And now let's discuss a special provisions in franchise agreement.
Apart from standard contract provisions,
our party may include special provisions concerning their business relations.
This may include obligation of the right holder
not to grant other persons similar IP rights.
The user's obligation not to compete with the right holder,
and not to enter into similar franchise agreements with competitors of the right holder.
User's obligation to obtain approval of the right holder concerning location
of the business premises, as well as their internal and external design.
This is connected with corporate image of the business.
And also their right holder's right to determine or fixed prices,
to establish the upper or lower limit of them,
all together, upper and lower limit of them.
And so, the parties are free to do that.
And now let's turn to drafting of a franchise agreement.
As we have seen in Russian Civil Code provisions are very general.
They do not contain detailed regulations concerning franchising,
it just have a legal framework as we say.
Therefore drafting of such contracts requires a lot of care
and attention in order to eliminate specific risks,
and to balance rights and obligations of the parties.
Many of these risks, and many important provisions,
are not mentioned in the Civil Code at all.
And I may recall about such standard risks
and provisions as duty of disclosure of information of the right holder exclusivity,
quality, liability, provisions of franchise agreements,
procedure for termination or renewal of the contract.
So, the parties would have to decide about these issues themselves.
And I may also recommend to use international soft law instruments such as,
if you need UNIDROIT guide to international master franchise arrangements,
or a UNIDROIT model franchise disclosure law,
they may help in structuring and drafting such franchise contract.
And to illustrate
what I've just said, to illustrate risks of that may be faced by the user or right holder.
I may give you an example of a dispute between a right holder of a trademark PYTEROCHKA,
of grocery stores in Russia, and a user in Tatarstan Republic. And this right holder
and user concluded their franchise agreement that contained exclusivity conditions.
It expressly mentioned that right holder had obligation not to grant
or the persons corresponding exclusive right with regard to trademark PYTEROCHKA.
What happened next?
Our franchisee opened 17 used stores in three years in Tatarstan,
one of the republics in Russia, paid royalties to the franchise on a regular basis.
But then franchisee discovered that franchisor started parallel use
of a trademark PYTEROCHKA on the same geographic territory.
Franchisor started opening new stores with a trademark PYTEROCHKA,
plus basically exactly the same trademark, and started competing with franchisee.
Because the stores were exactly the same in terms of products that they were selling,
and in terms of consumers oriented to.
Of course franchisee was very unhappy about that,
and he charged the franchisor with unfair competition claims.
And the basic question is whether this is a breach of contract,
or whether franchisor is dishonest in such practices,
and this is a very important question in franchising contracts.
And looking towards the court ruled in 2012 in the judgment,
I might say that we always need to pay a lot of attention
to the exact wording of articles of the Civil Code.
And if we read this article, 1033 of the civil code, we will see
that it mentions in other franchise agreement parties
may provide the right holder's obligation
not to grant other persons corresponding exclusive right.
This part of the provision was mentioned
in the contract between franchisor and franchisee.
And further, article 1033 also mentions,
'or to refrain from his own use of IP rights on this territory'.
And this part of the article
was not mentioned in the contract between franchisor and franchisee,
and that was the reason why the court decided in favor of the franchisor.
The court interpreted this provision, in the contract and in the law,
in the way of that the franchisor didn't give consent
to refrain from his own IP rights on the territory of Tatarstan Republic.
And that's why he was entitled to open new shops on this exactly territory
in parallel with the franchisee.
And I may say that this case illustrates some of the weaknesses of the Russian law.
It illustrates that there is no obligation of a franchisor
to disclose all relevant information to franchisee.
And here, in this case,
we see the franchisor failed to inform the franchisee about details of the contract,
its own plan to develop business in Tatarstan.
But according to Russian law he didn't have to.
And we can also see that a parallel use of a trademark rights,
under the Russian law, may be allowed if it's not directly excluded in the country.
So, the parties of the franchising contract should be very careful in this regard.
And at the end let's discuss liability issues in franchise contract.
We see that this is a joint business of franchisor and franchisee,
and that is why they should have a shared liability
with regard to a third parties claims and consumers.
And that is why article 1034 of the Russian Civil Code
contains specific provisions in this regard.
And it says that the right holder that is subsidiary liable
with respect to claims presented to the user,
concerning quality of goods sold, works performed, services provided
by the user under their contract.
And it also mentions that the right holder is jointly liable
with respect to the claims presented to the user as manufacturer of the goods.
Because in the eyes of the consumers, and in the eyes of the third parties,
it may be one in the same business,
and third parties usually do not distinguish where franchisee is and franchisor is.
That's why we have this specific provisions in the Russian law that allows liability,
and not only the franchisee but also the franchisor.
Thank you.
Vladislav StarzhenetskyAssociate Professor
