HOW TO DRAFT A FRANCHISE AGREEMENT?

HOW TO DRAFT A FRANCHISE AGREEMENT?

What is a Franchise?

Franchising is a form of lease, where the franchisor leases its intellectual property to the franchisee¹.

What is a Franchise Agreement?

Franchisors, to protect their brands in the best interest, are required to form detailed franchise agreements with the franchisee. The franchise agreement must be in relation to the Indian Contract Act, 1872.

To know more about, What is a Franchise Agreement, see the video below -

Content of a Franchise Agreement:

A franchise agreement shall have the following details well-drafted and understood by both the franchisor and franchisee²:

1. Details of the franchisor and franchisee- For the agreement to be legally enforceable, it is essential that both the parties mention their details, such as their name, contact details, etc..

2. Subject Matter and Purpose- The purpose of the franchise agreement as well as franchising the intellectual property of the franchisor to the franchisee must be mentioned. This helps the parties agree and stand on common ground.

3. Territorial Scope- Territorial scope shall mention where all can the franchisee exercise and enjoy the intellectual property of the franchisor.

4. IPRs franchised- This is an important part of the agreement, as it specifies the intellectual properties that are to be franchised to the franchisee. This way, the franchisee agrees to use and enjoy only the specifically mentioned properties and stays legally bound by the agreement.

5. Terms of Use- A franchisor might have some specifications of use which are to be well understood and assigned by them. This way, the franchisee knows how to use the property, and does it with the full consent of the franchisor.

6. Post Termination Use- The franchisee’s name gets attached to the property that is franchised. After the termination of the agreement, it is essential for the franchisor to lay certain restrictions on the post-termination use, as per the requirements.

7. Franchisee’s Obligations- Each franchisee needs to obey to certain rights they can enjoy while franchising someone else’s property. There are some reasonable obligations set by the franchisor, such as the way the services are to be rendered, maintaining the good faith, the minimum investment, and so on.

8. Franchisor’s Obligations- While the franchisee has some obligations to obey, the franchisor has to fulfill some duties, such as promoting the franchisee’s activities, provide all forms of support to the franchisee, provide training to the franchisee, and so on.

9. Finalizing Consideration- Deciding upon the initial basic fee, the royalty the franchisor shall receive, the advertising costs, and the mode and time of payment by each party are decided to avoid any confusion.

10. Termination of the Agreement- Agreements come to an end, and this clause helps the franchisor and the franchisee come up with the option of termination, grounds of termination, and the consequences of the termination.

11. Indemnification- There must be elaborated provisions on indemnification, such as who can indemnify and when will they indemnify, mention the liabilities that arise out of breach of contract.

12. Governing Law and Jurisdiction Clauses- Place of the business decides the nationality under which the agreement would be formed, the laws that will govern them, and under which territorial jurisdiction the agreement falls under.

Coming to how to form a franchise agreement, the following headings could be useful, as per the sample provided on one of the Government’s websites³. The heads can be-

1. Purpose- The purpose of forming the agreement shall be mentioned here, to make sure further parts of the agreement work with the purpose and don’t go beyond the scope provided.

2. Grant of Franchise- There shall be an official clause when the document mentions that the franchisee agrees to accept and the franchisor agrees to franchise the intellectual property, as per their free consent. This clause shall also mention the scope under which the franchise can be operated.

3. Franchise Location and Designated Area- The franchisor shall specify the area in which the franchisee can operate the functions regarding the intellectual property. In case the franchisee decided to relocate, the franchisor shall lay down some restrictions and limitations on the relocation of the franchise.

4. Initial Franchise Fee- The franchisor and franchisee shall come up with an initial franchise fee that shall be agreed upon and paid before starting the agreement.

5. Development of Franchise Location- If a location has been franchised, then the franchisor must give written approval to the franchisee. There shall be the acknowledgment of layout, color scheme, decoration, and design in case there is a change. The signs and equipment shall be in accordance with the franchisor’s agreement and use. There shall be proper permits and licenses authenticating the entire agreement.

6. Training- Training shall be provided to the people who will work under the franchisee. This training shall be free of cost, that’ll explain the aspects of the company’s businesses and how to run one under the franchisee’s intellectual property. This provision shall contain the length and details of additional training.

7. Development Assistance- For both the franchisor and franchisee to benefit from the franchise, it is important that the franchisor helps the franchisee set up the activities, and the clause shall mention that.

8. Operations Manual- The franchisor shall lend all material related t the intellectual property to the franchisee. The franchisee shall also obey to keep the confidentiality of the operations manual.

9. Operating Assistance- Under operating assistance, the franchisor must render to the franchisee’s needs from the intellectual property they are financing.

10. Franchisee’s Operational Covenants- This provision must strictly lay the ground rules for the franchisee to follow when they proceed with the activities related to the intellectual property so that the operations won’t affect the goodwill.

11. Royalties- Both the franchisor and the franchisee should come up with the royalty they decide to receive and pay. This amount shall be written with the period in which it is to be paid and the method of payment.

12. Advertising- To promote the services related to the intellectual property, the franchisor and the franchisee shall come up with advertising strategies together to be at par with what the franchisor.

13. Quality Control- For better services to the clients of the intellectual property, the franchisee must take necessary steps to maintain the quality. This can be done by constant evaluation and request to change necessary items.

14. Reports, Records, and Financial Statements- To maintain transparency, the franchisee shall provide the abovementioned documents and books to the franchisor. These shall be audited and verified by authorized people and accounting standards.

15. Transfer- The franchisee cannot create an agreement for a sub-transfer or transfer the intellectual property to any other party. Any form of transfer by the franchisor will require the permission of the franchisee, and then the franchisor can take action accordingly.

16. Term and Expiration- The term and the expiration of the franchise shall end as per the specifications. The continuation terms and the expiration terms should be laid down and understood by the parties.

17. Default and Termination- The franchisor has the right to terminate this contract in case of any instance that could harm the intellectual property and its authenticity. This provision shall lay the ground rules on which the agreement can be terminated.

18. Business Relationship- Via this clause, it is officially to be stated that the relationship between the franchisor and the franchisee is purely business-related in nature, and not fiduciary in any form.

19. Restrictive Covenants

20. Insurance- The franchisee is required to provide and maintain the insurance of anything related to the intellectual property they have franchised. Along with that, there shall be substantial proof of the same.

21. Miscellaneous Provisions, as per the requirement by the franchisor and the franchisee.

To know more about, What are the legal issues in Franchising, see the video below-

BY:-

Aditi Goel