Laws and Contracts
What clauses appear in the franchise agreement?
The franchise contract lays down the legal basis for the co-operation between franchisor and franchisee in so far as it establishes the nature and scope of legally binding respective rights and duties. Most franchise contracts drawn up in Europe contain the following features:
The preamble contains the basis of the franchise system, in that it indicates the requirements and defined economic purpose of the contract. It is customary for the preamble to describe the specific field of activity which the franchisor and his/her partner are intending to engage in, including elements of the corporate identity of the enterprise and the aims which the franchisor and his/her partners have set. Occasionally special attention will be drawn to the fact that the franchisee has been given the opportunity to familiarise him/herself with the franchise system and to have the contract examined by a lawyer.
Subject of the Contract
The part of the contract relating to the subject of the contract regulates the content and scope of the permitted franchise, the location and the geographical limits to the area covered by contract as well as the permitted applicability of the conferred rights. In particular it includes a description of the trade patent protection rights entered in the franchisor’s name and a copy of which is attached to the contract. It is laid down that the franchisor has the exclusive right to determine system landmarks (trade name, trade mark, furnishings and fittings) and that the franchisee is obliged to support him in maintaining these rights.
In addition the specific know-how of the franchise system in relation to the former Block Exemption Regulationand the guidelines to the new Regulation is explained in detail. Renewals and improvements which the franchisor him/herself develops during the time of the duration of the contract also become part of the know-how of the franchise system.
Legal Status of the Parties to the Contract
Franchisor and franchisee are independent businessmen in their legal relation to each other. Franchisees become active in their own name and at their own risk. The franchisor has no blanket right to issue instructions. From the legal point of view, they enjoy, despite limitations laid down by the franchise system, the commercial freedom of any independent business.
Each party to the contract assumes full responsibility for the carrying out of the obligations to which he has committed himself in the contract. The franchisor will on occasion make this clear by including a limited liability clause or in his decision as to the legal status of the company which the franchisee is going to choose.
The part of the contract detailing the training obligations of the franchisor lists the elements of the service package in addition to eventual further services. The system manual, provided by the franchisor, should be particularly exhaustive in this respect. Statements made in the franchisor’s promotional material are to be compared with the actual legal obligations as laid down in the contract.
This passage in the contract lists the obligations of a franchisee to the franchisor point by point. He is entitled and obliged to a contractual use of the franchisor’s service package. The franchisee’s contribution consists in providing work, capital and information. Over and beyond the duration of the contract he is obliged to treat the know-how which he receives in confidence and not reveal it to third parties. For a period of at least the duration of the contract publicity in competition with the franchise is not permitted.
Sometimes these regulations include a specification of the location, specifications as to the furnishing of the rooms of the business premises, the franchisor’s on the spot rights of entry and inspection, or the obligation to obey legal regulations concerning the opening and maintenance of the business.
As recompense for the know-how provided by the franchisor, the waiving of rights and the support given to the franchisee in the building up and management of his business, the fees are part of the contractual agreement. As a rule the recompense consists of an entry fee to be paid one time only along with the continuous fees. In special cases the franchise fee will be replaced or complemented by an increased charge on the purchase of goods. A frequent additional financial obligation on the part of the franchisee is a advertising fee, made possible the execution of a central marketing strategy via the central system.
Duration of Contract
Most franchise contracts are signed for a manageable period of time of 5 to 10 years, although 10 to 20 year contracts are not unusual. The duration of the contract is dependent upon such factors as area of business, product line/service, choice of partner and the business philosophy of the individual franchisor. The agreement should make it possible for the franchisee to amortise initial investments within the period of the planned duration of the contract, or provide for the option of a prolongation of the contract.
Ending of Contract
A franchise contract can come to an end at the planned time of expiry or prematurely by giving notice or by termination. In the case of a declaration of intent it is necessary to distinguish between a regular and an exceptional notice of termination. In the case of the franchisee’s severe illness or death, a premature termination of contract or the option of transfer to a third party can be provided for.
Consequences of Ending of Contract
A fair arrangement is not least important for the time when the contract is ended. The contract should provide for the return of unsold products and current publicity material, manuals and important and confidential data and documents to the franchisor. An eventual forbidding of the use of competitive material after the contract can also be considered.
With the ending of the contract the franchisee, independently of legal arguments, loses all rights contained in the franchise contract and is to desist from any activity whatsoever which could give the impression that he/she still belongs to the franchise system. A special agreement in the case of a system being given up may be advisable.
Summarised at the end are the general standard conditions as they affect the validity of the rest of the contract in relation to eventual non-applicability of particular requirements, the completeness of the contract, the requirement that the contract be drawn up in writing, the place where the contract is to be fulfilled and the court of jurisdiction and the applicable law.
Franchise agreements are often supplemented by important additional materials. The most important of these are the operating manuals or management guidelines in which the franchisor’s know-how and experience is presented in a standard form and documented so as to be fully comprehensible.
The future franchisee should demand to see these materials before he signs a franchise agreement. A careful franchisor will naturally attach great importance to the previous ratification in writing of a confidentiality agreement to protect him/herself and the other partners in the system.
This list is merely given as an example and is in no way obligatory. Each franchise agreement must contain individual regulations that have been adapted to the franchise system.