The Franchise Law Review: Georgia

Introduction

The development of franchising in Georgia started in the mid-90s, marked by the establishment in the capital, Tbilisi, of the first MacDonald's restaurant, which, in fact, preceded the introduction of the franchise-specific legislation now found in the Georgian Civil Code adopted in 1997. Since then, the number of international franchises has been gradually growing in all possible sectors, including food and beverage (F&B) retail, hospitality, etc. The influx of tourists and visitors in recent years has seen the necessity of creating a corresponding infrastructure, notably in the country's Black Sea resorts; as a result, international hotel brands that are currently present include Radisson, Sheraton, Holiday Inn, Hilton, Le Meridien, and Best Western, with openings also planned by other international brands.2

Nearly all entrants are established US or European brands. Unfortunately, local franchisors are still in their infancy. Certain local brands, notably in the retail and F&B sectors, have grown, however, to a point where possible expansion via franchising cannot be ruled out in the foreseeable future.

Despite its small market (in terms of both the size and the purchasing power of the population), Georgia offers international brands a sound business environment in general,3 as well as flexible, franchisor-friendly laws to help them structure their deals. Unlike mature western markets, Georgia offers international brands good opportunities to expand their business in a less competitive but growing economy.

Unfortunately, there are no official statistics or governmental reports recording franchising-related data in the country. Similarly, the establishment of franchising associations or similar organisations is still on the agenda.

Market entry

i Restrictions

Foreign franchisors do not face any legal restriction when entering the Georgian market, including for the granting of master franchises or development rights to local entities. In fact, for area development arrangements, which often cover the entire south Caucasus region (Georgia, Armenia, Azerbaijan), it is advantageous to ask the franchisee to incorporate a Georgian entity as a master franchisee or area developer since Georgia provides a sound legal system with no obstacles to enforcement and may generally be regarded as a stable and neutral place from which to operate in all three countries simultaneously.4

Foreign legal and natural persons may freely participate in the equity of a Georgian company or own real property in the country.5

ii Foreign exchange and tax

A foreign investor or entity (after payment of taxes and other charges) is entitled to convert income and funds from local currency to another preferred currency at the market exchange rate at banks in Georgia and repatriate the foreign currency without any limitation. The types of income and funds include: any profits, dividends or assets after sales, proceeds from use of intellectual property rights such as royalties and franchise or service fees, and payments relating to contractual obligations.

Generally, every legal and natural person within Georgia is obligated to calculate, announce, charge and make payments for goods and services exclusively in the national currency, the Georgian lari. However, payments for import- and export-related transactions (including payment of franchise fees) made offshore can be denominated and paid in any currency chosen by the parties. Offshore payments relating to these activities can be made directly into offshore accounts (subject to a resident entity presenting the bank with the reasons for a foreign currency transfer (e.g., referring to the existence of the franchise agreement).

There are no other reporting requirements. Both resident and non-resident legal entities are entitled to withdraw funds from their accounts and transfer an unlimited amount abroad.

It is not necessary for a foreign franchisor to establish a local presence in Georgia. In practice, most franchisors choose not to set up a local entity. Therefore, franchise fees paid to a foreign franchisor are subject to withholding tax unless an applicable double taxation agreement (DTA) provides for exemptions or favourable tax treatment. Favourable DTAs exist with a number of countries, including France, Germany, the United Kingdom and the Netherlands.

Intellectual property

i Brand search

Any interested party may apply and obtain from the Georgian Intellectual Property Centre (Sakpatenti) information on trademarks registered in Georgia. Online searches in the Sakpatenti online database are also available. It is usually best to use local lawyers or patent attorneys to handle these searches and advise on potential conflicts.

ii Brand protection

The Law of Georgia on Trademarks (the Trademark Law) regulates issues related to trademarks, rights of trademark owners, registration of trademarks and their transfer or licensing. Under this Law, a trademark is defined as a sign or combination of signs (words, letters, figures, sounds, a design including the shape of the goods or their packaging, etc.) that may be represented graphically and is capable of distinguishing the goods or services, or both, of one undertaking from those of other undertakings.

Registration of the trademarks does not represent a precondition to selling a franchise in Georgia, but since the owner may avail itself of the rights and protections granted under the Trademark Law only after trademark registration, it is recommended that any relevant trademarks are registered before or shortly after conclusion of the franchise agreement. Trademark registration generally takes up to 14 months from the date of application, but an accelerated procedure is available upon payment of an acceleration fee of US$840. Under the accelerated procedure, registration takes only 10 days, provided there are no queries or obstacles to registration.

Georgia uses the unique Georgian script so registration of a transliterated mark may be considered.

Any natural or legal person may obtain an exclusive right to a trademark by registering it with Sakpatenti. The trademark holder's exclusive right is effective from the date of the registration and entitles the latter to enjoy exclusive rights to the trademark and prevent third parties from using a trademark in the course of trade that is:

  1. identical to the protected trademark and relates to the same goods;
  2. identical to the protected trademark and the goods are so similar that there is a risk of confusion, including confusion based on association;
  3. similar to the protected trademark and the goods are identical or so similar that there is a risk of confusion of the marks, including confusion based on association; and
  4. identical or similar to the protected trademark and protected on account of the good reputation of the trademark in Georgia, so that the use of the mark affords unfair advantages to third parties or damages the good reputation of the trademark or its distinguishing power.

Without first obtaining the relevant consent of the trademark holder, any third party is prohibited from (1) affixing a sign identical or similar to the trademark on packaging materials, labels, tags, etc., and (2) offering, placing on the market, selling, preparing for sale, importing or exporting packaging material or packaging bearing the mark.

Trademarks may be registered with Sakpatenti in accordance with either ordinary or accelerated proceedings. Priority is based on the application for registration. Under both proceedings, a trademark application undergoes examination as to form, as well as substantive examination, and is followed by the trademark's publication, its registration, and issuance of the trademark certificate.

Trademarks are registered for 10 years following their registration date. Registration is renewable for consecutive 10-year terms.

iii Enforcement

In cases of infringement, the trademark holder can enforce its exclusive rights under the Trademark Law against third parties through court proceedings. Injunctions are available in trademark cases. Action can also be taken against a franchisee or licensee if the infringement relates to incorrect use of the trademarks by the franchisee. For example, this would be the case if the franchisee applied the trademark to unauthorised goods. The franchisee may bring an infringement action only with the consent of the trademark owner. The franchisee is, however, entitled to participate in court proceedings for infringement of the licensed trademark rights to secure its right to claim damages from the infringing party.

iv Data protection, cybercrime, social media and e-commerce

The Georgian Law on Personal Data Protection (the Personal Data Protection Law) was adopted in 2011. The Law regulates issues related to management of personal data, information disclosure, modes of data processing, rights of the data processor, administrative sanctions applicable in cases of violation of the statutory requirements, etc. Normally, processing of personal data is subject to express consent by the data subjects. If franchisees process personal data, compliance with statutory procedures and requirements is necessary, including obtaining consent from data subjects.

The Personal Data Protection Law provides that transfer of data abroad is permitted if there are statutory grounds for processing personal data and protection of data is sufficiently guaranteed in specific countries. Order N1 of the Office of the Personal Data Protection Inspector of Georgia dated 16 September 2014 further provides for whitelisted counties. All EU Member States are whitelisted. Intended data transfers to countries not listed in the Order N1 (such as, for instance, the United States) are subject to the prior approval of the Office of the Personal Data Protection Inspector of Georgia.

The Draft Law on Electronic Commerce has been discussed since 2018 but has yet to be adopted by the Parliament of Georgia.

Franchise law

i Legislation

The Georgian Civil Code contains a specific chapter on franchising, which it defines as 'a long-term contractual relationship under which independent businesses are bilaterally bound, as far as necessary, to promote the production and marketing of goods and rendering of services by performing specific obligations'.

The statutory provisions are relatively terse. They are mostly not mandatory in nature and can therefore be varied in the franchise agreement. They are seen as setting minimum standards for franchise agreements, which may be modified or supplemented in individual agreements between private contracting parties. The main points covered by the law concern the following, and these are outlined further below:

  1. obligations of the parties;
  2. duration of the contract; and
  3. requirements of form and content.

Obligations of the franchisor

The franchisor is under an obligation to license to the franchisee certain intellectual property rights. These have to be licensed in the same form in which the franchisor uses them. This covers:

  1. trademarks and trade names;
  2. samples and packaging;
  3. the know-how of the franchisor regarding items such as the methods of management, production, purchase and marketing of the goods; and
  4. other information required for the promotion of sales.

The franchisor also has an obligation to protect the franchisee's operation from intervention by third persons, to develop it consistently and to support the franchisee by sharing business skills and furnishing information and training.

Obligations of the franchisee

In turn, a franchisee is obligated to pay the franchise fee. In the absence of agreement to the contrary, the amount of the fee is calculated taking into account the contribution made by the franchisor to the implementation of the franchise system.

The franchisee also has an obligation to actively conduct the business with due diligence, to purchase goods through the franchisor or through persons named by the franchisor, and not to disclose confidential information.

The duration of the franchise contract may be freely determined by the parties, taking into consideration the requirements for marketing the given goods and services.

The law further stipulates that after expiration of the contract the parties must act fairly when competing with each other. This is generally understood to mean that the franchisee may be prohibited from competing with the franchisor within a specified area for a set period, not to exceed one year.

As to the form, a franchise contract is required to be in written form to be valid. In addition, the contract must also have a certain minimum content to be valid. The contract needs to set out clearly the rights and obligations of the parties, the contract term, provisions on termination or extension of the contract, a description of the franchise system, and other terms the parties deem essential and appropriate.

ii Pre-contractual disclosure

There is a statutory duty of pre-contractual disclosure set out in the franchise-specific provisions of the Civil Code.

The law provides, in general terms, that, at the time of execution of the contract, parties must duly inform each other about the circumstances relating to the franchise, especially the franchise system, and communicate the information to each other in good faith. There are no specific disclosure items detailed in the law and there are no additional requirements relating to the format and content of disclosure nor is there a stipulated minimum number of days that must expire before signing or payment. However, the general pre-contractual duty of disclosure is understood to impose on the franchisor an obligation to disclose to the franchisee all material facts relating to the franchise system. Failure to make full disclosure may theoretically result in claims for misrepresentation and termination of the contract.

iii Registration

There are no franchise registration laws.

iv Mandatory clauses

The franchise law provisions are considered non-mandatory and therefore may be contracted out of by express agreement of the parties. In the absence of an express contractual agreement of the parties in respect of a matter covered by the law, the relevant statutory regulations will take effect and become an implied term of the contract.

Statutory provisions feature basic (descriptive) regulations that are considered essential for a legal relationship to be considered to be franchising within the meaning of the Civil Code (and effectively this means that these provisions operate as mandatory law when the contract is silent). Accordingly, the franchisor has to ensure that the franchise agreement covers these issues as otherwise the statutory position will be implied.

The implied provisions are:

  1. the obligation for the franchisor to license to the franchisee intangible property rights, trademarks and trade names, concepts of management and other information required for the promotion of sales;
  2. the obligation for the franchisor to consistently develop the system and to support the franchisee by sharing business skills and furnishing information and training;
  3. the obligation for the franchisee to pay the franchise fee;
  4. the obligation for both parties not to disclose the information confided to them, even if the agreement is not executed; and
  5. the requirement for the agreement to be in written form.

v Guarantees and protection

In terms of guaranteeing payment or other obligations of the franchisee, both guarantees (i.e., bank guarantees) and other types of securities, particularly the suretyship, may be used. Security can be provided by legal or natural persons. The guarantor may be the owner of the franchisee entity or a third party such as a high net worth individual.

Tax

i Franchisor tax liabilities

Unless a foreign franchisor specifically establishes a corporate presence in Georgia, the conclusion of a franchise contract and the related underlying activities do not constitute the creation of a permanent establishment for the foreign franchisor in Georgia.

When the non-resident franchisor derives income from sources in Georgia, in the form of a franchisee fee, tax is generally required to be withheld at source. The applicable withholding tax rate is 10 per cent. The local franchisee is also obliged to apply reverse charge value added tax (VAT) (i.e., VAT will be recovered or credited by the franchisee).

Georgian taxpayers (i.e., local franchisees) are obliged to deduct withholding tax from payments to non-resident franchisors.

ii Franchisee tax liabilities

Corporate income tax is charged on the profits earned by a Georgian enterprise, including a local franchisee (and foreign enterprises carrying out their activities through a permanent establishment in Georgia), at a flat rate of 15 per cent. Under the new profits tax regime, companies are subject to tax not on their annual taxable profits but, rather, only if or when corporate profits are distributed.

Dividends distributed by Georgian companies (to a natural person or a foreign enterprise) are subject to 5 per cent withholding tax at the source of payment (unless in the case of a non-resident a relevant tax treaty stipulates otherwise). Dividends paid to Georgian enterprises are not taxed at the source of payment.

The VAT rate is 18 per cent.

iii Tax-efficient structures

If a person otherwise subject to withholding tax (e.g., a foreign franchisor with no permanent establishment) is resident in a jurisdiction with which Georgia has concluded a DTA, the withholding tax that would otherwise apply may be reduced or eliminated pursuant to the treaty.

Georgia has signed and ratified DTAs with more than 30 countries and it should be considered in each case whether the country of the franchisor has a DTA with Georgia that may allow favourable tax treatment. These countries include, for example, France, Germany, the United Kingdom and the Netherlands. Foreign tax residency of a franchisor should be proved by submission to the Georgian tax authority of the relevant tax residency certificate issued by the competent foreign authority.

Impact of general law

i Good faith and guarantees

The principle of good faith is recognised by Georgian law and applies to both franchisor and franchisee. Statutory provisions referring to the principle of good faith are found in the chapter of the Civil Code regulating franchising, as well as in the general law of obligations.

The principle of good faith extends to pre-contractual relationships as well as to the manner of performance of obligations and to the mechanisms handling dispute resolution and rights of termination. The principle of good faith impacts on the duty of pre-contractual disclosure in that it requires the franchisor to disclose to the franchisee all material facts regarding the franchise system prior to the execution of the franchise agreement. Failure to disclose material facts can give the franchisee the right to claim damages or terminate the contract.

ii Distributor model

There is no agency-related legislation in Georgia and, in the absence of legislation of this kind, no other legal provisions can be applied by analogy. Competition law may theoretically be applicable and parties to franchise arrangements should comply with applicable legislation by refraining from anticompetitive behaviour, notably price-fixing.

iii Employment law

Franchising is defined as a long-term relationship between independent businesses. That implies that the franchisee is an independent entrepreneur who is being granted certain liberty in conducting its business activities.

However, Georgian case law is silent on the issue of whether a franchisee who is closely supervised and controlled by the franchisor could claim to be an employee and therefore the risk that closely controlled franchising may be treated as employment is remote.

iv Consumer protection

Franchisees are not regarded as consumers and there are no statutory grounds or court practice to indicate any risk that franchisees may be treated as such.

v Competition law

Georgian competition law prohibits basic anticompetitive behaviours such as abuse of dominant market position, vertical and horizontal restraints and cartels. Theoretically, franchise agreements contain vertical constraints. However, the, enforcement of Georgian competition law is generally weak and practically non-existent in the framework of franchise arrangements, save for price-fixing, which is regarded as a hardcore anticompetitive behaviour and should therefore be avoided by the parties to franchise agreements.

vi Restrictive covenants

During the term of the franchise agreement, the franchisee can be prevented from competing with the franchisor and its other franchisees. Even after expiry of the franchise agreement, the parties are under a statutory obligation not to compete with each other unfairly. This is generally understood to mean that the franchisee may be prohibited from competing with the franchisor within a specified area for a set period, not to exceed one year.

If the prohibition against competition might endanger the professional business of the franchisee when the franchisee agrees not to compete after termination, the franchisee may be entitled to reasonable monetary compensation.

vii Termination

Under Georgian law, the franchise agreement is regarded as a long-term contractual relationship. The franchisor may, on legitimate grounds, terminate a long-term contractual relationship such as franchising before the expiry of the agreed fixed term. Grounds are legitimate when, taking into account the specific situation, including force majeure and mutual interests, an early termination is justified. Grounds for termination include breach of material contractual obligations, but a reasonable opportunity to remedy the breach must first be given. A cure period should therefore be set out in the franchise agreement, but if the contract is silent on this point, the law will imply a reasonable cure period. It is typically best to allow time for the implementation of a cure prior to proceeding with termination, unless it is obvious that giving additional time will yield no results. Once the prescribed cure period has expired without the breach being cured, the franchisor may terminate the agreement by written notice. It should also be noted that the franchisee will have a defence against the termination, if the breach is fully or principally attributable to the franchisor. This could be the case if the franchisee had not operated the business to the required standards but was able to show that this was due to the failure of the franchisor to provide proper training and support.

As stated above, the law allows restrictive covenants regarding non-competition to be agreed by the parties. As stated, if the covenant might endanger the professional business of the franchisee, the franchisee will be entitled to reasonable monetary compensation.

Some franchise agreements give the franchisor an option to require the franchisee to transfer the lease for the premises of the franchise business to the franchisor or its nominee on termination. The assignment of a lease agreement is possible in Georgia since Georgian law recognises contracts for the benefit of third parties. Ideally, the franchisor should also be a signatory to the initial lease agreement (along with the franchisee and the lessor) to expressly establish the right of assignment. Long-term leases are subject to registration with the Public Registry of the Ministry of Justice so in that case the rights of the franchisor would have to be registered.

Other tools used by franchisors to ensure the longevity of the local business after termination such as a buy-back option are legally possible under Georgian law but may be difficult to enforce in practice. A pledge and retention of the shares in the franchisee company may be taken to secure the franchisee's commitment.

viii Anti-corruption and anti-terrorism regulation

Anti-corruption legislation imposes specific requirements on public officials with regard to acceptance of 'gifts', which are broadly defined or interpreted, covering any valuable item, property, provision of services, full or partial release from monetary obligation, etc. if they exceed established monetary thresholds.

Violation of the rules has legal consequences for the official concerned (such as imposition of disciplinary sanctions or dismissal), unless bribery can be established, which represents a criminal offence and may result in criminal sanctions for the parties involved (i.e., both bribe-giver and bribe-taker alike).

If the franchisee gave a bribe without the knowledge of the franchisor, the franchisor would not typically be held responsible for this, unless the franchisor and franchisee acted in concert.

Anti-money laundering rules are applicable and transactions exceeding the threshold of 30,000 lari (or the equivalent in any currency) are subject to special scrutiny by monitoring entities.6 Pursuant to applicable anti-money laundering legislation, transactions shall be subject to monitoring if one or both of the following preconditions are met:

  1. the transaction amount exceeds 30,000 lari (or its equivalent in any currency) in both cash and non-cash settlements;
  2. the transaction qualifies as suspicious under the applicable law, namely there are reasonable grounds to suspect that the transaction, regardless of the amount and type, was concluded with the aim of legalising illicit income; or property, including monies, on which the transaction was based has been attained as a result of criminal activities; or the transaction has been concluded with the aim of financing terrorism (a transaction party or the origins of the transaction amount are suspicious, or the transaction is deemed suspicious for any other reason); or any transaction party is on a list of terrorists or persons supporting terrorism, or may be related to such persons, or the funds used in the transaction may be related to or used for terrorism; or the legal or actual address of a transaction party is in a non-cooperative country or territory, or the transfer of funds takes place to or from such a country.

When the transaction is suspicious, regardless of the transaction amount, it is not suspended by the monitoring entity, unless the client cannot be identified or the Financial Monitoring Service of Georgia issue an instruction on the suspension of the transaction (or operation). The monitoring entities are also required to pay close attention to unusual transactions (i.e., transactions that are complex, unusually large or comprised of unusual parts, lacking obvious economic (commercial) reasoning or obvious legitimate aim, or which are outside the usual course of business of the transaction party).

ix Dispute resolution

Since most, if not all, franchises in Georgia are granted by foreign franchisors, agreements normally envisage foreign (non-Georgian) fora or international arbitration as dispute settlement venues.

Georgian private international law allows forum shopping, but it provides that foreign court judgments will not be enforced if, inter alia, (1) the case falls within the exclusive jurisdiction of the Georgian courts (such as cases concerning immovable property located in Georgia), (2) the foreign country has not recognised decisions by a court of Georgia when given the opportunity in the past, or (3) a decision contradicts certain Georgian major legal principles (such as the right to due process and other procedural protections). Franchise agreements do not normally concern immovable property, but care has to be taken if the franchise contains an option over a registered lease. Typically, lack of reciprocity can be an obstacle to enforcement.

Georgia acceded to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards in May 1994. In accordance with the New York Convention, Georgia recognises foreign arbitral awards as binding and enforces these awards in its courts. Recognition and enforcement of foreign court decisions (notably US and UK court decisions) and arbitration awards have in fact become quite accepted as established legal practice.

Mediation is recognised but not practised widely. Injunctions are available and may be indispensable for franchisors against trademark infringements by former franchisees or other third parties.

Georgian private international law confirms that the parties to a contract may choose the law of either one of their countries of organisation, or of a third country, to govern the interpretation of their contract. Contractual choice-of-law provisions will not be honoured if the question relates to certain major legal principles of Georgia. The legal concepts underlying the aforementioned 'major legal principles' are considered 'imperative norms' of Georgian law.

Contractual penalties are enforceable for, inter alia, breach of restrictive covenants, provided the penalties are reasonable and if this is not the case, courts are entitled to decrease the amount payable in specific cases. The underlying principle of compensation is that a party responsible for damage must restore the state of affairs that would have existed if the circumstances giving rise to the duty to compensate had not occurred. If restoration of the original state of affairs is impossible, then monetary compensation may be granted. Damages are normally compensation for actual loss but may extend to lost profit. In the context of franchising, damages may cover repayment of franchise fees and wasted investment cost.

A handful of local law firms provide franchise-related advice and assistance in litigation, notably in the context of international franchising. Court fees are calculated on the basis of a fixed percentage of the value of the dispute and the losing party is responsible for those fees. Attorney fees may be recovered from the losing party subject to application of the statutory cap – which again is a certain percentage of the value of the claim.

Current developments

Soon after the outbreak of the covid-19 pandemic in March 2020, the Georgian government, to safeguard life and the health of its citizens, introduced various regulatory measures restricting or, from time to time, banning operations in various parts of the economy, notably the retail sector. These measures massively affected franchise businesses (particularly, F&B, fashion and retail) and have led franchisees and franchisors to revisit and even renegotiate some commercial terms of their agreements. Franchisees have also launched online platforms and found other novel channels for their goods and services, as well as renegotiating fees and related commercial terms with lessors of commercial real estate.

Footnotes

1 Mikheil Gogeshvili is a partner at MKD Law.

2 Some of these hotel brands may be operating under hotel management agreements.

3 The annual Doing Business report, published by the World Bank and the International Finance Corporation, ranked Georgia sixth in the world for ease of doing business in 2019 (https://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf).

4 This is because of political tensions between neighbouring Armenia and Azerbaijan.

5 The only restriction in respect of property concerns the ownership of agricultural land by foreigners, which is irrelevant in the context of franchising.

6 Monitoring will be carried out by commercial banks, currency exchanges, entities performing money remittance services, brokerage companies, insurance companies, notaries, payment service providers and other persons or entities authorised to conduct monitoring pursuant to applicable laws.

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