to use the franchisor’s intellectual property, the transfer of a licence to exploit such rights must comply with:

• the Law on the Protection of Rights in Marks for Goods and Services;
• the Law on the Protection of Rights in Inventions and Utility Models;
• the Law on the Protection of Rights in Industrial Designs; and
• the Law on the Protection of Literary and Artistic Works.

Although Ukraine's laws offer extensive protection for IP rights owners, such owners may also rely on the norms and provisions of the various international conventions and agreements to which Ukraine is a signatory, as the Constitution provides that such international agreements prevail over national laws and are part of national legislation.

The transfer of a licence to use elements in which IP rights subsist as part of a franchising agreement may be registered with the Department of Intellectual Property at the Ministry of Science and Education; the franchisor may decide whether the licensing agreement should be registered. A licensing agreement is valid in respect of third parties from the moment of its registration, which becomes official within two months of the relevant documents being submitted.

Civil Code and Franchising Agreements

The new Civil Code includes a chapter on franchising agreements. As in the equivalent Russian legislation, such agreements are termed 'commercial concession agreements'. The code stipulates that:

agreements must be made in writing and signed by duly authorized persons, failing which the agreement is null and void;

parties to the agreement must be entrepreneurs (ie, commercial entities or individuals engaged in business);

the conclusion, amendment and early termination of an agreement must be registered with the franchisor's relevant state registration body (if the franchisor is a Ukrainian resident) or with the franchisee’s equivalent body (if the franchisor is a foreign entrepreneur); and

the franchisor and franchisee may refer to the agreement in their dealings with third parties only once its conclusion, amendment or early termination has been registered with the state.

The code does not require the franchisor to disclose pre-contractual information about the franchise. Therefore, the franchisor is free to decide on the information to be disclosed and the timing of such disclosure.

The code indicates the basic rights and liabilities of the parties. The franchisor is required to:

• register the agreement;
• assist the franchisee in its business, which includes supplying permanent technical and consulting support for the franchisee and training for its personnel;
• monitor the quality of goods and services sold under its trademark; and
• perform its duties relating to independent franchise use (under a master franchise agreement).

The franchisee is required to:

• use the franchisor’s trademark and other symbols under the terms set out in the agreement;
• produce goods and/or supply services of the same quality as those of the franchisor;
• follow the franchisor’s instructions in relation to the character of its intellectual property and the terms and conditions of its use;
• inform customers of its status as part of the franchise;
• protect the franchisor’s confidential know-how;
• undertake not to compete with the franchisor; and
• agree with the franchisor on the location of its commercial premises.

Like its Russian equivalent, the code requires the franchisor to assume joint and several liability for the franchisee’s sale of goods and services. This requirement has proved an obstacle to franchising agreements in Russia and may impede the growth of the sector in Ukraine.

ILO