Franchise Agreement

Introduction
Intellectual property is acquired so that it can be exploited for commercial purposes. A
business may either use intellectual property rights (IPRs) to generate revenues by itself (i.e.
by manufacturing and selling products using its own patent and brand names) – this is the
most obvious manner to exploit intellectual property rights. A business may also sell the
IPRs permanently (through an assignment), or it may allow other entities to use its IPRs
through licensing, franchising or technology transfer. Some businesses have earned
millions through licensing their technology, while others have expanded globally based on
the franchising model. Note – selling the product is different from selling the IPR, that is the,
right to manufacture, sell and distribute the product to the market to the exclusion of
everyone else.

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.

FEATURES OF FRANCHISE AGREEMENT:

1. EXPANSION OF BUSINESS: Franchise agreement will help you to expand your business,
and gain wider acceptance of his trademark and brand name. The Franchisor can enter into
foreign markets also and enhance his goodwill and his business.

2. LEGALLY ENFORCEABLE: Franchise agreement is legally enforceable agreement. On the

breach of any terms and condition of Franchise agreement by Franchisor or franchisee they
both can sue each other on the basis of Franchise agreement.

3. REGULAR INCOME: By way of royalty from the Franchisee the Franchisor receives regular
income at no extra cost.
4. ADVANTAGE OF MARKET FEEDEBACK: Through the Franchisee the franchisor gets market
feedback about product and popularity preference and need of the local customers.

5. DURATION OF THE FRANCHISE AGREEMENT: This involves the length of the relationship,
the franchisee’s successor rights to enter into new agreements, and the requirement to
upgrade the franchisee’s location.

6. INITIAL AND CONTINUING FEES: Franchisees generally pay an initial and continuing fee to
the franchisor for entering into the system and remaining a franchisee. Agreements also
typically include a number of side fees.

7. ASSIGNED TERRITORY: Not every franchise agreement grants a franchisee an exclusive or

even a protected territory, but specifics about the territory must be defined. Franchisors
also need to deal with reservation of their rights within a franchisee’s territory, including
alternative distribution sites and sales over the internet.

8. SITE SELECTION AND DEVELOPMENT: Franchisees generally find their own sites and
develop them according to the franchisor’s standards. The role of the franchisor is generally
to approve the location found by the franchisee and then approve, prior to opening, that
the franchisee has built its location to meet design and other brand standards.

Regulatory Framework
There is no specific law governing the franchise agreements, but various statutory
enactments are applicable. Few of them are –

- Indian Contract Act, 1872

- Consumer Protection Act, 1986
- Trade Marks Act, 1999
- Copyright Act, 1957

Fundamental Provisions of the Franchise Agreement

Location-
This provision defines the franchisee’s territorial limits, the area the franchisee has the right
to operate and outlines its exclusive rights (if necessary).

Site selection and development-

The franchisee must select a suitable place of operating the business as per the
specification of the franchisor and obtain approval of the same before the signing of the
agreement.

Royalties-
This provision outlines the franchiser’s royalty structure, a fixed percentage on the sales
that the franchisee must pay for the brand name’s usage, to be paid monthly.

Franchise validity-
This provision details the length of time the franchisee will be allowed to sell under the
franchise’s brand or trademark.

Fees-
This provision details the upfront fees that the franchisee has to pay to obtain the
trademark for the company’s brand.

Training support-
The franchisor will provide training support to the franchisee to ensure uniformity in
service across various franchises. This provision will provide all the details of the same.

Operations-
This provision details how the business must run, the operation as per the operating
standards, the goods/services the franchisee is allowed to offer, the purchases the
franchisee needs to make exclusively from the franchisor, etc.

Trademark-
Detail of how the franchisee can use the franchisor trademark/patent, logo, or signage.

Advertising -
The franchisor will reveal the advertising commitment and the fees the franchisee will be
required to pay.

Cancellation policies and renewal-

This provision details the conditions for termination or cancellation and how the same can
be renewed. Some franchisors also include an arbitration clause. This will warrant that an
arbitrator will review the case before it goes to court in the case of any legal event.

Exit Strategies-
There is no standard exit strategy, some franchisors leave it to the discretion of the
franchisee, while some insert a clause for the buyback. This will give the franchise an option
to buy at a determined rate or match the buyer’s offer.

Important Clauses-

Agreement 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.

1. Recitals

Recitals usually are 1-2 line phrases beginning with the word 'Whereas'.

The recitals do not discuss the legal obligations of the parties, but explain the
background and circumstances within parties have decided to execute the
agreement. Sometimes, businessmen and parties ignore recitals, but it is a good
idea to describe them in some level of detail as this will help a court (or arbitral
tribunal) in understanding the agreement in its true light in the event of a dispute
and it will also bring to light the commercial intent of the parties. It will prevent a
party from taking a contrary or inconsistent stance from what has been mentioned
in the recitals.

2. Definition Clause

Every agreement has a ‘definitions’ clause so that key terms used in it can have a
specific and determinate meaning which is accepted by both parties.

3. Franchise Fees
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.

4. 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.

5. Franchisors Responsibilities
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.

- 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.

- 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.
6. Franchisee Responsibilities
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

- 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.

- Advertising
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.

7. Rights
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.

8. 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.

9. Confidentiality
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.

10. 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.

11. Severability
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.

12. Jurisdiction
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.

A useful key to contract drafting – how do you draft a good contract?

A good contract is essentially one which covers all the possibilities that are
likely to arise over the duration of the relationship and provides a clear
course that will be taken in each situation. How should you anticipate the
different possibilities that can arise? While it is not possible to cover all
possibilities at the time of drafting or negotiating an agreement, you should
try to ask the question “what if this were to happen?” with respect to the
commercial relationship. Try to imagine as many logical possibilities, even if
they appear unlikely under the current circumstances. That would give you
pointers about which situations you should address in the agreement. You
can then draft suitable clauses to address those situations. One should not
rule out the possibility of uncertain or unintended events from taking place.
Also, one should not presume that the other side will continue to be as
cooperative as it currently is.