Franchise Agreement And Model
HOW
TO DRAFT A FRANCHISE AGREEMENT?
What
is it a Franchise?
Franchising
is a form of lease, where the franchisor leases its intellectual property to
the franchisee.
What
is it 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 about the Indian Contract Act, 1872.
Content of a Franchise Agreement:
A franchise agreement shall have the following details well-drafted
and understood by both the franchisor and franchisee:
1. Details
of the franchisor and franchisee- For the agreement to
be legally enforceable, both the parties must 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 that
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, the franchisor needs to lay certain restrictions on the post-termination
use, as per the requirements.
7. Franchisee’s
Obligations- Each franchisee needs to obey certainly
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 good faith, the minimum investment, and so on.
8. Franchisor’s
Obligations- While the franchisee has some
obligations to obey, the franchisor too, has to fulfill some duties, such as the
promotion of the franchisee’s activities, provide all forms of support to the
franchisee, provide training to the franchisee, and so on.
9. Finalising
the 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 is 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, mentioning 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 websites. The heads can
be-
I.
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.
II.
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.
III.
Franchise Location and Designated
Area- The franchisor shall specify the area in which the
franchisee can operate the functions regarding intellectual property. In
case the franchisee decided to relocate, the franchisor shall lay down some
restrictions and limitations on the relocation of the franchise.
IV.
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.
V.
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 following the franchisor’s agreement and use. There shall be proper
permits and licenses authenticating the entire agreement.
VI.
Training- Training
shall be provided to the people who will work under the franchisee. This
training shall be free of cost, which will 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.
VII.
Development Assistance- For
both the franchisor and franchisee benefit from the franchise, it is
important that the franchisor helps the franchisee set up the activities, and
the clause shall mention that.
VIII. Operations
Manual- The franchisor shall lend all material related to
the intellectual property to the franchisee. The franchisee shall also obey to
keep the confidentiality of the operations manual.
IX.
Operating Assistance- Under
operating assistance, the franchisor must render to the franchisee’s needs from
the intellectual property they are financing.
X.
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.
XI.
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.
XII.
Advertising- To
promote the services related to intellectual property, the franchisor and the
franchisee shall come up with advertising strategies together to be at par with
the franchisor.
XIII. Quality
Control- For better services to the clients of intellectual
property, the franchisee must take the necessary steps to maintain quality.
This can be done by constant evaluation and request to change necessary items.
XIV. 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.
XV.
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
franchisee will require the permission of the franchisor, and then the
franchisor can take action accordingly.
XVI. 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.
XVII. 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.
XVIII. 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.
XIX. Restrictive
Covenants- Restricting
the franchisee’s certain conduct unless allowed by law. Such as restriction on
disclosure of confidential information unless mandated by government authority.
XX.
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.
XXI. Miscellaneous
Provisions - as per the
requirement by the franchisor and the franchisee.
