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November 26, 2019

Franchising in Cambodia

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Franchising Insider

This article was first published on Franchising Insider—a blog maintained by US Law Firm Quarles & Brady LLP—and was co-authored by Jay Cohen, partner and director of Tilleke & Gibbins’ Phnom Penh office; Mealtey Oeurn, an advisor in Tilleke & Gibbins’ Phnom Penh Office; and Robert A. Smith, a partner in the Washington, DC, office of Quarles & Brady LLP.

Introduction

Cambodia has a rapidly growing economy with a sustained impressive growth rate of 7.7% between 1995 and 2018 (World Bank, Cambodia Overview). During that time, Cambodia has transitioned from being classified by the World Bank as a low-income country to a lower middle-income country. In addition, a sizable middle class had developed, particularly in Phnom Penh. Along with economic growth, an expanding middle class, and a welcoming investment framework, Cambodia has witnessed the entrance of a number of international franchises, including Burger King, Carl’s Jr., Circle K, Cold Stone Creamery, Domino’s Pizza, Krispy Kreme, L’Occitane, Levi’s, Lotteria, Pandora, and Starbucks, among others.

Regulation

Cambodia has not enacted any comprehensive franchise laws; therefore, franchising is largely governed by laws of general application that implicate franchise issues. While the Ministry of Commerce is in the midst of developing a Law on Commercial Contracts, which purportedly contains a section on franchise agreements, there is no clear timeline for the enactment of this law. In the meantime, franchising is primarily governed by the following laws:

  • The Civil Code
  • The Law Concerning Marks, Trade Names and Acts of Unfair Competition (Trademark Law)
  • The Notification on the Recordal of License Contracts and Franchise Contracts, dated March 12, 2015 (Franchise Contract Notification)

For franchise agreements prepared in a foreign jurisdiction, franchisors should carefully localize the following provisions to ensure they are enforceable in Cambodia:

  • Dispute resolution clauses
  • Intellectual property provisions
  • Guarantee provisions
  • Non-complete obligations
  • Real estate provisions
  • Tax related clauses

In particular, under Article 19 of the Trademark Law, any license agreement for trademarks, including a franchise agreement that contains a trademark license, must impose on the licensor an obligation to effectively control the quality of the goods or services in connection with the mark, otherwise, the contract will not be valid.

In theory, the Trademark Law requires all trademark license agreements to be registered with the Department of Intellectual Property Rights (DIPR). However, in practice, it is only necessary to register a trademark license agreement, or a franchise agreement that contains a trademark license, if the licensor wants to allow the licensee the right to enforce the agreement against third parties (e.g., persons in Cambodia infringing the licensor’s trademarks).

Disclosure and Misrepresentation

While Cambodian law does not require pre-contract disclosure, all information provided in a franchise agreement must be accurate. Under the Civil Code, if a party enters into a contract on the basis of another party’s misrepresentation, that party is entitled to rescind the contract and seek damages from the party who made the misrepresentation. In addition, under the same legislation, a personal guarantee is invalid if the guarantor was not fully informed of all material information regarding the guaranteed obligation at the time that the guarantee was signed.

Intellectual Property

Franchisors typically grant franchisees the right to use trademarks, systems, logos, advertisements, and know-how in connection with the franchised business. Registration issues related to the grant of rights in trademarks, patents and industrial designs, and copyrights, registration issues are discussed below.

Trademarks

Trademark owners are encouraged to register their trademarks with the DIPR to receive protection under Cambodian law. To maintain registration and to avoid cancellation, the owner of the trademark must file an Affidavit of Use/Non-Use for the mark within one year following the fifth anniversary of the date of registration, or within one year following the fifth year from the renewal date (if the registration has already been renewed). A trademark is registered for a term of 10 years from the date of filing the application and can be renewed every 10 years. If the trademark registration is not renewed, trademark protection will lapse. In 2015, Cambodia became a member of the Madrid Protocol, thus trademark rights holders can initiate a trademark registration application at their national or regional intellectual property office, if that country is also a party to the system.

Patent and Industrial Designs

Patent and industrial design licenses must be registered with the Ministry of Industrial and Handicrafts. In addition, Cambodia has entered into international agreements with China, the European Union, and Singapore on validating patents first registered in those countries.

Copyrights

Foreign copyrights are generally not protected in Cambodia unless the work is (i) created by a person who is resident in Cambodia, (ii) created by a person who is a legal person with a registered office in Cambodia, or (iii) first published abroad and is registered in Cambodia within 30 days of the first communication to the public. Therefore, franchisors should understand that manuals and other similar materials may not be protected in Cambodia through copyrights, and other means of protection (i.e., by way of trade secrets) should be sought.

Competition Law

Cambodia does not currently have any specific competition legislation. Although the Ministry of Commerce is currently working on a draft Competition Law, there is no timeline for its enactment.  Even though there is no competition law in Cambodia, it is common for foreign companies to insert non-competition provisions in their franchise agreements to restrict franchisees from engaging in any activities that compete with the franchisor.

Choice of Law and Dispute Resolution

Choosing a foreign country’s law as the governing law for a franchise agreement does not contravene Cambodian law. In practice, however, local courts may be unwilling to apply foreign law to disputes before them. In addition, certain issues (i.e., advertisement approval requirements, real estate and zoning) can only be governed by Cambodian law.

Foreign franchisors should carefully consider the dispute resolution mechanism in their franchise agreements. Foreign court judgments are not enforceable in Cambodia, unless, among other requirements, there is a guarantee of reciprocity between Cambodia and the foreign country in which the court is based. To date, Cambodia has only entered into such an agreement with Vietnam, meaning that virtually all foreign court judgments will not be enforceable in Cambodia.

Cambodia is, however, a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and foreign arbitration awards are, therefore, enforceable in Cambodia. Cambodia also has its own domestic arbitration institution called the National Commercial Arbitration Center. Accordingly, arbitration is the preferred method of dispute resolution in Cambodia.

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