Everywhere we go, we stumble across franchised outlets - be they international ones such as McDonald's, Pizza Hut, KFC, Dunkin' Donuts, Auntie Anne's or local fare like Black Canyon, the Pizza Company, Yam Sap or noodle cart Chaisee Bamee Kiew, from the tiniest corner of a Silom alley to a major, marble-floored department store.

It is perhaps no surprise that, according to the International Retail and Franchise Business Research and Development Centre (IRF), Thailand's 456 registered franchises and their 24,000 stores generated about Bt83 billion last year - still a meagre 6 per cent of the total volume of retail trade.

There is huge potential for growth. IRF director Peerapong Kitiveshpokawat says that in the United States, franchises make up at least half of the retail sector.

A research study by PricewaterhouseCoopers estimates that the contribution of franchises to US gross domestic product next year will be US$624.6 billion (Bt21.6 trillion), or 3.9 per cent of the country's entire private sector.

"More franchises can be created locally or they can be imported, if Thailand has laws to govern the franchise business," Peerapong says.

Unfortunately, since 2000, the proposed Franchise Act - sponsored by the Commerce Ministry - has fallen in and out of discussion in a succession of Thai parliaments. And after multiple public hearings, it now looks likely to be shelved again, for the fourth time, for the time being.

Lately, the much-needed law has had to stand aside for the more politically charged Foreign Business Act and the draft retail business law. Still, a source at the Commerce Ministry's Business Development Department is optimistic that it will reach the National Legislative Assembly and, hopefully, will end up in the Royal Gazette's pipeline by next year.

Franchising allows companies more headroom in expansion - as committed entrepreneurs put in their time, money (usually in set-up costs, which may or may not include royalty fees) and sweat, while franchisers take care of the marketing and branding. Theoretically, it is a win-win model, and the Commerce Ministry's Internal Trade Department has been eager to promote it.

But currently, the Kingdom lacks specific laws to accommodate imminent growth in this sector - growth that could reach 17 to 20 per cent, according to Peerapong. Developed economies, such as the US and the United Kingdom, have specific legal measures, including fair disclosure, to help protect both parties in franchise arrangements. Malaysia introduced a Franchise Act in 1998, with mixed reviews.

To date Thailand, as a civil law jurisdiction, relies on a loose bundle of ministerial regulations to control the franchise business. The Civil and Commercial Code paves the way, followed closely by the Trademark Act, the Copyright Act, the Trade Secrets Act, the Unfair Contract Terms Act, the Trade Competition Act, the Revenue Code and an Act relating to prices of merchandise and services.

The problem is that these disparate laws touch on only a few basic points in any franchise agreement, and as a result all parties have to rely on the draftsmanship of their lawyers for watertight contracts.

Having waited for 10 years, Black Canyon Thailand managing director Pravit C.Pong is keen to see an overarching law that makes operators less dependent on individual judgement.

And Boonchai Leeraphante, president of the Franchise and Thai SMEs Business Association (FSA), points out that good governance and protection of the franchise system is a prerequisite for growth.

Yet lawmakers have to walk a legal tightrope, lest they scare off investors, forcing them to go outside the system. Three important aspects need to be addressed: the intellectual property of a franchise, the contract between the franchiser and the franchisee, and consumer protection.

Universally, franchise law tends to favour franchisees, says Business Development Department deputy-director general Dusit Uchupongamorn. Three commonly used methods are disclosure of appropriate market information (which is essential in the selection process), registration of franchises with the government and legal contracts between the two parties.

Governments around the world employ a mixture of these three methods. For example, Spain, Indonesia and Russia rely on franchisers for disclosure of appropriate information and business registration. Like Italy and China, Thailand - being a freedom-of-contract jurisdiction - emphasises individual contracts between the two parties and government registration.

Disclosure of business information to the public, something that is sorely lacking in Thailand, is high on the list of provisions in the proposed franchise law. In the US, public disclosure, albeit in varying degrees, is the basis for franchise transactions, and many countries model their franchise laws upon this principle.

Thirteen states of America require franchisers to make publicly available their Uniform Franchise Offering Circulars, which should contain comprehensive information about the franchisers, such as the business experience of people identified with them, and franchisers' litigation history, patents and copyrights and financing arrangements.

Thirty-one states require the circulars to be distributed only to prospective franchisees, while in Florida, Michigan, Nebraska, Kentucky, Texas and Utah, potential franchisees can only demand a one-page form.

Despite the varying degrees of disclosure, it is clear that transparency is paramount.

In a bid to defog the Thai system, the proposed franchise law would see more emphasis on disclosure. If passed, it will oblige franchisers to disclose business information to potential franchisees within 40 days prior to the signature of any agreement of purchase.

Despite an obligation on franchisees not to pass on any of the franchiser's trade information to a third party, the latest draft of the proposed law has already sent a shudder down franchisers' spines.

Black Canyon's Pravit has already been stung several times. It is not uncommon, he says, for an interested party to disappear right after having seen the business manual and a similar coffee shop to appear soon afterwards.

But Peerapong dismisses such business theft as having negligible impact. They might be able to mimic the operation and lift the menu, but they will never duplicate the brand or the values it stands for, he says.

Operators always have something to fret about. With the new set-up, Pravit worries that approval power will be concentrated in the hands of too few. According to the draft Act, the registrar - defined as the permanent secretary of the Business Development Department and "those designated [by the permanent secretary]" can reject applications if the applicants fail to comply with corrections recommended by the registrar.

In addition to being fined anything from Bt10,000 to Bt400,000, both franchisers and franchisees who fail to disclose evidence and documents pertaining to a franchise at the request of the registrar and departmental staff can serve a maximum of six months in jail, at the discretion of the registrar.

"I think criminal punishment is unnecessary," says Somchai Rattanachuesakul, a law lecturer at the University of the Thai Chamber of Commerce.

But even without the provisions as proposed, certain negligence or deliberation can even now see offenders behind bars. Infringement of the Patent Act 1979, as amended, is a criminal offence that can result in six months to two years of imprisonment. A breach of the Trade Secrets Act 2002 can also be a criminal offence, carrying one to 10 years in jail.

Ironically enough, the proposed law is drafted largely by academics, including Peerapong, certain members of the FSA, and civil servants from the Business Development Department.

As a check and balance, the proposed law holds the registrar accountable by establishing a Franchise Business Committee with the permanent secretary of the Commerce Ministry as its chairman. Directors will comprise the directors-general of the ministry's Business Development and Intellectual Property Departments and representatives from the National Police Bureau, the Thai Chamber of Commerce, the Federation of Thai Industries and the Office of Consumer Protection. The commerce minister will also be able to appoint two honorary directors with expertise in the franchise business.

But it remains unclear whether academics - who also double as consultants - or even seasoned franchisers will be invited to sit on the committee, which has the power, for instance, to prosecute franchisers on behalf of franchisees in case of mishaps.

In Malaysia, implementation of the nine-year-old Franchise Act has not been smooth. Critics abound, among them Malaysian Affandy Faiz, a colleague of Peerapong's at Francorp, a global franchise consultancy. He says the Malaysian franchise community is feeling the crunch of having too much power placed with a small group of people.

He says the act is a far cry from franchise laws in the US, which it tries to emulate. The Malaysian system lacks follow-through in implementation and execution of the law, Faiz says. "In most cases the registrars lack basic knowledge and understanding and have failed to meet the objectives [of the legislation]."

But Nancy Tan, general manager for business development of Golden Arches Restaurants, praises the Malaysian Franchise Act in an article in The Edge Malaysia, for putting "a good system in place". Tan, whose company was involved in drafting the Franchise Act, believes the law facilitates and supports the franchising process and came at the crucial moment as the business was about to reach critical mass.

Legal precedents must also be taken into account when fine-tuning the draft law. A Guide to the Fundamentals of Franchising in Thailand, published by law firm Tilleke and Gibbens International, cites a landmark US case, Scheck v Burger King Corp, as an example.

The case centres on the legal definition of "territoriality" in the franchiser and franchisee contract. Should the franchiser be allowed to set up a restaurant right next to a franchised unit? In such cases, there is no one-size-fits-all solution, and the precedents of foreign jurisdictions often have little effect over local law. But a legal guideline on "territoriality" would come in handy as franchisers and franchisees mull their contracts.

But the law is not enough on its own, as many starry-eyed or battle-weary franchise businesses look to other governmental measures, such as financial incentives, in addition to the long-awaited Franchise Act.

"After all, we're a real sector, and most of us are start-ups and SMEs. Franchises add value to the economy, and one franchise affects at least 20 businesses," says Peerapong with messianic fervour, believing that franchising offers entrepreneurs greater opportunities to emancipate themselves from wage slavery.

But for now they will have to be patient.

Ki Nan Tsui

The Nation