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Legal Aspects of Investing in a Franchise in the Dominican Republic

Legal Aspects of Investing in a Franchise in the Dominican Republic . Luis Julio Jiménez Jiménez Cruz Peña October 22, 2008. I. A Franchise.

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Legal Aspects of Investing in a Franchise in the Dominican Republic

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  1. Legal Aspects of Investing in a Franchise in the Dominican Republic Luis Julio Jiménez Jiménez Cruz Peña October 22, 2008

  2. I. A Franchise Is a commercial scheme consisting of an organization system, image, mark, modalities for the provision of services and manufacturing of products, and accumulated knowledge that allows: • The Franchisor, to establish within a determined territory, the commercial exploitation of such system and expand its presence with lower risks and lesser requirement of capital. • The Franchisee, to establish a business with a mark that is recognized and has been successful in other markets, with technical assistance and know how, thus reducing the commercial risk of its investment. • The Consumer, access to systems and products that are recognized and have been tested in other territories, operated through investors with knowledge of the local market.

  3. II. The Franchising Contract: 1. Definition: The Franchising Contract is an agreement of collaboration for the exploitation of a market. Pursuant to this agreement, one party grants the other the right to use the mark and facilitates technology for the manufacture of goods or the provision of a service, and the other party assumes the obligation to manufacture the product or provide de service and market such using the mark any paying certain amount of money to the principal company (grantor or franchisor). (Raúl Aníbal Etcheverry. New Contractual Figures. Pags. 30-31)

  4. II. The Franchising Contract: 2. Object: Goods, services, intellectual property, know-how, technical assistance and license. The Franchisee The Franchisor Royalties and other revenues for the assigned rights. Purpose: That the Franchisee exploits commercially, at its own business risk, the good or service, according to the obligatory guidelines typical for such commercial activity.

  5. II. The Franchising Contract: 3. Characteristics: • Of a commercial nature; • Formal (written and registration); • Opposable to third parties (Art. 90. Law 20-00); • Consensual; • Of successive performance; • Bilateral; • Onerous (“Royalty Fees”: fixed amounts or percentages); • Of supply; • Of technical subordination; and, • Atypical (is not expressly contemplated or regulated in our legal system, excepting the registration).

  6. III. Legal Regime Applicable to the Franchising Contract in the Dominican Republic • Law 20-00 on Industrial Property in the Dominican Republic. • Law 173 on the Protection to the Agent Importer of Merchandise and Products, dated April 6, 1966. • Law 16-95 on Foreign Investment in the Dominican Republic, dated November 20,1995 and the Regulation for its Application No. 214-04, dated March 11, 2004. • Civil Code • Tax Code. • International Treaties.

  7. III. Legal Regime Applicable to the Franchising Contract in the Dominican Republic • Law 20-00 on Industrial Property in the Dominican Republic Article 90 of Law 20-00 establishes: a) That the license related to a mark could* be registered in the National Office of Industrial Property (ONAPI) to make of public knowledge its existence. b) That in absence of any stipulation to the contrary, the following norms are applicable: - The licensee will have the right to use the mark during the term of the registration, including its renewals; - The licensee can not assign the license or grant sublicenses; - The license will not be exclusive; - When the license is exclusive, the Franchisor will not be able to grant other licenses for the use of the mark in the country, nor will be able to use it for itself. * Could: this word was added after the negotiation of the DR-CAFTA.

  8. III. Legal Regime Applicable to the Franchising Contract in the Dominican Republic • 2. Law 173 on the Protection to the Agent Importer of Merchandise and Products, dated April 6, 1966: In the Dominican Republic, contractual relations for distribution, representation and agency on which there is a foreign grantor, fall under the scope of Law 173. • Characteristics of Law 173: • The Franchising Contracts must be registered at the Legal Department of the Central Bank, according to the provisions of the Law; • Once the registration is made, its application is of public order and therefore, obligatory (applicable law and forum); • Unjust cause of termination: In the case of the Franchising Contracts, the purpose of Law 173 is to “protect the physical and juridical persons against the damages that may be caused by the unjust termination of the relationship pursuant to which they carry out such activities …” (Preamble Law 173, 1st Whereas); • Actions that mitigate the effects of Law 173.

  9. III. Legal Regime Applicable to the Franchising Contract in the Dominican Republic 3. Law 16-95 on Foreign Investment in the Dominican Republic, dated November 20,1995 and the Regulation for its Application No. 214-04, dated March 11, 2004. This law allows the registration of the agreements for purposes of the repatriation of profits or royalties abroad. It allows the repatriation of: a) The total amount of invested capital; b) The dividends declared on each fiscal period, up to the amount of net profits of such period, after the payment of applicable taxes, including capital gains earned and registered in the company books; c) The obligations resulting from services contracts where fees are established for the transfer of technology; d) Royalties included under local manufacturing contracts, without the need for prior authorization from the Central Bank.

  10. III. Legal Regime Applicable to the Franchising Contract in the Dominican Republic 4.Civil Code: Common law. 5. Tax Code (withholding at the source). 6. International Treaties. • Free Trade Agreement Dominican Republic-CARICOM; • Treaty DR-CAFTA.

  11. IV. Matters of Interest for the Franchise Contracting Parties 1. Matters to take into consideration by the Franchisor: • Scheme to be used: foreign grantor or establishment of a branch in the Dominican Republic; • Decision on exclusivity or not of the Franchisee; • Registration under Law 173; • Withholding on the source for royalty payments;

  12. IV. Matters of Interest for the Franchise Contracting Parties 1. Matters to take into consideration by the Franchisor: • Protection of Intellectual Property; • Personal guarantee from the representative of the Franchisee; • Protection of the Franchisor for obligations to be assumed by the Franchisee (prohibition of invoicing and assuming obligations using the commercial name: “Appearance Theory”); • Assignment of the franchise: Change of control of the Franchisee.

  13. IV. Matters of Interest for the Franchise Contracting Parties 2. Matters to take into consideration by the Franchisee: • Corporate vehicle; • Scheme of Investment: Separation or not of the franchise right and the right to develop each business unit; • Existence of previous registrations by concession holders; • Commitment from the Franchisor to provide technical assistance; • Right to early termination of the Franchisor under the Contract;

  14. IV. Matters of Interest for the Franchise Contracting Parties 2. Matters to take into consideration by the Franchisee: • Exclusivity Rights; • Registration under Law 173; • Protection of the Franchisee for obligations assumed by the Franchisor or by previous franchisees; • Rights of first refusal for the exploitation of the franchise in other territories; • Most Favorite Nation clause: In the event of coexistence of more that one franchisee in one same country.

  15. Jiménez Cruz Peña Citigroup Tower at Acrópolis, 14 Floor Av. Winston Churchill Santo Domingo, D.N., Dominican Republic (809) 955-2727 - Telephone (809) 955-2728 – Fax info@jcpdr.com www.jcpdr.com

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