This article is written by Damini, pursuing an Executive course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.
Franchise Agreement (“Agreement”) is a document which enables a Parent Company to operate through a number of branches run by different individuals who operate in compliance with the standards and specifications imposed by the Parent Company and based on its specific business model of. The Parent Company through the agreement shares the trademark and gains royalty in exchange for the use of the brand name. A Franchise Agreement begins with the date on which the Agreement is executed and the place where it is executed followed by the name of the parties.
There are two parties to a Franchise Agreement, the Franchisor that is the Parent Company or the Master Franchisor as the case may be, which provides with the brand name and the Franchisee, the third party which borrows the brand name to run the business.
For example in case of Gold’s Gym, the franchisor where the company has the head office in the United States, the company which has purchased the master rights is the franchisor and the individual who wants to gain the trade rights is the franchisee.
A Franchisee pays two kinds of fees to a Franchisor, first, being the Royalty fees which is to be paid for the use of proprietary mark and the second being the Franchise fees paid for the grant of rights of operating the business/system.
Franchise Agreement Terms
A franchisee agreement is mostly non-negotiable and is generally same for all the franchisees, however irrespective of the same there are certain terms which can be duly negotiated, the terms are generally drafted in a manner so as to not in any way curtail the right of Franchisor to exploit the business of the Franchisee.
Stated below are certain important clauses of a Franchise Agreement.
The owner of the business has his image and brand name associated with the Franchisee therefore the Franchisor also has the responsibility to help the Franchisor maintain the prescribed standards since the onus of maintaining the same cannot be solely enshrined on the Franchisee.
Duty to Provide Financial support: A franchisor has the responsibility to provide financial support to the franchisor whenever required to keep up with the standards of the brand. This could include initial set up costs or funds for effective advertisements.
Duty to Train the Employees: It is the responsibility of the Owner of the franchise to provide initial training to the employees in accordance with the business model on which it operates. This is to ensure that the product quality or quality of services provided is maintained. However, the Franchisee agreement tends to put a cap on the number of employees the Franchisor would be liable to train in order to cut unnecessary costs incurred in training when one adequately trained employee can further train and educate the other employees, this being said the Franchisor exercises discretion in this matter.
Provide Leadership: It is the duty of the Franchisor to provide guidance to the franchisee on running of the business and provide adequate solutions of any problems encountered during the process, this includes the duty to provide with manuals and help to keep the Franchisee updated with the changing business model.
Help in Advertising: The Franchisee pays a royalty fee to the Franchisor in exchange for the brand name, therefore it is the duty of the franchisor to help the franchisee in advertising the prospects of the business so as to ensure that the franchisee obtains economic benefits upon opening up of the business, hence, the Franchisor provides aids in advertising to solve two purposes which is to help out the new franchisee in expanding its business and secondly to ensure that the Franchisee does not indulge in any form of advertising that could in any manner be detrimental to the image of the Franchisor, therefore a Franchise Agreement often provides that the Franchisee takes the approval of the Franchisor before publishing any advertisement.
Mark territories to reduce competition: It is probable that a franchisor lends the Brand Name to more than one Franchisee in the same city therefore it is also important that the franchisor clearly demarcates the territory in which the franchisee are to operate to eliminate overlap of the same and prevent increase in competition for one franchisee by another franchisee of the same company.
The Franchisor lends his Brand Name to the franchisee therefore the franchisee is bound by the obligations to maintain the standards and abide by the standards set by the owner or Principle franchisor.
Make necessary investments: A Franchisee has the duty to uphold the image of the Franchisor, therefore it has the duty to make all necessary investments to keep up with the standards of the Franchisor’s business, this includes all the investments it shall have to make for the advertisement of the business, as well all the additional expenses it might have to undertake for training the employees. In conclusion it shall have to bear the responsibility of financially supporting its business.
Work in partnership with the Franchisor: Any Clause outlining the relationship of the Franchisee and the Franchisor has to be very clearly drafted, a Franchisee agreement is a mutually beneficial agreement, while the Franchisor earns by way of royalty and franchise fees, the Franchisee also obtains economic benefits by effective exploitation of the business, and thereby both act as team. Therefore, it is the responsibility of the Franchisee to take all the necessary approvals and suggestions from the Franchisor for running the business as and when required. The Franchisee has a responsibility to comply with all the directions, but at the same time the Agreement must also provide some discretion to the Franchisee to take all the necessary decisions regarding the day to day business.
Initiate effective communication: It is the responsibility of the Franchisee to seek help from the Franchisor wherever necessary, take permissions and approvals, and get the ideas for upgradation of business model sanctioned from the Franchisor. For the relationship between the franchisor and franchisee to run smoothly the Franchisee has to put the necessary efforts.
Both the Franchisor and the Franchisee makes necessary investments for the advertisement of Franchisee’s business. The Clause specifying the distribution of advertisement costs also puts an obligation upon the Franchisee to use the brand name to advertise only the specific Franchisee business mentioned in the Agreement and to refrain from causing any damage to the reputation of the Franchisee.
The rights clause highlight the specific rights of the Franchisor to develop and promote the Franchisee business and without causing any unnecessary fetters in the operation of business also inspect from time to time so as to ensure the Franchisee business is at par with the Franchisor’s business. The Franchisor has a right to operate after entering into the franchisee agreement and a right against arbitrary termination of the Agreement, however, has no territorial rights with respect to the said business.
Selling/Transfer of Franchise
Through a Franchisee Agreement the Franchisor confers upon the Franchisee and in alienable, non-transferable right to use the proprietary mark. The Franchisee holder has no right to transfer the business to any third person unless and until the Franchisor and the Franchisee enter into an agreement for the same.
The rights of the Franchisor are limited with respect to the business and are subject to the terms and conditions of the agreement. This is necessary to ensure the rights of the Franchisor.
In a Franchise Agreement the franchisor often shares its trade secrets or trade information which is exclusively in its knowledge, after entering into a Franchise Agreement. It is the responsibility of the Franchisee to maintain the confidentiality of such information while the Franchise Agreement is in option as well as after the Franchise Agreement has been terminated. A confidentiality clause is one of the most important clauses of the Franchise Agreement and is drafted with utmost caution.
Such a clause clearly states that the Franchisee has a limited right to use the right granted under any Patent, Copyright or Intellectual Property rights of the Franchisor, and the right only meant to be used in connection with an existing relationship between the parties. There are two parties to such confidentiality clause the disclosing party, which is to retain all the title, patents, and Intellectual Property rights and the Receiving party which guarantees to abstain from disclosing any information provided to it.
Renewal and Termination
It is very important to mention the commencement and expiration date in a Franchisee Agreement very clearly. Post the expiry of the Agreement the Franchisee can seek further renewal of the Agreement.
A Franchisor is however awarded with an additional right to terminate the Franchisee agreements where there has been breach of any of the conditions of the Agreement, where the Franchisee has been incapable of operating in compliance with the required standards or if the Franchisee holder has been declared insolvent.
Further a Franchise Agreement can also be terminated if the Franchisor is convicted of any offence pertaining to the operation of new Franchisee business, has been unable to keep up with the payment of fees and settlement of dues and most importantly acts in any manner which can potentially harm the reputation of the Franchisor.
The severability clause is incorporated to ensure that in a condition where any part or clause of the Agreement is deemed invalid or void according to the law, it shall have no effect upon the Agreement unless and until the purpose of the Agreement is extinguished by severing of such part. Further the clause often has a provision for substitution of the invalid part with the lawful valid clause.
The jurisdiction Clause at the end of the Agreement is incorporated to specify the place where a suit shall be filed in case a dispute ever arises between the Franchisor and Franchisee.
The Article highlights all the necessary clauses that are part of the Franchise Agreement, there isn no specific legislation which deals with the Franchise Agreement in India and the Agreement is guided by the provisions of the Indian Contract Act, 1872, The Competition Act, 2002, Income Tax Act, 1961, Consumer Protection Act, 1986, Arbitration and Conciliation Act, 1996, The Foreign Exchange Management Act, 1999 etc.
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