Philippines: President inks executive order ordering the registration of franchise agreements involving MSMEs

The President signed an Executive Order directing the registration with the DTI of franchise agreements involving MSMEs, as well as the establishment of a franchise registry.

In brief

On 12 May 2022, the President issued Executive Order No. 169 ("EO 169"), which seeks to intensify government efforts in strengthening the franchising industry and to help businesses, especially micro, small and medium enterprises (MSMEs), by developing a transparent and business-friendly environment, and promoting fair and equitable practices.

'MSME' refers to a micro, small or medium enterprise or any business activity or enterprise engaged in industry, agribusiness and/or services, whether as a single proprietorship, cooperative, partnership or corporation, whose total assets, inclusive of those arising from loans, but exclusive of the land on which the particular business entity's office, plant and equipment are situated, must have value falling under the following categories:

i.    Micro: less than PHP 50,000

ii.   Cottage: PHP 50,001-PHP 500,000

iii.  Small: PHP 500,001-PHP 5,000,000

      Medium: PHP 5,000,001-PHP 20,000,000

Some of the notable requirements under EO 169 are the inclusion of minimum terms and conditions in franchise agreements involving MSME franchisees, the registration of such franchise agreements with the DTI, and the creation of an MSME Registry of Franchise Agreements.

EO 169 is now in effect following its publication on the Official Gazette last 16 May 2022.

Recommended actions

Franchisors who are currently in business with or intends to be in business with MSMEs as their franchisees are strongly encouraged to comply with EO 169 in order to avail of the incentives or benefits to be rolled out by the Philippine government in the future. Accordingly, franchisors must ensure that their franchise agreements with their MSME franchisees contain the minimum terms and conditions under the executive order, as well as timely register such franchise agreements with the DTI once the MSME Registry of Franchise Agreements is established.

Our firm is closely monitoring the implementation of EO 169, as well as the promulgation of its implementing rules and regulations by the DTI. We shall update this client alert in due course.

In more detail

Registration requirement

Under EO 169, franchisors are responsible for registering with the DTI their franchise agreements with MSME franchisees, provided that franchisors that are members of duly registered franchise associations are only required to register with the DTI their Standard Franchise Agreement, as well as execute an undertaking that all future franchise agreements with MSME franchisees shall incorporate the minimum terms and conditions enumerated in the executive order.

However, in the case of franchisors that are not members of any duly registered franchise association, they are required to register all franchise agreements entered into with MSME franchisees within 30 days from execution thereof.

Creation of the MSME Registry of Franchise Agreements

EO 169 also orders the DTI to create the MSME Registry of Franchise Agreements. Under the executive order, only franchise agreements entered into by and between a franchisor and an MSME franchisee, which are compliant with the minimum terms and conditions set forth in the executive order, may be registered in said registry.

Minimum terms and conditions

EO 169 provides for minimum terms and conditions of franchise agreements involving MSME franchisees, namely:

  • Name and description of the products or services under the franchise
  • Specific rights granted to the MSME franchisee, such as, but not limited to, the right to use the mark or any other intellectual property rights duly registered with the Intellectual Property Office of the Philippines
  • Full disclosure of any presigning, initial or recurring fees, such as, but not limited to, franchise fee, promotion fee, royalty fee, or any related type of fee that may be imposed on the MSME franchisee
  • Detailed responsibilities of the franchisor, which shall include the enumeration of the types and particulars of assistance and the submission of the franchise agreement to the DTI
  • Detailed responsibilities of the MSME franchisee
  • Nondiscrimination provisions
  • Duration of the franchise and the terms and conditions for renewal
  • Effects of and grounds for pretermination, termination or expiration of the franchise agreement
  • Provision on 'cooling off' period where the MSME franchisee is given the option to terminate the agreement
  • Mechanism for dispute resolution, which shall include a stipulation that parties may seek voluntary mediation under Republic Act No. 9285, otherwise known as the Alternative Dispute Resolution Act
  • Remedies of the parties in case of any violation of the terms and conditions of the franchise agreement

While the inclusion of the foregoing terms and conditions is not mandatory in the case of non-MSME franchisees, franchisors may consider the same as best practice clauses and incorporate them in their respective franchise agreements.

Note that the inclusion of such terms and conditions in the franchise agreement may entitle the franchisor to incentives or benefits to be provided by the Philippine government. As of this writing, however, these incentives or benefits have yet to be rolled out to the public, but the DTI is tasked with the formulation of the same pursuant to EO 169.

Effect on existing franchise agreements

EO 169 clarifies that franchisors with existing franchise agreements with MSME franchisees are required to comply with both the inclusion of the foregoing minimum terms and conditions and the registration requirements upon renewal of their franchise agreements with their MSME franchisees.

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