FRANCHISE AGREEMENT

– Submitted by: Harshvardhan Abhimanyu Karad (MNLU Mumbai)

FRANCHISE AGREEMENT:

Definition:

the franchise agreement is a legally binding contract between the parties to a franchise relationship. A franchise agreement is a contract of adhesion. One has to sign the franchise agreement in order to take ownership of the franchise. The franchise agreement is a document that contains the rights and obligations of the parties.

The franchise relationship is not employer-employee. The reason behind this is that the franchisee operates a separate business in accordance with the franchise system. q2z1wez2 franchisee is an independent business owner and the franchise agreement reflects this separation of interests. A franchise agreement governs everything about the business that has to be run and what the parties should expect from one another1.

Who is Franchisor?

The franchisor is basically one who gives franchise. A franchisor is typically an entrepreneur that has laid the grounds for a successful and established business. The franchisor brings valuable assets to franchise relationships.

Who is Franchise?

The franchisee is basically one who takes the franchise. Rights and obligations are granted to the franchisee by the franchisor through the franchise agreement.

Role of Franchisor:

A proven business model should be present. To become a franchisor, the business of the franchisor should be at a level at which the model should work irrefutably. The consumers/customers should be able to recognize the brand and they should seek the products/services provided.

The franchisor must have a registered trademark. Registered trademarks are one of the most valuable assets that a franchisor can give to the franchisee. Registered trademarks are acquired through careful research as well as trials and errors.

Acquiring such trademarks require great dedication. Franchisors must have a well-established business system. From working with customers and clients to delivering products services, the franchisor should have an established business model that franchisees will follow.

Also, the franchisor must provide proper guidance and training to the franchisee. With the help of guidance and training of an experienced franchisor/entrepreneur, franchisees can learn various things from someone who has already achieved success.

Role of Franchisee:

Franchisees need to pay a fess known as Franchise Fee to obtain the franchise. Rights to establish a franchised business, a part of gross revenues, fee for advertising costs are provided once the franchise fee is paid.

Franchisees take the business system, guidance, training, etc. and put it into practice in their respective location. Franchisees have to control daily operations independently.

Components of franchise agreement:

  1. The first part of the franchise agreement contains information about the parties to the contract. It also includes information about the ownership and overall obligations of the franchisee to operate its business to a certain brand
  2. A franchise agreement gives rights to use the franchisor’s name, trademarks, service marks, logos, slogans, designs and other such things. Intellectual property rights also granted to the
  3. A franchise agreement obliges the franchisor to provide initial training and necessary support from time to time. The franchisor is obliged for both the initial and entire time of the
  4. The franchise agreement also provides the franchisor’s obligations to support the franchisee with marketing and advertising. In some franchises, franchisees need to spend a certain percentage of income on local
  5. The franchise agreement contains a part in which the duration of the franchise is stated. Generally, these types of agreements operate for long durations. The majority of the time, the duration is of 10 years.
  6. But it can be of 20 years or more in some scenarios. These agreements are of long duration because they will protect both the parties, their investment and profits. This duration can be renewed in keeping the mind conditions for
  7. The territory of the franchise is also stated in these agreements as territories are very important to limit market saturation.
  8. Most of the time, franchisors do not give the franchise to more than one franchisee near to each other as it will cause loss to both the franchisor and franchisee. We cannot see two different MacDonald’s outlets near each.
  9. Franchise agreement contains a part that deals with the cost of franchise ownership fees, initial fees, monthly royalty fees, marketing and advertising fees and any other expenses that can
  10. Each franchisee selects its own site. But the franchisor has the right to approve the location in most cases. The franchisee must follow the franchisor’s standards. Furniture, fixtures, upholstery, landscaping and signage everything should be according to the franchisor’s demands. Some franchisors require the franchisee to use approved vendors and service providers. The franchisor will inspect the build-out for adherence to the franchise system
  11. The franchise agreement also includes the conditions for early termination. Generally, the franchisor has the greatest termination rights while franchisees have near to zero rights to terminate Various causes for early termination can be the failure to pay a franchise fee, filing bankruptcy or failing to make needed repairs to premises. Also, some conditions are also mentioned to cure the default.
  12. The franchise agreement contains some guidelines for unwinding the business relationship in the case of early termination. Usually, this part contains a long list of specific obligations for the
  13. Franchise agreements do contain restrictive covenants limiting what franchisees can This is done for killing the possible competition. Also, agreements contain non-compete obligations that play a role after the termination.
  14. Franchise agreements contain an arbitration clause. It is used in situations of any dispute. The franchisor sometimes retains the right to file a lawsuit to obtain an injunction under certain conditions. The agreement will specify the jurisdiction for filing any lawsuit. The choice of jurisdiction will be favourable to the
  15. The franchise agreement will include the requirement for the franchisee to maintain certain insurance coverage throughout the term of the Expect indemnification clauses. Etc.

There is no standard format of the franchise agreement. Each and every franchisor creates its own contract. Although there are some common provisions, they need not to be exactly the same. Even though a franchise agreement is created by one party with greater bargaining power using standard form provisions, sometimes it’s possible for franchisees to negotiate minor points. Such minor points can be such as an instalment schedule for the initial franchise fee, etc

LAWS GOVERNING THE FRANCHISE AGREEMENT:

Franchising is an innovative way of expanding the business. Franchising can be spread all over the world if everything goes on the right path. In the world, different countries have different laws applicable to the franchising process. For example, we can take the United States of America (USA), the USA has various laws that govern the franchising industry.

These laws are there for governing the relationship between franchisor and franchisee. These laws have control over everything such as registration, disclosure forms, etc. Countries like Australia, Brazil and Malaysia have various strict laws for governing the franchising industry.

In many other countries all around the world, there are no specific laws are present for the governing of the franchise industry. In such places, more general laws are applicable to the franchise industry. For example, European Union. Franchise relationships are governed by competition laws in European Union.

While talking about our own country, India, even though there are no specific laws for the governing of the franchise industry, a range of other laws can be made applicable in this industry. Laws addressing contracts, competition, consumer protection, intellectual property, labour, taxation, property, etc can be applied to the franchise agreements.

Following is the list of all the common laws related to a franchise agreement in India:

The Indian Contract Act, 1872:

The Indian Contract Act is like the mother law for a franchise agreement. It governs all the fundamental aspects of franchise agreements. This act governs various aspects such as offering, acceptance, consideration, validity, breach and the termination of the contract. The act also ensures the parties so can consent freely and are competent to contract.

This act gives the definition of contract and all other aspects of it. Some of the important sections of the Indian contract that are related to the franchise agreement includes section 2(a), 2(b), 2(h), 11, 13, 23, 24 and 25. Each and every franchise agreement has to be in accordance with all above-mentioned sections to be legally enforceable.

Section 2(h) of the Indian contract act says that a contract is an agreement enforceable by law. While all other mentioned sections talk about all other elements that are required to constitute a contract.

The Competition Act, 2002:

This act was enacted in the year 2002. The competition commission of India enacted this law but it was 2009 when it came fully in the effect. The main objective of this law is to restrict various bigger franchises from creating a monopoly in Indian markets.

This act promotes competition. Also, freedom of trade is also promoted by this law. Various other objectives of this act include consumer protection, prevention agreements that restrict the competition, activities that can lead to preventive measures of competition.

This act prohibits the arrangements that can be in relation to production, supply, distribution, storage, acquisition, control of goods, prevention of services, etc which can ultimately lead to competitiveness. It aims to ensure that price maintenance does not inhibit competition in the marketplace.

Intellectual property Laws:

Mainly, in India, intellectual property rights i.e., IPRs are governed by four acts. Those four acts are The Copyright Act, 1957; The Patents Act, 1970; The Trademarks Act, 1999 and The Designs Act, 2000.

As the titles of acts mentioned above suggest, these acts deal with various concepts like trademark, patent, copyright, etc. These are all essential for the survival of franchise agreements and ultimately the franchise industry.

These acts provide protection for all the above-mentioned elements and allow legal actions to be brought. These legal actions can be brought against the third parties for the infringement of intellectual property rights.

Consumer Protection Acts, 1986:

The consumer protection act was initiated in the year 1986. The main objective of the act was to provide resources for consumers that received defective or wrong goods as well as unsatisfactory services.

As a result, a consumer is generally provided with a large number of safeguards against unfair trade practices. This act specifically promotes the consumer and interests of consumers. So, we can say that the Indian consumer protection laws are pro-consumer laws. This law encourages the consumer to file complaints if anything wrong is done

with him. So, a consumer can file actions and complaints against the franchisor or franchisee or both regarding the unfair trade. The nature of the franchise agreement affects against whom the complaint can be filed. Therefore, in this way, this act governs the franchise agreement.

The Foreign Exchange Management Act, 1999:

Also known as FEMA, this act governs the payment in currencies other than Indian National Rupee and related parts. This act is applicable to the international franchise. Various big brands have their franchise all across the globe. For example, Adidas, KFC, Subway, etc all have their franchise in various cities across the whole of India.

And these brands are not Indian brands. So, these franchisees come under cross border franchisees. These all franchises are controlled by this legislation especially the payment in foreign currency part. The Indian government has lifted a number of the prior restrictions on foreign franchisors’ ability to charge certain fees without needing governmental approval.

Labour Laws:

There are various labour laws which are present today in our country dealing with the labours and other related aspects. There are nearly 44 different labour laws but the 4 newly enacted codes will replace them. Those 4 are The Industrial Relations Code, 2020; The Code on Social Security, 2020; The Occupational Safety, Health and Working Conditions Code, 2020 and The ode on Wages, 2019.

These laws are also applicable to the concept of the franchise agreement. Both franchisor and franchisee must keep in mind such labour laws. Most of the rules, responsibilities that are in relation to the workforce are clearly delineated in such agreements. The Industrial Relations Code, 2020.

Income Tax Act, 1961:

This act governs the tax aspects of any franchise in India. Also, it governs that the cross-border franchisor complies with local tax regulations with respect to any applicable tax treaties. All the royalties or the franchise fee are taxed at applicable rates in India.

The Arbitration and Conciliation Act, 1996:

Alternate dispute resolution is promoted extensively in India and as a result, this act was enacted in the year 1996. This can be a way to get rid of unsolved cases that are present today in our country. The Arbitration and Conciliation Act expands the concept of arbitration to resolve the issues wherever possible.

Domestic and international arbitration laws in India are governed by The Arbitration and Conciliation Act. When there is a dispute between the franchisor and the franchisee, this law comes into effect.

Provincial Insolvency Act, 192021:

The Provincial Insolvency Act, 1920 comes into effect in the case of individual franchise units or franchise chains’ financial insolvency.

Rules of Reserve Bank of India:

The franchising agreement is also subject to all rules issued by the Reserve Bank of India (RBI)

DOS AND DON’TS WHILE DRAFTING FRANCHISE AGREEMENT:

A franchise agreement, being a legally valid document, binds all the parties and require them to adhere to the provisions made in the agreement. Also, it helps in the enforcement of the obligations that are made by mutual acceptance.

It offers to enforce the terms of the contract without any misunderstandings that lead to a longstanding relationship between the parties enabling to avoid the complex and costly processes to resolve the dispute or litigations and acts as valid evidence as all the terms and conditions are drafted and agreed by both parties.

Both the franchisor and franchisee must act in good faith with each other. But as we all know that there is no specific definition that states what does good faith stands for, there are some dos and don’ts that can be kept in mind while drafting the franchise agreement, so good faith can be attained in the franchise agreement.

Dos:

  1. Be honest. Franchisee must be honest to use franchisor’s confidential information,
  2. Co-operation must be there between the franchisee and franchisor,
  3. Franchisors should not open another franchise in the area from where they are getting good profit,
  4. Various decisions should be made in a reasonable time period be the decision from any of the parties,
  5. Take into account the other party’s business interests,
  6. Discuss proposed changes to the agreement,
  7. Choosing a franchise should not come down to picking a brand out of a hat. Not all franchisors are created equal, so be sure to pick one that will provide the support and resources you need,
  8. The franchisee should take advantage of franchisor be it related to marketing campaigns, access to a franchisee network, assistance with site selection, advanced technology and software, and other useful tools,
  9. Franchise disclosure documents should be read by the franchisee before giving any kind of fees to the franchisor,
  10. The franchisee should talk to another franchise of the brand and be 100% before making any decision,
  11. Right people should be hired,
  12. Marketing should be done for long term to attract more and more customers long time,

Don’ts:

  1. Don’t act in pursuit of some hidden, non-commercial, and illegitimate interest,
  2. Don’t issue breach notices and try to terminate the agreement on the basis of unfounded allegations, or without considering your legal position,
  3. Don’t impose your decisions on the other party,
  4. Don’t aggressively pressure the other side into agreeing to your position
  5. Don’t agree with everything and anything,
  6. Don’t refuse to engage in the dispute resolution process,
  7. Don’t approach Dispute Resolution in an antagonistic manner,
  8. Don’t try to do everything on your own,
  9. Don’t expect this business to be easy,
  10. Don’t Forget About Operational Costs,
  11. Don’t go with the flow to choose the franchise,
  12. Don’t Ignore the Franchise Business Model,

CONCLUSION:

After the completion of this research paper on drafting and drafting of the franchise agreement, I, the writer of this paper conclude that drafting is an art.

One can master this art only by the means of practice, the more one will practice, the more he/she/they will be smooth at drafting. Though there are various things that one needs to keep in mind while drafting, mastering it is achievable.

Franchisee agreements are widely used across the globe. The franchise is a quite good concept as it allows big brands to expand themselves as well as it helps those to grow who have various resources but don’t have any business idea.

A lot of consumers get various benefits due to this franchise agreement as well as it creates employment which is a good thing for the growth of the nation.

Though, I personally think that the franchise agreements that are needed to draft for the transfer of franchise from the franchisor to franchisee should become more and more user friendly in near future. I personally believe that the structure of the franchise agreement should be improved so both parties can understand the meaning of each term without taking the help of a law expert.

Finally, franchise agreements are very essential for the proper functioning of such a big franchise industry, and drafting them is also a challenging as well as an interesting thing.

 

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