In this part, we will be discussing the Intricacies and the important clauses that one should keep in mind while drafting the Franchise Agreement
The Franchisee and the Franchisor comprehend the nature of business along with the legal obligations attached to it and upon careful consideration both the Franchisor and the Franchisee having a mutual consensus sign the legal document. This legal document is known as the Franchise Agreement.
The Franchise Agreement is an Agreement which creates a contractual relationship between the parties, which allows the Franchisee to establish a franchised outlet and operation and utilize the Franchisors trademarks, trade dress, business systems, operations manual and sources of supply to sell the products and/or services designated by the Franchisor in exchange of Royalty Fees.
The Agreement shall comprise the following details that are of utmost importance to form the strong base for such Agreements:
- Business methodology;
- Cost associated with the franchising- initial capital;
- Royalty and other remunerations;
- Clauses deliberating on dispute resolution;
- Rights of the parties;
- Governing law;
- Termination, etc.
For the Agreement to be legally enforceable, the Agreement shall comply with the essentials of a valid contract as per the Indian Contract Act, 1872. The bedrock of the relationship between the Franchisor and the Franchisee is based on the Franchising Agreement, hence it is suggested that the Agreement shall be drafted and negotiated in a meticulous manner that covers all the crucial intricacies of a Franchise Agreement.
The structure of a Franchise Agreement differs from business to business. However, there are few important clauses which should be present in a Franchise Agreement.
These clauses include:
- Time-Period and Renewal:
Under this clause the duration to operate the Franchised unit shall be stated and the terms and conditions for renewal shall be laid down if the Franchisee wishes to continue with the Franchise.
Under this clause the parties shall specify the conditions regarding payment to be made such as (license fees, royalty fees and an annual continuance fee) and the time period within which such payment shall be made. Usually, during the course of the Franchising, the Franchisee is required to pay a percentage of the earnings to the Franchisor or with the mutual Agreement the parties can decide a minimum amount to be paid in intervals during the course of Franchising irrespective of the profits. Further, in case the payment is made outside India, the Agreement shall mention the party obtaining the legal and regulatory approvals.
- Training and Operating Assistance:
The Agreement must contain the training, technical and administrative support to be provided to the Franchisee during the course of Franchise and the time duration of the training along with the place shall be mentioned.
- Operation of Franchised Business:
The Franchisee shall agree to operate the business by strictly adhering to the rules and regulations provided by the Franchisor in the Agreement.
Franchisee shall maintain the confidentiality of all such information relating to the business provided by the Franchisor during the term of the Franchise Agreement or at any time thereafter.
All the cost of the advertising will be borne by the Franchisee and the Franchisor will have the right to provide the required advertising/promotional/marketing material/ Catalogues/Brochures to the Franchisee.
- Inspection Right:
The Franchisor shall have the rights to inspect and examine the manner in which the Franchisee is conducting its business; in the event of any such inspection, the Franchisee and its staff shall co-operate fully.
- Negative Covenants:
Under this clause the covenants relating to non-compete, protection of IPR and non-disclosure of confidential information including post-termination covenant between the Franchisee and the Franchisor shall be mentioned.
The Agreement shall contain a list containing the potential instances triggering liabilities for indemnification.
The list might include all claims, actions, losses, costs, damages, expenses, legal suits and other proceedings resulting from and arising out of actions, inaction or negligence of either party or their employees, agents or for violation of any provision of this Franchised Agreement or any provision thereof by any party or its employees or for infringement of any patent, trademark, or copyright of any third party.
Under this clause the parties is required to specify the potential grounds, which might lead to termination of the Agreement, which might include reasons ranging from legal incapacity to alterations in the laws or framework of the country affecting the Agreement, Change in control, non-payment of price or royalty, material breach by the terms of the Agreement, unreasonable delay in execution of the project, underperformance in terms of quality or quantity of work etc.
Under this clause the reasonable time within which the notice must be served before making any changes or take any decision related to the Agreement and the details of the Franchisee or Franchisor must be mentioned upon whom notice is to be served.
- Force Majeure:
In case a party is delayed or hindered to perform its obligation due to events that is not the fault of such party such as, war, acts of public enemies, terrorism, fires, floods, acts of God, strikes (being only national or regional strikes) or any causes beyond the reasonable control of such Party, then the performance of such an act shall be excused for the period of the delay and the period for performance of such act shall be extended.
- Governing Law and Jurisdiction:
Under this clause, the parties will decide the laws and the jurisdiction of a particular place/country will be applicable, in case there is any dispute between the parties. The governing law can be decided based on various concepts like the place of Agreement, place of performance of the contract, subject matter, nationality of the parties, etc. The Agreement needs to explicitly mention the governing law as the Franchisor and Franchisee have to comply with the laws during the course of Agreement.
- Dispute Resolution:
Under this clause the parties will decide the mechanisms and the procedure through which they will try to resolve their disputes amicably. Now, usually during the course of business, if a dispute arises between the parties, it is either brought in the Court of law or resolved through Alternative Dispute Resolution Mechanisms (Mediation, Conciliation or Arbitration), as decided between the parties in the Agreement.
The arbitrability of the issues arising out of the Franchise Agreement was upheld in the case of Euro Kids International Ltd. v. Bhaskar Vidhyapeeth Shikshan Sanstha (Arbitration Petition No. 1061 of 2014, Order dated, 01 July 2015) and Go Go Delicacy Ltd. v. Carona Holding Ltd. (2007 SGHC 165).
In this cut-throat competition of businesses worldwide where each day it’s a struggle to survive, the Franchise business model has proved to be one of the best tool for worldwide expansion and development of business in comparison of choosing to start your own operation from scratch.
However, due to the absence of specific legislation dealing with Franchising in India, various risk factors get involved when parties enter into a Franchise Agreement. Therefore, it is quintessential to negotiate and formulate an airtight Franchise Agreement to avoid a leak of legal disputes in the Franchise Agreements.
In the upcoming part, we attempt to discuss duties and responsibilities of the Franchisor and the Franchisee should abide by during the course of the Franchise Agreement for the success of Franchise. Stay Tuned!
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