Running a Franchise in Singapore: What To Look Out for as a Franchisee
When you buy a franchise, what you are really buying is its intellectual property e.g. a licence to use its trade-mark and the franchisor’s know-how, among other intellectual property rights.
As there are currently no specific franchising laws in Singapore which require a franchisor to make any specific disclosures about the franchise, it is important that you conduct your own due diligence and find out as much as you can about the franchise as possible.
As the franchisee, you are likely to be in a weaker bargaining position than the franchisor. Therefore, you will want to make sure that the franchise terms are fair to you.
Here are some things to take note of.
Payment of Royalties
When making royalty payments to a foreign franchisor who is not considered to be “resident in Singapore” as defined by the Income Tax Act, you are liable to pay withholding tax to the Inland Revenue Authority of Singapore (IRAS). Failure to do so on time can attract fines.
You can read more about paying withholding tax in our other article.
The franchisor may include non-competition clauses in the franchising agreement that may operate both during and after the duration of the franchising agreement. Make sure to read these carefully. These non-competition clauses may be void if they are found to be unreasonable in scope and duration.
You can read more about non-competition clauses in our other article.
Legal Actions against the Franchisor for False Statements/Misrepresentations
Because the franchisor will know much more about the franchise than you, there will be instances where you have to rely on the representations of the franchisor. If there are misrepresentations, you may be able to bring an action for tort of deceit. Generally, these are the elements of the tort of deceit:
- Representation of fact made by words or conduct.
- Representation made with the intention that it should be acted upon by the plaintiff, or by a class of persons which includes the plaintiff.
- The plaintiff had acted upon the false statement.
- The plaintiff suffered damage by acting upon the false statement.
- The representation was made with knowledge that it was false; it was wilfully false, or at least made in the absence of any genuine belief that it was true.
Alternatively, it is also possible to bring an action under section 2(1) of the Misrepresentation Act.
Termination of the Franchising Agreement
The franchising agreement should make provisions for the termination of the franchising relationship. Make sure to read and understand those provisions. As the franchising agreement is essentially a contract, the means of “getting out” of the franchising agreement is largely governed by contract law.
Where the franchisor has breached a term of the franchising agreement, that by itself does not give you the right to terminate the agreement unless:
- The franchisor breached a term of the contract which was intended by both parties to be so important that any breach of it would entitle you to terminate the contract
- For example, the case The Best Source Restaurant Pte Ltd v Wan Chai Capital Holdings Pte Ltd involved a franchising agreement where the franchise business was a restaurant. The franchisor breached the contract by failing to provide the franchisee with adequate recipes. The court found that it was the common intention of both franchisor and franchisee that the franchisor’s obligation to provide the franchisee with full details as to how to run the business, was an important one. Hence, when the franchisor breached that obligation, the franchisee was entitled to terminate the contract.
- The franchisor breached a term such that you were deprived of substantially the whole benefit which it was intended that you should obtain from the franchising agreement
You probably take on a franchise so that you would not have to spend the time and money to build your own brand and operations. Read the contract carefully to know what you are getting yourself into.
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