A franchise agreement is one through which a Franchisor, the owner of a business model, provides his business model and his brand name to a Franchisee for use. The terms and conditions of the usage of the franchisor’s business model and his brand name by the franchisee are clearly and precisely laid down in a franchise agreement so as to avoid any and all ambiguity that may arise. A franchise agreement ensures that both the franchisor and the franchisee are aware of all the conditions of the contract and agree to the same.
What are the advantages of having a Franchise Agreement?
Since there are no specific laws in India governing franchises, the presence of a reliable franchise agreement safeguards both parties against any infringement of their rights by either party and assures that they shall perform their obligations as and when required.
- Defines rights and liabilities of the franchisor and franchisee so as to leave no ambiguity.
- Provides valid proof in cases of dispute.
- Also, sets out the duties and obligations of the franchisor and franchisee, the non-performance of which can be cause for dispute.
Important details to be included in a Franchise Agreement.
Just like any legal document, a franchise agreement is full of complexities and hence it requires a great attention to detail by the drafter of such agreement. the following are some details that must be included in the franchise agreement.
- Term of franchise and renewal of the agreement: This clause specifies the time the franchise comes into operation and the time it ceases to operate. The renewal clause provides an option to renew the contract provided the franchisee serves notice before a specified time.
- Fees and Royalty: This clause contains the franchise fees that the franchisee must pay to the franchisor as consideration in return for using his business model and brand name. A royalty payment is a percentage of the franchisee’s earnings from the franchise which he must make to the franchisor monthly or weekly depending on the contract made.
- Confidentiality Clause: A confidentiality clause is quite often included by the franchisor to protect ideas used in his business model. This clause protects the franchisor’s interests and ensures that franchisee doesn’t divulge any trade secrets to the franchisor’s competitors. For example, a franchisee who manages a KFC outlet must ensure that the recipe for their signature dishes are not divulged to any of KFC’s competitors.
- Duty of the Franchisor and the Franchisee: As previously mentioned, a franchise agreement lays down in detail the duties of both the franchisor and the franchisee. Duties of the franchisor include providing all assistance necessary in construction and operation of the franchised unit. The franchisor must make sure all of his franchised units function on uniform and high standards. Similarly, the franchisee must make sure to maintain and meet the standards set by the franchisor. The franchisee must also uphold the goodwill and reputation of the franchised brand and advertise the brand accordingly.
Reasons for termination of a franchise agreement.
A franchise agreement may be terminated for many reasons. The termination clause in a franchise agreement specifies conditions the occurrence of which automatically leads to termination of a franchise agreement. Some of the conditions included in the clause may be:
- If the franchisee is bankrupt or insolvent
- If the franchisee does not abide by the standards set by the franchisor.
A franchise agreement which includes an exclusivity clause i.e., a clause where the franchisee agrees not to undertake any other franchise other than the franchisor’s, may be terminated when the exclusivity clause is breached. Similarly, the non-performance of duties by either of the parties to the agreement can lead to termination by way of a legal dispute.