Franchising in Pakistan
Akhund Forbes, Karachi
Is franchising based on licences or principal–agent relationships?
In Pakistan, although there are no specific laws regarding franchising, the relationship between a franchisor and a franchisee is governed by the Contract Act 1872. Franchisees enter into, essentially, contractual relationships and acquire licences to utilise brand names, logos, products, trademarks, copyrights and confidential information to conduct their own business operations. While these franchising contracts lack standardisation, they typically include clauses that enable franchisors to assist franchisees in their business operations for due consideration, usually through revenue sharing.
The Supreme Court of Pakistan, in the case of Bolan Beverages (Pvt) Ltd v Pepsico Inc & Others, laid out the definition of 'franchise', ie, 'a privilege granted or sold, such as to use a name or to sell products or service. The right given by a manufacturer or supplier to a retailer to use his product and name on terms and conditions mutually agreed upon'.
The judgment further elaborated that this definition makes franchise relationships similar to licence arrangements, and not principal–agent relationships, which require the agent to act, incur liabilities, accept payments from third parties, etc on the principal’s behalf. Essentially, pursuant to the terms of the contract, franchisees obtain a licence from the franchisor to carry out their own business operation using the franchisor’s trademarks and other intellectual properties.
The role of intellectual property in Pakistan’s franchising
Intellectual property theft is prevalent in Pakistan due to a lack of awareness among the general public regarding intellectual property rights. A notable example is the widespread sale of KFC’s popular and trademarked 'Zinger' burger at numerous local, small-scale fast-food chains. Additionally, in May 2018, the Competition Commission of Pakistan (CCP) issued a notice to a counterfeit Starbucks in Lahore. The Competition Act 2010 grants the CCP regulatory and investigative powers to address unfair business practices related to market competition, and section 10 of the Act specifically addresses deceptive marketing, such as a local restaurant falsely presenting itself as another well-established restaurant through deceptive advertisements, as was the case with the fake Starbucks restaurant in Lahore. The CCP has played a leading role in combating intellectual property theft and creating a favourable environment for franchisors to expand into Pakistan.
Repatriation of royalties to franchisors abroad
Chapter 14 of the Foreign Exchange Manual issued by the State Bank of Pakistan regulates the remittance of royalties for franchises to franchisors outside Pakistan. Royalty is defined as payments to be made to the franchisor for the use of their technology and other intellectual property, while the Technical Service Fee (TSF) is defined as the owner’s use of technology to provide services for users (franchisees) for certain consideration.
Entities in the manufacturing sector are permitted to pay an initial lump sum or a one-time fee to a foreign collaborator providing Royalty/Franchise Technical Service (RFT) services up to USD $1m with recurring payments not to exceed eight per cent of net local sales or ten per cent of net export sales. The maximum duration of agreements is set at ten years for general manufacturing and 15 years for export-related manufacturing. However, if the upfront fee is to be remitted beyond these limits, the combined amount of the additional upfront fee and the recurring royalty should not surpass the stipulated percentage of net sales.
For entities in the agriculture, social, infrastructure and service sectors, including international food chains, the initial lump sum or one-time fee is capped at USD $100,000, and recurring payments cannot exceed five per cent of net local sales, while the duration of these agreements is restricted to five years. For the use of a brand name, the RFT fee is capped at two per cent of net sales. The financial sector entities, regulated by the State Bank of Pakistan or by the Securities and Exchange Commission of Pakistan, must approach the Foreign Exchange Operations Department on a case-by-case basis for any RFT payments. In addition, RFT fees are not payable to franchisors for products that are not in their core products and are sold under a different brand name; for example, a Pakistani McDonalds franchise does not have to pay royalties to McDonalds on the sale of Coca-Cola.
Despite the absence of specific franchising laws in Pakistan, the industry revolves around contractual principles and frameworks and operates through licences rather than principal–agent relationships. Franchisees enter into contractual agreements with franchisors to utilise their intellectual properties, as seen in the McDonalds franchise model, and are required to pay royalties and technical service fees in accordance with the State Bank of Pakistan’s Foreign Exchange Regulations. Challenges such as intellectual property theft persist, necessitating efforts from organisations such as the Competition Commission of Pakistan to protect the interests of franchisors. Furthermore, the repatriation of royalties is regulated by the State Bank of Pakistan, which establishes guidelines for lump-sum fees and recurring payments. The existing legal framework presents significant opportunities in Pakistan’s franchising environment.