INTRODUCTION
A franchise agreement, also sometimes called a Business Franchise Agreement, is a legal contract in which a well-established business (franchisor) gives rights or a license to use brand name, logos, trade name to another party (franchisee) for them to setup and run a business, in exchange for payment of a fee or revenue share generated by the franchisee. Thus, a franchisor gets a licensee fee and some percentage of the profit whereas the franchisee gets the access to the brand name, goodwill, training and a proven methodology.
Nowadays, franchisee business is very popular because everyone wants to get associated to a well-established business name, to minimize their efforts and increase their chance of earning huge profits in less time. Indian market is loaded with foreign and Indian brands such as McDonald’s, KFC, Nike, Reebok, Big Bazaar and many such brands.
Such new business reaps the benefits from the existing goodwill and infrastructure of the franchised business. It also adopts the franchisor’s manner of business operations subject to the franchisor’s license terms, guidelines, controls or instructions. In an ideal scenario, there should be no difference in quality if a customer consumes product from the franchisor or the franchisee’s store. In this article, Team YLCC brings you comprehensive information regarding a franchise agreement. Read on!
FRANCHISE AGREEMENT AND ITS TYPES
A franchise agreement sets out the nature and purpose of the franchise agreement, grant of necessary IP licenses, any restrictions on the same and the parties ongoing rights and liabilities. Since it has specific investment obligations and continuing duties from both the parties, it is different from a license agreement.
There are four types of franchise agreement:
SINGLE-UNIT FRANCHISEE
In this type, the franchisor gives the right to franchisee only to open one single unit within an exclusive geographical limit. The single-franchisee operator has a limited operational area.
MULTI-UNIT FRANCHISES
As the name suggests, more than one unit can be opened in this type of franchisee
AREA DEVELOPMENT FRANCHISES
An area development franchise allows a franchisee to open multiple units over an agreed amount of time within a specified geographic location.
MASTER FRANCHISES
A master franchise agreement also referred to as sub-franchising, gives a franchisee the same rights as an area development agreement but also gives that franchisee rights to sell franchises to other people within its territory.
What sectors are heavily involved in the franchise business?
The franchise business can be broadly categorized into five heads viz. business franchise, investment franchise, conversion franchise, product or distribution franchise, and job franchise. There are around 120 sectors that are involved in the franchise business. Some of which are food and restaurants, cafes, footwear, clothing, luxury hotels, retail sector, etc. We all know some of the common franchises which derive from FDI and our lives are incomplete without these. For example, many multinational companies have started their operations, through franchising, and are also expanding very aggressively. Some of the notable names include – McDonald’s, Pizza Hut, KFC, Pizza Corner, Domino Pizza, Shell, Reebok, Levis, Lee, Adidas, Pepsi, Coke, Blue Dart, DTDC, Safexpress, United Parcel Service (UPS), The Sheraton and Ramada Inn, etc.
Important clauses to be included while drafting a Franchise Agreement
A well written Franchise Agreement helps in running franchise business smoothly. To put it in simpler words, the franchise agreement governs the relationship between the parties and it stands to protect the parties in an event of a dispute.
SCOPE
At the very outset, the franchise agreement should set out certain important aspects of the agreement like the nature of the business, or project that the parties have in mind, the geographical scope, the subject matter, and the term of the franchise. The subject matter should be clearly mentioned in this clause. Based on the subject matter the entire agreement can be tailored. Scope clause is analogous to a preamble, it gives you the central idea of the entire agreement. This clause should be written in a clear and unambiguous language as it can be referred from time to time for interpretation of the other clauses. The intentions of the parties could be deduced from the scope of the agreement
FRANCHISOR’S RESPONSIBILITIES
Responsibility of franchisor is very important clause in a franchise agreement. This clause set out the responsibilities of franchisor for a smooth franchise business. The parties negotiate on the responsibilities of the franchisor to act in a certain manner during the term of the agreement and thereby impose some obligations. These obligations should enlist under this clause.
Such responsibilities could include details about the:
- The finalization of locations
- provision of operations manual
- education, and training,
- the exclusivity of the franchise,
- regulatory or legal approvals,
- ongoing support, promotions, advertising, etc.
This will help the franchisee to bind the franchisor to abide by the responsibilities.
FRANCHISEE’S RESPONSIBILITIES
A franchise agreement contains certain activities that each party must perform during the term of the agreement. The responsibilities to be carried out by the franchisee are crucial in nature as it will determine the business income. Such responsibilities include the
- compulsory services to be rendered,
- infrastructure, and
- investments,
- adhering to the location of the outlet,
- adhere with the operating manual,
- protection of intellectual property rights, and confidential information,
- restrictions of suppliers (the franchisor may provide a list of suppliers and may obligate the franchisee to purchase materials on from such suppliers),
- co-operation during the inspection of accounts and inventory audits,
- good faith, etc.
CONFIDENTIALITY AND INTELLECTUAL PROPERTY
A franchise is a brand-based business. The franchisor has spent many years building its reputation and goodwill in the market. The internal strategies and the management plans are shared with the franchisees when they enter into an agreement. The confidentiality clause aims to protect such confidential information that is unique to the brand. The confidentiality clause should outline the permissible usage of intellectual property. The clause should also protect the trade secrets, know-how, business models, and designs as well as other relevant details. Apart from the above aspects, the parties must also negotiate to make provisions to protect confidentiality after the termination of the agreement.
In this clause you also must mentioned that The Franchisee acknowledges that the Franchisee has no rights in or to the Intellectual Property and undertakes not to do or omit to do anything by which the goodwill and reputation associated with the Intellectual Property might be diminished or jeopardised.
LIABILITY
A franchising arrangement generally gives rise to several liabilities concerning defaults, frauds, infringements, negligence, etc. The liability clause should outline the events under which the franchisee would be held liable. The clause should also provide adequate provisions for the indemnification of the parties for any liabilities arising out of the other party’s breach of contract. The liability clause must protect the party against the malicious act of another party. Mention specifically the events where the liability clause is capped or uncapped.
TERMINATION
The termination clause usually contains three important components: 1. pre-termination obligation, 2. Termination, and 3. post-termination obligations. All three components of the clause should be drafted diligently. Firstly, the clause should determine the events/grounds under which the agreement could be terminated. Distinguish between immediate termination and curable breach. Some events like fraud, criminal activities, breach of IP and confidentiality can enable immediate termination. However, some events like non-compliance of operating manuals, audit miscalculations may provide a cure period. On the failure of curing the defect, a termination notice can be served. The pre-termination obligations include the details of the termination notice. The party which intends to terminate must serve prior notice to another party. The time and mode for serving such notice should be clearly mentioned in the clause. The next part must mention the mode of communication of acceptance of the termination notice. Lastly, the clause should enlist the obligations that would arise on the termination of the agreement. This is the heart of this clause, as it will determine the actions that would be brought in an event of termination. Some of the important obligations that one must not miss while drafting the termination clause include maintaining confidentiality, returning all the materials provided by the franchisor, payment of all the dues, etc. The franchisor may also covenant that the franchisee should not open a competing business within the same location.
ACKNOWLEDGEMENTS
The acknowledgment clause is in its true sense, an acknowledgment from the franchisee that he or she has read and understood the agreement, has had an opportunity to review the agreement with an independent counsel, and has signed the agreement voluntarily. This clause should reflect all the important terms of the agreement. Such terms should include all the goals in the form of income, termination, confidentiality, fees, charges, payments, audits of accounts, right of franchisor to inspect the business, liabilities on breach of terms, etc. The clause must be drafted in a manner that the voluntary acceptance of all the terms by franchisee should be clearly seen.
PROPERTY
The entire concept of franchise agreement revolves around setting up multiple outlets at different locations. The property clause should be drafted in a way that the franchisee is bound to carry out its business on the given address. This clause should expressly provide for the release of the franchisor from any sort of issue, that may arise concerning the property of the business. This clause protects the franchisor from the unauthorized change in location by the franchisee. The mode of obtaining the property and the covenants related to it should also be made amply clear under this clause.
GOVERNING LAW & LANGUAGE & JURISDICTION
The parties can negotiate on what laws should drive the agreement. The governing laws would depend on various factors such as the place where it is made; the place of performance; the domicile, nationality or business center of the parties; the situation of the subject matter, and so on. However, once the parties decide on the laws that they want to apply to the agreement such should be clearly mentioned under this clause. The parties should also mention the jurisdiction of courts that would decide the dispute.
DISPUTE RESOLUTION
The dispute resolution clause should be clear and descriptive. It should determine the forum to which parties wish to refer the dispute to. When the parties decide on resolution through Arbitration, all the parameters required to draft an arbitration clause should be followed. The arbitration clause would normally stipulate the manner in which the arbitration is carried out. The clause would also mention the seat and venue of the arbitration, the procedure for appointment of the arbitrator, the fees payable, the laws applicable, the language of the arbitration, appeals, etc.
MISCELLANEOUS
Assignment
The assignment clause outlines the extent of the permissibility of the assignment of the intellectual property of the franchise. It should clearly state the permissions required and the restrictions imposed on such assignments
Waiver
The waiver clause is to ensure that no party accidentally waives its responsibilities under the agreement. It also aims to ensure that there is no waiver of the right to bring proceedings and recover damages, etc. under the agreement in the event of a breach of the contract by the other party. Such a waiver which will be detrimental to the rights of the other party and should not be allowed.
Contract
The purpose of the above clause is to ensure that the parties read the agreement including the schedules and annexures as a whole. The agreement should be interpreted as a whole.
CONCLUSION
Franchise Agreement defines the relationship between the franchisee and the franchisor, including both parties’ rights and liabilities. The agreement is more favourable towards franchisor, it ensures that the franchisor has better control over the business’s operations. It provides information for franchisee to adopt the business and branding and also mentioned about the penalties for mismanagement or violation of business branding. In simple terms Franchise Agreement is very important document for an franchise business and it should be drafted transparently.
Indian Contract Act, 1872, Consumer Protection Act, 1986, TradeMark Act, 1999, Copyright Act, 1957 are statutory enactments applicable on Franchise Agreement.
REFRENCES
- https://vakilsearch.com/franchise-agreement
- https://www.wonder.legal/in/modele/franchise-agreement-in?msclkid=818a1035ce2117010e9471c79c343de9
- https://cleartax.in/s/franchise-agreement
YLCC would like to thank Nikita Jain for her valuable insights in this article.
