Turkey: Franchise Agreements Under Turkish Law

Definition

Under Turkish law, franchise agreement, being a "sui generis" type of contract, contains features of various other agreements (e.g. sales & purchase agreement, agency agreement, service agreement, mandate agreement) and provisions of the Turkish Code of Obligation ("TCO") and Turkish Commercial Code ("TCC") that are relating to these contracts may also apply to franchise agreements by way of reference. Apart from that, franchise agreements are governed by the general principles of Turkish law, those related to contracts.

The franchise agreements are defined by the doctrine1 as well as Turkish Court of Appeals2 as follows:

"A franchise agreement is between two legally independent parties. It gives the franchisee (i) the right to market a product or service by using the franchisor's trademark or trade name, (ii) the right to market a product or service by using the franchisor's operation methods (know-how), (iii) the obligation to pay a royalty fee for such rights. It also obliges the franchisor to (i) provide know-how or license a trademark (or another IP right) and (ii) to support the franchisee."

Types

In general, there are two types of franchising; i) business format; and ii) product distribution by licensing trademark.

Under the product distribution type of franchising, the franchisor licenses its trademark and logo and provides its products to the franchisee and the franchisee sells and distributes the products of the franchisor under the given trademark license. In general, for such type of franchising, the franchisor does not provide the franchisee with an entire system for running its business.

On the other hand, business format type of franchising provides the franchise with the opportunity to use of a franchisor's products, services and trademarks, as well as the system and know-how to conduct the business.

Elements

The main elements of the franchise agreements can be considered as follows:

  1. The independency of the franchisee from the franchisor (the franchisee's ability to act on its own behalf and for its own account, independently from the franchisor);
  2. Know-how utilization in the relevant business system and integration of products and/or services;
  3. Uniform appearance of trademarks and logos on business items;
  4. Payment of a royalty fee;
  5. The franchisee's obligation to increase the sales; and
  6. Permanence.

As indicated above, the use of know-how or to license a trademark constitutes one of the main features of franchise agreements. In case the franchise agreements does not include the use of know-how in the production, operation and marketing system, it is highly likely that the agreement not be construed as a franchise agreement but a different form of contract, depending on its contents: For example, in a permanent sale and distribution type of agreement, if the title to the products passes from the principle to an intermediary, yet the contract does not involve transfer/use of know-how, then such agreement may be construed as a distributorship agreement. If the title to the products shall remain with the principle, yet the contract does not involve transfer/use of know-how, then such agreement shall be construed as an agency agreement.

Termination

The franchise agreement may be drafted for a definite or an indefinite term. Under a franchise agreement for an indefinite term, the agreement may be terminated either (i) by giving a "reasonable notice period" or (ii) upon the occurrence of a just cause (for instance the franchisee's breach of the contract and failure to remedy it within a reasonable cure period). In the absence of a contractual arrangement between the franchisor and the franchise dealing with the termination, the relevant party shall provide an "appropriate" notice period before the effective date of any contemplated termination. As per the Turkish doctrine, there is a tendency to apply, by reference; provisions of the TCC on termination of agency agreements to franchise agreements. The Turkish Court of Appeals' decisions are silent on the "reasonable notice period". Generally accepted period for prior termination notice in case of agency contracts with indefinite term is three months. However, there are also scholars indicating that termination notice for a franchise agreement should not be less than 6 months.3

Franchise agreement with a definite term, shall automatically terminate upon lapse of the contractual term, unless the parties agree on an automatic renewal system. In any case, any party may rely on occurrence of "just cause" to immediately terminate the franchise agreement.

If one of the parties terminates the agreement without a just cause, the other party may request the compensation of its tangible (e.g. direct damages, loss of profit, return of the products remain in stock, etc.) and/or intangible damages (e.g. loss of commercial reputation), which he can prove.

Even though the Turkish Court of Appeals' decisions are silent on compensation of royalty fee and portfolio compensation; doctrine recognize that in case of an unjust termination by the franchisor, a franchisee may, depending on the circumstances, claim the compensation of the advance royalty fee he paid and the portfolio compensation.4 The portfolio compensation herein is, a goodwill compensation for the benefits derived by the franchisor from the clientele formerly introduced by the franchisee, after termination.

Applicable Rules

As indicated above, there is no particular law that directly regulates franchise agreements in Turkey. As a sui generis agreement, franchise agreement is mainly subject to the general principles and rules of contracts law as well as the contract law rules, which are applicable to certain kind of agreements that have similarities with the franchise agreements. Turkish scholars believe that certain provisions of the TCC regulating agency agreements should be applied both to distribution and franchise agreements since there are similarities between these three types of agreements such as:

  • continuous relationship between the parties,
  • grant of right (either exclusive or non-exclusive) to sell products in a defined territory,
  • obligations to protect principles' commercial interests and promote business in the defined territory.

Apart from the above similarities, franchise agreements could differ from agency agreements with the use of know-how, operation system and trademarks.

In addition, a franchise agreement might, in particular, concern other rules and regulations such as Turkish competition and intellectual property laws.

As indicated above, one of the main features of the franchise agreements is the use of intellectual property rights and transfer of know-how. So that, the franchise agreements may well be subject to the Turkish intellectual property rights in the sense of licencing requirement, registration, infringement, etc.

As to the competition laws, a franchise agreement sets forth a vertical relationship between the franchisor and the franchisee. They mostly contain vertical restraints such as exclusivity, non-compete or information exchange provisions. To that end, they would be subject to prohibitions under Article 4 of Law No. 4054 on Protection of Competition ("Law no. 4054") unless the particular agreement benefits from a block exemption or an individual exemption. Article 5 of Law no. 4054 reads as follows: "All agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect or possible effect the prevention, restriction or distortion of competition within a product or service market shall be unlawful and prohibited". Depending on the content of the transferred know-how, the franchise agreements might fall within the scope of application of "Communiqué No. 2002/2 on Block Exemption for Vertical Agreements" or "Communiqué No. 2008/2 on Block Exemption of Technology Transfer Agreements". These two communiqués introduce different and detailed conditions for block exemption. In order to benefit from the block exemption under either of the communiqués, the agreement must fulfil the conditions laid down in the relevant communiqué and must be devoid of the restrictive covenants set forth in such communiqué.

In addition to the above, franchise agreement may be subject to some other rules and regulations under Turkish law with respect to the business and operational side of the agreement depending on the type of activities conducted by the parties. For example, there might be some licensing and operation requirements for the franchisee.

Conclusion

A franchise agreement is a sui generis agreement under which a franchisee participates in franchisor's business model by obtaining franchisor's know-how, operational system and business model, the right to use the trademarks and logos that the franchisor holds. Because of their sui generis nature; franchise agreements are governed by the general principles of contract law and provisions applicable to typical agreements, which considered as having similar elements with them such as sales agreements, mandate agreements and agency agreements. In addition, despite the freedom of contract principle, franchise agreements have a restricted nature due to competition rules. Therefore, for a specific case, it is always recommendable to seek legal advice before signing a particular agreement in order to achieve full legal conformity.

Footnotes

1. GÜRZUMAR, Osman Berat; Franchise Agreements, Beta Yayımları, Istanbul – 1995; pgs. 8-10.

2. Court of Appeals, 19th Civil Chamber; 25.06.2001, 2001/819E. - 2001/4917K.

3. GÜRZUMAR, pgs. 169-172; DURUKAN Tülin; Franchising Systems and the Turkish Practice, Asil Yayımları, Istanbul – 2006; pgs. 127-128.

4. GÜRZUMAR, pgs. 176 et seq.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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