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Franchising in Laos

Franchise & Distribution Alert Robert A. Smith, Dino Santaniello

Introduction

Hidden between some of the most prominent powerhouses in Asia—China, Thailand, and Vietnam—Laos has often been overlooked by foreign investors seeking to capitalize on investment opportunities in the region. However, thanks to an increased commitment from the government to ease restrictions on foreign direct investment (FDI) and efforts to create a more well-rounded economy that is less dependent on natural resources, Laos has witnessed a surge of new franchise operations over the past few years. From food and beverage operators to car rental providers and clothing retailers, these new franchises represent a variety of different industries and help to diversify the Lao economy. To date, some of the most well-known brands present in Laos include Avis, Café Amazon, Mini Big C, Pizza Company, and Texas Chicken (the overseas version of Church’s Chicken).

Regulation

While there are no specific franchising regulations in Laos, there are a number of other pieces of legislation that govern franchises in the country.

The Decision on Wholesale and Retail Businesses 2015 No. 1005/MOIC.ITD, dated May 22, 2015, defines the term “franchise” and stipulates that general wholesale/retail activities can be carried out under this definition. While there are no prohibitions on foreigners who wish to invest in a franchised business, there are specific requirements and restrictions on FDI. For example, the minimum registered capital imposed on foreign investors will depend on the share equity held in the company carrying out the franchised business. Depending on the business activities of the franchise, additional restrictions on the ratio of shares between foreigners and Lao nationals may apply.

Because there is no law on franchising, there are no specific provisions that must be included in franchise agreements in Laos. However, all franchise agreements are governed by the common rules of the Law on Contract and Tort No. 01/NA, dated December 8, 2008 (Contract and Tort Law), and the Law on Notary No. 11/NA, dated November 26, 2009 (the Notary Law). Specifically, the Law on Notary provides that a contract must be certified by the Notary Office of the Ministry of Justice or one of its related departments (for certification purposes, a Lao version of the contract will be requested). This certification is important because it proves that a contract is valid and, thus, enforceable against a third party.

There are no statutory pre-contract disclosure requirements in Laos.

Good Faith

While the Contract and Tort Law provides for a duty of good faith in the performance of contracts, it fails to provide a definition of what “good faith” requires under Lao law. This legislation also remains silent on the duty of good faith during negotiations of franchise agreements. Generally, good faith should be construed as performing a contract with the intention to defraud the other party, or to act with malice; however, the study of precedents in Laos remains challenging, making it difficult to assume an interpretation of the term that may be given by the Lao People’s Court.

Intellectual Property

There is no requirement to register a trademark under Lao law; however, brand owners are strongly advised to do so if they have plans to use and distribute products or services bearing the trademark in the Lao market. Laos uses the first-to-file system for trademark registrations, meaning that the first person to file a trademark will own the exclusive rights over that mark. According to the Law on Intellectual Property No. 38/NA, dated November 15, 2017 (the IP Law), registration of a trademark gives the registered owner the ability to act against infringers and to enforce their rights. For instance, a trademark owner in Laos has the right to enlist the assistance of the authorities to conduct seizures of counterfeit or imitation goods, provided that the mark owner has provided certified evidence that the goods are indeed fake.

According to the IP Law, copyrights do not need to be registered in order to be protected; those rights are granted immediately, without registration requirements, when a work is created. However, the owner of the work is advised to issue an official notification to claim copyright ownership, which can be used as strong evidence in the case of a violation or dispute.

Similarly, trade secrets are expressly mentioned under the IP Law, and also do not require registration in order to be protected. Trade secrets will remain protected as long as the information (1) remains confidential; (2) has trade value; and (3) is not easily accessible.

Competition Law

The Law on Business Competition, No. 60/NA, dated July 14, 2015 (the Business Competition Law), sanctions the act of imposing different prices or terms of purchase/sale for the same goods or services. Accordingly, a franchisor cannot treat any of its franchisees differently than others. Similarly, the Business Competition Law prohibits the imposition of terms and conditions through a sale/purchase agreement, and the act of forcing the performance of obligations which are not required by contract. This provision aims to protect franchisees from franchisors who may attempt to abuse their power during negotiations or during the performance of the contract. Finally, the Business Competition Law expressly prohibits price fixing. As such, franchisors are not permitted to impose a price related to their goods/services upon franchisees, except in very particular circumstances.

Non-compete clauses that amount to an absolute or excessive restraint of trade are not permitted. What is usually permissible, however, is a reasonable restraint that is narrow in scope and specific to the circumstances. Despite the absence of case law defining a reasonable scope for a non-compete provision, provisions with a very narrow scope relating to specific circumstances would likely be enforceable. For these reasons, post-contractual non-compete clauses should be drafted carefully, identifying a reasonable and clearly defined scope.

Taxation

Under the Law on Tax No. 70/NA, dated December 15, 2015, a 10 percent withholding tax applies to payments made with respect to dividends and a 5 percent withholding tax applies to intellectual property royalty fees.

Taxation rates may differ from those prescribed in the law (and outlined above), if the recipient of the payment is from a country that has signed a double taxation agreement with Laos. Currently, this applies to Brunei, China, Luxembourg, Malaysia, Myanmar, North Korea, Russia, Singapore, South Korea, Thailand, and Vietnam.

Dispute Resolution

In Laos, there is no dispute resolution body with specific responsibility for handling franchise disputes. Generally, franchise operators in Laos prefer to remedy disputes by filing complaints with the relevant administrative bodies (determined by the nature of the dispute), instead of filing complaints with the Lao People’s Court. Mediation is often considered a prerequisite to filing a complaint with the Lao People’s Court.

Laos is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Accordingly, foreign arbitral awards are recognized and enforceable in Laos. However, local regulations provide a number of conditions that must be met prior to the recognition and enforcement of a foreign arbitral award. Among other things, these conditions include requirements that the foreign arbitral award does not affect the sovereignty or contradict the laws of Laos, and does not affect the “peace and orderliness” of Lao society.

Dino Santaniello is the head of Tilleke & Gibbins’ office in Laos. He regularly advises and represents global franchisors, across a range of industries, as they prepare to enter and capitalize on the expanding Lao market. Bob Smith is a partner in the Washington, DC office of Quarles & Brady LLP. He has represented franchisors for almost 40 years in a variety of transactions, including franchise deals in more than 80 countries.

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