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Franchising in Taiwan: governing law

by Gregory Buxton, Yi-Kai Chen and Bryan Tan

In our previous article we took a look at obtaining preliminary injunctions in Taiwan. Now, we turn to governing law. Governing law and dispute resolution clauses are often relegated to the end of commercial agreements together with other “boilerplate” provisions. Franchise agreements are typically no different. However, these two provisions can have a significant impact on a franchisor’s ability to enforce its contractual rights in Taiwan.

International brand owners almost invariably insist on using a single governing law across all their franchise agreements worldwide. This is understandable as it promotes consistency in administration and enforcement of the franchisor’s contractual rights. However, by electing to litigate or arbitrate a dispute outside of Taiwan, a franchisor may inadvertently be erecting substantial impediments to enforcing its rights in Taiwan.

Taiwan is not a signatory to the Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents nor the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Although a successful plaintiff or claimant in a foreign proceeding can typically get its foreign judgment or award enforced in Taiwan, the process can take a significant amount of time. The foreign judgment or award would also be subject to challenge in Taiwan courts.

Challenges to foreign judgments would be brought under Article 402 of Taiwan’s Code of Civil Procedure. Challenges to foreign arbitral awards would be brought under Articles 49 and 50 of Taiwan’s Arbitration Act. Without going into too much detail, the most common successful challenges we encounter are challenges based on failure to provide proper notice to the defendant or respondent. Most Taiwan courts have held that if notice were delivered to the parties pursuant to the laws and/or arbitration rules by which the foreign proceeding was bound, the requirements of proper notice would be fulfilled. However, we note that in a minority of cases, some Taiwan courts required actual receipt of notice, and found foreign judgments and arbitral awards unenforceable in Taiwan on the grounds that the defendant or respondent did not receive such notice. If franchisors insist on having a single, foreign governing law and dispute resolution venue, we strongly recommend direct personal service of all related notices and documents. This single precaution greatly reduces the risk that Taiwan courts may reject requests to enforce the related foreign judgment or arbitral award.

If a franchisor is willing to consider amending its form franchise agreement, we recommend including a non-exclusive jurisdiction clause at least with respect to the franchisor, allowing the franchisor to initiate an action or seat an arbitration in its home jurisdiction or in Taiwan at the franchisor’s election. If the governing law of the franchise agreement were foreign law, such a provision would lead to Taiwan courts or arbitral tribunals applying foreign law, which they would do but which typically adds significant time and expense to the proceedings.  Therefore, we also suggest considering applying Taiwan law should the dispute resolution venue be located in Taiwan.

Of course, many factors affect any decision as to governing law and dispute resolution venue.  Franchisors rightly examine issues related to ease and cost of pursuing any action and the location of the counterparty’s assets. We suggest that if the franchisee has a substantial portion of its assets located in Taiwan, the franchisor should consider maintaining at least the option to pursue proceedings in Taiwan under Taiwan law.

In our next article we will look at fair trade and disclosure. If you have any questions or require additional information on franchising in Taiwan, please contact Greg Buxton at gbuxton@winklerpartners.com.

 

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