Franchising in the Philippines: Assessing Non-Compete Clauses

A brand may be right for you, but the scope of its non-compete restrictions may not be. Before buying a franchise in the Philippines, check whether the contract limits your other businesses, investments or livelihood after the agreement ends. Protecting confidential know-how matters in franchising—but it should be clear which activities are prohibited, who the restrictions apply to and how long they last.

1. Identify exactly what is prohibited

A non-compete clause may apply during the franchise agreement, after it ends, or both. Do not confuse it with the obligation to keep recipes, manuals and other confidential information secret. It is also distinct from restrictions on encouraging employees or customers to move to another business.

Look for the full scope of the restrictions in the contract and its attachments. Additional restrictions may be buried in the definition of a “related business”, a separate confidentiality agreement or a document the owners must sign.

Make a checklist covering the following:

• Activities: Does the restriction cover ownership only, or also employment, consultancy, lending and investment?
• Businesses: Does it apply to direct competitors, or to any business selling similar products?
• People: Does it apply only to you, or also to partners, directors and associated companies?
• Duration: When does each restriction begin and end?
• Area: Does it cover a defined area around the outlet, an entire city or the whole of the Philippines?

For example, a ban on opening a similar shop near your outlet is different from a ban on involvement in any food business nationwide. The word “reasonable” is not enough without clearly defined limits.

2. Understand the law, not just the seller’s explanation

The Philippines has no single comprehensive law covering every aspect of franchising. That does not mean, however, that contracts are free from legal limits.

Under Article 1306 of the Civil Code, parties may set contractual terms, but these must not conflict with the law, morals, good customs, public order or public policy. A non-compete clause is not automatically invalid. Its reasonableness is assessed in light of the circumstances, including its duration, the type of trade and the geographical area covered.

Republic Act No. 8293, or the Intellectual Property Code, is also relevant. Where an agreement constitutes an arrangement for the transfer of technology or systematic knowledge, it is subject to the prohibited and mandatory provisions in Sections 87 and 88. There are specific limits on restrictions on the use of technology after the agreement ends, with exceptions that a lawyer should review. Do not assume that every broadly worded restriction is valid simply because you have signed it.

For franchisees that are micro, small and medium-sized enterprises, Executive Order No. 169, series of 2022, sets minimum contractual requirements and a registration framework with the Department of Trade and Industry (DTI). It does not automatically validate a non-compete clause. Confirm the applicable process with the DTI, and do not treat registration as a guarantee that every clause is fair.

3. Compare the clause with how you actually earn a living

Before choosing a brand, list your current sources of income and planned business ventures. Include ownership interests in other companies, side businesses and work you could return to if the franchise does not suit you.

Then test the contract against concrete scenarios:

• Can you continue running your existing small shop?
• Can you hold a small passive investment in another business without taking part in its management?
• Can you work in the same type of business after the agreement ends?
• Are online sales covered even if your physical shop is far away?
• What happens if your spouse or business partner has a business of their own?

A relative who has not signed the contract does not automatically become a party to it. However, you may be obliged not to use another person to get around the restriction. Have the exact wording reviewed rather than relying on a general explanation.

Also ask current and former franchisees how the restriction is enforced. Use their experiences as a warning or guide, not as a substitute for the written agreement.

4. Ask for clear limits before signing

If the restriction is too broad, propose specific changes: a clear definition of a direct competitor, a defined geographical area, a reasonable duration and listed exceptions for your existing business. Clarify how to request consent and who has the authority to grant it.

Ask for whatever is agreed to be included in the signed contract or an attached amendment. A verbal assurance that “we don’t actually enforce that” is not enough. Also have someone check whether the restriction can be expanded simply by issuing a new manual.

Practical takeaway: Choose a brand that clearly protects its know-how while also setting clear limits on restrictions affecting your livelihood. Before signing, you should know what is prohibited, where, for how long and which exceptions are recorded in writing.