Franchising and Franchise Agreements - Legal Issues

Franchising

What is meant by franchising?

The most common format of franchising is the granting of a licence by one person – called the franchisor – to another – called the franchisee. The licence then allows the franchisee to trade under the trade mark or trade name of the franchisor and to make use of an entire package. This entire package will comprise of all the necessary elements to establish a previously untrained person in the business and to enable them to run it with continual assistance on a predetermined basis.

What are the first legal steps when entering into a franchising situation?

The first legal steps which will usually be taken when entering into a franchising situation are as follows:

• Signing a confidentiality agreement
• Entering into a deposit agreement and paying the required deposit – in some cases this may be a non-refundable deposit
• Entering into a franchise agreement

The Franchise Agreement

All legal agreements should seek to protect the benefit of both parties involved and a franchise agreement is no different. For example certain clauses which will be contained in a franchise agreement will have mutual benefit to both parties involved such as the clauses concerning the various Intellectual Property rights.

Are there any regulations governing franchising agreements?

There are no specific statutes in England and Wales which govern franchising agreements but it is advisable to seek a franchise company which has been accredited by the British Franchise Association.

Many franchisors that have a number of different franchise outlets run by different franchisees under that company name will have a standard franchise agreement which all franchisees must sign. However, this may not always be the case meaning that some of the terms of the contract will be able to be individually negotiated.

What terms are likely to be included within a franchise agreement?

In a franchise agreement there are likely to be terms which benefit both the franchisor and franchisee.

What terms in the contract are likely to protect the franchisor?

The following terms in the franchise agreement are likely to protect the franchisor:

• Terms that enables the franchisor to adequately monitor the performance of the franchisee
• Terms that protects the franchisor from unfair competition
• Terms that protects the intellectual property of the franchisor
• Terms that restricts the franchise regarding the rights that have been granted by the franchisor to the franchisee

What terms in the contract are likely to protect the franchisee?

The following terms in the franchise agreement are likely to protect the franchisee:

• Terms that deal with the training of the franchisee and their staff
• Terms that deal with the supply of goods and or services
• Terms that details the responsibility for marketing, advertising and promotions
• Terms that may provide for assistance in finding suitable premises and help to fit out in the premises in the correct manner
• Terms that details the provision of management and accounting services

Intellectual Property

What Intellectual Property Rights may be provided for in the franchising agreement?

In a franchising agreement the following issues are likely to come into play:

• Trade names
• Trade marks
• Goodwill
• Copyright
• Confidential Information

However, the most common issue which will come into play in the franchising situation is that of trademarks or trade names.

When will this come into play in the franchising situation?

One of the main reasons why a franchisee will take on a franchise agreement is that they will be able to trade under the already existing trade name of a company and use the various benefits that the recognisable name has in the mind of consumers. Accordingly they will also wish to use the various trademarks owned by the franchisor in their promotional material etc.

What must the franchisor thus ensure?

It follows that if the trade names and trademarks are to be used in this manner by the franchisee that the franchisor must ensure that the use of these is sufficiently protected in the franchise agreement.

It is in the best interests of both parties wishing to have use of the trade names or trademarks that they are protected from use by third parties.

How long should a franchise agreement last for?

An agreement dealing with a franchise situation should be organised so that they can exists easily over a long period of time. This means that there should be an appropriate system and procedures set in place making all obligations and rights set in place dealing with such things as management fees and training. Franchises over take a period of time to establish themselves meaning the agreement should be able to continue over time with the specific obligations set in place.

Should there be a clause in the agreement dealing with the termination of the agreement?

There should always be a termination clause in a franchise agreement as there is no guarantee that the relationship between the franchisor and the franchisee will work.

On what grounds could the agreement be terminated?

A franchise agreement should provide for termination on the following grounds:

• Breach by the franchisor
• Breach by the franchisee
• The fixed term of the agreement has ended and the franchisee decides not to renew the agreement
• The franchisee sells the business and a new franchise is granted to another party
• Both parties come to a mutual agreement to end the franchise relationship