Franchising in the Philippines: Time to Remedy a Breach

Before buying a franchise in the Philippines, find out what happens if you fail to meet your contractual obligations. A late report, missing paperwork or a problem identified during an inspection could lead to serious penalties. Responsible franchising requires clear notice, evidence and an opportunity to put things right. An assurance that “we always discuss these things” is not enough; the agreement should set out the process to be followed.

1. Identify what constitutes a breach and how serious it is

Ask for the full draft contract and any attachments setting out operating standards. Look for provisions on default, suspension and termination. Make a list of each breach and its possible consequences.

Distinguish between shortcomings that are easily remedied and situations that may require immediate action. A late report, for example, is different from a risk to customer safety. However, do not assume every brand classifies breaches in the same way: you need to examine the contract itself.

Ask the following questions:

• Which breaches can be remedied before a penalty is imposed?
• Which could lead to immediate suspension or termination?
• Who decides whether a breach is serious, and what evidence is required?
• Will different minor shortcomings be treated as repeated breaches?

Be wary of broad wording such as “any breach” if it carries the same severe consequences in every case. Ask for the categories and criteria to be clarified before signing, rather than waiting until a complaint has been made against you.

2. Check the notice procedure and the time allowed to remedy a breach

The agreement should clearly state how notice will be delivered: to a registered address, a designated email address or by another agreed method. Also establish when notice is deemed to have been received. This matters if the clock starts running before the owner has read the message.

Ask for the notice to specify the provision breached, the circumstances and supporting evidence, the corrective action required, the deadline and the consequences of failing to respond. If the required changes are unclear, it will be difficult to prove that you have made them.

Do not assume that a single period automatically applies to every shortcoming. The time you request should reflect the work involved. A report may be corrected quickly, whereas equipment repairs may require spare parts or a technician.

Ask whether you can request an extension if you have evidence of prompt action but face delays beyond your control. Clarify whether the period is measured in calendar days or working days, and who has authority to grant an extension in writing.

3. Understand the law and the limits of a code of conduct

The Philippines does not have a single comprehensive law covering every aspect of franchising. However, specific rules do apply, including Executive Order No. 169, which provides protections for micro, small and medium-sized enterprises in franchise agreements. This does not remove the need to review each contractual provision.

The Civil Code also applies. Under Article 1306, parties may agree contractual terms, but these must not be contrary to law, morals, good customs, public order or public policy. The Intellectual Property Code also covers technology transfer arrangements, including relevant franchise agreements.

It is important to distinguish between the law, the contract and voluntary standards. Under the QFA Code of Conduct, franchisors are expected to give written notice of a breach and allow a reasonable period for it to be remedied. However, the code is not automatically part of the contract and is not a substitute for the law.

Ask for the notice and remedy procedure to be written into the agreement itself. Have your own lawyer review any exceptions and provisions allowing immediate penalties; do not rely solely on the brand’s membership of an association.

4. Establish how successful corrective action will be confirmed

Your review should go beyond the number of days allowed. It should be clear who will receive evidence of corrective action, when any follow-up inspection will take place and how closure of the matter will be confirmed. Ask whether there is a charge for reinspection and whether fees continue to accrue while operations are suspended.

Test the process with a simple example: an inspection identifies a shortcoming, and you put it right before the deadline. Are photographs and receipts sufficient, or must a representative visit again? If that visit is delayed, will you still be recorded as being in breach?

Request written acknowledgement that the breach has been remedied, and keep copies of notices, responses and evidence. Also clarify how long an earlier breach can count towards a finding of repeated breaches.

Practical reminder: Before buying, make sure the contract answers four questions: what constitutes a breach, how you will be notified, how long you have to put it right, and who will confirm that the matter is resolved.