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Franchising in Caribbean: Key Legal Issues
Key legal issues faced by franchise companies looking to expand in the Caribbean.
BY BABETTE MARZHEUSER-WOOD AND NATALIA MICHALCZYK
The Caribbean region consists of a large number of countries each with its own laws. Some countries apply common law principles (BVI) whilst others follow elements of Dutch law (Sint Maarten), or French law (Guadeloupe, Martinique, Saint Martin and Saint Barthelemy). Franchising is not yet well developed in these island nations, and as a result, most countries in the Caribbean do not have franchise laws.
In this article, we look at franchising in Anguilla, Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominican Republic, Grand Cayman, Guadeloupe, Jamaica, Martinique, St Barthelemy, St Kitts, St Maarten, St Martin, Tortola and Virgin Gorda (BVI) and Trinidad & Tobago.
Key issues faced by franchise companies looking to expand in the Caribbean States are currency controls, enforcing foreign judgments and arbitral awards as well as franchise disclosure and registration obligations.
CURRENCY CONTROL
Companies should pay particular attention to foreign exchange laws that may impact the ability of the franchisor to receive payments in a foreign currency.
In Bahamas and Barbados, franchisees need to obtain permission from the Central Bank every time a transaction is made in any foreign currency. The application needs to be supported by documentation, including a copy of the Franchise Agreement. The permissions are not automatic, they can be granted subject to conditions or refused altogether.
WITHHOLDING TAXES
Withholding taxes are applicable to royalties in the majority of Caribbean states. Tax on royalties ranges from at 5% in Barbados to 27% in Dominican Republic. Some states such as Belize impose a withholding tax on all payments except royalties, while others such as St Kitts and Trinidad and Tobago apply taxes to both royalties and service fees.
Most franchisors include in their franchise agreement a grossing-up clause which obliges the franchisee to pay all sums due to the franchisor, without deductions of local taxes. However, given the high level of withholding taxes, we have found that in practice, most franchisees refuse to gross up payment or disregard the contractual arrangements and pay the fees net of tax.
Some countries -- such as for example the Bahamas, Grand Cayman and the BVI -- do not apply withholding taxes to royalty payments.
ENFORCEMENT OF FOREIGN JUDGMENTS AND ARBITRAL AWARDS
Many Caribbean states recognize foreign judgments and arbitral awards. However, typically the enforcement is not automatic and requires the party to obtain leave from the local court for enforcement, or to complete an exequatur procedure. Not only can this be expensive and time consuming, but it also offers the franchisee an opportunity to raise objections and further delay payment.
Other jurisdictions, such as Jamaica, offer relative ease of enforcement. Franchisors should ensure their home country has a treaty arrangement with the relevant Caribbean state that facilitates collection and enforcement. For example, Belize recognizes judgments of the English Courts and the French overseas territories recognize judgements of the French Courts. US judgement can be more difficult to enforce.
Many Caribbean States are party to the New York Convention on the enforcement of foreign arbitral awards. This includes Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominican Republic, Grand Cayman, Jamaica, Tortola and Virgin Gorda (BVI) and Trinidad and Tobago.
In French overseas territories, it can be expected that the courts will also consider whether it is fair and reasonable to require a local franchisee to attend court proceedings or arbitration proceedings abroad. In a recent decision involving a Subway Franchise, the French courts found that the requirement to arbitrate in the US was unfair because of the expense involved for the franchisee. The rationale behind this decision was that the costs for US attorneys, travel and costs associated with US arbitration would be prohibitively expensive for the franchisee.
DISCLOSURE REQUIREMENTS
French law jurisdictions directly adopt the French Commercial Code. Therefore, the franchisor will have to provide the franchisee with a disclosure document outlining key contractual provisions as well as financial information and market data.
It remains to be seen if Dutch-dependent Sint Maarten will apply the new Dutch franchise law.
In the Dominican Republic, it is recommended to provide the franchisee with a disclosure document. Dominican law does not say when the document needs to provided, what form it should take, or what information has to be included. Franchisors need to take a common-sense approach and assess which information is important to be disclosed to the franchisee as a pre-emptive step against culpa in contrahendo claims.
Antigua and Barbuda do not require a disclosure document per se, however, but the negotiation of a franchise opportunity needs to be published in the Official Gazette.
Apart from the above listed jurisdictions, there are no other Caribbean states that require franchise disclosure.
REGISTRATION
None of the Caribbean States require the registration of a franchise agreement per se.
Two states – Antigua and Barbuda, and Barbados require the Franchisee to obtain a Franchise Licence. This requirement needs to be carefully considered. It is a form of business licence. A Franchise Licence can be difficult to obtain and may be subject to conditions. Sometimes the application is refused altogether. If the franchisee successfully obtains the Licence, it will only be valid for one year. If the franchisee has not obtained the required licence, it may be subject to fines and other penalties.
The Dominican Republic has a designated franchise law that protects the local franchisee against termination. Upon registration of the franchise agreement, the local franchisee is entitled to certain additional rights and protections. One of the most important effects is that the franchisor cannot terminate the franchise agreement other than for just cause.
CONCLUSION
The Caribbean countries have a franchise market catering for locals and foreign tourists alike. Well known US brands such as IHOP are expanding in this growing market. Arcos Dorados - the McDonalds Master Franchisee for Latin America - is reporting buoyant growth. Real estate, car rental and hotels are also very active franchise sectors. However, the unique nature of the legal systems of the Caribbean islands must be taken into account when structuring your franchise relationship in these markets.
Babette Marzheuser-Wood, is Global Head of Dentons Franchise Advisory, and Natalia Michalczyk is an associate at Dentons.
This article is based on an overview from Dentons. Republished with permission.
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