Franchising in the Republic of Kazakhstan
Franchise & Distribution Alert 06/27/19 Aliya Seitova, Robert A. Smith
The franchise market in Kazakhstan started to develop in the mid-1990s. The Kazakhstan Franchising Agency (KFA) estimates that the number of foreign brands currently franchising in Kazakhstan is close to 500 (and will grow to 550 by 2020), with an estimated 3,000 franchised outlets employing over 30,000 people and estimated annual sales of US $2.5 billion. According to the KFA, there are about 30 domestic (local) franchises with over 200 franchised outlets.
The Civil Code contains provisions dealing with package business licenses (franchises). In 2002, the Franchise Law, regulating the franchise relationship, was passed in Kazakhstan. The legislation establishes the principle of freedom of contract and that the terms of an agreement are determined at the parties’ discretion, except for situations where the law prescribes the content of a specific term.
If one of the parties to a franchise agreement is a foreign resident, the parties may elect a foreign law as the applicable law. However, the imperative rules of Kazakhstan legislation are applicable, regardless of the governing law chosen.
Thus, a franchise agreement must identify the intellectual property objects that comprise the subject of the franchise. The agreement also must specify how a franchisee may use the intellectual property objects, the period for which the right of use is transferred and the territory is covered by the franchise agreement. A franchise agreement also should contain conditions regarding the quality of goods and services and the ability of the franchisor to inspect the quality of goods produced and/ or services rendered by the franchisee.
Presale Disclosure and Misrepresentation
Kazakhstan law requires presale disclosure to a prospective franchisee, but does not contain any requirement as to the amount and type of information to be disclosed. There is a general obligation that a franchisor must disclose information to a prospective franchisee on the rights to be granted pursuant to the franchise agreement. The parties should determine independently the extent of the disclosure. A franchisee has a corresponding obligation to not disclose the information received and to be liable for losses caused to its franchisor as a result of a breach of this non-disclosure obligation.
Kazakhstan law does not impose any civil liability for losses caused as a result of the failure of a franchisor to provide presale disclosure or to otherwise properly satisfy its pre-contractual obligations. However, liability may exist where the contract execution was facilitated by fraud or willful misrepresentation. In that case, a court may invalidate the agreement.
If a contract is invalidated, each party must reimburse the other party for all things received by it under the transaction and, if the return in kind is not possible, pay the value of the property to be returned, the cost of the use of property, or completed work or services. In addition, a court may award damages from the party whose actions invalidated the transaction in favor of the other party.
Trademarks and industrial property objects (inventions, useful models, patent designs) must be registered in order to be protected in Kazakhstan. Copyrighted objects are protected from the moment of their creation (their expression in physical form), and registration is at the discretion of the authors. Commercial secrets, which are often the subject of franchise agreements, are protected if the following conditions are met: (a) information that constitutes the commercial secret has actual or potential commercial value by virtue of it being unknown to third parties; (b) there is no free access to it on legal grounds; and (c) the holder of the information takes measures to secure its confidentiality.
If a franchise agreement includes registrable intellectual property objects, the agreement is subject to registration with the local Trademark and Patent Office. Registration in practice takes 10 business days and requires two Russian language originals of the agreement and payment of the official fee. Kazakhstan law does not regulate which party is responsible for the registration, it is left to the parties. In practice, the franchisor most often assumes this duty.
Kazakhstan’s competition law excludes agreements for the use of intellectual property objects (including franchise agreements) from the legislation provided the agreement has not led or cannot lead to the restriction or elimination of competition.
According to the Civil Code, a franchise agreement may contain restrictive conditions, for example, the obligation of the franchisor not to issue similar licenses to third parties and/ or to refrain from similar activities in the territory covered by the franchise agreement. A franchise agreement also may contain a noncompete obligation on the franchisee's part.
Price fixing and setting maximum or minimum prices by a franchisor, the sale of goods and rendering of services to a certain category of customers or customers having a location in a territory specified in the agreement by the franchisee are not permitted and will render those parts of the franchise agreement void.
Under the Personal Data Law introduced in 2016, personal data can be collected, processed and transferred abroad only with consent of the subject of personal data. Under this rule, databases containing personal data (for example, personal data of local customers, employees etc.) must be stored in Kazakhstan.
Parties to a franchise agreement may choose the dispute resolution method to be used. There is no established practice for using a particular dispute resolution method. Kazakhstan, however, is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Aliya Seitova is an associate, trademark and patent attorney in Dentons’ Almaty office. She has experience of representing clients before the local Trademark and Patent Office, and actively works on assignment and licensing/ franchising of companies’ copyright, trademark and patent rights. 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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