Franchising has long been a popular business model worldwide, allowing entrepreneurs to expand their brands and reach new markets. In Pakistan, although specific laws regarding franchising are lacking, the Contract Act, of 1872 governs the relationship between franchisors and franchisees. This blog will outline the essential legal aspects to be considered before starting a franchise in Pakistan.
Understanding the Legal Framework
In Pakistan, franchising contracts are essentially contractual relationships governed by the Contract Act, of 1872. Franchisees enter into agreements that grant them licenses to utilize brand names, logos, products, trademarks, copyrights, and confidential information. While these contracts lack standardization, they typically include clauses allowing franchisors to aid franchisees in exchange for monetary consideration, often through revenue sharing.
In the seminal case of Bolan Beverages (Pvt) Ltd v Pepsico Inc & Others, the Supreme Court of Pakistan has defined a franchise as a privilege granted or sold to use a name, sell products, or provide services. This definition aligns franchise relationships with license arrangements rather than principal-agent relationships, as franchisees obtain licenses from franchisors to conduct their own business operations using the franchisor’s intellectual property.
Protecting Intellectual Property
Intellectual property theft is a significant concern in Pakistan, primarily due to a lack of awareness about intellectual property rights amongst the public. Instances of counterfeit products and deceptive marketing practices are prevalent, such as the unauthorized sale of trademarked products by local fast-food chains, or the establishment of fake restaurants imitating popular brands. A significant example is the widespread sale of KFC’s trademarked ‘Zinger’ burger at numerous local, small-scale fast-food chains. Additionally, in May 2018, the Competition Commission of Pakistan (“CCP”) issued a notice to a counterfeit Starbucks in Lahore.
To curb intellectual property theft and create a conducive environment for franchisors, the CCP plays a leading role. By virtue of the Competition Act, of 2010, the CCP has regulatory and investigative powers to address unfair business practices related to market competition, including deceptive marketing. Their efforts help protect the interests of franchisors and maintain the integrity of their brands in Pakistan.
Repatriating Royalties
Franchisees of international franchisors operating in Pakistan may need to remit royalties to their foreign counterparts. The State Bank of Pakistan (“SBP”) regulates the remittance of royalties for franchises to franchisors abroad, under chapter 14 of the Foreign Exchange Manual. Royalty payments have made for the use of technology and other intellectual property, while Technical Service Fees (“TSF”) have paid for providing services to franchisees.
SBP sets limits on amounts of upfront fees, recurring royalty payments, and the duration of agreements. The limits vary based on the sector, with manufacturing entities permitted to pay an initial lump sum or a one-time fee of up to USD $1 million, and other sectors capped at USD $100,000. The recurring royalty payments are also subject to specific percentages of net sales, depending on the sector.
Embracing Opportunities and Overcoming Challenges
Despite the absence of specific franchising laws in Pakistan, the contractual principles and frameworks govern franchising enabling entrepreneurs to agreements with franchisors to leverage their intellectual properties and benefit from established brands and systems. However, challenges such as intellectual property theft prevail, necessitating efforts from regulatory bodies such as the CCP to protect the interests of franchisors. It is crucial for both franchisors and franchisees to be aware of their rights and obligations, seek legal advice when necessary, and establish clear contractual agreements.
Therefore, starting a franchise in Pakistan requires a thorough understanding of the legal framework, protection of intellectual property, and compliance with regulations that govern the repatriation of payments to international franchisors. Although specific franchising laws are absent, the existing legal principles provide a foundation for franchising operations. With efforts from regulatory bodies and a growing awareness of intellectual property rights, Pakistan’s franchising environment offers significant opportunities for entrepreneurs to expand their businesses and contribute to the country’s economic growth.
Moreover, Visit CxO Global FORUM or CxO News Live for all the latest updates.
