Understanding the Franchise Agreement: A Business Owner’s Guide in Singapore

A franchise agreement is one of the most critical documents in a franchising relationship. It sets out the legal framework that governs the partnership between the franchisor and the franchisee, answering essential questions about fees, obligations, and rights. For business owners in Singapore, understanding this document is crucial to protecting your interests and ensuring compliance with local laws.

What a Franchise Agreement Includes

A well-crafted franchise agreement provides answers to key questions that will arise during the course of the franchise relationship:

• What fees and payments does the franchisee owe?
• What is the duration of the franchise agreement?
• What rights and restrictions apply to the use of the franchisor’s branding and intellectual property?
• Does the franchisee need to purchase specific equipment or products from the franchisor?
• Is the franchisee required to participate in marketing or promotional activities?
• What are the conditions if the franchisee wishes to sell the franchised business?
• How are disputes handled?
• Under what circumstances can the franchise agreement be terminated?
• What obligations remain after the franchise agreement ends?
   

What is Required to Form a Franchise Agreement?

In Singapore, a franchise agreement typically involves the following elements:

• The franchisor grants the franchisee the right to operate a business using a specific system or marketing plan.
• The business is associated with trademarks or other commercial symbols licensed by the franchisor, often protected under Singapore’s Trade Marks Act.
• The franchisee agrees to make payments to the franchisor for the right to operate the business.

Franchise agreements in Singapore must meet the legal standards set by local laws, but they can be written, oral, or implied. Franchisees must carefully review all terms and conditions, as these agreements often include obligations that last for years.

What’s Allowed in a Franchise Agreement?

Franchise agreements in Singapore, like many other jurisdictions, are typically drafted by the franchisor and may favor their interests. However, Singapore’s laws—particularly contract law and consumer protection provisions—place limits on what can be included in such agreements.

Some key restrictions in Singapore include:

• Competition Law: Under the Competition Act, certain practices such as resale price maintenance and exclusive dealing that harm competition are regulated.
• Unfair Contract Terms: Singapore’s Unfair Contract Terms Act (UCTA) applies to certain contracts, limiting the extent to which liability can be excluded by the franchisor. This ensures that franchise agreements do not contain grossly unfair terms that disadvantage the franchisee.
• Good Faith and Fair Dealing: Though not always explicitly required by Singapore law, there is an expectation of good faith and fair dealing between franchisors and franchisees. Franchisors must provide disclosure documents to prospective franchisees, as mandated by industry best practices, including detailed information on fees, obligations, and potential risks.

Additionally, Singapore adheres to international IP protection standards through agreements such as the Paris Convention and the Madrid Protocol, which impact how franchisors handle trademarks and intellectual property in franchise agreements.

Protection from Unfair Contract Terms

Franchise agreements in Singapore are often considered standard form contracts, especially for small businesses. This means that many franchisees may not have significant room to negotiate terms, but they are protected under the Consumer Protection (Fair Trading) Act (CPFTA) and the UCTA, which prevent the enforcement of unfair contract terms.

A term is deemed unfair if it:

• Causes a significant imbalance in the rights and obligations of the parties.
• Is not reasonably necessary to protect the interests of the party that benefits from the term.
• Causes detriment to the other party if enforced.

Franchisees are encouraged to seek legal advice before signing to identify any unfair terms and ensure compliance with Singaporean law.

Changing a Franchise Agreement

In Singapore, franchisees can negotiate changes to an agreement before signing, though the franchisor is not required to agree to these changes. During the disclosure period, the franchise agreement must be provided in its final form, with only minor changes allowed for clarification, updating particulars, or correcting errors. Once the agreement is signed, any changes usually require mutual consent unless the agreement permits unilateral variation.

Franchisees should also be aware of the Unfair Contract Terms Act (UCTA), which governs clauses that seek to limit or exclude liability, especially in standard agreements. UCTA protects parties from unreasonable or prejudicial terms, ensuring that liabilities, such as for negligence, cannot simply be excluded without reasonableness being tested. This is crucial in franchise agreements, where certain clauses could be deemed unfair and unenforceable under UCTA, particularly when it comes to consumer protection.

Unilateral changes must comply with the Franchise Code of Ethics, adopted by the Franchising and Licensing Association (FLA) (Singapore). This code promotes transparency and fair dealing in franchise relationships, requiring disclosure of past variations and future instances where the agreement may be unilaterally changed.
 

Take Control of Your Franchise Journey with the WSQ Navigating Franchise Laws and Agreements (FLAGS) Course

For business owners in Singapore, franchising is a powerful avenue for growth, but navigating the complexities of franchise agreements can be challenging. The WSQ Navigating Franchise Laws and Agreements (FLAGS) course, offered by FLA (Singapore), is designed to give you the knowledge and tools you need to manage your franchise agreements with confidence.

This 2-day course covers:

• Franchise Contracts: Understand how to draft and manage franchise agreements in line with Singapore’s IP and contract laws.

• Legal Compliance: Learn how to ensure your agreements comply with local laws such as the Competition Act and Unfair Contract Terms Act.

• Negotiation Skills: Develop effective strategies for negotiating terms that protect your business.

• Intellectual Property Management: Gain insights into managing your brand and trademarks under Singapore’s IP laws.

With up to 70% funding available and SkillsFuture Credits eligibility, this course is an essential investment for any business owner or franchisee operating in Singapore.

Equip yourself with the legal expertise to protect your business and ensure your franchise agreements comply with Singapore’s laws. Register for the WSQ Navigating Franchise Laws and Agreements course today. Visit FLA’s registration page or contact us for more information.