Franchise Equipment: Ownership, Warranties and Replacement

Your franchise offering may include machinery, tools and retail equipment, but a list of what comes in the package is not enough. If essential equipment breaks down, who arranges repairs, and how will the outlet keep operating? Before expanding through franchising in the Philippines, establish clear rules for equipment ownership, acceptance, maintenance and replacement.

1. Distinguish between purchase, equipment provided for use and hire

Start with an inventory of all the equipment each outlet needs. For every item, specify its purpose, required capacity, associated parts and how it will be obtained. Do not group equipment with different ownership arrangements under the vague label of a “complete package”.

There may be three distinct arrangements:

• Purchased by the franchisee: Clarify when ownership transfers and whether any instalments remain outstanding.
• Provided for use by the franchisor: Specify that the franchisee does not own the equipment, where it may be used and when it must be returned.
• Hired from a third-party supplier: Record who hires it, pays for it and is liable for loss or damage.

The distinction between ownership and liability during transit also matters. If a machine is damaged before it reaches the outlet, there should be no need to argue at that point about who will pursue a claim against the carrier.

Include a description of each item and the relevant purchase or equipment-use documents in a schedule to the agreement. For branded equipment, distinguish the right to use the brand from ownership of the physical item. Permission to use the brand does not automatically continue simply because the equipment has been purchased.

2. Establish a delivery and acceptance process

The arrival of a box does not mean the machine has been properly accepted. Prepare an inspection checklist to use before confirming that the delivery is complete and the equipment works.

It should cover:

• Checking the model, quantity and serial numbers against what was agreed.
• Inspecting for damage, missing parts and accompanying instructions.
• Confirming that the electricity supply, water supply, ventilation and installation space are suitable.
• Testing the equipment under normal outlet operating conditions, rather than merely switching it on.
• Recording defects, work required and the person responsible for the next step.

For example, a refrigeration unit may run without reaching the temperature required for the products. In that situation, it should be clear whether acceptance is provisional, when testing will be repeated and whether the outlet’s opening will be affected.

Have authorised representatives of both parties sign the acceptance record. Attach photographs and test results. Do not make signing a delivery receipt an automatic waiver of all rights relating to hidden defects; have a lawyer review any such condition.

3. Allocate responsibility for warranties and repairs

The manufacturer’s warranty is separate from the support you promise as a franchisor. If your role is limited to facilitating warranty claims, say so clearly. Do not promise to replace equipment yourself unless you have the capacity or arrangements to fulfil that promise.

For each essential item, record when the warranty starts, what it covers, any exclusions and where claims should be submitted. Also clarify who pays for labour, parts, transport and technician call-outs.

Prepare a regular cleaning and maintenance schedule based on the manufacturer’s instructions. Specify which tasks staff may carry out and which require a qualified technician. Keep a record of every repair so that the equipment’s history is not lost when managers change.

Agree on what will happen while the machine is out of service. Is a temporary replacement available on loan? Can the outlet temporarily reduce its product range? Who can authorise an interim solution? Avoid promising a fixed repair time unless you can deliver it across all locations.

4. Put replacement requirements and costs in the right document

The Philippines has no single comprehensive law covering every aspect of franchising. However, Executive Order No. 169, series of 2022, sets out specific rules to protect micro, small and medium-sized enterprises that become franchisees. It prescribes minimum content for agreements within its scope, including disclosure of fees, and registration with the Department of Trade and Industry (DTI).

The Civil Code also governs obligations and contracts. The Intellectual Property Code, or Republic Act No. 8293, is relevant where brand use and technology transfer are involved. Have the entire arrangement reviewed, not just the equipment schedule.

If a franchisee may be required to replace a machine, specify reasonable grounds, such as safety, unavailable spare parts or inadequate capacity. Clarify notice requirements, approval, costs and what happens to the old equipment. Do not bury a spending obligation in the manual if it is not clear in the agreement.

Practical reminder: Before signing up your first franchisee, complete the ownership records, acceptance checks, warranty terms and replacement arrangements. Clear responsibility for equipment helps prevent a broken machine from becoming a dispute.