The Franchise Law Review: Singapore
Singapore is an attractive market for franchisors as it is an open economy with one of the most liberal trading regimes in the world. As of 2012, Singapore was estimated to have more than 600 franchise concepts and more than 40,000 franchisees, with the majority of them in the food and beverage, retail, business services and health-care industries.
The franchising and licensing industry accounts for 18 per cent of Singapore's total domestic retail sales volume, and generates a turnover of about S$6 billion. In 2013, its estimated gross domestic product (GDP) contribution was 1.6 per cent of Singapore's GDP, and this is projected to expand rapidly to about 3 per cent by 2017.2 In 2013, the nominal value added in these sectors was S$5.1 billion and S$3.3 billion respectively, with the franchising industry alone accounting for approximately S$1 billion.3
The Franchising and Licensing Association of Singapore (FLA) serves as Singapore's national franchise body and seeks to promote and facilitate the growth of franchising both locally and abroad. Companies may choose to become members of the FLA. The FLA has released a Code of Ethics, which is binding only upon FLA's members.
Foreign franchises are warmly welcomed in Singapore and account for the bulk of franchise sales in the country. The United States is the dominant supplier of foreign franchises in Singapore. Australian franchises, as well as Japanese and Taiwanese franchises, primarily in the food and beverage industry, also enjoy a degree of presence in Singapore; however, with support from the local government as well as industry-led efforts, local players have grown rapidly in recent years, particularly in the food and beverage, child-related and training industries. At the Franchising & Licensing Asia forum held in Singapore in October 2019, there were more than 197 brands from over 15 countries around the world present to showcase their products and services.4
The covid-19 pandemic undoubtedly had a significant impact on the retail and consumer sectors globally, including in Singapore. With mandatory closures and restrictions placed on non-essential services, businesses were severely affected and many were forced to reduce operations or even wind up the business altogether. In response to these challenges, the Singapore government acted swiftly to pass the Covid-19 (Temporary Measures) Act in April 2020 to provide various forms of relief to affected businesses that were unable to fulfil their contractual obligations because of the pandemic and the safe-distancing measures imposed.
Singapore attracts many foreign franchises mainly because of its liberal, pro-business policies and transparent governance. Except in a small number of product areas, Singapore does not generally impose restrictive trade or investment policies on foreign franchises. For example, foreign franchisors are not required to enter into private or official joint ventures, and do not need to relinquish management control to local entities. In addition, Singapore does not restrict foreign ownership of businesses and does not impose foreign exchange controls or taxes on capital gains on foreign franchisors.
ii Foreign exchange and tax
In Singapore, franchisees are not required to comply with any formalities nor seek any approval from any authority when paying royalties to a franchisor. Franchisees are also free to convert royalties to foreign currency for payment to a foreign franchisor, but local franchisees must pay withholding taxes to the Inland Revenue Authority of Singapore (IRAS) on royalties payable to a non-resident franchisor at the prevailing withholding tax rate of 10 per cent subject to variation by virtue of any avoidance of double-taxation agreement (DTA) between Singapore and the home country of the franchisor.
i Brand search
Before a franchisor or franchisee enters the local market to seek to establish itself as a brand in Singapore, it should first conduct relevant searches to ensure that there are no conflicts with, or similarities to, existing brands. The following are the most important searches to be conducted.
To minimise risk of infringement, franchisees should search the local trademark registry, administered by the Intellectual Property Office of Singapore (IPOS), for any existing registered or pending trademarks that could be in conflict with the franchisor's brand; however, such searches are not exhaustive as the local registry only has records of pending or registered trademarks. Unregistered trademarks are not reflected on these records and the owner of an unregistered trademark may be able to lodge an objection with IPOS against the franchisor's application for a trademark if the application mark is similar to the unregistered trademark on the basis of, inter alia, passing off (which is a civil action available at common law) or if it qualifies as a 'well-known trademark' in Singapore.
Business and company name searches
The Accounting and Corporate Regulatory Authority of Singapore (ACRA) maintains a database of businesses and companies registered or incorporated in Singapore. A franchisor or franchisee intending to incorporate a company in Singapore to conduct its franchising business in the country must first reserve with ACRA a valid company name that does not conflict with an existing company name or any business name prohibited by law. ACRA usually takes two business days to approve a name reservation application, as it conducts its own conflict checks on the proposed company name.
Domain name searches
It is good practice to ensure that the desired domain names are available for registration by conducting domain name searches. Even though a particular domain name may be available for registration, that domain name may nevertheless be similar or identical to an existing registered or unregistered trademark. Cybersquatters often register domain names that are also popular trademarks or variants of popular trademarks. Trademark owners typically seek to enforce their rights against cybersquatters by alleging that those domain names were registered in bad faith. Domain name disputes of this type are usually resolved using the Uniform Domain Name Resolution Policy process developed by the Internet Corporation for Assigned Names and Numbers.
Copyright due diligence
Copyright generally automatically subsists upon creation of a work. There is no requirement for copyright to be registered and no registration system for copyright in Singapore. It is important, therefore, to conduct due diligence checks to ensure that the necessary copyright clearances, licences or assignments have been obtained with respect to any source materials used in the franchise's marketing and promotional materials.
A registered patent grants the patent holder the exclusive right to prevent others from making, using, importing or selling the patent without his or her permission. Therefore, use of a patent without the patent holder's permission could amount to patent infringement. To minimise the risk of infringement, franchisors and franchisees should carry out proper due diligence when engaging in business that involves inventions or new technology. To determine if a particular invention is protected by a patent, franchisors and franchisees can search the local patent registry administered by IPOS, or engage a qualified patent attorney.
ii Brand protection
There is no time limit for registering any trademark, therefore a trademark may be used by the owner without the need for registration; however, registration of a trademark confers a wider scope of protection on the trademark.
There are a number of advantages in owning a registered trademark. Unless a trademark is registered, the trademark owner cannot bring an action for registered trademark infringement or seek relief under the Trade Marks Act. A claim for infringement of a registered mark is generally easier to establish than a claim under the common law tort of passing off. The registration of the trademark also serves as a notice to the public of the ownership of the 'proprietor' and interest and rights in the trademark, and potential competitors who conduct trademark searches will be alerted that the registered trademark is not available for their use. In addition, using a mark that is registered also serves as a defence against trademark infringement claims from proprietors who may allege that their trademarks are similar to the mark.
The process to apply for registration of a trademark in Singapore is fairly straightforward. An applicant is permitted to file for several classes of goods or services within the same application (i.e., a multi-class application).5 The applicant may also designate Singapore through the Madrid Protocol (an international registration system of marks administered by the International Bureau of the World Intellectual Property Organization), to which Singapore is a signatory. If the applicant is a national of, is resident in or has a real and effective industrial or commercial establishment in Singapore, it can also consider taking advantage of the Madrid Protocol treaty and filing an international application through Singapore as the office of origin.
Where an earlier claim for the same trademark has already been filed in another Paris Convention country or a World Trade Organization member country, there is a priority claim procedure in place in Singapore. The Singapore application must be filed within six months of the date of the first filing.
Typically, an application will be examined by IPOS within about two to four months of the date that the application is filed. Thereafter, the applicant will be informed whether the application is in order for acceptance and publication, or if there are any objections to the application by third parties.
The trademark registration process is the same for both traditional trademarks such as word marks and logos, and non-traditional marks such as aspects of packaging, sound marks and shape marks. Franchisors may therefore also wish to expand the scope of protection and enhance their competitive edge by putting in place an appropriate protection strategy to protect their brands, which can include both traditional and non-traditional trademarks, depending on the nature of the marks in question.
Confidential information and trade secrets
Franchisors and franchisees should ensure that all parties who may have or have had access to confidential information or trade secrets have signed and are contractually bound by appropriate non-disclosure agreements that provide a sufficient scope of protection over the information. Appropriate non-disclosure agreements should also be put in place prior to disclosing proprietary or sensitive information, even as parties assess the suitability of the franchise partner or the viability of the arrangements at the early stages of discussions (i.e., pre-contractual talks)
Franchisees should ensure that they have obtained the necessary licences or assignments of intellectual property rights from the franchisor in accordance with the general intellectual property laws of Singapore prior to commencing use or exploitation of these rights. Failure to do so may attract civil or criminal sanctions.
Generally, the owner of the intellectual property may be entitled to take legal action against an infringing party by seeking relief in the form of an injunction to stop the infringing action, obtaining profits gained by the infringing party by virtue of the infringement, or seeking damages or compensation for loss suffered because of the infringement. In the event that an intellectual property infringement is committed deliberately and to a significant extent, this may attract criminal penalties such as a fine or imprisonment.
An exclusive licensee is entitled to bring infringement proceedings against any person in his or her own name, if his or her licence so provides. Where this is the case, the exclusive licensee need not join the proprietor as a plaintiff in the action.6 However, for non-exclusive licensees, the right to enforce varies depending on the terms of the licence, as well as the governing law. For example, under the Trade Marks Act, a non-exclusive licensee is also entitled to bring infringement proceedings in his or her own name, unless the licence provides otherwise, but only if he or she has first called on the proprietor to instate infringement proceedings and the proprietor has refused or failed to do so within two months of being called upon. If this is the case, the non-exclusive licensee must join the proprietor as a plaintiff in the action.7 Under the Copyright Act, however, a non-exclusive licensee has no right of action.8
iv Data protection, cybercrime, social media and e-commerce
The Personal Data Protection Act 2012 (PDPA) came into force on 2 July 2014. While the PDPA regulates how organisations process the personal data of individuals, it is not intended to be overly burdensome.
In general, organisations may collect, use and disclose personal data solely with notice to and the consent of the individual. To obtain valid consent, the organisation must notify the individual of the purposes of the collection, use, or disclosure. The organisation must also limit its collection, use, or disclosure of personal data to purposes that would be considered reasonable in the given circumstances, and that the individual was notified by the organisation. If the organisation wishes to use personal data for new purposes, fresh consent must be obtained in respect of these new purposes.
An organisation may only transfer personal data to another country or territory in accordance with the requirements prescribed under the PDPA. This is to ensure that organisations abroad provide for a standard of protection that is equal or greater than that prescribed by the PDPA.
Under the PDPA, organisations that outsource the processing of data to a third party will be held responsible for the acts of that third party and should ensure that its contract with the third party requires the third party to comply with the requirements of the PDPA, whether locally or abroad.
Franchisees and franchisors have to ensure compliance with the requirements under the PDPA, as failure to comply with the PDPA amounts to an offence. In October 2020, a bill was introduced proposing significant changes to the PDPA, to keep Singapore's data protection laws up to date with latest technological developments and global trends, as well as to enhance Singapore's attractiveness as a digital hub for the region. The key changes include larger penalties for breaches, compulsory breach reporting obligations and a new data portability obligation, among others.
On the other hand, there are some specific statutory laws that permit or require organisations to disclose data to law enforcement authorities, particularly where the disclosures relate to an offence. For example, under the Criminal Procedure Code of Singapore, depending on the suspected offence, law enforcement authorities may obtain a warrant to access certain decryption information for the purposes of investigation.
Previously, the Computer Misuse and Cybersecurity Act (CMCA) was in force to protect computers, programs and stored data from unauthorised access, modification, interception and interference. The CMCA was recently amended and split into two separate pieces of legislation.
The Cybersecurity Act 2018 came into force on 31 August 2018. The Cybersecurity Act establishes a framework to oversee and maintain national cybersecurity in Singapore and, most notably, establishes the Cybersecurity Commission. The Act confers upon the Commissioner significant powers to respond to and address cybersecurity threats affecting Singapore. These include powers to seize evidence, examine persons and conduct investigations.
Similarly, cybercrimes are also governed by the Computer Misuse Act. The Computer Misuse Act mirrors the language found in the previous CMCA (as referenced above). The Computer Misuse Act is not technology-specific and defines 'computer' widely, thereby capturing offences committed in relation to cloud services or online platforms. Under the Computer Misuse Act, an aggrieved company may make a police report, which will then be investigated by the Technology Crime Division.
In relation to commercial communications, the Spam Control Act regulates the sending of unsolicited electronic mail in bulk. This may be relevant where an organisation's advertising or marketing strategy involves the sending of electronic messages in bulk to its recipients. The Spam Control Act prescribes certain requirements that may have to be met when unsolicited commercial electronic messages are sent. These requirements include the inclusion of an unsubscribe facility or opt-out function or mechanism, and labelling of the electronic message with ' E-commerce is also regulated under the Electronic Transactions Act, which closely matches the provisions of the UN Convention on the Use of Electronic Communications in International Contracts signed and ratified by Singapore. The Electronic Transactions Act addresses issues that may arise specifically in the context of digital signatures and contracts that are entered into electronically. In general, Singapore has well-developed laws that recognise and support electronic transactions, in recognition of the importance of technology and the internet as part of doing business. To keep pace with the developments in involving e-commerce, franchisors or franchisees should keep a lookout for any legal developments in this fast-moving industry. While there is no legislation specifically and directly governing social media in Singapore, existing laws relating to data protection, cybercrime and e-commerce, as described above, will apply equally to the use of social media by organisations as part of the brand recognition and marketing strategy for their business. Organisations would be prudent to take additional care when making use of social media. While the social media space continues to function in the traditional manner as an online phone book, thereby involving potential data protection and privacy issues, social media is also increasingly playing a dual role as a space for users to gather for the purposes of transacting and offering goods or services for sale, thereby effectively hosting an online marketplace where cybercrime and e-commerce issues may arise. These platforms are also increasingly relied upon as effective marketing tools, as consumers resort more to online sources for information. In August 2016, the Advertising Standards Authority of Singapore published guidelines to supplement the Singapore Code of Advertising Practice, which promotes high standards of ethics in advertising. These guidelines address new advertising issues arising from online marketing platforms such as blogs, Facebook, Instagram and Twitter; for instance: In May 2019, the Protection from Online Falsehoods and Manipulation Act (POFMA) was passed, giving the Singapore government broad powers to issue directions to counteract the virality of online falsehoods and 'fake news', which are easily spread through chat groups and social media platforms. Although the POFMA is only meant to target falsehoods that threaten the wider 'public interest', its effects in relation to social media use should be noted.
E-commerce is also regulated under the Electronic Transactions Act, which closely matches the provisions of the UN Convention on the Use of Electronic Communications in International Contracts signed and ratified by Singapore. The Electronic Transactions Act addresses issues that may arise specifically in the context of digital signatures and contracts that are entered into electronically.
In general, Singapore has well-developed laws that recognise and support electronic transactions, in recognition of the importance of technology and the internet as part of doing business. To keep pace with the developments in involving e-commerce, franchisors or franchisees should keep a lookout for any legal developments in this fast-moving industry.
While there is no legislation specifically and directly governing social media in Singapore, existing laws relating to data protection, cybercrime and e-commerce, as described above, will apply equally to the use of social media by organisations as part of the brand recognition and marketing strategy for their business.
Organisations would be prudent to take additional care when making use of social media. While the social media space continues to function in the traditional manner as an online phone book, thereby involving potential data protection and privacy issues, social media is also increasingly playing a dual role as a space for users to gather for the purposes of transacting and offering goods or services for sale, thereby effectively hosting an online marketplace where cybercrime and e-commerce issues may arise. These platforms are also increasingly relied upon as effective marketing tools, as consumers resort more to online sources for information.
In August 2016, the Advertising Standards Authority of Singapore published guidelines to supplement the Singapore Code of Advertising Practice, which promotes high standards of ethics in advertising. These guidelines address new advertising issues arising from online marketing platforms such as blogs, Facebook, Instagram and Twitter; for instance:
In May 2019, the Protection from Online Falsehoods and Manipulation Act (POFMA) was passed, giving the Singapore government broad powers to issue directions to counteract the virality of online falsehoods and 'fake news', which are easily spread through chat groups and social media platforms. Although the POFMA is only meant to target falsehoods that threaten the wider 'public interest', its effects in relation to social media use should be noted.
There is no separate jurisprudence or regime that relates specifically and solely to the context of franchising. The general laws of Singapore apply equally to franchise-related issues in Singapore.
The FLA, Singapore's national franchise association, has provided a Code of Ethics for franchising, binding only on FLA's members, and which contains provisions on disclosure requirements, contracts regarding existing franchisees, proper selection of franchisees, provision of proper training and business guidance, standards of conduct, notice of breach, rights of termination and dispute resolution, among others.
Additionally, the general laws of Singapore apply to all franchisors and franchisees, regardless of whether they are members of the FLA, and may affect the enforceability of any franchise agreement.
Unfair Contract Terms Act
If any contractual terms are considered unfair under the Unfair Contract Terms Act, they will not be enforceable. Contractual terms are considered unfair if they exclude or restrict liability of any person for death or personal injury resulting from negligence. In the event of other losses or damage, it is also considered unfair if the contractual term provides for an unreasonable exclusion or restriction of liability for such loss or damage.
Misrepresentation under the common law
A franchise agreement may be rendered void on the grounds of misrepresentation under the common law; however, any false statement (whether innocently or fraudulently made) does not, by itself, give rise to a cause of action. It is an actionable misrepresentation only where the false statement has induced the other party to enter into the contract.
ii Pre-contractual disclosure
There are no pre-contractual disclosure regulations relating specifically to the context of franchising.
Apart from the common law rules against misrepresentation described above, which apply equally to franchise-related deals, the FLA's Code of Ethics also prescribes certain rules relating to pre-contractual disclosure.
For example, under the Code of Ethics, FLA's members are prohibited from offering, selling or promoting the sale of any franchise, product or service by means of any explicit or implied representation that has a tendency to deceive or mislead prospective purchasers of such a franchise, product or service.
The Code of Ethics also requires the investment requirements of a franchise to be set out in a detailed and specific manner to avoid being misleading. Additionally, the franchisor is required under the Code of Ethics to disclose to the franchisee at least seven days prior to the execution of the franchise agreement its current operations, the investment required, performance records and any other information reasonably required by the franchisee that is material to the franchise relationship.
Franchises and franchise agreements
There are no requirements in Singapore for franchises or franchise agreements to be registered. However, companies may choose to become registered members of the FLA, in which case they will be required to abide by the FLA's Code of Ethics.
Trademarks used in the franchise
Although there is no mandatory requirement to register any trademarks used in the franchise, it is advisable for the franchisor to do so. The various advantages of obtaining trademark registration have already been discussed (see Section III.ii). More specifically, the trademarks embody the brand in the franchise system, and go a long way in creating the value of the system. Trademarks therefore form one of the key assets of any franchise system and as such would be closely scrutinised by the potential franchisees of the system.
It is not compulsory for trademark licences to be recorded. However, it may be advantageous for franchisees or licensees to register a trademark licence with IPOS. Such a registration serves as prima facie evidence of the grant of the licence. Additionally, a record of the trademark licence serves to put third parties on notice of the existence of the licence and the licensee's interest in the licensed mark. The Trade Marks Act provides for a presumption such that once a trademark licence is entered in the register, every person is deemed to have notice of it (including 'equity's darling' – the bona fide purchaser without actual notice). This presumption therefore goes a long way towards protecting a franchisee who has registered its licence.
iv Mandatory clauses
Under general Singapore laws, there is no requirement for mandatory clauses to be included in franchise agreements, and parties are free to negotiate the terms of the deal.
The FLA's Code of Ethics, binding only on members of the FLA, contains certain requirements relating to the clauses in the franchise agreement. For example, a franchise agreement may be terminated only if there is a good cause, which includes the failure of a franchise to comply with any lawful requirements of the franchise agreement.
v Guarantees and protection
Guarantees from individuals and companies to the franchisor are generally enforceable. Under such a guarantee, the guarantor's liability is defined as having to procure that the franchisee performs its obligations, as well as having to perform him or herself if the franchisee fails to do so; however, it is not common practice for local franchisors to require a guarantee, except for in exceptional cases where the franchisor may have reservations about the franchisee's finances or ability to operate the franchise.
i Franchisor tax liabilities
Franchisors (and franchisees) may choose to operate in any of the following business structures, among others, and must pay income tax as follows:
- sole proprietorship: a sole proprietor carries on business on his or her own behalf and is essentially self-employed (sole proprietors must pay income tax on their profits);
- partnership: profit and loss will be shared equally among partners and each partner will be taxed at personal income tax rates in each individual partner's name;
- limited liability partnership (LLP): each partner will be taxed on his or her share of the income from the LLP (where the partner is an individual or a company, its share of the income from the LLP will be taxed at the personal income tax rate or the tax rate for companies respectively); and
- company: regardless of whether it is a local or foreign company, a company is taxed at a flat rate on its chargeable income.
The Singapore government also offers numerous tax incentives and benefits to businesses as part of its pro-business economic strategy. For example, Singapore adopts a flat, single-tier corporate system that is often regarded as one of the most business-friendly in the world. Under the single-tier corporate tax system, tax paid by a company on its chargeable income is the final tax, and all dividends paid by a company are exempt from tax in the hands of the shareholders.
ii Franchisee tax liabilities
In addition to applicable income taxes, local franchisees must pay withholding taxes to the IRAS on royalties payable to a franchisor that is not resident in the country.
The prevailing withholding tax rate is 10 per cent and can be varied depending on the mutual DTAs between Singapore and the home country of the franchisor. Singapore is a party to comprehensive agreements for the avoidance of double taxation with numerous countries worldwide, including China, France, Germany, India, Italy, Japan, the Russian Federation, South Korea, Switzerland, the United Arab Emirates and the United Kingdom; and has limited treaties with countries such as Hong Kong and the United States.
iii Tax-efficient structures
There is no single most tax-efficient structure for a franchisor or franchisee. Much depends on the scope and level of operations of the franchise and, depending on the particular business entity, operational arrangements and corporate or investment structure that the organisation has adopted, the various tax and deductibility rules that the business can utilise to its advantage. Therefore, seeking professional tax advice to properly plan a business's financial and tax structures is recommended.
Impact of general law
i Good faith
In Singapore, good faith has no general application in commercial relationships that are governed by the terms of a contractual agreement. Accordingly, franchisors and franchisees do not have an implied duty to act in good faith by virtue of the franchise agreement executed by them.
In the case of Ng Giap Hon v. Westcomb Securities Pte Ltd,9 the Court of Appeal held that the doctrine of good faith is very much a 'fledgling doctrine' in Singapore contract law, and therefore did not endorse an implied duty of good faith in commercial contractual relationships. The Court also found it unnecessary to imply a duty of good faith, on the principle that judges should not rewrite contracts based on their own sense of justice.
However, Singapore courts have upheld contracts that contain an express duty to negotiate in good faith in the recent case of HSBC Institutional Trust Services (Singapore) Ltd (Trustee of Starhill Global Real Estate Investment Trust) v. Toshin Development Singapore Pte Ltd.10 In so doing, the court also considered the public interest and broader impact of upholding a principle of good faith in contracts, and held:
In our view, there is no good reason why an express agreement between contracting parties that they must negotiate in good faith should not be upheld. . . . Indeed, we think that such 'negotiate in good faith' clauses are in the public interest as they promote the consensual disposition of any potential disputes. We note, for instance, that it is fairly common practice for Asian businesses to include similar clauses in their commercial contracts . . . We think that the 'friendly negotiations' and 'confer in good faith' clauses . . . are consistent with our cultural value of promoting consensus whenever possible. Clearly, it is in the wider public interest in Singapore as well to promote such an approach towards resolving differences.
Therefore, where a franchise agreement governed by Singapore law expressly provides for a duty of good faith to operate, this duty is likely to be upheld and enforced by the Singapore courts. It is worth noting, however, that the Singapore Court of Appeal recently acknowledged in The One Suites Pte Ltd v. Pacific Motor Credit (Pte) Ltd 11 that 'the law in this particular sphere (viz. good faith) continues to be in a state of flux'. After briefly examining recent decisions in other common law jurisdictions, the Court of Appeal stated that 'the question as to whether or not there is a duty on the part of the parties to cooperate and, if so, what its scope is and what its relationship is to doctrines such as good faith, are all matters that ought best to be decided in a definitive fashion only when they next come directly for decision before the courts'. Therefore, franchisors or franchisees who may be affected should continue to look out for legal developments in this area.
ii Agency distributor model
The general practice in Singapore is for the franchise agreement to expressly state that the parties are independent contractors and are not to be treated as being an agency relationship. Franchisees typically do not operate as agents, as they generally trade in their own name, obtain income for their own account and are ultimately and directly responsible for any goods or services supplied or sold.
Franchising is distinct from a distributorship arrangement because the former does not involve parties being considered the 'seller' or 'buyer' in the business relationship. Typically, franchisees are required to pay royalties for franchising rights. This contrasts with a distributorship relationship, in which the distributor's profits arise from the difference between the cost of manufacturing or obtaining the goods and the price at which the goods are sold.
iii Employment law
There are no reported cases to date where the franchisor–franchisee relationship has been treated as an employment relationship by the courts. However, franchisors may be held liable for the acts of franchisees on the basis of vicarious liability.
Generally, the courts will look at the franchisor's degree of control over the franchisee's business operations, products or supply of services, the extent to which customers are led to believe that the franchisor was responsible for or warrants the quality of the franchisee's goods or services, and the tangible financial or promotional benefits accruing to the franchisor. It would therefore be prudent for franchisors to select their franchisees with care, maintain proper quality controls and provide for such controls in the franchise agreement, obtain appropriate insurance and seek indemnification from the franchisee in the franchise agreement.
iv Consumer protection
The provisions of the Multi-Level Marketing and Pyramid Selling (Prohibition) Act may apply to franchises. This statute was enacted in 1973 to prohibit objectionable features of pyramid selling. However, certain classes of schemes, such as master franchises, are exempted provided they satisfy certain conditions set out in the Multi-Level Marketing and Pyramid Selling (Excluded Schemes and Arrangements) Order.
Examples of these requirements, in relation to a master franchise arrangement or any arrangement where a person is given the right to sub-franchise a franchise, include the following.
- The benefits received by any person under the arrangement may not be a result of, or promoted to result from, the introduction or recruitment of other persons to be participants in the arrangement.
- Promoters of the arrangement may not knowingly make any misleading representation, omit any material particular relating to the arrangement or engage in conduct that is misleading to any material particular relating to the arrangement, and the promoter may not use fraud, coercion, harassment or other unconscionable means to promote the arrangement.
v Competition law
The Competition Act came into force in 2005 and has retrospective effect, applying equally to all agreements made before the effective date of the Act or the relevant provisions. In general, the Competition Act prohibits any agreement that has the object or effect of preventing, restricting or distorting competition within Singapore. Therefore, a franchise agreement will be rendered void to the extent that the franchise agreement prevents, restricts or distorts such competition.
Practices that may be considered anticompetitive include:
- directly or indirectly fixing prices of goods;
- limiting or controlling markets, technical development or investment;
- imposing different conditions to equivalent transactions with other trading partners such that one partner receives a competitive disadvantage; and
- subjecting the conclusion of a contract to supplementary obligations that have no connection with the subject matter of the contract.
The Competition Act provides certain exemptions to and exclusions from the strict application of the provisions in the Competition Act. If a franchise agreement meets all the criteria required for any exemptions or falls within any exclusions, it can be exempted from compliance with the Competition Act requirements.
On 20 July 2020, the Competition and Consumer Commission of Singapore (CCCS) issued a guidance note to provide businesses with more clarity on collaborations between competitors in relation to the supply of essential goods or services in Singapore in response to the covid-19 pandemic. The CCCS acknowledged the exceptional circumstances brought about by the pandemic and clarified that it would recognise the need for collaborations between competitors to be put in place quickly to meet the demand for certain specified essential goods or services in Singapore.
vi Restrictive covenants
As a general rule, unreasonable restraint of trade clauses are against public policy and therefore void and unenforceable under Singapore law. In determining whether a restraint of trade clause is enforceable, the Singapore court will typically take into consideration the duration, extent, scope and nature of restraint, including the duration and geographical boundary of the restriction compared with the term of the franchise agreement and the territory granted to the franchisee. Franchisors should therefore take extra care and diligence in crafting the parameters of a restrictive covenant to ensure that any restrictive clauses are reasonable and are necessary to protect the legitimate interests of the franchisor so as to avoid falling foul of public policy.
Restrictive covenants that place restrictions on the franchisee upon termination of the franchise agreement are subject to principles similar to those that apply to restrictive covenants in general, as described above.
viii Anti-corruption and anti-terrorism regulation
The general laws of Singapore relating to fraud, anti-corruption and money laundering, such as the statutory prohibitions in the Prevention of Corruption Act and the Penal Code, apply equally in the franchising context. There are no laws specifically relating to franchises.
ix Dispute resolution
Dispute resolution mechanism
The FLA's Code of Ethics provides that a franchisor is required to make every effort to resolve disputes with its franchisees with good faith and goodwill through fair and reasonable direct communications and negotiation. If the franchisor and franchisee are unable to resolve the dispute by mutual negotiation, the parties shall seek to have the dispute resolved through conciliation, failing which the dispute may be resolved by whatever means agreed between the parties, whether by arbitration or litigation.
Apart from the Code of Ethics, which is binding only on FLA members, parties to franchise deals are free to opt to resolve disputes by voluntary mediation, arbitration or litigation. Where the deals involve foreign entities, arbitration may be a more favourable option depending on the ease of enforcement of arbitral awards in the country in which the foreign entity or its assets are located.
Many franchise agreements include an arbitration clause instead of resorting to court action immediately. From the franchisor's point of view, arbitration proceedings are valuable as they offer parties a private forum to settle disputes while maintaining confidentiality and privacy over any differences that may tarnish the image and goodwill of the franchise or the parties involved. Further, this confidentiality is desirable to the franchisor so that any decision or settlement reached will not form a precedent for future reference by its other franchisees.
Enforcement of foreign arbitral awards in Singapore
Singapore acceded to the New York Convention of 1958 and subsequently re-enacted most of its provisions in Part III of the International Arbitration Act of Singapore. As a result, Singapore is bound by international law to recognise arbitral awards made in countries that are also signatories to the New York Convention.
Additionally, as Singapore belongs to the Commonwealth of Nations, it has enacted the Reciprocal Enforcement of Commonwealth Judgments Act (RECJA). Therefore, Singapore will recognise judgments made in the United Kingdom, jurisdictions that are part of the Commonwealth and other countries with which Singapore has reciprocal arrangements to mutually recognise and enforce judgments. Generally, an arbitral award from each of these countries will be enforceable in Singapore under the RECJA only if the award has become enforceable in that country in the same manner as a judgment given in its own courts.
The Singapore International Commercial Court
The Singapore International Commercial Court (ICC) was launched on 5 January 2015.
The ICC seeks to build on the existing success of Singapore as a global arbitration hub, and further boost Singapore as a leading centre for international commercial dispute resolution. As a specialised commercial court, the ICC offers litigants the option of having their disputes adjudicated by a panel of experienced judges comprising specialist commercial judges from Singapore and international judges from both common law and civil law jurisdictions. The ICC offers a well-designed court-based mechanism that will enable parties to avoid several problems that may be faced in international arbitration proceedings; for instance, the absence of appeals and the inability to join third parties in arbitration. On the whole, the ICC potentially offers franchisors and franchisees a further reliable and reputable option if they are seeking to have their disputes resolved in Singapore.
In July 2014, the FLA launched new membership categories to better meet the needs of current and future franchisees and licensees: franchisee membership, licensee membership and start-up membership. Franchisee and licensee members will have opportunities to attend educational workshops and networking events, and be exposed to best practices within the industry. Start-up membership will benefit aspiring entrepreneurs (with three business units or fewer) through expert guidance and workshops.
In addition to industry-led efforts, the Singapore government also continues to take a keen interest in promoting franchise development in Singapore, with several government agencies and statutory boards under the Ministry of Trade and Industry playing an active role in franchise development.
One example of this is Enterprise Singapore, which was formed in April 2018 with the merger of Spring Singapore and IE Singapore. Enterprise Singapore administers schemes that provide grants, tax incentives, and other financial assistance to small and medium-sized local enterprises to facilitate growth and enhance innovation and the use of technology within Singapore.
On 25 October 2018, the Enterprise Development Grant (EDG) was introduced (replacing the previous Capability Development Grant) to assist companies in improving business capabilities, innovation and internationalisation. The EDG funds up to 70 per cent of qualifying project costs, such as third-party consultancy fees, software and equipment, and incremental internal manpower costs. In light of covid-19, the government has raised the maximum support level of the grant to 80 per cent for small and medium-sized enterprises, for the period of 1 November 2020 to 30 September 2021.
In addition, Enterprise Singapore also assists and supports local companies to franchise their concepts abroad. Enterprise Singapore administers schemes that provide tax deductions to support various overseas growth activities, such as market preparation, market exploration, market promotion and establishing market presence. Enterprise Singapore also provides financial support and funding to companies in areas such as manpower development, market access and capability building. In particular, the Market Readiness Assistance (MRA) grant provides companies with funds to help with up to 70 per cent of costs incurred for overseas market set-up, covering activities such as intellectual property search and applications, drafting of franchising or distributorship agreements, and other advisory or legal expenses. The MRA grant also supports business-matching activities such as third-party costs incurred in identifying potential business partners in licensee or franchisee arrangements.
With the government's support, local franchises had expanded rapidly over the past few years prior to the onset of covid-19, particularly in the food and beverage, child-related and private education industries. Notwithstanding the ravaging effects of the pandemic, the Singapore government remains committed to economic recovery. In fact, in November 2020, Singapore signed the Regional Comprehensive Economic Partnership, a significant trade pact between the 10 members of the Association of Southeast Asian Nations (or ASEAN) and Australia, China, Japan, South Korea and New Zealand, which will broaden trade links across the Asia-Pacific region, auguring well for the Singapore economy as it battles the global economic crisis.
1 Lorraine Anne Tay is a partner and Just Wang is a senior associate at Bird & Bird ATMD LLP.
2 Speech by Mr Teo Ser Luck, Minister of State for Trade and Industry, at the opening ceremony of Franchising & Licensing Asia 2013, 3 October 2013. See: http://www.nas.gov.sg/archivesonline/speeches/view-html?filename=20131010002.htm.
3 Opening address by Mr Teo Ser Luck, Minister of State for Trade and Industry, at the opening ceremony of Franchising & Licensing Asia 2014, 16 October 2014. See: https://www.mti.gov.sg/Newsroom/Speeches/2014/10/Mr-Teo-Ser-Luck-at-the-Opening-Ceremony-of-Franchising-and-Licensing-Asia-2014.
4 Opening address by Mr Chee Hong Tat, Senior Minister of State for Trade and Industry, at the opening ceremony of Franchising & Licensing Asia 2019, 24 October 2019. See: https://www.mti.gov.sg/Newsroom/Speeches/2019/10/Speech-by-SMS-Chee-Hong-Tat-at-the-opening-ceremony-of-Franchising-and-Licensing-Asia-2019.
5 Official fees are charged on a per class basis.
6 Section 74 Patents Act, S. 45(2) Trade Marks Act and Section 124 Copyright Act.
7 Section 44 Trade Marks Act.
8 Alliance Entertainment Singapore Pte Ltd v. Sim Kay Teck and another  SGHC 43.
9  3 SLR (R) 518.
10  SGCA 48.
11  SGCA 21.