Thailand currently lacks a specific franchise act. Consequently, the legality of any franchise agreement is determined by its compliance with various existing laws, such as the Civil and Commercial Code, the Trademark Act B.E. 2534 (1991) (as amended), and the Unfair Contract Terms Act B.E. 2530 (1997).
Thailand is a freedom-to-contract jurisdiction. This allows for a high degree of flexibility and autonomy in contractual arrangements, provided that the terms do not violate any laws or public policy and do not fall under the scope of unfair contract terms. Given this, the requirement for fairness in franchise agreement terms often leads to uncertainty, but decisions from the Trade Competition Commission of Thailand (TCCT) can provide guidance on whether specific contentious terms are in fact fair. One issue worth examining in this light is the inclusion of terms on nonrefundable franchise fees and strict purchasing conditions.
Franchise Fee: Unfair to Refuse Refund?
Nonrefundable franchise fees represent a significant upfront investment for franchisees, often becoming a point of contention if the franchise relationship deteriorates or the franchisor ceases operations. Their fairness and enforceability are frequently scrutinized by regulatory bodies like the TCCT, highlighting the critical balance between contractual freedom and franchisee protection.
Faced with one such case, the TCCT considered whether it was unfair for the franchisor to refuse to refund the franchise fee after the franchisor ceased operations. The franchisee had entered into a service agreement on August 2, 2021, and begun operating on October 9, 2021. However, by November 21, 2023, the franchisee was notified that the system would be shut down for maintenance, and by December 26, 2023, the franchisor announced the cessation of operations due to financial losses. The franchisee then requested a refund of the franchise fee.
Unfortunately for the franchisee, the TCCT found that the franchisor’s shutdown and cessation of services were justified by business reasons and that both parties had freely entered into a written agreement containing the clause pertaining to the fee being nonrefundable. The TCCT determined that inclusion of this clause did not constitute an unfair trade practice, so there was no violation under the Trade Competition Act B.E. 2560 (2017).
Purchasing Conditions: Are They Unfair?
Purchasing conditions, particularly those involving practices such as tying, bundling, and conditional sale, are generally considered unfair trade practices under Thai trade competition law, as they can restrict competition and consumer choice. However, the TCCT has, in certain circumstances, recognized exceptions to this general rule. For instance, the franchise agreement between a bubble tea brand and a franchisee contained a purchasing condition that required the franchisee to purchase green tea, Thai tea, and Taiwanese tea from the franchisor. Although there were no problems at the start, there was then a period of over a year where the franchisee did not purchase any green or Thai tea. As a result, the franchisor refused to sell Taiwanese tea unless the franchisee ordered all three teas. The franchisor stated that they had concerns over the quality control and suspected that the franchisee was sourcing the green and Thai tea from another supplier, which would be a breach of the agreement.
In this matter, the TCCT found in favor of the franchisor, ruling that these purchasing conditions, despite potentially resembling tying or conditional sale, were not unfair under the Trade Competition Act in this specific franchise context. The TCCT agreed with the franchisor that these conditions were reasonable, as the franchisor needed to maintain product quality and brand standards, which are crucial for a franchise model. Additionally, the agreement was explicit in its requirement for purchasing all three teas from the franchisor.
This case highlights that the TCCT recognized an exception in this franchise scenario and again shows the importance of ensuring the agreement is clear and that any purchasing conditions align with legitimate business justifications. If the condition is explicit, aligns with accepted business practices, and is demonstrably necessary to ensure brand standards and quality controls, the TCCT may find such conditions not to be unfair, even if they might otherwise be seen as anticompetitive.
Conclusion: Structure Agreements Correctly
The key takeaway from these cases is the importance of having reasonable and explicit agreement terms. It is common for franchise fees to be nonrefundable, and the TCCT decision described above supports franchisors who clearly communicate this term. If the nonrefundable nature of the fee is made clear to the franchisee and both parties sign a memorandum or terms-of-use agreement, the TCCT is likely to uphold the term. However, if the nonrefundable fee is mentioned only in informal correspondence or letters of intent, its enforceability may be subject to the TCCT’s interpretation.
While practices such as tying, bundling, and conditional sales are generally considered unfair under Thai trade competition law, the TCCT may permit such purchasing conditions within franchise agreements if they are explicit, align with brand standards, and are necessary for quality control. Franchisees should be given adequate time to review the terms, and any potentially onerous provisions should be clearly highlighted before signing. This ensures that, in the event of a dispute before the TCCT, the franchisor can demonstrate that the franchisee was fully informed of the terms and their implications.
