Franchising and Franchise Agreements - Legal Issues


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

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For more information on:

  • Intellectual Property
  • When will this come into play in the franchising situation?
  • What must the franchisor thus ensure?
  • How long should a franchise agreement last for?
  • Should there be a clause in the agreement dealing with the termination of the agreement?
  • On what grounds could the agreement be terminated?