We need to consider several legal points in franchise agreements under Iranian law. These points will be discussed in this article.
Reviewing franchise agreements under Iranian law can be exciting for business persons seeking new opportunities to grow their business activities in the heart of the Middle East. It was first in 1850 when new types of business contracts were born through Isaac Singer, an inventor of advanced sewing machines.
Isaac applied for a contract to sell and distribute his goods, which is almost identical to our current franchise agreements. Franchise agreements open a door for both parties of the contract to benefit from their business's revenue.
On the one hand, the franchisee has this chance to take advantage of a pre-established brand and the franchisor's business support. Such as advertising, supply marketing, and training of staff. In most cases, the franchisor provides the franchisee with everything that has contributed to the business and its success. This situation helps the franchisee to avoid setting up a business from scratch.
On the other hand, a franchise agreement allows franchisors to expand their business by selling franchise opportunities instead of investing capital from the beginning of opening an additional business unit.
Principals of franchise agreements under Iranian law
While in most countries, the laws governing franchise agreements are either part of a set of rules or, in a few cases, a specific direction, the Iranian legislature still needs to take a precise approach. In supporting the legal nature and eligibility of the franchise agreement under Iranian law, the principle of contractual freedom reflected in Article 10 of Iran's Civil Code ("Code") is very effective. This article stipulates:
"Private contracts for those who have entered into it, if it is not explicitly against the law, it is effective."
In addition to Article 10 of "The Civil Code of Iran," Articles of the "Law on Patents, Industrial Designs and Trademarks," without referring to the term franchise, foresees the possibility of exploiting the registered trademark in the form of a contract. Articles 17, 44, and 50 are more specifically discussed an agreement for permission to use the registered invention and industrial designs or the registered trademark. For example, Article 50 stipulates:
"Any agreement to allow exploitation of registered inventions and industrial designs, or registered trademarks or declarations related to them, shall be submitted to the Industrial Property Office. The Industrial Property Department keeps the terms of the contract confidential but registers and announces the exploitation permission. Such contracts' effect on third parties is subject to compliance with the above formalities."
The law, as mentioned above, does not refer to the matter of technical knowledge and trade secrets, and classified information.
Also, in the Executive Regulations on Issuance & Renewal of business unit licenses, references have been made to franchise trade units. The lawmaker has regulated the rules of establishing and managing chain stores in Iran. In light of the provisions of these regulations, it is clear that a franchise agreement is accepted between the central office of a chain store and its branches, whereby the branches are permitted to use the name and trademark of the main office.
Due to the popularity of franchise contracts in Iran, in the proposed Bill of Trade Law (Chapter twelve), franchise contracts have been specially categorized under the title of business concession contracts along with other commercial contracts. Ratification of this proposed bill is still required before it can be implemented.
The general structure of the Franchise Agreements
A franchise agreement is a legally binding document between the owner of the brand or trademark (Franchisor) and another party that intends to benefit from the usage of the brand or trademark (Franchisee) customarily on a long-term basis. The franchise agreement outlines terms and conditions for both parties. You should know what you are expected to do and what you should expect in return. In the following, we will discuss essential points you need to pay attention to while signing a franchise agreement in Iran.
Critical points in setting up a franchise agreements in Iran
In this section, we will review the essential facts that you should be aware of before setting up a franchise agreement in Iran.
A. Obtain the required license
First and foremost, you must keep in mind that businesses shall obtain the necessary permits in Iran before operating. The Iranian government generally issues two types of licenses: general and special. There are several activities for which special permits are required. However, a general license is a series of licenses that can be obtained by anyone in Iran regardless of their educational qualifications and other specific qualifications required for a special license. This depends on the type of business. Listed below are examples of special licenses that must be obtained prior to awarding franchise privileges to a franchisee.
- Health-related products must be licensed by the Ministry of Health (MoH).
- In the case of the sale of durable goods, these licenses must be obtained from affiliated offices of the Ministry of Industry, Mine, and Trade (MIMT).
For complementary information regarding the business activities with specific permit requirements and to understand the special restrictions, you can study our article under the title of "Legal restrictions related to certain types of commercial activities in Iran" (Please click Types of commercial activities).
B. Tax affairs and anti-money laundry
Tax liability on Iran-sourced income (For instance, incomes from royalties paid by Iranian entities) is applied to foreign persons (individuals and entities). Consequently, if foreign investors enter into franchise agreements with a local entity (even if the foreign company wholly owns the Iranian entity) and royalties are charged, they become liable to pay income tax (for more information on the Iranian tax system, please click Tax law).
The financial relationship between the franchisee and franchisor shall be transparent and uncloudy. Recently, the Iranian authorities have been more focused on the breach of anti-money laundering law by Iranian and foreign companies in Iran. Therefore, it is crucial for a foreign franchisor to have an obvious understanding of Iran's Anti-Money Laundering Law. You may find additional information regarding this topic Anti Money Laundering Law.
C. Intellectual property
In order to sign a franchise contract, you, as the franchisor, have to rest assured that your brand and trademark have been fully and successfully registered in Iran. Some official websites will help you search for trademarks, patents, and industrial designs, as well as trade names and corporate information. This risk always exists that the Iranian franchisee registers your trademark under its own name and provides you with some difficulties for the usage of this trademark in the future.
Concluding a comprehensive franchise agreement in Iran
In this section, we will discuss the various parts of the franchise agreement in Iran that need to be carefully considered:
1. Parties to the contract
According to Iranian law, any contract to be binding for a company shall be signed merely by its official signatories. Otherwise, the company is not liable for contractual commitments. The list of signatories of a company shall be controlled through the latest update of the official Gazette of Iran. The "Article of Associations" of a company is not a reliable source of information for the signatories due to the fact that this document could be subject to several modifications with the passage of time.
Earlier, it was mentioned that prior to concluding a franchise agreement, it is advisable to control the necessary licenses of the parties involved. Consultation with the union and syndicate related to the activity in question is also considered a vital measure.
If you are negotiating a franchise agreement with an Iranian company in Iran, obtain information about the Iranian company's previous franchise agreements with other foreign corporations and their commercial-legal status. The information received from the Iranian company shall be double-checked by enquiring at the relevant Iranian authorities as an essential part of the due diligence prior to conducting a franchise agreement.
2. Determining franchise fees
Franchise fees are regular payments made by the franchisee, usually on an ongoing basis. New franchisees shall pay an initial franchise fee prior to entering the franchise business. Generally, three categories of costs are defined in setting up a franchise contract: initial, annual, and monthly payment basis. We will also review other methods of payment of franchise fees in this section.
One of these methods is called the "Fixed fee," which is a set of money franchisees are required to pay the franchisor every week or every month. Setting a "percentage of income or revenue" is another method of calculating franchise fees. For instance, 10% of the franchisee's income each week or month is considered a franchise fee. This method is also called "paying a royalty fee." Instead of receiving payment from the franchisee, there is a possibility of obtaining a "commission from suppliers" who supply products to the franchisee. Profitable and successful clients are encouraged to purchase additional products through this method of calculating franchise fees.
In the case of choosing one of the above methods, this is very important for a foreign franchisor to have the right of financial control over the implementation of the agreement. Indeed, a foreign franchisor, based on the agreement, shall be able to control the financial books and deeds related to the franchise activity.
3. Contract duration
It is covered in this section of the contract how long the agreement is and whether the rights can be purchased or extended prior to the expiration of the contract. In addition, the franchise contract specifies the conditions under which a franchise can be sold to another individual.
These requirements may be extremely stringent to ensure that the future franchisee possesses the required qualifications. Typically the duration of a franchise agreement is between 10 to 20 years. A long-term condition can be attributed to the franchisor's desire to ensure the stability of the business.
4. Determining the geographical scope of the franchise
Your franchise agreement should specify the scope of your business activities in this section. A provision for the non-competition can be helpful in this regard. This clause is set up in order to prevent the exploitation of competitive advantages obtained by the other party in the contract. This clause usually prohibits one party from operating in a specific field for a period of time specified in the agreement or for a particular geographic area agreed upon by the parties.
5. Agreement on how to protect information
A non-disclosure agreement or clause should be kept in mind as you produce and distribute products under the franchise agreement. This clause is considered the protection of intellectual property rights and maintenance of data and information. During negotiations or when partnering with another company, individual, or colleague, you can safeguard your confidential information by establishing a non-disclosure agreement.
6. Determining the settlement of disputes through arbitration
Whenever there is a dispute regarding the interpretation or implementation of the contract, and the parties cannot resolve it, the court will be competent. However, The Iranian Civil Procedure Code and the Law on International Commercial Arbitration recognize commercial arbitration as well. If you are interested to read more about Iran's arbitration system, click Iranian Arbitration.
According to Article 454 of the Civil Procedure Code of Iran, the parties can settle their possible disputes through arbitration. The critical point you need to consider is, according to Article 456 of the Code: "Regarding transactions and contracts between Iranian and foreign nationals, as long as no dispute has arisen, the Iranian party cannot be bound in any way to refer the dispute to an arbitrator or arbitrators or a committee that has the same nationality as the other part has." The arbitration may be designated your dispute resolution method by agreement between both parties. This method is not time-consuming, and your case will be examined professionally.
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.