Franchising in the Philippines: Who Is Responsible for Complaints?

Customers may see the brand name, but that does not mean the brand owner is responsible for every complaint. When buying a franchise, it is important to examine clauses that shift liability and costs onto you. A fair franchise relationship requires clarity about who controls the source of a problem, who must act and who must pay.

1. Understand how liability is transferred

Some contracts require the franchisee to reimburse the brand owner for losses, claims and expenses arising from the operation of the business. These may include compensation paid to customers, legal fees and settlement payments.

Such a clause is not necessarily unreasonable. It makes sense for you to be responsible for mistakes by your staff or failures to follow proper storage procedures. The risk lies in overly broad obligations, such as making you responsible for all complaints even where the cause is a product that was defective before it reached your outlet.

Look for answers to the following questions in the contract:

• What triggers your obligation to pay?
• Must you first be proven to be at fault?
• Does the obligation extend to negligence by the brand owner or its supplier?
• Are costs covered even before a final decision on liability?
• Does the obligation continue after the contract ends, and which events does it cover?

Also distinguish between an obligation to handle and fund the defence of a claim and an obligation to pay for proven harm. The former may arise before anyone knows who is actually liable.

2. Match liability to the source of the problem

Before signing, draw up a list of possible complaints. For each one, identify who controls the product, process or decision that could cause harm.

In a food business, for example, a product that arrives contaminated is different from one that spoils because the outlet’s fridge is not working. Likewise, if you are required to use a machine selected by the brand owner, a manufacturing defect is different from misuse by your staff.

Ask for the contract to clearly address:

• Each party’s responsibility for its own mistakes or breaches.
• How costs will be shared when more than one party is at fault.
• Assistance with investigations, including access to delivery records and product testing.
• Reimbursement if you pay initially but another party turns out to be responsible.

Do not rely on a promise that “we’ll take care of it” if a complaint arises. The assistance to be provided, and who has authority to commit to it, should be set out in writing.

3. Understand the legal limits of the contract

The Philippines has no single comprehensive law covering every aspect of franchising. There are, however, specific rules: Executive Order No. 169, series of 2022, sets out mandatory contractual provisions for covered micro, small and medium-sized enterprises entering into franchise agreements.

The Civil Code, Republic Act No. 386, is also important. Under Article 1306, parties may set contractual terms provided these do not conflict with the law, morals, good customs, public order or public policy. It is therefore not enough to say that every clause is valid simply because you signed the agreement.

Where a defective product or service causes harm, Republic Act No. 7394, the Consumer Act of the Philippines, and other applicable rules may come into play. Your contractual allocation of costs does not automatically remove a consumer’s right to bring a claim against those who may be liable under the law.

Have a lawyer review any broad clause releasing the other party from liability. Who a consumer can bring a claim against and who must reimburse costs between the contracting parties are separate questions.

4. Put a complaints process and funding arrangements in place

The contract should make clear who must receive reports of complaints, how quickly they must be reported and what evidence must be preserved. This should include receipts, photographs, delivery records and incident reports, while complying with personal data protection rules.

Clarify who will appoint the lawyer and whether either party can settle a claim without the other’s consent. Avoid being obliged to fund a settlement you have not reviewed. There should also be a process for taking immediate steps to protect customers while the cause is being investigated.

If insurance is required, ask for the precise scope of cover, exclusions, policy limits and any excess you must pay. Insurance does not necessarily cover every liability you voluntarily accept under a contract.

Practical takeaway: Before buying, make sure your liability reflects your control over the business. Put cost-sharing arrangements, complaints procedures and the other party’s support obligations in writing—before a problem arises.