Ukraine: Hidden Dangers for Franchisors

Franchisors either in the Ukraine or looking to enter the Ukraine will need to carefully consider their franchise agreements in light of a recent franchise decision of the Ukraine courts.

In a recent Ukrainian case, the Lower Commercial Courts ruled that a franchise agreement which was not registered with the Ukranian authorities was invalid. However, the Higher Commercial Court overturned this decision ruling that the agreement was still valid between the parties who signed it, but not third parties. The agreement was then referred back to the Lower Commercial Court for interpretation.

The franchisor's claim that the franchisee sold poor quality products failed as there was no evidence of inspection of the products by the franchisor. In addition the franchisor failed to provide any appropriate evidence - which the court stated as 'duly executed documents and testimony' - that the franchisee had actually hindered the franchisor's inspection attempts.

The franchisor also claimed that the franchisee was in breach of its ongoing payment obligations in respect of royalties and advertising fees.  Interestingly the court held that the cumulative effect of the franchisor's failure to deliver service books and certain software programs (and enter into the appropriate licences) negated not only the franchisee's payment obligations but also the indemnity provision in respect of any losses suffered by the franchisor flowing from the franchisee's conduct.

The franchisor also claimed that the franchisee had infringed its intellectual property rights by using the trade marks in an incorrect manner.  The court held that as the appropriate intellectual property licence provisions had not been entered into between the parties it could not uphold the franchisor's claims.

In summary franchisors in the Ukraine must ensure that:

• all obligations on franchisees (including, for example, the payment of fees, quality of products, delivery of products and the method of confirming receipt) are clearly stipulated in the agreement;
• intellectual property rights must be correctly protected in the territory and the licensing terms clearly stipulated;
• any claims brought by a franchisor for breaches by the franchisee, must be substantiated by documentary evidence and not tarnished by breaches by the franchisor of its obligations. 

Last year's franflash noted that a provision should be included in Ukraine franchise agreements dealing with registration of the agreement with the Ukraine authorities. As the issue is one which has been highlighted by the Ukraine courts, this is still advisable. 

For more information please contact Mark Abell, Babette Märzheuser-Wood or Graeme Payne.